OFFSHORE OPERATING AGREEMENT
by and between
Chevron U.S.A. Inc.,
Newfield Exploration Company
and
Ridgewood Energy Corporation, Manager Ridgewood Energy Q Fund, LLC.
effective October 1, 2005
covering
Main Pass Block 221; OCS-G 26163
Main Pass Block 222; OCS-G 26164
TABLE OF CONTENTS
ARTICLE 1. APPLICATION ...........................................................................................1
1.1 Application to Contract Area .........................................................................1
ARTICLE 2. DEFINITIONS ..........................................................................................1
2.1 Additional Testing ...................................................................................1
2.2 Affiliate ............................................................................................1
2.3 Authorization For Expenditure ........................................................................2
2:4 Complete, Completing, Completion .....................................................................2
2.5. Completion Equipment .................................................................................2
2.6 Confidential Data ....................................................................................2
2.7 Contract Area ........................................................................................2
2.8 Deepen, Deepening ....................................................................................2
2.9 Development Facilities ...............................................................................2
2.10 Development Operation ................................................................................3
2.11 Development Well .....................................................................................3
2.12 Exploratory Operation ................................................................................3
2.13 Exploratory Well .....................................................................................3
2.14 Export Pipelines .....................................................................................3
2.15 Force Majeure ........................................................................................3
2.16 Hydrocarbons .........................................................................................3
2.17 Joint Account ........................................................................................4
2.18 Lease ................................................................................................4
2.19 MMS ..................................................................................................4
2.20 Non-consent Operation ................................................................................4
2.21 Non-consent Platform .................................................................................4
2.22 Non-consent Well .....................................................................................4
2.23 Non-operator .........................................................................................4
2.24 Non-participating Party ..............................................................................4
2.25 Non-participating Party's Share ......................................................................4
2.26 Objective Depth ......................................................................................4
2.27 Objective Horizon ....................................................................................4
2.28 Offsite Host Facilities ..............................................................................4
2.29 Operator .............................................................................................5
2.30 Participating interest ...............................................................................5
2.31 Participating Party ..................................................................................5
2.32 Platform .............................................................................................5
2.33 Producible Reservoir .................................................................................5
2.34 Producible Well ......................................................................................5
2.35 Production Interval ..................................................................................5
2.36 Recomplete, Recompleting, Recompletion ...............................................................5
2.37 Rework, Reworking ....................................................................................6
2.38 Sidetrack, Sidetracking ..............................................................................6
2.39 Take-in-Kind Facilities ..............................................................................6
2.40 Transfer of Interest .................................................................................6
2.41 Working Interest .....................................................................................6
ARTICLE 3. EXHIBITS .............................................................................................6
3.1 Exhibits .............................................................................................6
3.1.1 Exhibit A - Operator, Description of Leases, etc ..................................................6
3.1.2 Exhibit B - Insurance Provisions ..................................................................6
3.1.3 Exhibit C - Accounting Procedure ..................................................................6
3.1.4 Exhibit D - Non-discrimination Provisions .........................................................7
3.1.5 Exhibit E - Gas Balancing Agreement ...............................................................7
3.1.6 Exhibit F -Tax Partnership Provision ..............................................................7
3.1.7 Exhibit G - Memorandum of Operating Agreement and Financing Statement .............................7
3.1.8 Exhibit H - Other .................................................................................7
3.1.9 Exhibit I - Security Rights, Default, Unpaid Charges, Carved-out. Interests .......................7
3.2 Conflicts ............................................................................................7
ARTICLE 4. OPERATOR ..............................................................................................7
4.1 Operator .............................................................................................7
4.2 Substitute Operator ..................................................................................7
4.2.1 Circumstances Under Which the Operator Must Conduct a Non-Consent Operation .......................8
4.2.2 Operator's Conduct of a Non-Consent Operation in Which it is a Non participating Party ............8
4.2,3 Appointment of a Substitute Operator ..............................................................8
4.2.4 Redesignation of Operator .........................................................................9
4.3 Resignation of Operator ..............................................................................9
4.4 Removal of Operator ..................................................................................9
4.5 Selection of Successor Operator ......................................................................10
4.6 Effective Date of Resignation or Removal .............................................................10
4.7 Delivery of Property .................................................................................10
ARTICLE 5. AUTHORITY AND DUTIES OF OPERATOR ......................................................................11
5.1 Exclusive Right to Operate ...........................................................................11
5.2 Workmanlike Conduct ..................................................................................11
5.3 Liens and Encumbrances ...............................................................................11
5.4 Employees and Contractors ............................................................................11
5.5 Records ..............................................................................................12
5.6 Compliance ...........................................................................................12
5.7 Contractors ..........................................................................................12
5.8 Governmental Reports .................................................................................12
5.9 Information to Participating Parties .................................................................12
5.10 Information to Non-participating Parties .............................................................13
ARTICLE 6. VOTING AND VOTING PROCEDURES ..........................................................................14
6.1 Voting Procedures .....................................................................................14
6.1.1 Voting interest ...................................................................................14
6.1.2 Vote Required .....................................................................................14
6.1.3 Votes .............................................................................................14
6.1.4 Meetings ..........................................................................................14
ARTICLE 7. ACCESS ................................................................................................14
7.1 Access to Contract Area ..............................................................................14
7.2 Reports ..............................................................................................15
7.3 Confidentiality ......................................................................................15
7.4 Limited Disclosure ...................................................................................15
7.5 Limited Releases to Offshore Scout Association .......................................................16
7.6 Media Releases .......................................................................................16
ARTICLE 8. EXPENDITURES ..........................................................................................16
8.1 Basis of Charge to the Parties .......................................................................16
8.2 AFEs .................................................................................................17
8.3 Emergency and Required-Expenditures ..................................................................17
8.4 Advance ▇▇▇▇▇▇▇▇ .....................................................................................17
8.5 Commingling of Funds .................................................................................17
8.6 Security Rights (LA) .................................................................................17
8.7 Overexpenditures .....................................................................................17
ARTICLE 9. NOTICES ...............................................................................................18
9.1 Giving and Receiving Notices .........................................................................18
9.2 Content of Notice ....................................................................................19
9.3 Response to Notices ..................................................................................19
9.3.1 Platform and/or Development Proposals .............................................................19
9.3.2 Well Proposals ....................................................................................20
9.3.3 Proposal for Multiple Operations ..................................................................20
9.3.4 Other Matters .....................................................................................20
9.4 Failure to Respond ...................................................................................20
9.5 Response to Counterproposals .........................................................................20
9.6 Timely Well Operations ...............................................................................20
9.7 Timely Platform/Development Facilities Operations ....................................................21
ARTICLE 10. EXPLORATORY OPERATIONS ...............................................................................21
10.1 Proposing Operations .................................................................................21
10.2 Counterproposals .....................................................................................21
10.3 Operations by All Parties ............................................................................22
10.4 Second Opportunity to Participate ....................................................................22
10.5 Operations by Fewer Than All Parties .................................................................22
10.6 Expenditures Approved ................................................................................23
10.7 Conduct of Operations ................................................................................23
10.8 Course of Action After Reaching Objective Depth ......................................................23
10.8.1 Election by Participating Parties ..............................................................23
10.8.2 Priority of Operations .........................................................................23
10.8.3 Second Opportunity to Participate ..............................................................24
10.8.4 Operations by Fewer Than All Parties ...........................................................24
10.8.5 Subsequent Operations ..........................................................................25
10.9 ▇▇▇▇▇ Proposed Below Deepest Producible Reservoir .....................................................25
ARTICLE 11. DEVELOPMENT OPERATIONS ...............................................................................26
11.1 Proposing Operations .................................................................................26
11.2 Counterproposals .....................................................................................26
11.3 Operations by All Parties ............................................................................27
11.4 Second Opportunity to Participate ....................................................................27
11.5 Operations by Fewer Than All Parties .................................................................27
11.6 Expenditures Approved ................................................................................28
11.7 Conduct of Operations ................................................................................28
11.8 Course of Action After Reaching Objective Depth ......................................................28
11.8.1 Election by Fewer Than All Parties .............................................................28
11.8.2 Priority of Operations .........................................................................29
11.8.3 Second Opportunity to Participate ..............................................................29
11.8.4 Operations by Fewer Than All Parties ...........................................................30
11.8.5 Subsequent Operations ..........................................................................30
ARTICLE 12. PLATFORM AND DEVELOPMENT FACILITIES ...............................................................31
12.1 Proposal .............................................................................................31
12.2 Counterproposals .....................................................................................31
12.2.1 Operations by All Parties ......................................................................31
12.2.2 Second Opportunity to Participate ..............................................................31
12.2.3 Operations by Fewer Than All Parties ...........................................................32
12.3 Ownership and Use of the Platform and Development Facilities .........................................33
12.4 Rights to Take in Kind ...............................................................................33
12.5 Expansion or Modification of a Platform and/or Development Facilities ................................34
12.6 Offsite Host Facilities ..............................................................................35
ARTICLE 13. NON-CONSENT OPERATIONS ...............................................................................35
13.1 Non-consent Operations ...............................................................................35
13.1.1 Non-interference ..............................................................................35
13.1.2 "Multiple Completion Limitation ...............................................................35
13.1.3 Metering ...........................................................................................35
13.1.4 Non-consent Well ..............................................................................35
13.1.5 Cost Information ..............................................................................36
13.1.6 Completions ...................................................................................36
13.2 Relinquishment of Interest ...........................................................................36
13.2.1 Production Reversion Recoupment ...............................................................37
13.2.2 Non-production Reversion ......................................................................38
13.3 Deepening or Sidetracking of Non-consent Well ........................................................38
13.4 Deepening or Sidetracking Cost Adjustments ...........................................................38
13.5 Subsequent Operations in Non-consent Well ............................................................39
13,6 Operations in a Production Interval ..................................................................39
13.7 Operations Utilizing a Non-consent Platform and/or Development Facilities ...........................39
13.8 Discovery or Extension from Non-consent Drilling .....................................................40
13.9 Allocation of Platform/Development Facilities Costs to Non-consent Operations ........................40
13.9.1 Investment Usage Fees ...........................................................................41
13.9.2 Operating and Maintenance Charges ...............................................................43
13.10 Allocation of Costs Between Zones ....................................................................44
13.11 Lease Maintenance Operations .........................................................................44
13.11.1 Participation in Lease Maintenance Operations ...................................................44
13.11.2 Accounting for Non participation ................................................................45
13.12 Retention of Lease by Non-consent Well ...............................................................45
13.13 Non-Consent Premiums .................................................................................46
ARTICLE 14. ABANDONMENT, SALVAGE AND SURPLUS .....................................................................46
14.1 Platform Salvage and Removal Costs ...................................................................46
14.2 Abandonment of Platforms, Development Facilities or ▇▇▇▇▇ ............................................46
14.3 Assignment of Interest ...............................................................................47
14.4 Abandonment Operations Required by Governmental Authority ............................................47
14.5 Disposal of Surplus Material .........................................................................47
ARTICLE 15. WITHDRAWAL ...........................................................................................48
15.1 Right to Withdraw ....................................................................................48
15.2 Response to Withdrawal Notice ........................................................................48
15.2.1 Unanimous Withdrawal ............................................................................48
15.2.2 No Additional Withdrawing Parties ...............................................................49
15.2.3 Acceptance of the Withdrawing Parties' Interests ................................................49
15.2.4 Effects of Withdrawal ...........................................................................49
15.3 Limitation Upon and Conditions of Withdrawal .........................................................49
15.3.1 Prior Expenses ..................................................................................49
15.3.2 Confidentiality .................................................................................50
15.3.3 Emergencies and Force Majeure ...................................................................50
ARTICLE 16. RENTALS, ROYALTIES AND OTHER PAYMENTS ................................................................51
16.1 Overriding Royalty and Other Burdens .................................................................51
16.2 Subsequently Created Interest ........................................................................51
16.3 Payment of Rentals and Minimum Royalties .............................................................52
16.4 Non-participation in Payments ........................................................................52
16.5 Royalty Payments .....................................................................................52
ARTICLE 17. TAXES ................................................................................................52
17.1 Property Taxes .......................................................................................52
17.2 Contest of Property Tax Valuation ....................................................................53
17.3 Production and Severance Taxes .......................................................................53
17.4 Other Taxes and Assessments ..........................................................................53
ARTICLE 18. INSURANCE. ...........................................................................................53
18.1 Insurance ............................................................................................53
18.2 Bonds ................................................................................................53
ARTICLE 19. LIABILITY, CLAIMS AND LAWSUITS .......................................................................54
19.1 Individual Obligations ...............................................................................54
19.2 Notice of Claim or Lawsuit ...........................................................................54
19.3 Settlements ..........................................................................................54
19.4 Defense of Claims and Lawsuits .......................................................................54
19.5 Liability for Damages ................................................................................55
19.6 Indemnification for Non-Consent Operations ...........................................................55
19.7 Damage to Reservoir, Loss of Reserves and Profit .....................................................56
19.8 Non-Essential Personnel ..............................................................................56
19.9 Dispute Resolution Procedure .........................................................................56
ARTICLE 20. INTERNAL REVENUE PROVISION ...........................................................................56
20.1 Internal Revenue Provision ...........................................................................56
ARTICLE 21 CONTRIBUTIONS .........................................................................................57
21.1 Notice of Contributions Other Than Advances for Sale of Production ...................................57
21.2 Cash Contributions ...................................................................................57
21.3 Acreage Contributions ................................................................................57
ARTICLE 22. DISPOSITION OF PRODUCTION ............................................................................58
22.1 Take-in-Kind Facilities ..............................................................................58
22.2 Duty to Take-in-Kind .................................................................................58
22.3 Failure to Take Oil and Condensate in-Kind ...........................................................58
22.4 Failure to Take Gas in-Kind ..........................................................................59
22.5 Expenses of Delivery in-Kind .........................................................................59
ARTICLE 23. APPLICABLE LAW .......................................................................................59
23.1 Applicable Law .......................................................................................59
ARTICLE 24. LAWS, REGULATIONS AND NON-DISCRIMINATION .............................................................60
24.1 Laws and Regulations .................................................................................60
24.2 Non-discrimination ...................................................................................60
ARTICLE 25. FORCE MAJEURE ........................................................................................60
25.1 Force Majeure ........................................................................................60
ARTICLE 26. SUCCESSORS, ASSIGNS AND PREFERENTIAL RIGHTS ..........................................................60
26.1 Successors and Assigns ...............................................................................60
26.2 Transfer of Interest .................................................................................61
26.3 Consent to Assign ....................................................................................61
26.4 Transfers Between Parties ............................................................................61
26.5 Division of Interest .................................................................................62
26.6 Preferential Rights ..................................................................................62
ARTICLE 27. ADMINISTRATIVE PROVISIONS ............................................................................63
27.1 Term .................................................................................................63
27.2 Waiver ...............................................................................................63
27.3 Waiver of Right to Partition .........................................................................63
27.4 Compliance With Laws and Regulations .................................................................64
27.4.1 Severance of Invalid Provisions ................................................................64
27.4.2 Fair and Equal Employment ......................................................................64
27.5 Construction and Interpretation of this Agreement ....................................................64
27.5.1 Headings for Convenience .......................................................................64
27.5.2 Article References .............................................................................64
27.5.3 Gender and Number ..............................................................................65
27.5.4 Future References ..............................................................................65
27.5.5 Currency .......................................................................................65
27.5.6 Optional Provisions ............................................................................65
27.5.7 Joint Preparation ..............................................................................65
27.5.8 Integrated Agreement ...........................................................................65
27.5.9 Binding Effect .................................................................................65
27.5.10 Further Assurances .............................................................................65
27.5.11 Counterpart Execution ..........................................................................66
27.6 Restricted Bidding ...................................................................................66
ARTICLE 28. AREA OF MUTUAL INTEREST ..............................................................................66
28.1 Area of Mutual Interest (AMI) .........................................................................66
OFFSHORE OPERATING AGREEMENT
THIS AGREEMENT, made effective the 1St day of October, 2005, by and between
Chevron U.S.A. Inc., Newfield Exploration Company-and Ridgewood. Energy
Corporation, Manager Ridgewood Energy Q Fund, LLC., their respective heirs,
successors, legal representatives, and assigns, herein referred to collectively
as the "Parties" and individually as a "Party."
WITNESSETH:
WHEREAS, the Parties own a leasehold interest in one or more oil and gas Leases
identified in Exhibit "A" and desire to explore, develop, produce, and operate
those Leases pursuant to this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants in
this Agreement, the Parties agree as follows:
ARTICLE 1
APPLICATION
1.1 Application to Contract Area
This Agreement applies to the entire Contract Area. For purposes of this
Agreement, activities or operations affecting one Lease are considered
activities or operations affecting all Leases. Unless otherwise provided
in this Agreement, the Parties according to their respective Working
interests, own all rights and obligations in and under the Leases, all
property acquired with funds from the Joint Account, and all
Hydrocarbons.
ARTICLE 2
DEFINITIONS
2.1 Additional Testing
An operation not previously approved in the AFE and proposed for the
specific purpose of obtaining additional subsurface data.
2.2 Affiliate
For a person, another person that controls, is controlled by, or is under
common control with that person. In this definition, (a) "control" means
the ownership by one person, directly or Indirectly, of more than fifty
percent (50%) of the voting securities of a corporation or, for other
persons, the equivalent ownership interest (such as partnership
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interests), and (b) "person" means an individual, corporation,
partnership, trust, estate, unincorporated organization, association, or
other legal entity.
2.3 Authorization For Expenditure (AFE)
An authority to expend funds prepared by a Party to estimate the costs to
be incurred in conducting an operation under this Agreement.
2.4 Complete, Completing, Completion
An operation to complete a well for initial Hydrocarbon production in one
or more Producible Reservoirs, including, but not limited to, setting
production casing, perforating the casing, stimulating the well,
installing Completion Equipment, and/or conducting production tests.
2.5 Completion Equipment
That certain equipment on an Exploratory Well or a Development Well
required to be installed prior to the movement of a well-completion rig
of that well
(a) under 30 CFR 250.502, or any succeeding order or regulation issued
by the MMS, up to and including the tree, and
(b) by any other regulatory agency having jurisdiction, including, but
not limited to, a caisson and navigational aids.
2.6 Confidential Data
The information and data obtained under this Agreement, including, but
not limited to, geological, geophysical, and reservoir information;
originals and copies of logs; core and core analysis; and other well
information including, but not limited to, the progress, tests, or
results of a well drilled or an operation conducted under this Agreement,
except data or information that becomes public other than by breach of
this Agreement or as agreed to in writing by the Participating Parties.
2.7 Contract Area
The Leases, or portions thereof, listed on Exhibit "A" to this Agreement.
2.8 Deepen, Deepening
A drilling operation conducted in an existing wellbore below the
Objective Depth to which the well was previously drilled.
2.9 Development Facilities
Production equipment other than Completion Equipment that is installed on
or outside the Contract Area in order to handle or process Hydrocarbon
production. Development Facilities include, but are not limited to,
(a) compression, separation, dehydration, generators, treaters,
skimmers, bunkhouses and metering equipment,
(b) the flowlines, gathering lines or lateral lines that deliver
Hydrocarbons and water
1 from the Completion Equipment to the Platform or to Offsite
Host Facilities, or
2 from the Platform to Export Pipelines; and
(c) injection and disposal ▇▇▇▇▇.
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Development Facilities include Export Pipelines.
2.10 Development Operation
An operation on the Contract Area other than an Exploratory Operation.
2.11 Development Well A well or portion of a well proposed as a Development
Operation.
2.12 Exploratory Operation
An operation that is conducted on the Contract Area and that is any of
the following:
(a) proposed to Complete an Exploratory Well;
(b) proposed for an Objective Horizon that is not a Producible
Reservoir; or
(c) proposed for an Objective Horizon that has a Producible Well, but
that will be penetrated at a location where the distance between
the midpoint of the Objective Horizon to be penetrated by the
proposed operation and the midpoint of the same Objective Horizon
where it is actually penetrated by a Producible Well will be at
least six thousand (6,000) feet for a gas Completion and at least
three thousand five hundred (3,500) feet for an oil Completion.
(d) proposed for an Objective Horizon that is unanimously agreed by
the Parties not to be in an existing Producible Reservoir; or
(e) proposed as a deeper drilling operation below the base of the
deepest producible reservoir.
2.13 Exploratory Weil
A well or portion of a well proposed as an Exploratory Operation.
2.14 Export Pipelines
Pipelines to which a gathering line or lateral line downstream of the
Platform and/or Development Facilities or, if there is no Platform, the
Completion Equipment, is connected and which are used to transport
Hydrocarbons or produced water to shore.
2.15 Force Majeure
An event or cause that is reasonably beyond the control of the Party
claiming the existence of such event or cause, which includes, but is not
limited to, a flood, storm, hurricane, loop current/eddy, or other act of
God, a fire, loss of well control, oil spill, or other environmental
catastrophe, a war, terrorist act, a civil disturbance, a labor dispute,
a strike, a lockout, compliance with a law, order, rule, or regulation,
governmental. action or delay in granting necessary permits or permit
approvals, and the inability to secure materials or a rig.
2.16 Hydrocarbons
Oil and/or gas and associated liquid and gaseous by-products (except
helium) which may be produced from a wellbore located on the Lease.
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2.17 Joint Account
This term has the same definition as the defined term "Joint Account" in
Exhibit "C" (Accounting Procedure).
2.18 Lease
Each oil and gas lease identified in Exhibit R' and the lands- covered by
that-lease.
2:19 MMS
The Minerals Management Service, United States Department of Interior, or
its successor agency. Where appropriate, the reference to MMS shall
include the appropriate state agency.
2.20 Non-consent Operation
An operation conducted on the Contract Area by fewer than all Parties,
which subjects the Nonparticipating Party to Article 13 (Non-Consent
Operations).
2.21 Non-consent Platform
A Platform owned by fewer than all Parties.
2.22 Non-consent Well
An Exploratory Well or a Development Well owned by fewer than all
Parties.
2.23 Non-operator
A Party other than the Operator.
2.24 Non-participating Party
A Party other than a Participating Party.
2.25 Non-participating Party's Share The Participating Interest that a
Non-participating Party would have had if all Parties had participated in
the operation.
2.26 Objective Depth
A depth sufficient to test the lesser of the Objective Horizon or the
specific footage depth stated in the AFE and approved by the
Participating Parties.
2.27 Objective Horizon
The interval consisting of the deepest zone, formation, or horizon to be
tested in an Exploratory Well, Development Well, Deepening operation, or
Sidetracking operation, as stated in the AFE and approved by the
Participating Parties.
2.28 Offsite Host Facilities
Development and handling facilities that (a) are located off the Contract
Area and (b) are either owned by one or more third parties or by one or
more Participating Parties in a well, whose interests in the development
and handling facilities differ from their respective Working Interest
shares in the well.
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2.29 Operator
The Party designated in Article 4.1 (Designation of the Operator), a
successor Operator-selected under Article 4.5, (Selection of Successor
Operator), and, if applicable, a substitute Operator selected under
Article 4.2 (Substitute Operator).
2.30 Participating Interest
The percentage of the costs and risks of conducting an operation under
this Agreement that a Participating Party agrees, or is otherwise
obligated, to pay and bear.
2.31 Participating Party
A Party that executes an AFE for a proposed operation or otherwise
agrees, or becomes liable, to pay and bear a share of the costs and risks
of conducting an operation under this Agreement.
2.32 Platform
An offshore structure on the Contract Area that supports ▇▇▇▇▇,
Completion Equipment, or Development Facilities, whether fixed,
compliant, or floating, and the components of that structure, including,
but not limited to, caissons or well protectors to the extent same are
not Completion Equipment, rising above the water line and used for the
exploration, development, or production of Hydrocarbons. The term
"Platform" shall also mean any offshore equipment or template (excluding
templates used for drilling operations) and any component thereof, other
than Completion Equipment (including, but not limited to, flow lines and
control systems), that is resting on or attached to the sea floor and
used to obtain production of Hydrocarbons.
2.33 Producible Reservoir
An underground accumulation of Hydrocarbons (a) in a single and separate
natural pool characterized by a distinct pressure system, (b) not in
Hydrocarbon communication with another accumulation of Hydrocarbons, and
(c) into which a Producible Well has been drilled.
2.34 Producible Well
A well that is drilled under this Agreement and that (a) is producing
Hydrocarbons; (b) is determined to be, or meets the criteria for being
determined to be, capable of producing Hydrocarbons in paying quantities
under an applicable order or regulation issued by the governmental
authority having jurisdiction; or (c) is determined to be a Producible
Well by two (2) or more Participating Parties having a combined Working
Interest of forty-five percent (45%) or more, even if the well has been
plugged and permanently or temporarily abandoned.
2.35 Production Interval
A zone or interval producing or capable of producing Hydrocarbons from a
well without Reworking operations.
2.36 Recomplete, Recompleting, Recompletion
An operation whereby a Completion in one Producible Reservoir is
abandoned in order to attempt a Completion in a different Producible
Reservoir within the existing wellbore.
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2.37 Rework, Reworking
An operation conducted in a well, after it has been Completed in one or
more Producible Reservoirs, to restore, maintain, or improve Hydrocarbon
production from one or more of those Producible Reservoirs, but
specifically excluding drilling, Sidetracking, Deepening, Completing, or
Recompleting the well.
2.38 Sidetrack, Sidetracking
The directional control and intentional deviation of a well to change the
bottom-hole location, whether it be to the original Objective Depth or
formation or another bottom-hole location not deeper than the
stratigraphic equivalent. of the initial Objective Depth, unless the
intentional 'deviation is done to straighten the hole or to drill around
junk in the hole or to overcome other mechanical difficulties.
2.39 Take-in-Kind Facilities
Facilities which (i) are not paid for by the Joint Account and (ii) are
installed for the benefit and use of a particular Party or Parties to
take its or their share of Hydrocarbon production in kind.
2.40 Transfer of Interest
A conveyance, assignment, transfer, farmout, exchange, or other
disposition of all or part of a Party's Working Interest.
2.41 Working Interest
The record title interest, or where applicable, the leasehold
interest or the operating rights of each Party in and to each
Lease (expressed as the percentage provided in Exhibit "A"). If a
Party's record title interest is different from its operating
rights, the Working Interest of each Party is the interest
provided in Exhibit "A".
ARTICLE 3
EXHIBITS
3.1 Exhibits
The following exhibits are attached to this Agreement and incorporated
into this Agreement by reference:
(Check the exhibits the Parties wish to incorporate into this Agreement.)
3.1.1 Exhibit "A"
Operator, Description of Leases, Division of Interests, and
Notification Addresses
3.1.2 Exhibit "B"
Insurance Provisions.
3.1.3 Exhibit "C"
Accounting procedure.
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3.1.4 Exhibit "D"
Nan-discrimination Provisions.
3.1.5 Exhibit "E"
Gas Balancing Agreement.
3.1.6 Exhibit "F"
Tax Partnership Provision.
3.1.7 Exhibit "G"
Memorandum of Operating Agreement and Financing Statement.
3.1.8 Exhibit "H".
Other (e.g. -Dispute-Resolution).
3.1.9 Exhibit "I"
Security Rights; Default' Unpaid Charges' Carved-out Interests
3.2 Conflicts
If a provision of an exhibit, except Exhibits "D," "E," or "F", is
inconsistent with a provision in the body of this Agreement, the
provision in the body of this Agreement shall prevail. If a provision of
Exhibit "D," "E," or "F", is inconsistent with a provision in the body of
this Agreement, however, the provision of the exhibit shall prevail.
ARTICLE 4
OPERATOR
4.1 Operator
Chevron U.S.A. Inc. (Chevron) is designated as the Operator of the
Contract Area covered by this Offshore Operating Agreement. The Parties
shall promptly execute and provide Operator with all documents required
by the MMS in connection with the designation of Chevron as Operator or
with the designation of any other Party as a substitute or successor
Operator. Unless agreed to the contrary by all Parties hereto, Operator
shall also be classified as the designated applicant for oil spill
financial responsibility purposes and each Non-operating Party shall
promptly execute the appropriate documentation reflecting this
designation and promptly provide same to Operator for filing with MMS.
4.2 Substitute Operator
Except as otherwise provided in Article 4.2.1 (Circumstances Under Which
the Operator Must Conduct a Non-Consent Operation), if the Operator
becomes a Non-participating Party in a Non-consent Operation, the
Participating Parties may approve the designation of any Participating
Party as the substitute Operator by the vote of two (2) or more of the
7
Participating Parties having a combined forty-five percent (45%) or more
of the Participating Interests. The substitute Operator shall serve only
(a) for the Non-consent Operation, (b) on the Lease, or that portion of
the Lease, affected by the Non-consent Operation, and (c) with the same
authority, rights, obligations, and duties as the Operator. If a
Non-operator is the only Participating Party in a Non-consent Operation,
then the Non-operator shall be designated as. the substitute Operator for
that Non-consent Operation, with. no vote required, unless the
Non-operator elects not to accept the designation. No Non-operator shall
ever be designated as a substitute Operator against its will. If a
substitute Operator is not designated under the foregoing procedures, the
Operator shall, upon the unanimous agreement of the Participating Parties
and the Operator, conduct the Non-consent Operation on behalf of the
Participating Parties and at the Participating Parties' sole cost and
risk under Article 13 (Non-Consent Operations).
4.2.1 Circumstances Under Which the Operator Must Conduct a Non-Consent
Operation If:
(a) a drilling rig is on location and the Operator becomes a
Non-participating Party in a supplemental AFE for an
Exploratory Operation, or Development Operation, or
(b) the Operator becomes a Non-participating Party in an
operation to be conducted from a Platform operated by the
Operator, the Operator, as a Non-participating Party, shall
conduct the Non-consent Operation on behalf of the
Participating Parties and at the Participating Parties'
sole cost and risk under Article 13 (Non-Consent
Operations).
4.2.2 Operator's Conduct of a Non-Consent Operation in Which it is a
Non-participating Party
When, under Article 4.2 (Substitute Operator) or Article 4.2.1
(Circumstances Under Which the Operator Must Conduct a Non-Consent
Operation), the Operator conducts a Non-consent Operation in which
it is a Non-participating Party, it shall follow the practices and
standards in Article 5 (Authorities and Duties of Operator).
Notwithstanding anything to the contrary in Exhibit "C", the
Operator shall not be required to proceed with the Non consent
Operation until the Participating Parties have advanced the total
estimated costs of the Non-consent Operation to the Operator. The
Operator shall never be obligated to expend any of its own funds
for the Non-consent Operation in which it is a Non participating
Party.
4.2.3 Appointment of a Substitute Operator After expiration of all
applicable response periods for the Non-consent Operation and
selection of a substitute Operator, each Party shall promptly
provide the substitute Operator with the appropriate MMS
designation of operator forms and designation of oil spill
responsibility forms. The Operator and the substitute Operator
8
shall coordinate the change of operatorship to avoid interfering
with ongoing activities and operations, if any, including but not
limited to, lease maintenance activities and operations.
4.2.4 Redesignation of Operator
Within five (5) days after conclusion of the Non-consent
Operation, all Parties shall execute and provide the Operator with
the appropriate MMS designation of operator forms and designation
of oil spill responsibility forms to return operatorship to the
Operator, thereby superseding the Parties' designation of the
substitute Operator under Article 4.2.3 (Appointment of a
Substitute Operator).
4.3 Resignation of Operator
Subject to Article 4.5 (Selection of Successor), the Operator may resign
at any time by giving written notice to the Parties, except that the
Operator may not resign during a Force Majeure or an emergency that poses
a threat to life, safety, property, or the environment. If the. Operator
ceases to own a Working Interest, the Operator automatically shall be
deemed to have resigned as the Operator without any action by the
Non-operators.
4.4 Removal of Operator
Operator may be removed by an affirmative vote of the Parties owning a
combined Working Interest of fifty-one percent (51%) or more of the
remaining Working Interest after excluding the Operator's Working
Interest if:
(a) Operator becomes insolvent or unable to pay its debts as they
mature, makes an assignment for the benefit of creditors, commits
an act of bankruptcy, or seeks relief under laws providing for the
relief of debtors;
(b) a receiver is appointed for Operator or for substantially all of
its property or affairs;
(c) a Transfer of Interest by the Operator which reduces the
Operator's Working Interest to less than the Working Interest of a
Non-operator, whether accomplished by one or more Transfer of
Interest; or
(d) Operator commits a substantial breach of a material provision of
this Agreement and fails to cure the breach within thirty (30)
days after notice of the breach.
If a petition for relief under the federal bankruptcy laws is filed by or
against Operator, and if a federal bankruptcy court prevents the removal
of Operator, all Non-operators and Operator shall comprise an interim
operating committee to operate until Operator has elected to reject or
assume this Agreement under the Bankruptcy Code. An election by Operator
as a debtor-inpossession or by a trustee in bankruptcy to reject this
Agreement shall be deemed to be a resignation by Operator without any
action by the Non-operators, except the selection of a successor. To be
effective, a vote to remove Operator for any cause described above must
be taken within sixty (60) days after a Non-operator receives actual
knowledge of the cause. A change of corporate name or structure of
Operator shall not be deemed to be a resignation or basis for removing
Operator.
9
4.5 Selection of Successor
Upon resignation or removal of Operator, a successor Operator shall be
selected from among the Parties by an affirmative vote of two (2) or more
Parties having a combined Working Interest of forty-five percent (45%) or
more. If the resigned or removed Operator is not entitled to vote, fails
to vote, or votes only to succeed itself, then the successor Operator
shall be selected by the affirmative vote of the Parties owning a
combined Working Interest of fifty-one percent (51%) or more of the
remaining Working Interest after excluding the Working Interest of the
resigned or removed Operator. If the Operator assigns all or a part of
its Working Interest, then under Article 4.3 (Resignation of Operator) or
Article 4.4.(c), the Party who acquired all or a part of the former
Operator's Working Interest shall not be excluded from voting for a
successor Operator. If there are only two Parties to this Agreement when
the Operator resigns or is removed, then the Non operator automatically
has the right, but not the obligation, to become the Operator. If no
Party is willing to become the Operator, this Agreement shall terminate
under Article 27.1 (Term).
4.6 Effective Date of Resignation or Removal
The resignation or removal of the Operator shall become effective as soon
as practical but no later than 7:00 a.m. on the first day of the month
following a period of ninety (90) days after the date of resignation or
removal, unless a longer period is required for the Parties to obtain
approval of the designation of the successor Operator, and designated
applicant for oil spill financial responsibility purposes, by the MMS;
however, in no event shall the resignation or removal of Operator become
effective until a successor Operator has assumed the duties of Operator.
The resignation or removal of the outgoing Operator shall not prejudice
any rights, obligations, or liabilities resulting from its operatorship.
The successor Operator may charge the Joint Account for reasonable costs
incurred in connection with copying or obtaining the former Operator's
records, information or data except when the change of Operator results
from a merger, consolidation, reorganization or sale or transfer to an
Affiliate of the Operator.
4.7 Delivery of Property
On the effective date of resignation or removal of the Operator, the
outgoing Operator shall deliver or transfer to the successor Operator
custodianship of the Joint Account and possession of all items purchased
for the Joint Account under this Agreement, all Hydrocarbons that are not
the separate property of a Party, all equipment, materials, and
appurtenances purchased for the Joint Account under this Agreement, which
are not already in the possession of the successor Operator, and all
books, records, and inventories relating to the Joint Account (other than
those books, records, and inventories maintained by the outgoing Operator
as the owner of a Working Interest). The outgoing Operator shall
distribute or return all funds related to the Joint Account to the
Parties who contributed the funds or are otherwise entitled to receive
the funds under this Agreement. The outgoing Operator shall further use
its reasonable efforts to transfer to the successor Operator, as of the
effective date of the resignation or removal, its rights as Operator
10
under all contracts exclusively relating to the activities or operations
conducted under this Agreement, and the successor Operator shall assume
all obligations of the Operator that are assignable under the contracts.
The Parties may audit the Joint Account and conduct an inventory of all
property and all Hydrocarbons that are not the separate property of a
Party, and the inventory shall be used in the accounting to ' all Parties
by the outgoing Operator of the property and the Hydrocarbons that are
not the separate property of a Party. The inventory and audit shall be
conducted under Exhibit "C".
ARTICLE 5
AUTHORITY AND DUTIES OF OPERATOR
5.1 Exclusive Right to Operate
Unless otherwise provided in this Agreement, Operator shall have the
exclusive right and duty to conduct operations (or cause them to be
conducted) under this Agreement. In performing services under this
Agreement for the Non-operators, Operator shall be an independent
contractor, not subject to the control or direction of Non-operators,
except for the type of operation to be undertaken in accordance with the
voting and election procedures in this Agreement. No Party shall be
deemed to be, or hold itself out as, the agent or fiduciary of another
Party.
5.2 Workmanlike Conduct
Operator shall timely commence and conduct all operations in a good and
workmanlike manner, as would a prudent operator under the same or similar
circumstances. OPERATOR SHALL NOT BE LIABLE TO NON-OPERATORS FOR LOSSES
SUSTAINED OR LIABILITIES INCURRED, EXCEPT AS MAY RESULT FROM OPERATOR'S
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Operator shall never be required
under this Agreement to conduct an operation that it believes would be
unsafe or would endanger persons, property or the environment. Unless
otherwise provided in this Agreement, Operator shall consult with
Non-operators and keep them informed of all important matters.
5.3 Liens and Encumbrances
Operator shall endeavor to keep the Contract Area, ▇▇▇▇▇, Platforms,
Development Facilities, and other equipment free from all liens and other
encumbrances occasioned by operations hereunder, except those provided in
Article 8.6 (Security Rights).
5.4 Employees and Contractors
Operator shall select employees and contractors and determine their
number, hours of labor, and compensation. The employees shall be
employees of Operator.
11
5.5 Records
The Operator shall keep or cause to be kept accurate books, accounts, and
records of activities or operations under this Agreement in compliance
with the Accounting Procedure in Exhibit "C". Unless otherwise provided
in this Agreement, all records of the Joint Account shall be available to
a Non-operator as provided in Exhibit "C". The Operator shall use
good-faith efforts to ensure the settlements, ▇▇▇▇▇▇▇▇, and reports
rendered to each Party under this Agreement are complete and accurate.
The Operator shall notify the other Parties promptly upon the discovery
of any error or omission pertaining to the settlements, ▇▇▇▇▇▇▇▇, and
reports rendered to each Party.
5.6 Compliance
Operator shall comply, and shall require' all agents and contractors to
comply, with all applicable laws, rules, regulations, and orders of
governmental authorities having jurisdiction.
5.7 Contractors
Operator may enter into contracts with qualified and responsible
independent contractors for the design, construction, installation,
drilling, production or operation of ▇▇▇▇▇, Platforms and Development
Facilities. Insofar as possible, Operator shall use competitive bidding
to procure goods and services for the benefit of the Parties. All
drilling operations conducted under this Agreement shall be conducted by
properly qualified and responsible drilling contractors under current
competitive contracts. A drilling contract will be deemed to be a current
competitive contract if it (a) was made within twelve (12) months before
the commencement of the well and (b) contains terms, rates, and
provisions that, when the contract was made, did not exceed those
generally prevailing in the area for operations involving substantially
equivalent rigs that are capable of conducting the drilling operation. At
its election, Operator may use its own or an Affiliate's drilling
equipment, ▇▇▇▇▇▇▇ barge, tools, or machinery to conduct drilling
operations, but the work shall be (i) performed by Operator or its
Affiliate acting as an independent contractor, (ii) approved by written
agreement with the Participating Parties before commencement of
operations, and (iii) conducted under the same terms and conditions and
at the same rates as are customary and prevailing in competitive
contracts of third parties doing work of similar nature.
5.8 Governmental Reports
Operator shall make reports to governmental authorities it has a duty to
make as Operator and shall furnish copies of the reports to the
Participating Parties. The Operator shall provide each Non-operating
Party with a copy of each notice, order, and directive received from the
MMS. As soon as reasonably practicable, each Party shall give written
notice to the other Parties before each meeting with government
authorities of which it has notice and that affects the Contract Area.
5.9 Information to Participating Parties
Except as provided in Article 8.6, Operator shall furnish each
Participating Party the following information, if applicable, for each
activity or operation conducted by Operator:
12
5.9.1 A copy of the application for permit to drill and all amendments
thereto.
5.9.2 A daily drilling report (or Reworking report or Recornpletion
report, if applicable), giving the depth, corresponding
lithological information, data on drilling fluid characteristics,
information about drilling or operational difficulties or delays,
if any, and other pertinent information, by facsimile transmission
or electronic mail within twenty-four (24) hours (exclusive of
Saturdays, Sundays, and federal holidays) for well operations
conducted in the preceding twenty-four (24) hour period.
5.9.3 A complete report of each core analysis.
5.9.4 A copy of each electrical survey, currently as it is run; all
data for each radioactivity log, temperature survey, deviation or
directional survey, caliper log, and other log or survey obtained
during the drilling of the well; and, upon completion of the well,
a composite of all electrical-type logs, insofar as is reasonable
and customary.
5.9.5 A copy of all well test results, bottom-hole pressure surveys, and
fluid analyses.
5.9.6 Upon written request received by Operator before commencement of
drilling, samples of cuttings and cores taken from the well (if
sufficient cores are retrieved), packaged in containers furnished
by Operator at the expense of the requesting Party, marked as to
the depths from which they were taken, and shipped at the expense
of the requesting Party by express courier to the address
designated by the requesting Party. 5.9.7 To the extent possible,
twenty-four (24) hours' advance notice of, and access to, logging,
coring, and testing operations.
5.9.8 A monthly report on the volume of Hydrocarbons and water produced
from each well; however, Operator shall provide reports more often
if feasible.
5.9.9 A copy of each report made to a governmental authority having
jurisdiction.
5.9.10 Upon written request, other pertinent information available to
Operator, including, but not limited to, those portions of the
contracts to be used for the benefit of the Joint Account and
which pertain to the Lease, but excluding the Operator's
proprietary or secret information and its subsurface
interpretations that have been independently developed at
Operator's sole cost and expense.
5.10 Information to Non-participating Parties
Operator shall furnish each Non-participating Party a copy of each
Operator's governmental report that is available to the public and
associated with the applicable Non-consent Operation, Until the
applicable recoupment under Article 13 (Non-consent Operations) is
complete, a Non participating Party shall not receive or review any other
information specified by Article 5.9 (information to Participating
Parties), except as may be necessary for a payout audit of the Non
consent Operation.
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ARTICLE 6
VOTING AND VOTING PROCEDURES
6.1 Voting Procedures
Unless otherwise provided in this Agreement, each matter requiring
approval of the Parties shall be determined as follows:
6.1.1 Voting Interest
Subject to Article 8.6 (Security Rights), each Party shall have a voting
interest equal to its Working Interest or its Participating Interest, as
applicable.
6.1.2 Vote Required
Unless expressly stated to the contrary herein, a matter requiring
approval of the Parties shall be decided by the affirmative vote of two
(2) or more Parties having a combined voting interest of forty-five
percent (45%) or more. If, there are only two (2) Parties to this
Agreement, the matter shall be determined by unanimous consent.
6.1.3 Votes
The Parties may vote at a meeting; by telephone, promptly confirmed in
writing to Operator; or by facsimile transmission. Operator shall give
each Party prompt notice of the results of the voting.
6.1.4 Meetings
Meetings of the Parties may be called by Operator upon its own motion or
at the request of a Party having a voting interest of not less than ten
percent (10%). Except in an emergency, no meeting shall be called on less
than five (5) days' advance written notice, and the notice of meeting
shall include the meeting agenda prepared by the Operator or the
requesting Party. The representative of Operator shall be chairman of
each meeting. Only matters included in the agenda may be discussed at a
meeting, but the agenda and items included in the agenda may be amended
prior to or during the meeting by unanimous agreement of all Parties.
ARTICLE 7
ACCESS
7.1 Access to Contract Area
Except as provided in Article 8.6, each Party shall have access, at its
sole risk and expense and at all reasonable times, to the Contract Area,
Platform, Development Facilities and Joint Account assets to inspect
activities, operations and ▇▇▇▇▇ in which it participates, and to
pertinent records and data. A Non-operator shall give Operator at least
twenty-four (24) hours' notice of the Non
14
operator's intention to visit the Contract Area. To protect Operator and
the Non-operators from unnecessary lawsuits, claims, and legal liability,
if it is necessary for a person who is not performing services for
Operator directly related to the joint operations, but is performing
services solely for a Non-operator or pertaining to the business or
operations of a Non-operator, to visit, use, or board a rig, well,
Platform, or Development Facilities subject to this Agreement, the
Nonoperator shall give Operator advance notice of the visit, use, or
boarding, and shall secure from that person an agreement, in a form
satisfactory to Operator, indemnifying and holding Operator and
Non-operators harmless, or shall itself provide the same hold harmless
and indemnification in favor of Operator and other Non-operators before
the visit, use, or boarding.
7.2 Reports
On written request, Operator shall furnish a requesting Party any
information not otherwise furnished under Article 5 (Authority and Duties
of Operator) to which that Party is entitled under this Agreement. The
costs of gathering and furnishing information not furnished under Article
5 shall be charged to the requesting Party. Operator is not obligated to
furnish interpretative data that was generated by Operator at its sole
cost.
7.3 Confidentiality
Except as otherwise provided in Article 7.4 (Limited Disclosure), Article
7.5 (Limited Releases to Offshore Scout Association), Article 7.6 (Media
Releases), and Article 21.1 (Notice of Contributions Other Than Advances
for Sale of Production), and except for necessary disclosures to
governmental authorities having jurisdiction, or except as agreed in
writing by all Participating Parties, no Party or Affiliate shall
disclose Confidential Data to a third party. This Article 7.3 shall be in
force and effect for a term of two (2) years after termination of this
Agreement.
7.4 Limited Disclosure
A Party may make Confidential Data to which it is entitled under this
Agreement available to:
(a) outside professional consultants and reputable engineering firms
for the purpose of evaluations and/or submitting bids;
(b) gas transmission companies for Hydrocarbon reserve or other
technical evaluations;
(c) reputable financial institutions for study before commitment of
funds;
(d) governmental authorities having jurisdiction or the public, to the
extent required by applicable laws or by those governmental
authorities;
(e) the public, to the extent required by the regulations of a
recognized stock exchange;
(f) third parties with whom a Party is engaged in a bona fide effort
to effect a merger or consolidation, sell all or a controlling
part of that Party's stock, or sell all or substantially all
assets of that Party or an Affiliate of that Party; and
(g) an Affiliate of a Party.
(h) such limited well information that is typically disclosed by
Operator's representative during meetings of the Offshore Oil
Scouts Association.
15
(i) third parties with whom a Party is engaged in a bona fide effort to
sell, farm out, or trade all or a portion of its interest in the Contract
Area; Confidential Data, made available under Articles 7.4(f) and 7.4(i)
shall not be removed from the custody or premises of the Party making the
Confidential Data available to third parties described in those Articles.
A third party permitted access under Articles 7.4, (a), (b), (c), (f),
and (i) shall first agree in writing neither to disclose the Confidential
Data to others nor to use the Confidential Data, except for the purpose
for which it was disclosed. The disclosing Party shall give prior notice
to the other Parties that it intends to make the Confidential Data
available.
7.5 Limited Releases to Offshore Scout Association
The Operator may disclose Confidential Data to the Offshore Oil Scouts
Association at their regularly scheduled meetings. The Confidential Data
that may be disclosed is limited to information concerning well
locations, well operations, and well completions to the extent
reasonable and customary in industry practice or required under the
by-laws of the Offshore Oil Scouts Association.
7.6 Media Releases
Without the prior written consent of the other Participating Parties,
which such consent shall not be unreasonably withheld, or otherwise
permitted by this Article, no Party shall issue a news or media release
about operations on the Contract Area. In an emergency involving
extensive property or environmental damage, operations failure, loss of
human life, or other clear emergency, and for which there is insufficient
time to obtain the prior approval of the Parties, Operator may furnish
the minimum, strictly factual, information necessary to satisfy the
legitimate public interest of the media and governmental authorities
having jurisdiction. Operator shall then promptly advise the other
Parties of the information furnished in response to the emergency. The
foregoing, however, shall not restrict disclosures by either Party which
are required by applicable securities or other laws or regulations or the
applicable rules of any stock exchange having jurisdiction over the
disclosing Party or its Affiliates.
ARTICLE 8
EXPENDITURES
8.1 Basis of Charge to the Parties
Subject to the other provisions of this Agreement, Operator shall pay all
costs incurred under this Agreement, and each Party shall reimburse
Operator in proportion to its Participating Interest. All charges,
credits, and accounting for expenditures shall be made and done pursuant
to Exhibit "C".
16
8.2 AFEs
Before undertaking an operation or making a single expenditure to be in
excess of Two Hundred and Fifty Thousand Dollars ($250,000), and before
conducting an activity or operation to drill, Sidetrack, Deepen,
Complete, Rework or Recomplete a. well (regardless of the estimated
cost), Operator shall submit an AFE for the operation or expenditure to
the Parties for approval. Operator shall also furnish an informational
AFE to all Parties for- an operation or single expenditure estimated to
cost Two Hundred and Fifty Thousand Dollars ($250,000) or less, but in
excess of Fifty-Thousand Dollars ($50,000).
8.3 Emergency and Required Expenditures
Notwithstanding anything in -this Agreement to the contrary,. Operator is
hereby authorized to conduct operations and incur expenses that in its
opinion are reasonably necessary to safeguard life, property, and the
environment in case of an actual or imminently. threatened. blowout,
explosion, accident, fire, food, storm, hurricane, catastrophe, or other
emergency, and the expenses shall be borne by the Participating Parties
in the affected operation. Operator shall report to the Participating
Parties, as promptly as possible, the nature of the emergency and the
action taken. Operator is also authorized to conduct operations and incur
expenses reasonably required by statute, regulation, order, or permit
condition or by a governmental authority having jurisdiction, which
expenses shall be borne by the Participating Parties in the affected
operation, subject to Exhibit "C".
8.4 Advance ▇▇▇▇▇▇▇▇
Operator may require each Party to advance its respective share of
estimated expenditures pursuant to Exhibit "C".
8.5 Commingling of Funds
Funds received by Operator under this Agreement may be commingled with
its own funds.
8.6 Security Rights (LA)
Exhibit "I" (LOUISIANA) if applicable, applies.
8.7 Overexpenditures
Operator shall notify the Participating Parties when it appears that
actual expenditures for an approved operation in an Exploratory or
Development Well or for the design, construction, and installation of a
Platform or Development Facilities will exceed the AFE estimate (the
excess being an "Overexpenditure"). If it appears that the
Overexpenditure will be no more than twenty percent (20%), hereinafter
referred to as the "Allowable Variance," Operator's notice shall be
forwarded for information only. If Operator determines that the
Overexpenditure will exceed the Allowable Variance, Operator shall submit
a new AFE for the current operation ("Supplemental AFE") for approval of
the Participating Parties. The Participating Parties may then elect
whether to continue to participate within thirty (30) days or forty-eight
(48) hours if a rig is on location, exclusive of Saturdays, Sundays, and
17
federal holidays, after receipt of the Supplemental AFE. If fewer than
all, but one (1) or more Participating Parties elect to continue to
participate in the current operation and agree to pay and bear one
hundred percent (100%) of the costs and risks of conducting it, Operator
shall continue to conduct the current operation. Otherwise, the operation
shall cease. A Participating Party that elects not to continue to
participate in the current operation shall become a Non-participating
Party in the operation, from and after the date when the Overexpenditure
exceeds the Allowable Variance, not including emergency expenditures, and
Article 13.2 (Relinquishment of Interest) shall apply to the Party only
to the extent that the costs of the operation exceed the Allowable
Variance. Unless otherwise agreed by the Participating Parties, each
Participating Party. electing to continue to participate in the current
operation may, but is not obligated to, pay and bear that portion of the
costs and risks attributable to the interests of the Non-participating
Parties in the ratio that the Participating Party's interest bears to the
total interests of all Participating Parties electing to continue
participating in the current operation. If it appears to Operator that
actual expenditures for an approved operation will exceed the
Supplemental AFE estimate, Operator shall again repeat the procedure of
this Article 8.7, using the estimate in the most recently approved
Supplemental AFE as the basis for determining the Overexpenditure and
Allowable Variance. An initial Participating Party in an operation shall
remain responsible for its share of all costs and risks for plugging,
replugging, capping, burying, disposing, abandoning, removing, and
restoring associated with the operation, subject to Article 14
(Abandonment, Salvage, and Surplus), regardless of its subsequent
election on a Supplemental AFE, except to the extent such costs were
increased by subsequent operations in which it elected not to
participate. Notwithstanding anything in this Article to the contrary, if
expenditures exceed the Allowable Variance for an emergency, as provided
in Article 8.3 (Emergency and Required Expenditures), Operator shall not
be required to secure the approval of the Participating Parties, as the
expenditures will be borne by all Participating Parties. However, once
stabilization takes place and emergency expenditures are no longer' being
incurred, Operator shall promptly furnish a Supplemental AFE to the
Participating Parties for their review and election, as provided above.
ARTICLE 9
NOTICES
9.1 Giving and Receiving Notices
Except as otherwise provided in this Agreement, all AFEs and notices
required or permitted by this Agreement shall be in writing and shall be
delivered in person or by mail, courier service, or facsimile
transmission, with postage and charges prepaid, addressed to the Parties
at the addresses in Exhibit "A". When a drilling rig is on location and
18
standby charges are accumulating, however, notices pertaining to the rig
shall be given orally or by telephone. All telephone or oral notices
permitted by this Agreement shall be confirmed immediately thereafter by
written notice. A notice shall be deemed to have been delivered only when
received by the Party to whom it was directed, and the period for a Party
to deliver a response thereto begins on the date the notice is received.
"Receipt", for oral or telephone notice, means actual and immediate
communication to the Party to be-notified, and for written notice, means
actual delivery of the notice to the address of the Party to be notified,
as specified in this Agreement, or to the facsimile machine of that
Party. A responsive notice shall be deemed to have been delivered when
the Party to be notified is in receipt of same. When a response is
required in forty-eight. (48) hours or less, however, the response shall
be given orally or by telephone or facsimile transmission within that
period. If a Party is unavailable to accept delivery of a notice required
to be given orally or by telephone, the notice may be delivered by any
other method specified in this Article 9.1. A message left on an
answering machine or with an answering service or other third person
shall not be deemed to be adequate telephonic or oral notice.
9.2 Content of Notice
An AFE or notice requiring a response shall indicate the maximum response
time specified in Article 9.3 (Response to Notices). A proposal for a
Platform and/or Development Facilities shall include an AFE, containing a
description of the Platform and/or Development Facilities, including, but
not limited to, location, and the estimated costs of design, fabrication,
transportation, and installation. A proposal for a well operation shall
include an AFE, describing the estimated commencement date, the proposed
depth, the objective formation or formations to be penetrated or tested,
the Objective Horizon, the surface and bottomhole locations, proposed
directional or horizontal drilling operations, the type of equipment to
be used, and the estimated costs of the operation, including, but not
limited to, the estimated costs of drilling, testing, and Completing or
abandoning the well. If a proposed operation is subject to Article 13.11
(Lease Maintenance Operations), the notice shall specify that the
proposal is a Lease Maintenance Operation. A proposal for multiple
operations on more than one well location by the same rig shall contain
separate AFEs or notices for each operation and shall specify in writing
in what order the operations will be conducted. Each Party shall respond
to each proposed multiple operation in the manner provided in Article
9.3.3 (Proposal for Multiple Operations).
9.3 Response to Notices
Except as provided in Article 9.1, each Party's response to a proposal
shall be in writing to the proposing Party. Unless otherwise provided in
this Agreement, the response time shall be as follows:
9.3.1 Platform and/or Development Facilities Proposals
Each Party shall respond within ninety (90) days after its receipt
of the AFE or notice for a Platform and/or Development Facilities.
19
9.3.2 Well Proposals
Except as provided in Article 9.3.3 (Proposal for Multiple
Operations), each Party shall respond within thirty (30) days
after receipt of the well, Rework or Recompletion proposal, but if
(a) a drilling rig is on location, (b) the proposal relates to the
same well or its substitute, and (c) standby charges are
accumulating, a response shall be made within forty-eight(48)
hours after receipt of the proposal, exclusive of Saturdays,,
Sundays, and federal holidays.
9.3.3 Proposal for Multiple Operations
When a proposal is made to conduct multiple Development
Operations at separate well locations using the same rig, each
Party shall respond (a) to the well operation taking precedence,
within thirty (30) days after receipt of the proposal; and (b) to
each subsequent well location, within forty-eight (48) hours after
completion of approved operations at the prior location and
notification thereof by Operator.
9.3.4 Other Matters
For all other matters requiring notice, each Party shall respond
within thirty (30) days after receipt of notice.
9.4 Failure to Respond
Failure of a Party to respond to a proposal or notice, to vote, or to
elect to participate within the period required by this Agreement shall
be deemed to be a negative response, vote, or election.
9.5 Response to Counterproposals
Should a counterproposal be allowed under this Agreement, responses to
that counterproposal must be made within the response period for the
original proposal.
9.6 Timely Well Operations
Unless otherwise provided, an approved well shall be commenced within one
hundred twenty (120) days after the date when the last applicable
election on that well may be made. ▇▇▇▇▇ shall be deemed to have
commenced on the day charges commence under the drilling contract for
that well. If the Operator does not commence the drilling of an approved
well within the one hundred twenty (120) day time frame, the other
Participating Parties in that well may select a substitute Operator to
drill the approved well. In all events, including the occurrence of a
Force Majeure, if the substitute Operator fails to commence actual
drilling operations on an approved well within one hundred eighty (180)
days from the proposal of the approved well, the proposal of the well and
its approval will be deemed to have been withdrawn. Subject to Exhibit
"C", if a proposal for a well is deemed to have been withdrawn, all costs
incurred in the preparation for or in furtherance of that well will be
chargeable to the Parties who voted to participate in the well proposal
for that well.
20
9.7 Timely Platform/Development Facilities Operations
Unless otherwise provided, Operator shall commence, or cause to commence,
the construction, acquisition, or refurbishment of an approved proposal
for a Platform and/or Development Facilities within one hundred eighty
(180) days after the date when the last applicable election on that
Platform and/or Development Facilities may be made. The construction,
acquisition, or refurbishment of an approved Platform and/or Development
Facilities proposal shall be deemed to have commenced on the date the
contract is awarded for the design, acquisition, fabrication, or
refurbishment of the Platform and/or Development Facilities. If the
Operator does not commence the construction, acquisition, or
refurbishment of an approved Platform and/or Development Facilities
proposal within the one hundred eighty (180) day time frame, the other
Participating Parties in that Platform and/or Development Facilities
proposal may select a substitute Operator to commence the Platform and/or
Development Facilities. In all events, including the occurrence of a
Force Majeure, if the substitute Operator fails to commence the
construction, acquisition, or refurbishment of an approved Platform
and/or Development Facilities within two hundred forty (240) days from
the proposal of the approved Platform and/or Development Facilities, the
proposal of the Platform and/or Development Facilities and their approval
will be deemed to have been withdrawn. Subject to Exhibit "C", regardless
of whether or not the construction, acquisition, or refurbishment of a
Platform and/or Development Facilities is commenced, all costs incurred
by Operator, attributable to that activity, shall be paid by the
Participating Parties.
ARTICLE 10
EXPLORATORY OPERATIONS
10.1 Proposing Operations
A Party may propose an Exploratory Operation in accordance with Article 9
(Notices) to the other Parties who are entitled to vote or make an
election in regard to that operation.
10.2 Counterproposals
When an Exploratory Operation is proposed, a Party may, within fifteen
(15) days after receipt of the AFE or notice for the original proposal,
make a counterproposal to conduct an alternative Exploratory Operation by
sending an AFE or notice to such Parties in accordance with Article 9
(Notices). The AFE or notice shall indicate that the proposal is a
counterproposal to the original proposal. If one or more counterproposals
are made, such Parties shall elect to participate in either the original
proposal, one counterproposal, or neither the original proposal nor a
counterproposal. If two or more proposals receive the approval of the
number of Parties and combined Working Interests required by Article 10.5
(Operations by Fewer Than All Parties), the proposal receiving the
largest percentage of Working Interest approval shall take precedence,
21
and in the event of a tie between two (2) or more approved proposals, the
proposal first received by the Parties shall take precedence. Except for
the response period provided in this Article 10.2, a counterproposal
shall be subject to the same terms and conditions as the original
proposal.
10.3 Operations by All Parties
If all Parties elect to participate in the proposed operation, Operator
shall conduct the operation at their cost and risk.
10.4 Second Opportunity to Participate
If there are more than two (2) Parties to this Agreement and if fewer
than all but two (2) or more Parties having a combined Working Interest
of forty-five percent (45%) or more elect to participate, then the
proposing Party shall notify the Parties of the elections made, whereupon
a Party originally electing not to participate may then elect to
participate by notifying the proposing Party within forty eight (48)
hours, exclusive of Saturdays, Sundays, and federal holidays, after
receipt of such notice. If all Parties elect to participate in the
proposed operation, Operator shall conduct the operation at their cost
and risk. If there are only two (2) Parties to this Agreement and one (1)
of the Parties having forty-five percent (45%) or more of the Working
Interest elects to participate and agrees to pay and bear one hundred
percent (100%) of the costs and risks of the operation, then there shall
be no second election and the Operator, subject to Article 4.2
(Substitute Operator), shall conduct the operation as a Non-consent
Operation for the benefit of the Participating Party, and the provisions
of Article 13 (Non-consent Operations) shall apply.
10.5 Operations by Fewer Than All Parties
If after the election (if applicable) made under Article 10.4 (Second
Opportunity to Participate), fewer than all but two (2) or more Parties
having a combined Working Interest of forty-five percent (45%) or more
have elected to participate in the proposed operation, the proposing
Party shall notify the Participating Parties, and each Participating
Party shall have forty eight (48) hours, exclusive of Saturdays, Sundays,
and federal holidays, after receipt of the notice to notify the proposing
Party of the portion of costs and risks, attributable to the total
Non-participating Parties' interests it elects to pay and bear. Unless
otherwise agreed by the Participating Parties, each Participating Party
may, but shall not be obligated to, pay and bear that portion of the
costs and risks attributable to the total Non-participating Parties'
interests in the ratio that the Participating Party's interest bears to
the total interests of all Participating Parties who elect to pay and
bear a portion of costs and risks attributable to the total
Non-participating Parties' interests. Failure to respond shall be deemed
to be an election not to pay or bear any additional costs or risks. If
the Participating Parties agree to pay and bear one hundred percent
(100%) of the costs and risks of the operation, Operator, subject to
Article 4.2 (Substitute Operator), shall conduct the operation as a
Non-consent Operation for the benefit of the Participating Parties, and
the provisions of Article 13 (Non-consent Operations) shall apply. If
such agreement is not obtained, however, the operation shall not be
conducted and the effect shall be as if the proposal had not been made.
22
10.6 Expenditures Approved
Approval of an Exploratory Operation shall cover all necessary
expenditures associated with the operation proposed in the AFE or notice
that are incurred by Operator in connection with (a) preparations for
drilling; (b) the actual drilling; (c) evaluations, such as testing,
coring, and logging; and (d) plugging and abandonment, subject to any
limitation that may exist as provided under Article 8 above.
10.7 Conduct of Operations
After commencement of drilling an Exploratory Well, Operator shall
diligently conduct the operation without unreasonable delay until the
well reaches the Objective Depth, unless the well encounters, at a lesser
depth, impenetrable conditions or mechanical difficulties that cannot be
overcome by reasonable and prudent operations and that render further
operations impracticable, except as may otherwise be provided in optional
provision Article 8.7 (Overexpenditures), if selected. If a well does not
reach its Objective Depth as a result of the conditions mentioned in this
Article 10.7, the operation shall be deemed to have been completed and
Article 13 (Non consent Operations) shall apply to each Non-participating
Party for the portion of the well drilled.
10.8 Course of Action After Reaching Objective Depth
When an Exploratory Well has been drilled to its Objective Depth and
reasonable testing, coring, and logging have been completed as set forth
in the approved AFE and the results have been furnished to the
Participating Parties, Operator shall notify the Participating Parties of
Operator's recommendation for further operations in the well, and the
following provisions shall apply:
10.8.1 Election by Participating Parties
A Participating Party shall have the right to propose another
operation by notifying the Operator and the other Participating
Parties of its proposed operation within twenty-four (24) hours,
exclusive of Saturdays, Sundays, and federal holidays, of receipt
of the Operator's notice. The Participating Parties shall notify
Operator within forty-eight (48) hours, exclusive of Saturdays,
Sundays, and federal holidays, of receipt of the Operator's
proposal whether the Participating Parties elect to (a)
participate in Operator's recommended operation, (b) participate
in another proposed operation, or (c) not participate in any
operation. Failure to respond shall be deemed to be an election
not to participate in any of the proposed operations. The
Participating Parties shall respond to all proposals within the
period allotted to the original proposal.
10.8.2 Priority of Operations
If all Participating Parties elect to participate in the same
proposed operation, Operator shall conduct the operation at their
cost and risk. If more than one (1) operation is approved by two
(2) or more Participating Parties having a combined Working
Interest of forty-five percent (45%) or more, then the approved
operation with the lowest number as indicated below shall take
precedence:
23
(Indicate the order of preference.)
1 Additional Testing, coring, or logging. (if conflicting
proposals are approved, the proposal receiving the largest
percentage of Working Interest approval shall take
precedence, and in the event of a tie between two (2) or
more approved proposals, the approved proposal first
received by the Parties shall take precedence.)
2 Deepen. (If conflicting proposals are approved, the
proposal receiving the largest percentage Working Interest
approval shall take precedence, and in the event of a tie
between two (2) or more approved proposals, the approved
proposal first received by the Parties shall take
precedence.)
3 Sidetrack. (If conflicting proposals are approved, the
proposal receiving the largest percentage Working Interest
approval shall take precedence, and in the event of a tie
between two (2) or more approved proposals, the approved
proposal first received by the Parties shall take
precedence.)
4 Complete at the Objective Horizon
5 Complete above the Objective Horizon. (If conflicting
proposals are approved, the operation proposed at the
deepest depth shall take precedence.)
6 Other operations: __________________ (If conflicting
proposals are approved, the proposal receiving the largest
percentage Working Interest approval shall take precedence,
and in the event of a tie between two (2) or more approved
proposals, the approved proposal first received by the
Parties shall take precedence.)
7 Temporarily abandon.
8 Plug and abandon.
10.8.3 Second Opportunity to Participate
If fewer than all but two (2) or more Participating Parties having
a combined Working Interest of forty-five percent (45%) or more
elect to participate in an operation, the proposing Party shall
notify the Participating Parties of the elections made, whereupon
a Party originally electing not to participate in the proposed
operation may then elect to participate by notifying the proposing
Party within twenty four (24) hours, exclusive of Saturdays,
Sundays, and federal holidays, after receipt of such notice. If
all Parties elect to participate in the proposed operation,
Operator shall conduct the operation at their cost and risk.
10.8.4 Operations by Fewer Than All Parties
If, after the election (if applicable) made under Article 10.8.3
(Second Opportunity to Participate), fewer than all but two (2) or
more Parties having a combined Working Interest of forty-five
percent (45%) or more elect to participate in the proposed
operation that takes precedence, the proposing Party shall notify
the Participating Parties and each Participating Party shall have
24
twenty four (24) hours, exclusive of Saturdays, Sundays, and
federal holidays, after receipt of the notice to notify the
proposing Party of the portion of the costs and risks attributable
to the total Non-participating Parties' interests it elects to pay
and bear. Unless otherwise agreed by the Participating Parties,
each Participating Party may, but shall not be obligated to, pay
and bear that portion of the costs and risks attributable to the
total Non-participating Parties' interests in the ratio that the
Participating Party's interest bears to the total interests of all
Participating Parties who elect to pay and bear a portion of costs
and risks attributable to the Non-participating Parties'
interests. Failure to respond shall be deemed to be an election
not to pay or bear any additional costs or risks. If the
Participating Parties agree to bear one hundred percent (100%) of
the costs and risks of the operation, Operator, subject to Article
4.2 (Substitute Operator), shall conduct the operation as a
Non-consent Operation for the benefit of the Participating
Parties, and the provisions. of Article 13 (Non-consent
Operations) shall apply. If such agreement is not obtained,
however, the operation shall not be conducted and the effect shall
be as if the proposal had not been made. If a Participating Party
in a well elects not to participate in the Deepening or
Sidetracking operation in the well, such non-consenting Party
shall become a Non-participating Party in all operations conducted
in the Deepened or Sidetracked portion of the well after that
election. If the Non-consent Operation is an Additional Testing,
coring, or logging operation, Article 13 (Non-consent Operations)
shall not apply, however, a Party electing not to participate in
the Additional Testing, coring, or logging shall not be entitled
to information resulting from the operation.
10.8.5 Subsequent Operations
Upon completion of an operation conducted under Article 10.8
(Course of Action After Reaching Objective Depth), if the well is
not either (a) Completed as a Producible Well, or (b) temporarily
abandoned or permanently plugged and abandoned, Operator shall
notify the Participating Parties of Operator's recommendation for
further operations in the well under Articles 10.8.1 through
10.8.4, which again shall apply. If sufficient approval is not
obtained to conduct a subsequent operation in a well or if all
Participating Parties elect to plug and abandon the well, subject
to Article 14 (Abandonment, Salvage, and Surplus), Operator shall
permanently plug and abandon the well at the cost and risk of all
Participating Parties. Each Participating Party shall be
responsible for its proportionate share of the plugging and
abandonment costs associated with the operation in which it
participated.
10.9 ▇▇▇▇▇ Proposed Below Deepest Producible Reservoir
If a proposal is made to conduct an Exploratory Operation involving the
drilling of a well to an Objective Horizon below the base of the deepest
25
Producible Reservoir, a Party may elect within the applicable period to
limit its participation in the operation down to the base of the deepest
Producible Reservoir. For purposes of this Article 10.9, a Party who
elects to limit its participation in the operation down to the base of
the deepest Producible Reservoir shall be referred to as "Shallow
Participant and a Party who elects to participate in the entire operation
shall be referred to as "Deep Participant". If a Party elects to limit
its participation to the base of the deepest Producible Reservoir;
Operator shall prepare and submit .to the Shallow Participant, for
informational purposes, a separate AFE covering operations down to the
deepest Producible Reservoir. The Shallow Participant shall be a
Participating Party in, and shall pay and bear the costs and risks of,
each operation to the base of the deepest Producible Reservoir, according
to its Participating Interest. The Shallow Participant shall be a
Non-participating Party in each operation below the deepest Producible
Reservoir, and the operation shall be considered a Non consent Operation,
and the provisions of Article 13 (Non-consent Operations) shall apply. If
the, well is Completed and produces Hydrocarbons from a horizon below the
deepest Producible Reservoir, the Deep Participant shall reimburse the
Shallow Participant for its share of the actual well costs to the base of
the deepest Producible Reservoir. Payment shall be due within thirty days
after receipt of notice of the well being completed below the deepest
Producible Reservoir. If the well is Completed and produces Hydrocarbons
from a horizon below the deepest Producible Reservoir, the Shallow
Participant shall reimburse the Deep Participant for its Working Interest
share of the actual well costs to the base of the deepest Producible
Reservoir in accordance with Article 13.4 (Deepening or Sidetracking Cost
Adjustments), upon the earlier of the time that (a) the well is plugged
back to a horizon above the base of the deepest Producible Reservoir, as
determined when the original well was proposed, (b) the well is plugged
and abandoned, or (c) the amount to be recouped by the Deep Participant
under Article 13 (Non consent Operations) is recovered.
ARTICLE 11
DEVELOPMENT OPERATIONS
11.1 Proposing Operations
A Party may propose a Development Operation in accordance with Article 9
(Notices) to the other Parties who are entitled to vote or make an
election in regard to that operation.
11.2 Counterproposals
When a Development Operation is proposed, a Party may, within fifteen
(15) days after receipt of the AFE or notice for the original proposal,
make a counterproposal to conduct an alternative Development Operation by
sending an AFE or notice to such Parties in accordance with Article 9
(Notices). The AFE or notice shall indicate that the proposal is a
26
counterproposal to the original proposal. If one or more counterproposals
are made, such Parties shall elect to participate in either the original
proposal, one counterproposal, or neither the original proposal nor a
counterproposal. If two or more proposals receive the approval of the
number of Parties and combined Working Interests required by Article 11.5
(Operations By Fewer Than All Parties), the proposal receiving the
largest percentage Working Interest approval shall take precedence, and
in the event of a tie between two (2) or more approved proposals, the
approved proposal of first received by the Parties shall prevail. Except
for the response period provided in this Article 11.2, a counterproposal
shall be subject to the same terms and conditions as the original
proposal.
11.3 Operations by All Parties
If all Parties elect to participate in the proposed operation, Operator
shall conduct the-operation at their cost and risk.
11.4 Second Opportunity to Participate
If there are, more than two (2) Parties to this Agreement and if fewer
than all but two (2) or more Parties having a combined Working Interest
of forty-five (45%) or more elect to participate, then the proposing
Party shall notify the Parties of the elections made, whereupon a Party
originally electing not to participate may then elect to participate by
notifying the proposing Party within forty eight (48) hours, exclusive of
Saturdays, Sundays, and federal holidays, after receipt of such notice.
If all Parties elect to participate in the proposed operation, Operator
shall conduct the operation at their cost and risk. If there are only two
(2) Parties to this Agreement and one (1) of the Parties having
forty-five percent (45%) or more of the Working Interest elects to
participate and agrees to pay and bear one hundred percent (100%) of the
costs and risks of the operation, then there shall be no second election
and the Operator, subject to Article 4.2 (Substitute Operator), shall
conduct the operation as a Non-consent Operation for the benefit of the
Participating Party, and the provisions of Article 13 (Non-consent
Operations) shall apply.
11.5 Operations by Fewer Than All Parties
If after the election (if applicable) made under Article 11.4 (Second
Opportunity to Participate), fewer than all but two (2) or more Parties
having a combined Working Interest of forty-five percent (45%) or more
have elected to participate in the proposed operation, the proposing
Party shall notify the Participating Parties, and each Participating
Party shall have forty eight (48) hours, exclusive of Saturdays, Sundays,
and federal holidays, after receipt of the notice to notify the proposing
Party of the portion of the costs and risks attributable to the total
Non-participating Parties' interests it elects to pay and bear. Unless
otherwise agreed by the Participating Parties, each Participating Party
may, but shall not be obligated to, pay and bear that portion of costs
and risks attributable to the total Non-participating Parties' interests
in the ratio that the Participating Party's interest bears to the total
interests of all Participating Parties who elect to pay and bear a
portion of the costs and risks attributable to the total
Non-participating Parties' interests. Failure to respond shall be deemed
to be an election not to pay or bear any additional costs or risks. If
27
the Participating Parties agree to pay and bear one hundred percent
(100%) of the costs and risks of the operation, Operator, subject to
Article 4.2 (Substitute Operator) shall conduct the operation as a
Non-consent Operation for the benefit of the Participating Parties, and
the provisions of Article 13 (Non-consent Operations) shall apply. If
such agreement is not obtained, however, the operation shall not be
conducted and the effect shall be as if the proposal had not been made.
11.6 Expenditures Approved
Approval of a Development Operation shall cover all necessary
expenditures associated with the operation proposed in the AFE or notice
that are incurred by Operator in connection with (a) preparations for
drilling; (b) the actual drilling; (c) evaluations, such as testing,
coring, and logging; and (d) plugging and abandonment, subject to any
limitation that may exist as provided under Article 8 above.
11.7 Conduct of Operations
After commencement of a Development Well, Operator shall diligently
conduct the operation without unreasonable delay until the well reaches
the Objective Depth, unless the well encounters, at a lesser depth,
impenetrable conditions or mechanical difficulties that cannot be
overcome by reasonable and prudent operations and render further
operations impracticable, except as may otherwise be provided in
optional provision Article 8.7 (Overexpenditures), if elected. If a
well does not reach its Objective Depth as a result of the conditions
mentioned in this Article 11.7, the operation shall be deemed to have
been completed and Article 13 (Non consent Operations) shall apply to
each Non-participating Party for the portion of the well drilled.
11.8 Course of Action After Reaching Objective Depth
When a Development Well has been drilled to its Objective Depth and
reasonable testing, coring, and logging have been completed and the
results have been furnished to the Participating Parties, Operator shall
notify the Participating Parties of Operator's recommendation for further
operations in the well and the following provisions shall apply:
11.8.1 Election by Fewer Than All Parties
A Participating Party shall have the right to propose another
operation by notifying the Operator and the other Participating
Parties of its proposed operation within twenty-four (24) hours,
exclusive of Saturdays, Sundays, and federal holidays, of receipt
of the Operator's notice. The Participating Parties shall notify
Operator within forty-eight (48) hours, exclusive of Saturdays,
Sundays, and federal holidays, of receipt of the Operator's
proposal whether the Participating Parties elect to (a)
participate in Operator's recommended operation, (b) participate
in another proposed operation, or (c) not participate in any
operation. Failure to respond shall be deemed to be an election
not to participate in any of the proposed operations. The
Participating Parties shall respond to all proposals within the
period allotted to the original proposal.
28
11.8.2 Priority of Operations
If all Participating Parties elect to participate in the same
proposed operation, Operator shall conduct the operation at their
cost and risk. If more than one (1) operation is approved by two
(2) or more Participating Parties having a combined Working
Interest of forty-five percent (45%) or more, then the approved
operation with the lowest number as indicated below shall take
precedence:
(indicate the order of preference.)
1 Additional Testing, coring, or logging. (If conflicting
proposals are approved, the proposal receiving the largest
percentage of Working Interest approval shall take
precedence, and in the event of a tie between two (2) or
more approved proposals, the approved proposal first
received by the Parties shall take precedence.)
2 Complete at the Objective Horizon.
3 Complete above the Objective Horizon. (If conflicting
proposals are approved, the operation proposed to the
deepest depth shall take precedence.)
4 Deepen. (If conflicting proposals are approved, the
proposal receiving the largest percentage of Working
Interest approval shall take precedence, and in the event
of a tie between two (2) or more approved proposals, the
approved proposal first received by the Parties shall take
precedence.)
5 Sidetrack. (If conflicting proposals are approved, the
proposal receiving the largest percentage of Working
Interest approval shall take precedence, and in the event
of a tie between two (2) or more approved proposals, the
approved proposal first received by the Parties shall take
precedence.)
6 Other operations: ___________ (If conflicting proposals are
approved, the proposal receiving the largest percentage of
Working Interest approval shall take precedence, and in the
event of a tie between two (2) or more approved proposals,
the approved proposal first received by the Parties shall
take precedence.)
7 Temporarily abandon.
8 Plug and abandon.
11.8.3 Second Opportunity to Participate
If fewer than all but two (2) or more Participating Parties having
a combined Working Interest of forty-five percent (45%) or more
elect to participate in an operation, the proposing Party shall
notify the Participating Parties of the elections made, whereupon
a Party originally electing not to participate in the proposed
operation may then elect to participate by notifying the proposing
Party within twenty four (24) hours, exclusive of Saturdays,
Sundays, and federal holidays, after receipt of such notice. If
29
all Parties elect to participate in the proposed operation,
Operator shall conduct the operation at their cost and risk.
11.8.4 Operations by Fewer Than All Parties
If, after the election (if applicable) made under Article 11.8.3
(Second Opportunity to Participate), fewer than all but two (2) or
more Parties having a combined Working Interest of forty-five
percent (45%) or more elect to participate in the proposed
operation that takes precedence, the proposing Party shall notify
the Participating Parties and each Participating Party shall have
twenty four (24) hours, exclusive of Saturdays, Sundays, and
federal holidays, after receipt of the notice to notify the
proposing Party of the portion of the costs and risks attributable
to the total Non-participating Parties' interests it elects to pay
and bear. Unless otherwise agreed by the Participating Parties,
each Participating Party may, but shall not be obligated to, pay
and bear that portion of the costs and risks attributable to the
total Non-participating Parties' interests in the ratio that the
Participating Party's interest bears to the total interests of all
Participating Parties who elect to pay and bear a portion of costs
and risks attributable to the Non-participating Parties'
interests. Failure to respond shall be deemed to be an election
not to pay or bear any additional costs or risks. If the
Participating Parties agree to pay and bear one hundred percent
(100%) of the costs and risks of the operation, Operator, subject
to Article 4.2 (Substitute Operator), shall conduct the operation
as a Non-consent Operation for the benefit of the Participating
Parties, and the provisions of Article 13 (Non-consent Operations)
shall apply. If such agreement is not obtained, however, the
operation shall not be conducted and the effect shall be as if the
proposal had not been made. If a Participating Party in a well
elects not to participate in the Deepening or Sidetracking
operation in the well, such non-consenting Party shall become a
Non-participating Party in all operations conducted in the
Deepened or Sidetracked portion of the well after that election.
If the Non-consent Operation is an Additional Testing, coring, or
logging operation, Article 13 (Non-consent Operations) shall not
apply, however, a Party electing not to participate in the
Additional Testing, coring, or logging shall not be entitled to
information resulting from the operation.
11.8.5 Subsequent Operations
Upon the completion of an operation conducted under Article 11.8
(Course of Action After Reaching Objective Depth), if the well is
not either (a) Completed as a well capable of producing
Hydrocarbons in paying quantities, or (b) temporarily abandoned or
permanently plugged and abandoned, Operator shall notify the
Participating Parties of Operator's recommendation for operations
in the well under Articles 11.8.1 through 11.8.4 which again shall
apply. If sufficient approval is not obtained to conduct a
30
subsequent operation in a well, or if all Participating Parties
elect to plug and abandon the. well, subject to Article 14
(Abandonment, Salvage, and Surplus), Operator shall permanently
plug and abandon the well at the expense of all Participating
Parties. Each Participating Party shall be responsible for its
proportionate share, of the plugging and abandonment costs
associated with the operation in which it participated.
ARTICLE 12
PLATFORM AND DEVELOPMENT FACILITIES
12.1 Proposal
A Party may propose the fabrication or acquisition and installation of a
Platform and/or Development Facilities, by sending an AFE or notice to
the other Parties in accordance with Article 9 (Notices). Any proposal by
a Party for a Platform and/or Development Facilities shall not provide
for excess capacity and/or space which is greater than ten percent (10%)
of what is required for such Platform and/or Development Facilities based
upon the expected size of the Producible Reservoir(s); the number of
existing Producible ▇▇▇▇▇; the quality of Hydrocarbons to be produced,
processed, and transported; and the number of scheduled Development
▇▇▇▇▇.
12.2 Counterproposals
When a Platform and/or Development Facilities is proposed under Article
12.1, a Party may, within thirty (30) days after receipt of the AFE or
notice for the original proposal, make a counterproposal to fabricate or
otherwise acquire and install said Platform and/or Development Facilities
by sending an AFE or notice to the other Parties in accordance with
Article 9 (Notices). The AFE or notice shall indicate that the proposal
is a counterproposal to the original proposal. If one or more
counterproposals are made, each Party shall elect to participate in
either the original proposal, one counterproposal, or neither the
original proposal nor a counterproposal. If two or more proposals receive
the approval of the number of Parties and combined Working Interests
required by Article 12.2.3 (Operations By Fewer Than All Parties), the
proposal receiving the largest percentage Working Interest approval shall
be deemed approved, and in the event two (2) or more approved proposals
receive the same Working Interest approval, the approved proposal first
received by the Parties shall be deemed approved.
12.2.1 Operations by All Parties
If all Parties elect to participate in the proposed operation,
Operator shall conduct the operation at their cost and risk.
12.2.2 Second Opportunity to Participate
If there are more than two (2) Parties and if fewer than all but
two (2) or more Parties having a combined Working Interest of
31
forty-five percent (45%) or more elect to participate in the
Platform and/or Development Facilities, then the proposing Party
shall notify the Parties of the elections made, whereupon a Party
originally electing not to participate may then elect to
participate by notifying the proposing Party within forty eight
(48) hours, exclusive of Saturdays, Sundays, and federal holidays,
after receipt of such notice. If all Parties, elect to participate
in the Platform and/or Development Facilities, Operator shall
timely commence the fabrication and installation of the Platform
and/or Development Facilities at their cost and risk. If there are
only two (2) Parties to this Agreement and one (1) of the Parties
having fifty-one percent (51%) or more of the Working Interest
elects to participate and agrees to pay and bear one hundred
percent (100%) of the costs and risks of the operation, then there
shall be no second election and the Operator, subject to Article
4.2 (Substitute Operator), shall conduct the operation as a
Non-consent Operation for the benefit of the Participating Party,
and the provisions of Article 13 (Non-consent Operations) shall
apply.
12.2.3 Operations by Fewer Than All Parties
If after the election (if applicable) made under Article 12.2.2
(Second Opportunity to Participate), fewer than all but two (2) or
more Parties having a combined Working Interest of forty-five
percent (45%) or more elect to participate in the Platform and/or
Development Facilities, the proposing Party shall notify the
Participating Parties, and each Participating Party shall have
forty eight (48) hours, exclusive of Saturdays, Sundays, and
federal holidays, after receipt of the notice to notify the
proposing Party of the portion of the costs and risks attributable
to the total Non-participating Parties' interests it elects to pay
and bear. Unless otherwise agreed by the Participating Parties,
each Participating Party may, but shall not be obligated to, pay
and bear that portion of costs and risks attributable to the total
Non-participating Parties' interests in the ratio that the
Participating Party's interest bears to the total interests of all
Participating Parties who elect to pay and bear a portion of the
costs and risks attributable to the total Nonparticipating
Parties' interests. Failure to respond shall be deemed to be an
election not to pay or bear any additional costs or risks. If the
Participating Parties agree to pay and bear one hundred percent
(100%) of the costs and risks of the operation, the Operator,
subject to Article 4.2 (Substitute Operator), shall conduct the
operation as a Non-consent Operation for the benefit of the
Participating Parties, and except as provided in Article 12.4
(Rights to Take in Kind), the provisions of Article 13.2.1.(b)
shall apply. If such agreement is not obtained, however, the
fabrication and installation of the Platform and/or Development
Facilities shall not be commenced, and the effect shall be as if
the proposal had not been made.
32
12.3 Ownership and Use of the Platform and Development Facilities
The Participating Parties in the Development Facilities own all of the
excess capacity of the Development Facilities and the excess weight,
space and buoyancy of the Platform. Each Participating Party in the
Development Facilities does not have the right to use its Participating
Interest share of the excess capacity, weight, space and buoyancy for
hydrocarbon production from outside the Contract Area. Each Participating
Party in the Development Facilities or Platform must obtain the unanimous
approval of the other Participating Parties in the Development Facilities
or Platform in order to utilize any portion of the excess capacity,
weight, space and buoyancy. It must negotiate the payment of a fee with
the Participating Parties in the Development Facilities or Platform in
order to utilize any portion of the excess capacity, weight, space and
buoyancy. Each of the Participating Parties in the Development Facilities
or Platform shall receive its Participating Interest share of all fees
derived from the utilization of the excess capacity, weight, space and
buoyancy. All hydrocarbon production from outside the Contract Area shall
be processed under a "Facilities Use and Production Handling Agreement"
unanimously agreed to by the Participating Parties in the Development
Facilities.
12.4 Rights to Take in Kind
Nothing in this Article 12 shall act to limit a Party's rights under
Article 22 (Disposition of Production), or to otherwise separately
dispose of its share of Hydrocarbon production. If a Party elects (a) not
to participate in an approved Development Facilities proposal and (b) to
separately dispose of its share of Hydrocarbon production (the
"Separately Disposing Party"), the Separately Disposing Party shall not
be subject to the provisions of Article 13.2.1.(b), but must provide
proof to the Participating Parties in the approved Development Facilities
proposal, within sixty (60) days from the last applicable response date
to the Development Facilities proposal that it has entered into
fabrication and transportation contracts to separately dispose of its own
share of Hydrocarbon production. If a Separately Disposing Party fails to
provide such proof by that deadline and if there is sufficient capacity
for the Development Facilities to accommodate the Separately Disposing
Party's share of the Hydrocarbons, it shall immediately (I) become a
Participating Party in the Development Facilities and utilize the
Development Facilities for its share of Hydrocarbon production, (II) pay
to the Participating Parties in the approved Development Facilities
proposal an amount equal to one hundred fifty percent (150%) of what
would have been the Separately Disposing Party's share of the costs and
expense of the Development Facilities had it elected to participate in
the Development Facilities under Article 12.1 or 12.2, and (III) assume
its share of the risks and liabilities associated with the construction
and ownership of the Development Facilities as of the date of
commencement of the operations to construct same. The Participating
Parties in the original Development Facilities and the Separately
Disposing Party, which becomes a Participating Party in the original
Development Facilities under Article 12.4 (1), shall own the original
33
Development Facilities based on their Participating Interest share in the
original Development Facilities. If a Separately Disposing Party fails to
provide such proof by that deadline and if there is insufficient capacity
for the Development Facilities to accommodate the Separately Disposing
Party's share of the Hydrocarbons, the Separately Disposing Party shall
(i) become a. Participating Party in the original Development Facilities
and utilize the available capacity in the original Development
Facilities, if any, for its share of Hydrocarbon production, (ii) pay one
hundred percent (100%) of the costs of an expansion or modification of
the Development Facilities, which is required to accommodate all or a
portion of its share of the Hydrocarbons, and assume one hundred percent
(100%) of the risks and liabilities associated, with (A) the
construction, installation and commissioning of the expanded or modified
Development Facilities and (B) the utilization of the expanded or
modified Development Facilities for seven (7) days subsequent to the
commencement of Hydrocarbon production through same, (iii) pay to the
Participating Parties in' the approved Development Facilities proposal an
amount equal to one hundred fifty percent (150%) of what would have been
the Separately Disposing Party's share of the costs and expense of the
original Development Facilities had it elected to participate in the
original Development Facilities under Article 12.1 or 12.2, (iv) assume
its share of the risks and liabilities associated with the construction
and ownership of the original Development Facilities as of the date of
commencement of the operations to construct the original Development
Facilities. The Participating Parties in the original Development
Facilities and the Separately Disposing Party, which becomes a
Participating Party in the original Development Facilities under Article
12.4(i), shall own the expanded or modified Development Facilities based
on their Participating Interest share in the original Development
Facilities, and the Participating Parties in the original Development
Facilities shall assume their Participating Interest share of the risks
and liabilities associated with the ownership of the expanded or modified
Development Facilities seven (7) days after that the expanded or modified
Development Facilities have been utilized.
12.5 Expansion or Modification of a Platform and/or Development Facilities
After installation of a Platform and/or Development Facilities, any
Participating Party in that Platform and/or Development Facilities may
propose the expansion or modification of that Platform and/or Development
Facilities by written notice (along with its associated AFE) to the other
Participating Parties in that Platform and/or Development Facilities.
That proposal requires approval by two of more of the Participating
Parties in the Platform and/or Development Facilities with more than
seventy five percent (75%) of the Participating Interest in the Platform
and/or Development Facilities. If approved, that proposal will be binding
on all Participating Parties in that Platform and/or Development
Facilities, and the Operator shall commence that expansion or
modification at the sole cost and risk of all of the Participating
Parties in that Platform and/or Development Facilities unless otherwise
agreed.
34
12.6 Offsite Host Facilities
In the event that two (2) or more Parties with more than forty-five
percent (45%) of the Participating Interest in Hydrocarbon production
agree that Hydrocarbon production can most effectively be processed and
handled by an Offsite Host Facilities, the Operator, with consultation
and input from the Participating Parties, shall use reasonable efforts
to secure a formal "Facilities Use and Production Handling Agreement"
from the owners of the Offsite Host Facilities. If the Operator does
secure access to Offsite Host Facilities in a Facilities Use and
Production Handling Agreement, each Participating Party shall have the
right, but not the obligation, to utilize its Participating interest
share of the capacity so secured. This Article 12.6 shall not constitute
a limit on a Party's right to install its own Take-in-Kind Facilities
under Article 22 (Disposition of Production).
ARTICLE 13
NON-CONSENT OPERATIONS
13.1 Non-consent Operations
Operator or substitute Operator under Article 4.2 (Substitute Operator)
shall conduct Non-consent Operations at the sole cost and risk of the
Participating Parties in accordance with the following provisions:
13.1.1 Non-interference
Non-consent Operations shall not interfere unreasonably with
operations approved by all of the Parties.
13.1.2 Multiple Completion Limitation
Subject to Article 10.9, a Non-consent Operation shall not be
conducted in a well having multiple Completions unless (a) each
Completion is owned by the same Parties in the same proportions;
(b) the well is incapable of producing from any Completion; or (c)
all Participating Parties in the well consent to the operation.
13.1.3 Metering
In Non-consent Operations, Hydrocarbon production shall be
determined upon the basis of appropriate well tests, unless
separate metering devices are required by a governmental authority
having jurisdiction.
13.1.4 Non-consent Well
Operations on a Non-consent Well shall not be conducted in a
Producible Reservoir without approval of all Parties unless (a)
the Producible Reservoir is designated in the notice as a
Completion objective; (b) Completion of the well in the Producible
Reservoir will not increase the rates of Hydrocarbon production
35
that are prescribed and approved for the Producible Reservoir by
the governmental authority having jurisdiction; and (c) the
horizontal. distance between the vertical projections of the
midpoint of the Producible Reservoir in the well and an existing
well currently completed in and producing from the same Producible
Reservoir will be at least three thousand (3,000) feet for an
oil-well Completion or five thousand (5,000) feet for a gas-well
Completion.
13.1.5 Cost Information
Operator shall, within one hundred twenty (120) days after
completion of a Non-consent Operation, furnish the Parties either
(a) an inventory and an itemized statement of the cost of the
Non-consent Operation and equipment pertaining thereto, or (b) a
detailed statement of the monthly ▇▇▇▇▇▇▇▇: Each month thereafer,
while the Participating Parties are being reimbursed under Article
13.2.1 (Production Reversion Recoupment), Operator shall furnish
the Non-participating Parties a monthly statement detailing all
costs -and' liabilities incurred in the Non-consent Operation,
together with a statement of the quantities of Hydrocarbons
produced from it and the amount of the proceeds from the sale of
the Non-participating Parties' relinquished Hydrocarbon production
from the Non consent Operation for the preceding month. Operator
shall prepare the monthly statement of the quantities of
Hydrocarbons produced and the amounts of the proceeds from the
sale of Non-participating Parties' relinquished Hydrocarbon
production based on the proceeds received for the Operator's share
of Hydrocarbon production. When Operator's payout calculation
indicates that payout has occurred, Operator shall promptly notify
all Parties. The Participating Parties who assumed a portion of
the Non participating Parties' relinquished interest shall then
provide Operator all information pertaining to the cumulative
proceeds received from the sale of the Non-participating Parties'
relinquished Hydrocarbon production. Operator shall revise the
payout date using the actual proceeds from the sale of the
Non-participating Parties' relinquished Hydrocarbon production and
administer any subsequent adjustments between the Parties.
13.1.6 Completions
For determinations under Article 13.1 (Non-consent Operations),
each Non-consent Operation in a single wellbore shall be accounted
for separately.
13.2 Relinquishment of Interest
Upon commencement of Non-consent Operations, other than Non-consent
Operations governed by Article 13.7 (Operations Utilizing a Non-consent
Platform and/or Development Facilities), each Non-participating Party's
interest and leasehold operating rights in the Non-consent Operation and
title to Hydrocarbon production resulting therefrom; and if Article 13.8
(Discovery or Extension from Non-consent Drilling) is effective, one-half
(1/2) of each Non-participating Party's interest and leasehold operating
36
rights and title to Hydrocarbon production from ▇▇▇▇▇ mentioned in
Article 13.8 (Discovery or Extension from Non-consent Drilling); shall be
owned by and vested in each Participating Party in proportion to its
Participating Interest, or in the proportions otherwise agreed by the
Participating Parties, for as long as the Non-Consent Operation is being
conducted or Hydrocarbon production is obtained therefrom, subject to the
following:
13.2.1 Production Reversion Recoupment
When the Participating Parties have recouped out of Hydrocarbon
production from the Non-consent Operations attributable to the
Non-participating Party's interest an amount, which when added to
amounts received under Article 13.3 (Deepening or Sidetracking of
Non-consent Well), equals the sum of the following:
(a) Eight hundred percent (800%) of the Non-participating
Party's share of the costs of the following Non-consent
Exploratory Operations, or four hundred percent (400%) of
the Non-participating Party's share of the costs of the
following Non' consent Development Operations: drilling,
testing, Completing, Recompleting, Deepening, Sidetracking,
Reworking, plugging back, and temporarily abandoning a
well, reduced by the Non-participating Party's Share of a
cash contribution received under Article 21.2 (Cash
Contributions);
(b) Three hundred percent (300%) of Non-participating Party's
Share of the cost of Platforms and/or Development
Facilities approved under Article 12.1 (Proposal) or
Article 12.2 (Counterproposals); such recoupment is limited
to the Non participating Party's Share of the Hydrocarbon
production that utilize such Platform and/or Development
Facilities;
(c) Four hundred percent (400%) of the Non-paricipating Party's
Share of the cost charged in accordance with Article 13.9
(Allocation of Platform/Development Facilities Costs to
Non-consent Operations) of using an existing
Platform/Development Facilities; and
(d) the Non-participating Party's Share of the costs of
operation, maintenance, treating, processing, gathering,
and transportation, including, but not limited to, an
Offsite Host Facilities' handling fees, as well as lessor's
royalties and severance, Hydrocarbon production, and excise
taxes,
then, the relinquished interests of the Non-participating Party
shall automatically revert to the Non-participating Party as of
7:00 a.m. of the day after the recoupment occurs. Thereafter, the
Non-participating Party shall own the same interest in the
Non-consent Well, equipment pertaining thereto, including, but not
limited to, any Platform or Development Facilities, and the
Hydrocarbon production therefrom as the Nonparticipating Party
would have owned or been entitled to if it had participated in the
Nonconsent Operation. Upon reversion, the Non-participating Party
37
shall become a Participating Party and, as such, shall become
liable for its proportionate share of the further costs of the
operation as set forth in this Agreement and Exhibit "C".
13.2.2 Non-production Reversion
If the Non-consent Operation fails to obtain Hydrocarbon
production or if the operation results in Hydrocarbon production
that ceases before complete recoupment by the Participating
Parties under Article 13.2.1 (Production Reversion- Recoupment),
such leasehold operating rights shall revert to each
Non-participating Party, except that all Non-consent ▇▇▇▇▇,
Platforms, and Development Facilities shall remain vested in the
Participating Parties (but the salvage value in excess of the
sum remaining under Article 13.2.1 shall be credited to all
Parties).
13.3 Deepening or Sidetracking of Non-consent Well
If a Participating Party proposes to Deepen or Sidetrack a Non-consent
Well, a Non-participating Party may then elect to participate in the
Deepening or Sidetracking operation by notifying Operator within thirty
(30) days, or within forty-eight (48) hours, exclusive of Saturdays,
Sundays, and federal holidays, if a rig is on location and standby
charges are being incurred, after receiving notice of the proposal. A
Non-participating Party that elects to participate in Deepening or
Sidetracking the well, as proposed, shall immediately pay the
Participating Parties, in accordance with Article 13.4 (Deepening or
Sidetracking Cost Adjustments), its Working Interest share of actual well
costs (excluding logging, coring, testing, and Completion costs other
than the cost of setting any casing or Completion Equipment that is used
in the Deepening or Sidetracking), less all amounts recovered by the
Participating Parties from the proceeds of Hydrocarbon production from
the well, as if the Non-participating Party had originally participated
to the initial objective depth or formation, in the case of a Deepening
operation, or the depth at which the Sidetracking operation is initiated.
Thereafter, the Non-participating Party shall be deemed to be a
Participating Party for the Deepening or Sidetracking operations, and
Article 13.2.1 (a) shall not apply to that Party for the Deepened or
Sidetracked portion of the well. The initial Participating Parties,
however, shall continue to recoup out of the proceeds of Hydrocarbon
production from the non-consent portion of the well any balance for the
Non-consent Well remaining to be recovered under Article 13.2.1
(Production Reversion Recoupment), less the amounts paid by the
Non-participating Party under this Article 13.3.
13.4 Deepening or Sidetracking Cost Adjustments
If a proposal is made to Deepen or Sidetrack a Non-consent Well, a well
cost adjustment will be performed as follows:
(a) Intangible drilling will be valued at the actual cost incurred by
the Participating Parties.
(b) Tangible materials will be valued at the actual cost incurred by
the Participating Parties.
(c) For Sidetracking operations, the values determined in Articles
13.4(a) and 13.4(b) shall be reduced by the amount allocated to
38
that portion of the well from the surface to one hundred feet
(100') below the point at which the Sidetracking was initiated.
Such allocations shall be consistent with the guidelines
recommended by the applicable Council of Petroleum Accountants
Societies ("▇▇▇▇▇") Guideline, as amended from time to time.
(d) Amortization/depreciation shall be applied to both intangible and
tangible values at the rate of ten percent (10%) per annum from
the date the well commenced Hydrocarbon production to the date
operations commence to Deepen or Sidetrack the well, provided,
however, the value of tangible materials after applying
depreciation shall never be less than fifty percent (50%) of the
value determined in Article 13.4(b).
13.5 Subsequent Operations in Non-consent Well
Except as provided in Article 13.3 (Deepening or Sidetracking of
Non-consent Well), an election not to participate in the drilling,
Sidetracking, or Deepening of a well shall be deemed to be an election
not to participate in any subsequent operations in the well before full
recovery by the Participating Parties of the Non-participating Party's
recoupment amount.
13.6 Operations in a Production Interval
A Participating Party in a Production Interval may propose Rework or
Sidetrack operations within that Production Interval, or to permanently
plug and abandon that Production Interval in a well; however, no
Production Interval in a well shall be abandoned without the unanimous
approval of the Participating Parties in the Production Interval. If a
proposal, estimated to exceed the amount specified in Article 8.2
(Authorization), is made to Rework or Sidetrack a Production Interval and
the Participating Parties elect to participate in the proposed operation,
Operator shall conduct the operation at their sole cost and risk. If
fewer than all but two (2) or more Parties having a combined
Participating Interest of forty-five percent (45%) or more elect to
participate in the proposed operation, Operator shall conduct the
Reworking or Sidetracking operation at the cost and risk of the
Participating Parties owning an interest in the Production Interval. A
proposal to Rework an interval, other than a Production Interval, shall
be made and approved in accordance with Article 11.5 (Operations by Fewer
Than All Parties).
13.7 Operations Utilizing a Non-consent Platform and/or Development Facilities
Except as otherwise provided in Article 12.4 (Rights to Take in Kind) and
this Article 13.7, if applicable, a Party that did not originally
participate in a Platform and/or Development Facilities shall be a
Non-participating Party for all operations utilizing the Platform and/or
Development Facilities and shall be subject to Article 13.2
(Relinquishment of Interest). Notice, in accordance with Article 9
(Notices), shall be given to the Non-participating Party for all ▇▇▇▇▇
proposed to be drilled from or tied-back to the Non-consent Platform
and/or handled by non-consent Development Facilities. If a
Non-participating Party in a Non-consent Platform and/or Development
Facilities desires to participate in the drilling of any such well
proposed by the Participating Parties in the Platform and/or Development
39
Facilities, the Non-participating Party desiring to join in the proposed
well shall first pay the Participating Parties in the Platform and/or
Development Facilities its proportionate share of the cost of the
Platform and/or Development Facilities, including, but not limited to,
costs of material, fabrication, transportation, and installation plus any
remaining amounts to be recouped under Article 13.2.1(b). The
Non-participating Party shall remit payment to Operator and Operator
shall (a) reimburse the Participating Parties in the Platform and/or
Development Facilities in the same proportions they are sharing in the
Platforms and/or Development Facilities recoupment account, and (b)
credit the applicable payout account, Upon payment of that amount, the
original Non-participating Party shall become an owner and a
Participating Party in the Platform and/or Development Facilities in. the
same manner as if recoupment had occurred under Article 13.2.1
(Production Reversion Recoupment), and may participate in all future
▇▇▇▇▇ drilled from or tied back to the Platform. As to well operations
conducted from the Platform and/or Development Facilities prior to
payment under this Article, 13.7, the original Non-participating Party
shall remain a Non-participating Party in such Non consent Operations
until such time as the entire recoupment balance applicable to all such
Non consent Operations in the aggregate has occurred, as provided for in
Articles 13.2.1 (a) and 13.2.1(d).
13.8 Discovery or Extension from Non-consent Drilling
If a Non-consent Well (a) discovers a new Producible Reservoir or (b)
extends an existing Producible Reservoir beyond its recognized
boundaries, as unanimously agreed by the Participating Parties in all
existing ▇▇▇▇▇ currently producing from the existing Producible Reservoir
before commencement of drilling operations, the recoupment of costs for
the well shall be governed by Article 13.2 (Relinquishment of Interest)
and shall be recovered by the Participating Parties in-one of the
following ways:
(a) if the Non-consent Well is not completed and produced, recoupment
shall be out of one half (1/2) of each Non-participating Party's
interest in Hydrocarbon production from all subsequently drilled
and completed ▇▇▇▇▇ on the Contract Area that are completed in the
Producible Reservoir discovered, or in that portion extended, by
the Non-consent Well and in which the Non-participating Party has
a Participating Interest; or
(b) if the Non-consent Well is completed and produced, recoupment
shall be out of the Non participating Party's Share of all
Hydrocarbon production from the Non-consent Well and one-half
(1/2) of the Non-participating Party's interest in Hydrocarbon
production from all subsequently drilled and completed ▇▇▇▇▇ on
the Contract Area that are completed in the Producible Reservoir
discovered, or in that portion extended, by the Non-consent Well
and in which the Non-participating Party has a Participating
Interest.
13.9 Allocation of Platform/Development Facilities Costs to Non-consent
Operations
In the event a well is drilled from or produced through a Platform or is
produced through Development Facilities which are owned by the
40
Participating Parties in different proportions than the ownership of the
Non-consent well, the rights of the Participating Parties in such well
and the costs to utilize such Platform or Development. Facilities for
such well shall be determined as follows:
13.9.1 Investment Usage Fees
The Participating Parties in such well shall pay to the Operator,
for credit to the owners of the Platform and/or Development
Facilities; a one-time usage fee for the right to use the Platform
and/or Development Facilities. Such usage fees shall be determined
in accordance with paragraphs (a) and (b) below:
(a) A fee for slot usage will be determined as follows:
(i) In the event the well uses a platform with well
slots and such platform has no Development
Facilities installed on it, the slot usage fee shall
be an amount equal to the ratio which one Platform
slot bears to the total number of slots on the
Platform times the total cost of the Platform.
(ii) In the event the well uses a Platform with well
slots and such Platform has Development Facilities
installed on it, the slot usage fee shall be an
amount equal to the ratio which one Platform slot
bears to the total number of slots on the Platform
times the total cost of the Platform attributable to
well slot area, determined as follows:
Slot Usage Fee = (one platform slot divided by total
platform slots) x [(Total Cost of Platform - Any Cost of
Development Facilities Included In the Total Cost of
Platform) x Well Slot Area %]
Well Slot Area % = Deck Space Dedicated to Well Slots
divided by (Deck Space Dedicated to Well Slots + Deck
Space Dedicated to Development Facilities)
The cost of Development Facilities [as used in Article
13.9.1 (a) and (b)] shall include the cost of design,
material, fabrication, transportation, installation and
modifications of such Development Facilities.
For purposes of calculating the slot usage fee [under
Article 13.9.1 (a) (i) or (ii)], the total cost of the
Platform shall be reduced by 0.83333% per month, commencing
on the first day of the month following the date the
Platform was installed and continuing every month thereafer
until the month actual drilling operations on such well is
commenced; however, the total cost of the Platform shall
not be reduced by more than forty percent (40%) of the
total Platform costs.
41
The cost of additions to the Platform shall be reduced in
the same manner commencing the first day of the month after
the addition is installed
If such well is abandoned, having never produced, the right
of the. Participating Parties in such well to utilize the
Platform slot through which such well was drilled shall
terminate unless such Parties commence drilling a
substitute well for the abandoned well through the same
slot within ninety (90) days of the abandonment. If such
substitute well is abandoned, having never produced, the
right of the Participating Parties in such well to utilize
the Platform slot through which such well was drilled shall
terminate.
No refund or credit of the slot usage fee shall be given or
due if a subsequent well operation is conducted through the
same slot or if that Platform slot is restored to a usable
condition.
If subsequent Non-consent Operations (such as Workover,
Recompletion, Deepening, or Sidetracking operations) are
conducted in any wellbore where either all Parties to this
agreement participated in the original well drilling costs
or a previous Non-consent Operation was conducted, no slot
usage fee shall be charged to the Participating Parties in
the subsequent Non-consent Operation.
(b) The Participating Parties in such well shall pay to the
owners of the Development Facilities a sum equal to that
portion of the total cost of such Development Facilities
which the throughput volume of the Non-consent Operation
bears to the total design throughput volume of the
Development Facilities at the time such well is connected.
Throughput volume shall be estimated by the Operator using
an average daily volume of the first three months of
production from the Non consent Operation.
The Total Cost of Development Facilities shall include the cost of
design, material, fabrication, transportation, installation and
modifications of Development Facilities plus that portion of the
cost of the Platform attributable to Development Facilities Area.
The Development Facilities Usage Fee shall be based on the
following:
Development Facilities Usage Fee = Total Cost of Development
Facilities x Throughput Volume of Non-consent Well divided by
Total Design Throughput of Facilities
42
Total Cost of Development Facilities = Cost of Development
Facilities + [(Total Cost of Platform - Any Cost of Development
Facilities Included in the Total Cost of Platform) x Development
Facilities Area %]
Development Facilities Area % = Deck Space Dedicated to
Development Facilities divided by (Deck Space Dedicated to Well
Slots + Deck Space Dedicated to Development Facilities)
For purposes of calculating the Development, Facilities usage fee,
the total cost of the Development Facilities, shall be reduced by
0.83333% per month, commencing from the first day of the month
following the date when the Development Facilities where installed
and continuing every month thereafter until the first day of the
month during which production from the Non-consent Operation is
commenced; however, the total cost of the Development Facilities
shall not be reduced more than forty percent (40%). If
modifications, expansions or additions to the Development
Facilities are made after commencing first production and prior to
the connection of the Non-consent Operation to the Development
Facilities, such Development Facilities investment shall be
reduced in the same manner as described above, from the first day
of the month the Development Facilities modification, expansion or
addition is completed until the first day of the month during
which production from the Non-consent Operation is commenced.
If modifications, expansions or additions are made to the
Development Facilities after connection of the Non-consent Well
which benefit the Non-consent Well, such costs shall be shared by
the Non-consent Well based on that portion which the throughput
volume of the Non-consent Well bears to the total design
throughput volume of the Development Facilities at the time of
completion of such modification, expansion or addition. The
Non-consent well's throughput volumes shall be determined in the
same manner as described above.
Payment of sums under this Article 13.9.1 is not a purchase of an
additional interest in the Platform or the Development Facilities.
Such payment shall be included in the total amount that the
Participating Parties are entitled to recoup out of Hydrocarbon
production from the Non-consent Well.
13.9.2 Operating and Maintenance Charges
The Participating Parties shall pay all costs necessary to connect
a Non-consent Well to the Platform and/or Development Facilities
43
and that proportionate part of the costs of operating and
maintaining the Platform and/or Development Facilities applicable
to the Non-consent Well. Platform operating and maintenance costs.
that are costs not directly attributable to a wellbore shall be
allocated equally to all actively producing Completions. Operating
and maintenance costs for the Development Facilities shall be
allocated on a volume throughput basis, that is, in the proportion
that the volume throughput of the well bears to the total volume
throughput of all ▇▇▇▇▇ connected to the Development Facilities.
Operating and maintenance expense for support facilities (e.g.,
electrical systems and living quarters which do not handle
production) shall be allocated by applying a usage basis
appropriate for that support facility.
13.10 Allocation of Costs Between Zones
Except as provided in Article 10.9 (▇▇▇▇▇ Proposed Below Deepest
Producible Reservoir), if for any reason the Participating Interests of
the Parties in a well are not the same for the entire depth or the
Completion thereof, the costs of drilling, Completing, and equipping the
well shall be allocated in an equitable manner, as agreed by the Parties,
based on the value and allocation recommended in the applicable ▇▇▇▇▇
Guideline, as amended from time to time.
13.11 Lease Maintenance Operations
An operation proposed within the last six (6) months of the primary term
or, subsequent thereto, an operation proposed to perpetuate the Lease or
portion thereof at its expiration date or otherwise, including, but not
limited to, well operations, regulatory relief (for example, course of
action necessary to satisfy the statutory or regulatory requirements of
the governmental authority having jurisdiction), and other Lease
operations, shall be deemed to be a "Lease Maintenance Operation." To
invoke this Article 13.11, a notice or AFE that proposes an operation
must state that the proposed operation is a Lease Maintenance Operation.
13.11.1 Participation in Lease Maintenance Operations
A Party may propose a Lease Maintenance Operation by giving notice
to the other Parties. If fewer than all Parties elect to
participate in the proposed Lease Maintenance Operation, the
proposing Party shall notify the Parties of the elections made.
Each Party electing not to participate shall then have a second
opportunity to participate in the proposed operation by notifying
the other Parties of its election within forty-eight (48) hours
after receipt of the notice. A Lease Maintenance Operation shall
not require minimum approval, either of the number of Parties or
the percentage of the voting interests of the Parties otherwise
required in Article 6.1.2 (Vote Required). For a Lease Maintenance
Operation to be conducted, the Participating Parties must agree to
pay and bear one hundred percent (100%) of the costs and risks of
the operation. If more than one Lease Maintenance Operation is
proposed, the operation with the greatest percentage approval
shall be conducted. Notwithstanding the recoupment provisions of
this Agreement, a Party electing not to participate in a well
44
operation proposed as a Lease Maintenance Operation shall promptly
assign, effective as of the date the operation commences, to the
Participating Parties all of its right, title, and interest in
and to that portion of the Lease that would otherwise expire and
the property and equipment attributable thereto, in accordance
with Article 26 (Successors, Assigns, [and Preferential Rights]).
If more than one Lease Maintenance Operation is proposed and there
is a tie between two proposed operations, both operations shall be
conducted and the costs and risks of conducting both operations
shall be paid and borne by the Participating Parties. If the
drilling of a well is undertaken as a Lease Maintenance Operation,
further operations conducted by the Participating Parties in the
well shall be governed by Article 10.9 (Course of Action*After
Reaching Objective Depth) or Article 11.9 (Course of Action After
Reaching Objective Depth), whichever applies. If more than one
well operation is conducted, any of which would perpetuate the
Lease or such portion thereof, an, assignment shall not be
required from a Party participating in any such well operation.
13.11.2 Accounting for Non-participation
If after one (1) year from completion of a well operation
conducted as a Lease Maintenance Operation, the Lease or portion
thereof is being perpetuated by a Lease Maintenance Operation, as
provided in Article 13.11.1 (Participation in Lease Maintenance
Operations), Operator shall render a final statement, if
applicable, to the assigning Party for its share of all expenses
attributed to the assigned interest before the effective date of
the assignment, plus any credit or deficiency in salvage value
calculated under Article 15.3.1 (Prior Expenses). The assigning
Party shall settle any deficiency owed the non-assigning Parties
within thirty (30) days after receipt of Operator's statement.
13.12 Retention of Lease by Non-consent Well
If, at the expiration of the primary term of the Lease, one or more
Non-consent ▇▇▇▇▇ are the only ▇▇▇▇▇ perpetuating the Lease, Operator
shall give written notice to each Non-participating Party that the
Non-consent ▇▇▇▇▇ are serving to perpetuate the Lease. Each
Non-participating Party shall, within thirty (30) days after receipt of
Operator's written notice, elect one of the following:
(a) to assign its entire interest in the Lease to the Participating
Parties in the proportions in which the Non-consent ▇▇▇▇▇ are
owned; or
(b) to pay the Participating Parties, within sixty (60) days after its
election, the lesser of its proportionate share of the actual well
costs of the ▇▇▇▇▇, as if the Non-participating Party had
originally participated, or the balance of the recoupment account.
The payment shall be made to Operator and credited to the account
of each Participating Party. The Nonparticipating Party shall
remain as a Non-participating Party until full recoupment is
45
obtained, but the payment shall be credited against the total
amount to be recouped by the Participating Parties.
A Non-participating Party that fails to make the required election shall
be deemed to have elected under Article 13.12(a) to relinquish its entire
interest in the Lease. If a Non-participating Party elects to make
payment under Article 13.12(b) but fails to make the required payment
within sixty (60) days after its election, the Non-participating Party
shall either remain liable on the -obligation. to pay or, by unanimous
vote of the Participating Parties, be deemed to have elected under
Article 13.12(a) to relinquish its entire interest in the Lease. Each
relinquishing Non-participating Party shall promptly execute and deliver
an assignment of its interest to the Participating Parties, in accordance
with Article 26 (Successors; Assigns, [and Preferential Rights]).
13.13 Non-Consent Premiums
A non-consent premium paid by a Non-Participating Party to the
Participating Parties- shall be allocated to the Participating Parties
based on their original Participating Interest share in the Non-consent
Operation which generated the non-consent premium.
ARTICLE 14
ABANDONMENT, SALVAGE, AND SURPLUS
14.1 Platform Salvage and Removal Costs
When the Parties owning ▇▇▇▇▇, Platforms and/or Development Facilities
unanimously agree to dispose of the ▇▇▇▇▇, Platforms and/or Development
Facilities, it shall be disposed of by Operator in the time and manner
approved by the Parties. The costs, risks, and net proceeds, if any, for
the disposal shall be shared by the Parties in proportion to their
Participating Interests therein.
14.2 Abandonment of Platforms, Development Facilities or ▇▇▇▇▇
Except as provided in Article 10 (Exploratory Operations) and Article 11
(Development Operations), a Participating Party may propose the
abandonment of a Platform and Development Facilities or ▇▇▇▇▇ by
notifying the other Participating Parties. No Platform and Development
Facilities or wellbore shall be abandoned without the unanimous approval
of the Participating Parties. If the Participating Parties do not approve
abandoning the Platform and Development Facilities or ▇▇▇▇▇, the Operator
shall prepare a statement of the abandoning Party's share of estimated
wellbore plugging and abandonment costs, Platform and Development
Facilities removal costs and/or any related reclamation costs, less its
share of estimated salvage value, as determined by the Operator pursuant
to Exhibit "C". The Party desiring to abandon it shall pay the Operator,
on behalf of the Participating Parties for that Party's share of the
estimated abandonment costs, less its share of estimated salvage value,
within thirty (30) days after receipt of the Operator's statement. If an
46
abandoning Party's respective share of the estimated salvage value is
greater than its share of the estimated costs, Operator, on behalf of the
Participating Parties, shall pay a sum equal, to the deficiency to the
abandoning Party within thirty (30) days after the abandoning Party's
receipt of the Operator's statement.
14.3 Assignment of Interest
Each Participating Party desiring to abandon a Platform and Development
Facilities or ▇▇▇▇▇ under Article 14.2 (Abandonment of Platforms,
Development Facilities or ▇▇▇▇▇) shall assign, effective as of the last
applicable election date, to the non-abandoning Parties, in proportion to
their Participating Interests, its interest in the Platform and
Development Facilities or ▇▇▇▇▇ and the equipment therein and its
ownership in the Hydrocarbon production from the ▇▇▇▇▇. A Party so
assigning shall be relieved from, further liability for the Platform and
Development Facilities, or ▇▇▇▇▇, except liability for payments under
Article 14.2 (Abandonment of Platforms, Development Facilities or ▇▇▇▇▇).
14.4 Abandonment Operations Required by Governmental Authority
A well abandonment or Platform and Development Facilities removal
required by a governmental authority having jurisdiction shall be
accomplished by Operator with the costs, risks, and net proceeds, if any,
to be shared by the Parties owning the well or Platform and Development
Facilities in proportion to their Participating Interests therein. No
approval by the Parties will be necessary for Operator to proceed with
the government required well abandonment, or Platform and Development
Facilities removal. The Operator shall provide the Parties with an
informational AFE prior to commencing such an abandonment or removal.
14.5 Disposal of Surplus Material
Material and equipment acquired hereunder may be classified as surplus by
Operator when deemed no longer needed in present or foreseeable
operations. Operator shall determine the value and cost of disposing of
the materials in accordance with Exhibit "C". If the material is
classified as junk or if the value, less cost of disposal, is less than
or equal to One Hundred Thousand Dollars ($100,000), Operator shall
dispose of the surplus materials in any manner it deems appropriate. If
the value, less the cost of disposal of the surplus material, is greater
than One Hundred Thousand Dollars ($100,000), Operator shall give written
notice thereof to the Parties owning the material. Unless purchased by
Operator, the surplus material shall be disposed of in accordance with
the method of disposal approved by the Parties owning the material.
Proceeds from the sale or transfer of surplus material shall be promptly
credited to each Party in proportion to its ownership of the material at
the time of retirement or disposition.
47
ARTICLE 15 WITHDRAWAL
15.1 Right to Withdraw
Subject to this Article 15.1, any Party may withdraw from this Agreement
as to one or more Leases (the "Withdrawing Party") by giving prior
written notice to all other Parties stating its decision to withdraw
("the withdrawal notice"). The withdrawal notice shall specify an
effective date of withdrawal that is at least thirty (30) days, but not
more than one hundred twenty (120) days, after the date of the withdrawal
notice. Within thirty (30) days of receipt of the withdrawal notice, the
other Parties may join in the withdrawal by giving written notice of
that fact to the Operator ("written notice to join in the withdrawal")
and upon giving written notice to join in the withdrawal are "Other
Withdrawing Parties". The withdrawal notice and the written notice to
join in the withdrawal are unconditional and irrevocable offers by the
Withdrawing Party and the Other Withdrawing Parties to convey to the
Parties who do not join in the withdrawal ("the Remaining Parties") the
Withdrawing Party's and the Other Withdrawing Parties' entire Working
Interest in all of the Lease or Leases, Hydrocarbon production, and other
property and equipment owned under this Agreement.
15.2 Response to Withdrawal Notice
Failure to respond to a withdrawal notice is deemed a decision not to
join in the withdrawal.
15.2.1 Unanimous Withdrawal
If all the other Parties join in the withdrawal,
(a) no assignment of Working Interests shall take place;
(b) subject to Article 14.4, no further operations may be
conducted under this Agreement unless agreed to by all
Parties;
(c) the Parties shall abandon all activities and operations
within the Lease and relinquish all of their Working
Interests to the MMS within fifteen (15) days of the
conclusion of the thirty (30) day joining period; and
(d) notwithstanding anything to the contrary in Article 14
(Abandonment, Salvage and Surplus), the Operator shall:
1) furnish all Parties a detailed abandonment plan, if
applicable, and a detailed cost estimate for the
abandonment within thirty (30) days after the
conclusion of the thirty (30) day joining period;
and
2) cease operations and begin to permanently plug and
abandon all ▇▇▇▇▇ and remove all Facilities in
accordance with the abandonment plan.
48
15.2.2 No Additional Withdrawing Parties
If none of the other Parties join in the withdrawal, then the
Remaining Parties must accept an assignment of their Participating
Interest share of the Withdrawing Party's Working Interest.
15.2.3 Acceptance of the Withdrawing Parties' Interests.
If one or more but not all of the other Parties join in the
withdrawal and become Other Withdrawing Parties, then within
forty-eight (48) hours (exclusive of Saturdays, Sundays, and
federal holidays) of the conclusion of the thirty (30) day joining
period, each of the Remaining Parties shall submit to the Operator
a written rejection or acceptance of its Participating Interest
share of the Withdrawing Party's and Other Withdrawing Parties',
Working Interest. Failure to make that written rejection or
acceptance shall be deemed a written acceptance. If the Remaining
Parties are unable to select a successor Operator, if applicable,
or if a Remaining Party submits a written rejection and the other
Remaining Parties do not agree to accept one hundred percent
(100%) of the Withdrawing Party's and Other Withdrawing Parties'
Working Interest within ten (10) days of the conclusion of the
forty-eight (48) hour period to submit a written rejection or
acceptance, the Remaining Parties will be deemed to have joined in
the withdrawal, and Article 15.2.1 (Unanimous Withdrawal) will
apply.
15.2.4 Effects of Withdrawal
Except as otherwise provided in this Agreement, after giving a
withdrawal notice or a written notice to join in the withdrawal,
the Withdrawing Party and Other Withdrawing Parties are not
entitled to approve or participate in any activity or operation in
the Lease, other than those activities or operations for which
they retain a financial responsibility. The Withdrawing Party and
Other Withdrawing Parties shall take all necessary steps to
accomplish their withdrawal by the effective date referred to in
Article 15.1 (Right to Withdraw) and shall execute and deliver to
the Remaining Parties all necessary instruments to assign their
Working Interest to the Remaining Parties. A Withdrawing Party and
Other Withdrawing Parties shall bear all expenses associated with
their withdrawal and the transfer of their Working Interest.
15.3 Limitation Upon and Conditions of Withdrawal
15.3.1 Prior Expenses
The Withdrawing Party and Other Withdrawing Parties remain liable
for their Participating Interest share of the costs of all
activities, operations, rentals, royalties, taxes, damages,
Hydrocarbon imbalances, or other liability or expense accruing or
relating to (i) obligations existing as of the effective date of
the withdrawal, (ii) operations conducted before the effective
date of the withdrawal, (iii) operations approved by the
Withdrawing Party and Other Withdrawing Parties before the
effective date of the withdrawal, or (iv)
49
operations commenced by the Operator under one of its
discretionary powers under this Agreement before the effective
date of the withdrawal. Before the effective date of the
withdrawal, the Operator shall provide a statement to the
Withdrawing Party and Other Withdrawing Parties for (1) their
respective shares of all identifiable costs under this Article
15.3.1 and (2} their, respective Participating Interest shares of
the. estimated current costs of plugging and abandoning all ▇▇▇▇▇
and removing all Platforms, Development Facilities, and other
materiel and equipment owned by the Joint Account, less their
respective Participating Interest Shares of the estimated salvage
value of the assets at the time of abandonment, as approved by
vote. This statement of expenses, costs, and salvage value shall
be prepared by the Operator under Exhibit "C". Before
withdrawing, the Withdrawing Party and Other Withdrawing Parties
shall either pay the Operator, for the benefit of the Remaining
Parties, the amounts allocated to-them as, shown in the
statement, or provide security satisfactory to the Remaining
Parties for all obligations and liabilities they have incurred
and all obligations and liabilities attributable to them before
the effective date of the withdrawal. All liens, charges, and
other encumbrances, including but not limited to overriding
royalties, net profits interest and production payments, which
the Withdrawing Party and Other Withdrawing Parties placed (or
caused to be placed) on their Working Interest shall be fully
satisfied or released prior to the effective date of its
withdrawal (unless the Remaining Parties are willing to accept
the Working Interest subject to those liens, charges, and other
encumbrances).
15.3.2 Confidentiality
The Withdrawing Party and Other Withdrawing Parties will continue
to be bound by the confidentiality provisions of Article 7.3
(Confidentiality) after the effective date of the withdrawal but
will have no further access to technical information relating to
activities or operations under this Agreement. The Withdrawing
Party and Other Withdrawing Parties are not required to return to
the Remaining Parties Confidential Data acquired prior to the
effective date of the withdrawal.
15.3.3 Emergencies and Force Majeure
No Party may withdraw during a Force Majeure or emergency that
poses a threat to life, safety, property or the environment but
may withdraw from this Agreement after termination of the Force
Majeure or emergency. The Withdrawing Party and Other Withdrawing
Parties remain liable for their share of all costs and liabilities
arising from the Force Majeure or emergency, including but not
limited to the drilling of relief ▇▇▇▇▇, containment and cleanup
of oil spills and pollution, and all costs of debris removal made
necessary by the Force Majeure or emergency.
50
ARTICLE 16
RENTALS, ROYALTIES AND OTHER PAYMENTS
16.1 Overriding Royalty and Other Burdens
If the Working Interest or Participating Interest of. a Party is subject
to an overriding royalty, Hydrocarbon production payment, net profits
interest, mortgage, lien, security interest, or other burden or
encumbrance, other than lessor's royalty and other burdens listed in
Exhibit "A", the Party so burdened shall pay and bear all liabilities and
obligations created or secured by the burden or encumbrance and shall
indemnify and hold the other Parties harmless from all claims and demands
for payment asserted by the owners of the burdens or encumbrances. If a
Party becomes entitled to an assignment under this Agreement, or as a
result of Non-consent Operations hereunder becomes entitled to receive a
relinquished interest, as provided in Article 13.2 (Relinquishment of
Interest), otherwise belonging to a Non-participating Party whose Working
Interest in the operations is so burdened or encumbered, the Party
entitled to receive the assignment from the Non-participating Party or
the relinquished interest of the Non-participating Party's Hydrocarbon
production shall receive same free and clear of all such burdens and
encumbrances, and the Non-participating Party whose interest is subject
to the burdens and encumbrances shall hold the Participating Parties
harmless for the burdens and encumbrances, and will bear same at its own
expense.
16.2 Subsequently Created Interest
Notwithstanding anything in this Agreement to the contrary, if a Party,
after execution of this Agreement, creates an overriding royalty,
Hydrocarbon production payment, net profits interest, carried interest,
or any other interest out of its Working Interest which the Parties do
not unanimously agree to list on Exhibit "A", (hereinafer called
"Subsequently Created Interest"), the Subsequently Created Interest shall
be made specifically subject to this Agreement. If the Party owning the
interest from which the Subsequently Created Interest was established
fails to pay, when due, its share of costs, and if the proceeds from the
sale of Hydrocarbon production under Article 8.6 (Security Rights) are
insufficient for that purpose, or elects to abandon a well, or elects to
relinquish its interest in the Contract Area, the Subsequently Created
interest shall be chargeable with a pro rata portion of all costs in the
same manner as if the Subsequently Created Interest were a Working
Interest, and Operator may enforce against the Subsequently Created
Interest the lien and other rights granted or recognized under this
Agreement to secure and enforce collection of costs chargeable to the
Subsequently Created Interest. The rights of the owner of the
Subsequently Created Interest shall be, and hereby are, subordinated to
the rights granted or recognized by Article 8.6 (Security Rights).
51
16.3 Payment of Rentals and Minimum Royalties
Operator shall pay in a timely manner, for the joint account of the
Parties, all rental, minimum royalties, and other similar payments
accruing under the Contract Area and shall, on request, submit evidence
of each such payment to the Parties. Operator shall not be held liable.
to the other Parties in damages for loss of the Contract Area or
interest therein if, through mistake or oversight, a rental, minimum
royalty, or other payment is not paid or is erroneously paid. The loss of
a Lease or interest therein resulting from the Operator's failure to pay,
or erroneous payment of rental or minimum royalty shall be a joint loss,
and there shall be no readjustment of interests. For Hydrocarbon
production delivered in kind by Operator to a Non-operator or to another
for the account of a Non-operator, the Non-operator shall provide
Operator with information about the Non-operator's proceeds received or
the value of the Hydrocarbon production taken in kind in order that
Operator may make payments of minimum royalties due.
16.4 Non-participation in Payments
A Party that desires not to pay its share of a rental, minimum royalty,
or similar payment shall notify the other Parties in writing at least
sixty (60) days before the payment is due. Operator shall then make the
payment for the benefit of the Parties that do desire to maintain the
Lease. In such event, the Non-participating Party shall assign to the
Participating Parties, upon their request, the portions of its interest
in the Lease maintained by the payment. The assigned interest shall be
owned by each Participating Party in proportion to its Participating
Interest. The assignment shall be made in accordance with Article 27
(Successors, Assigns, [and Preferential Rights]).
16.5 Royalty Payments
Each Party shall be responsible for and shall separately bear and
properly pay or cause to be paid all royalty and other amounts due on'
its share of Hydrocarbon production taken in accordance with state or
federal regulations, as may be amended from time-to-time. Adjustments
shall be made among the Parties in accordance with Exhibit "E" (Gas
Balancing Agreement). During a period when Participating Parties in a
Non-consent Operation are receiving a Nonparticipating Party's share of
Hydrocarbon production, the Participating Parties shall bear and properly
pay, or cause to be paid, the Lease royalty on the Hydrocarbon production
taken, and shall hold the Non-participating Parties harmless from
liability for the payment.
ARTICLE 17
TAXES
17.1 Property Taxes
Operator shall render property covered by this Agreement for ad valorem
taxation, if applicable, and shall pay the property taxes for the benefit
52
of each Party. Operator shall charge each Party its share of the tax
payments. If the ad valorem taxes are based in whole or in part upon
separate valuations of each. Party's Working Interest, then
notwithstanding anything in this Agreement to the contrary, each Party's
share of property taxes shall be in proportion to the tax value generated
by that Party's Working Interest.
17.2 Contest of Property Tax Valuation
Operator shall timely and diligently protest to a final determination
each tax valuation it deems unreasonable. Pending such determination,
Operator may elect to pay under protest. Upon final determination,
Operator shall pay the taxes and the interest, penalties, and costs
accrued as a result of the protest. In either event, Operator shall
charge each Party its share of any amounts due, and each Party shall be
responsible for reimbursing Operator for any such amounts paid.
17.3 Production and Severance Taxes
Each Party shall pay, or cause to be paid, all production and severance
taxes due on Hydrocarbon production that it receives under this
Agreement.
17.4 Other Taxes and Assessments
Operator shall pay other applicable taxes (other than income taxes,
excise taxes, or other similar types of taxes) or assessments and charge
each Party its share.
ARTICLE 18
INSURANCE
18.1 Insurance
Operator shall provide and maintain the insurance prescribed in Exhibit
"B" and charge those costs to the Joint Account. No other insurance shall
be carried for the benefit of the Parties under this Agreement, except as
provided in Exhibit "B".
18.2 Bonds
Operator shall obtain and maintain all bonds or financial guarantees
required by an applicable law, regulation or rule. The costs of those
bonds or financial guarantees acquired exclusively for the conduct of
activities and operations under this Agreement shall be charged to the
Joint Account, including an amount equivalent to the reasonable cost of
that bond or financial guarantee if Operator provides that bond or
guarantee itself and does not engage a third party to do so. Operator
shall require all contractors to obtain and maintain all bonds required
by an applicable law, regulation or rule.
53
ARTICLE 19
LIABILITY, CLAIMS, AND LAWSUITS
19.1 Individual Obligations
The obligations, duties, and liabilities of the Parties under this
Agreement are, several, hot joint or collective. Nothing in this
Agreement shall ever be construed as creating a partnership of any kind,
joint venture, agency relationship, association, or other character of
business entity recognizable in law for any purpose. In their relations
with each other under this Agreement, the Parties shall not be considered
to be fiduciaries or to have established a confidential relationship,
except as specifically provided in Article 7.3 (Confidentiality) and
Article 7.4 (Limited Disclosure), but rather shall be free to act at
arm's length in accordance with their own respective self-interests. Each
Party shall hold all other Parties harmless from liens and encumbrances
on the Contract Area arising as a result of its acts.
19.2 Notice of Claim or Lawsuit
If, on account of a matter involving activities or operations under this
Agreement, or affecting the Contract Area, a claim is made against a
Party, or if a party outside of this Agreement files a lawsuit against a
Party, or if a Party files a lawsuit, or if a Party receives notice of a
material administrative or judicial hearing or other proceeding, that
Party shall give written notice of the claim, lawsuit, hearing, or
proceeding ("Claim") to the other Parties as soon as reasonably
practicable.
19.3 Settlements
The Operator may settle a Claim, or multiple Claims arising out of the
same incident, involving activities or operations under this Agreement or
affecting the Contract Area, if the aggregate expenditure does not exceed
Fifty Thousand Dollars ($50,000) and if the payment is in complete
settlement of these Claims. If the amount required for settlement exceeds
this amount, the Parties shall determine the further handling of the
Claims under Article 19.4 (Defense of Claims and Lawsuits).
19.4 Defense of Claims and Lawsuits
The Operator shall supervise the handling, conduct, and prosecution of
all Claims involving activities or operations under this Agreement or
affecting the Contract Area. Claims may be settled in excess of the
amount specified in Article 19.3 (Settlements) if the settlement is
approved by vote of the Participating Parties. (in accordance with
Article 6.1.2) in the activity or operation out of which the Claim arose,
but a Party may independently settle a Claim or the portion of a Claim
which is attributable to its Participating Interest share alone as long
as that settlement does not directly adversely affect the interest or
rights of the other Participating Parties. Charges for services performed
by the legal staff of a Party shall be made in accordance with Exhibit
"C", but all other expenses incurred by the Operator in the prosecution
or defense
54
of Claims for the Parties, together with the amount paid to discharge a
final judgment, are costs and shall be paid by the Parties in proportion
to their Participating Interest share in the activity or operation out of
which the Claim arose. The employment of outside counsel, but not the
selection of that counsel, requires unanimous approval by the Parties
involved in the activity or operation out, of which the Claim arose. If
the use of outside counsel is approved, the fees and expenses incurred as
a result thereof shall be charged to the Parties in proportion to their
Participating' Interest share in the activity or operation out of which
that Claim arose. Each Party has the right to hire its own outside
counsel at its sole cost with respect to its own defense in which case
the Party would not be obligated to participate in the cost of retaining
outside counsel selected by Operator.
19.5 Liability for Damages
UNLESS SPECIFICALLY PROVIDED OTHERWISE IN THIS AGREEMENT, LIABILITY FOR
LOSSES, DAMAGES, COSTS, EXPENSES OR CLAIMS INVOLVING ACTIVITIES OR
OPERATIONS UNDER THIS AGREEMENT OR AFFECTING THE CONTRACT AREA WHICH ARE
NOT COVERED BY OR IN EXCESS OF THE INSURANCE CARRIED FOR THE JOINT
ACCOUNT SHALL BE BORNE BY EACH PARTY IN PROPORTION TO ITS PARTICIPATING
INTEREST SHARE IN THE ACTIVITY OR OPERATION OUT OF WHICH THAT LIABILITY
ARISES, EXCEPT TO THE EXTENT LIABILITY RESULTS FROM THE GROSS NEGLIGENCE
OR WILLFUL MISCONDUCT OF A PARTY, IN WHICH CASE THAT PARTY SHALL BE
SOLELY RESPONSIBLE FOR LIABILITY RESULTING FROM ITS GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT.
19.6 Indemnification for Non-Consent Operations
TO THE EXTENT ALLOWED BY LAW, THE PARTICIPATING PARTIES WILL HOLD THE
NON-PARTICIPATING PARTIES (AND THEIR AFFILIATES, AGENTS, INSURERS,
DIRECTORS, OFFICERS, AND EMPLOYEES) HARMLESS AND RELEASE, DEFEND, AND
INDEMNITY THEM AGAINST ALL CLAIMS, DEMANDS, LIABILITIES, REGULATORY
DECREES, AND LIENS FOR ENVIRONMENTAL POLLUTION AND PROPERTY DAMAGE OR
PERSONAL INJURY, INCLUDING SICKNESS AND DEATH, CAUSED BY OR OTHERWISE
ARISING OUT OF NON-CONSENT OPERATIONS, AND ANY LOSS AND COST SUFFERED BY
A NON-PARTICIPATING PARTY AS AN INCIDENT THEREOF, EXCEPT WHERE THAT LOSS
OR COST RESULTS FROM THE SOLE, CONCURRENT, OR JOINT NEGLIGENCE, FAULT OR
STRICT LIABILITY OF THAT NON-PARTICIPATING PARTY, IN WHICH CASE EACH
PARTY SHALL PAY OR CONTRIBUTE TO THE SETTLEMENT OR SATISFACTION OF
JUDGMENT IN THE PROPORTION THAT ITS NEGLIGENCE, FAULT OR STRICT LIABILITY
CAUSED OR CONTRIBUTED TO THE INCIDENT. IF AN INDEMNITY IN THIS AGREEMENT
IS DETERMINED TO VIOLATE LAW OR PUBLIC POLICY, THAT INDEMNITY SHALL THEN
BE ENFORCEABLE ONLY TO THE MAXIMUM EXTENT ALLOWED BY LAW.
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19.7 Damage to Reservoir, Loss of Reserves and Profit
NOTWITHSTANDING ANY CONTRARY PROVISION OF THIS AGREEMENT, OTHER THAN
ARTICLES 10.8.6 AND 11.8.6, IF SELECTED, NO PARTY IS LIABLE TO ANY OTHER
PARTY FOR DAMAGE TO A RESERVOIR, LOSS OF HYDROCARBONS, LOSS OF PROFITS,
OR OTHER CONSEQUENTIAL DAMAGES, DAMAGES FOR BUSINESS INTERRUPTION, OR
PUNITIVE DAMAGES, EXCEPT TO THE EXTENT THAT THE DAMAGE OR LOSS ARISES
FROM A PARTY'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, IN WHICH CASE THAT
PARTY SHALL BE SOLELY RESPONSIBLE FOR DAMAGE OR LOSS ARISING FROM ITS
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT; NOR DOES A PARTY INDEMNIFY ANY
OTHER PARTY FOR THAT DAMAGE OR LOSS.
19.8 Non-Essential Personnel
A NON-OPERATOR THAT REQUESTS TRANSPORTATION OR ACCESS TO A DRILLING RIG,
PLATFORM, VESSEL, OR OTHER FACILITY USED FOR ACTIVITIES OR OPERATIONS
UNDER THIS AGREEMENT SHALL HOLD THE OTHER PARTIES HARMLESS AND SHALL
RELEASE, DEFEND, AND INDEMNIFY THEM AGAINST (I) ALL CLAIMS, DEMANDS, AND
LIABILITIES FOR PROPERTY DAMAGE AND (II) ALL CLAIMS, DEMANDS, AND
LIABILITIES FOR ANY LOSS OR COST SUFFERED BY A PARTY AS AN INCIDENT
THEREOF, INCLUDING, BUT NOT LIMITED TO, INJURY, SICKNESS AND DEATH,
CAUSED BY OR OTHERWISE ARISING OUT OF THAT TRANSPORTATION OR ACCESS, OR
BOTH, EXCEPT TO THE EXTENT THAT LOSS OR COST RESULTS FROM THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY SO INDEMNIFIED AND
PROTECTED.
19.9 Dispute Resolution Procedure
Any claim, controversy or dispute arising out of, relating to, or in
connection with this Agreement or an activity or operation conducted
under this Agreement shall be resolved under the Dispute Resolution
Procedure in Exhibit "H" to this Agreement.
ARTICLE 20
INTERNAL REVENUE PROVISION
20.1 Internal Revenue Provision
Notwithstanding any provision in this Agreement to the effect that the
rights and liabilities of the Parties are several, not joint or
collective, and that this Agreement and the activities and operations
under this Agreement do not constitute a partnership under state law;
however, the Parties agree that the activities and operations under this
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Agreement shall constitute a partnership for federal and, to the extent
allowable, state and local income tax law and shall be governed for such
purposes by the, terms of Exhibit F hereto.
ARTICLE 21
CONTRIBUTIONS
21.1 Notice of Contributions Other Than Advances for Sale of Production
Each Party shall promptly notify the other Parties of all offers of
contributions that it may obtain, or contributions it is attempting to
obtain, for the drilling of a well or the conducting of an operation on
the Contract Area. Payments received as consideration for entering into a
contract for the sale of Hydrocarbon production from the Contract Area,
loans, and other financial arrangements shall not be considered
contributions for the purpose of this Article 21. No Party shall release
or obligate itself to release Confidential Data in return for a
contribution from a third party without prior written consent of the
Participating Parties or Parties having the right to participate in the
well.
21.2 Cash Contributions
If a Party receives a cash contribution for drilling a well on the
Contract Area or conducting an activity or operation on the Contract
Area, the cash contribution shall be paid to Operator, and Operator shall
credit the amount thereof to the Parties in proportion to their
Participating Interests in the well or the Platform and/or Development
Facilities. If the well is a Non-consent Well, the amount of the
contribution shall be deducted from the cost specified in Article
13.2.1(a) before computation of the amount to be recouped out of
Hydrocarbon production.
21.3 Acreage Contributions
If a Party receives an acreage contribution for the drilling of a well on
the Contract Area, the acreage contribution shall be shared by each
Participating Party that accepts it in proportion to its Participating
Interest in the well. As between the Participating Parties, this
Agreement shall apply separately to the acreage.
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ARTICLE 22
DISPOSITION OF PRODUCTION
22.1 Take-in-Kind Facilities
Subject to Article 22.2, a Party may, at its sole cost and risk,
construct Take-in-Kind Facilities to take its share of Hydrocarbon
production in kind.
22.2 Duty to Take in Kind
Each Party shall own and, at its own cost and risk, shall take in kind or
separately dispose of its share of the oil, gas, and condensate produced
and saved from the Contract Area, exclusive of Hydrocarbon production
used by Operator in activities or operations conducted under this
Agreement, subject to this Article 22. In order to avoid interference
with operations on or regarding the Platform, the Development Facilities,
and the Contract Area, a Party exercising its right to construct Take-in
Kind Facilities ("the Take in Kind Party") shall provide the Operator
with a list of equipment it deems necessary for its Take in Kind
Facilities ("the components") along with its notice informing the
Operator of its election to take in kind. If the Operator agrees to
install and operate the Take-in Kind Facilities, the Operator shall
purchase the components and install it on behalf of the Take in Kind
Party at the Take in Kind Party's sole risk and cost, including, but not
limited to, any fees, penalties or other costs incurred as a result of
any cancellation of placed orders as may be requested by the Take in Kind
Party. The Operator shall provide the Take in Kind Party with monthly
updates on the progress of the ordering and installation of the Take in
Kind Facilities. The Operator, based on the instructions of Take in Kind
Party, shall install and operate all of the components. The Operator
shall not be responsible for any losses or damages to the components or
the Take in Kind Party's Hydrocarbon production metered, treated,
processed or transported by the components unless such losses or damages
are the result of the Operator's gross negligence or willful misconduct.
If the Operator refuses or falls to commence the installation of the
Take-in Kind Facilities by thirty (30) days prior to the deadline
provided in Section 12.4, the Take-in Kind Party shall have the right to
install and operate the Take-in Kind Facilities providing that such
operations do not interfere with existing operations or proposed
operations that have been approved under terms of this Agreement.
22.3 Failure to Take Oil and Condensate in Kind
Notwithstanding Article 22.2 (Duty to Take in Kind), if a Party fails to
take in kind or dispose of its share of the oil or condensate, Operator
shall have the right, but not the obligation, subject to revocation at
will by the Party owning the Hydrocarbon production, to purchase for its
own account, sell to others, or otherwise dispose of all or part of the
Hydrocarbon production at the same price at which Operator calculates and
pays lessor's royalty on its own portion of the oil or condensate.
Operator shall notify the non-taking Party when the option is exercised.
A purchase or sale by Operator of any other Party's share of the oil or
58
condensate shall be for such reasonable periods of time as are consistent
with the minimum needs of the industry under the circumstances, but in,
no event shall a contract be for a period in excess of one (1) year.
Proceeds of the oil or condensate purchased, sold, or otherwise disposed
of by Operator under this Article 22.3 shall be paid to the Party that
had, but did not exercise, the right to take in kind and separately
dispose of the oil or condensate. Operator, indisposing of another
Party's oil or condensate, shall not be responsible for making any filing
with regulatory agencies 'not required by law to be made by it in respect
to another Party's share of oil or condensate. Unless required by
governmental authority having jurisdiction or by judicial process, no
Party shall be forced to share an available market with a non-taking
Party.
22.4 Failure to Take Gas in Kind
Article 22.3 (Failure to Take Oil and Condensate in Kind) shall not apply
to gas produced from the Contract Area. In no event shall Operator be
responsible for, or obligated to dispose of, another Party's share of gas
production. If for any reason a Party fails to take or market its full
share of gas as produced, that Party may later take, market, or receive a
cash accounting for its full share in accordance with Exhibit "E".
22.5 Expenses of Delivery in Kind
A cost that is incurred by Operator in making delivery of a Party's share
of Hydrocarbons or disposing of same shall be paid by the Party.
ARTICLE 23
APPLICABLE LAW
23.1 Applicable Law
THIS AGREEMENT AND THE RELATIONSHIP OF THE PARTIES UNDER THIS AGREEMENT
SHALL BE GOVERNED BY AND INTERPRETED UNDER FEDERAL LAWS AND LAWS OF THE
STATE OF ALABAMA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS THAT
WOULD OTHERWISE REFER THE MATTER TO THE LAWS OF ANOTHER JURISDICTION.
59
ARTICLE 24
LAWS, REGULATIONS AND NON-DISCRIMINATION
24.1 Laws and Regulations
This Agreement and operations under this Agreement are subject to all
applicable laws, rules, regulations, and orders by all governmental
authorities claiming jurisdiction now and in the future. A provision of
this Agreement found to be contrary to or inconsistent with any such law,
rule, regulation, or order shall be deemed to have been modified
accordingly.
24.2 Non-discrimination
In performing work under this Agreement, the Parties shall comply and
Operator shall require each independent contractor to comply with the
governmental requirements in Exhibit "D" and with Articles 202(1) to (7),
inclusive of Executive Order 11246, as amended.
ARTICLE 25
FORCE MAJEURE
25.1 Force Majeure
If a Party is unable, wholly or in part because of a Force Majeure, to
carry out its obligations under this Agreement, other than the obligation
to make money payments, that Party shall give the other Parties prompt
written notice of the Force Majeure with full particulars about it.
Effective upon the date notice is given, the obligations of the Party, so
far as they are affected by the Force Majeure, shall be suspended during,
but no longer than, the .continuance of the Force Majeure. Time is of the
essence in the performance of this Agreement, and every reasonable effort
will be made by the Party to avoid delay or suspension of any work or
acts to be performed under this Agreement. The requirement that the Force
Majeure be remedied with all reasonable dispatch shall not require a
Party to settle strikes or other labor difficulties.
ARTICLE 26
SUCCESSORS, ASSIGNS AND PREFERENTIAL RIGHTS
26.1 Successors and Assigns
This Agreement binds and inures to the benefit of the Parties and their
respective heirs, successors, and assigns and shall constitute a covenant
running with the Contract Area. Each Party shall incorporate in each
assignment of an interest in the Contract Area a provision that the
assignment is subject to this Agreement.
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26.2 Transfer of interest
No transfer, assignment, or other disposition of interest by a Party
shall relieve the Party of liabilities and obligations it has incurred or
that are attributable to the interest transferred before the date of the
transfer, and the obligation to pay and bear all costs and risks
attributable to an operation in which the Party was a Participating Party
before making the transfer, and the lien and security rights granted by
Section 8.6 (Security Rights) shall continue to burden the interest
transferred to secure payment of the obligations. The transferor shall be
liable for all costs, expenses, and liabilities for well plugging and
abandonment, Platform and Development Facilities removal and disposal,
and site clearance for property and equipment attributable to the
assigned interest before the date of the transfer, net of salvage
proceeds.
26.3 Consent to Assign
A Party may not sell, transfer, farm out, assign, or otherwise dispose of
all or part of its Working Interest in the Contract Area without the
prior written consent of the other Parties, unless:
(a) the transferee is financially capable of assuming the obligations
hereunder and, in accordance with Subsection 26.3(c), the
transferor furnishes the Parties with proof of such financial
capability that, in the case of Outer Continental Shelf leases,
shall be proof that the transferee is currently qualified by the
Minerals Management Service, an agency of the United States
Department of the Interior, or a successor agency having
jurisdiction (hereinafter "MMS"), to own Outer Continental Shelf
leases and that the transferee would not be required by the MMS to
post a supplemental bond pursuant to 30 CFR ss. 256.53(d) & (e) if
such transferee owned 100% of the Working Interest in the Contract
Area.
(b) the transferee agrees in writing to assume all obligations and
liabilities under this Agreement related to the interest acquired
arising from and after the effective date of the transfer, and
(c) the transferor has given the other Parties written notice of the
transfer at least fifteen (15) days before the date of the
transfer, such notice to include the name of each proposed
transferee, a description of the interests to be transferred, and
the proof set forth in Subsection 26.3(a).
The requirements of this Section 26.3 shall not apply to a merger,
consolidation, reorganization, sale or transfer to an Affiliate, a
mortgage by a Party of its interest in the Contract Area, a sale of all,
or substantially all, of a Party's domestic exploration and production
properties, or a transfer or disposition between the Parties hereto.
26.4 Transfers Between Parties
A transfer, relinquishment, or other disposition of interests in the
Contract Area between Parties under the Acreage Out Option (if selected)
under Section 10.5 (Operations by Fewer Than All Parties); Section 13.11
(Lease Maintenance Operations); Section 13.12 (Retention of Lease by
Non-consent Well); Article 15 (Withdrawal); or Section 16.4
(Non-participation in Payments) shall be made without warranty of title.
61
Any such transfer between the Parties, if applicable, shall be free and
clear of all Subsequently Created Interests, as defined in Section 16.2
(Subsequently Created Interest), and all mortgages, liens, and
encumbrances.
26.5 Division of interest
If, at any time, the interest of a Party is divided among and owned by
four (4) or more co-owners, Operator, at its discretion, may require the
co-owners to appoint a single trustee or agent with full authority to
receive notices, approve expenditures, receive ▇▇▇▇▇▇▇▇ for, and approve
and pay the Party's share of the joint expenses, and to deal generally
with, and with power to bind the co owners of the Party's interest within
the scope of the operations embraced in this Agreement. All such
co-owners may separately dispose of their respective shares of the oil,
gas, and condensate produced from the Contract Area and may receive,
separately, payment of the sale proceeds thereof.
26.6 Preferential Rights
If a Party desires to transfer, sell, farm out, assign, or otherwise
dispose of all or part of its Working Interest ("Disposing Party"), it
shall promptly give written notice to the other Parties with full
information about the proposed transaction, including, but not limited
to, the name and address of the prospective transferee (who must be
ready, willing, and able to acquire the interest and deliver the stated
consideration therefor), the consideration for the transfer, farm out
terms, and all other terms of the offer. In the case of a package sale of
oil and gas interests that includes all or part of the Disposing Party's
Working Interest, or if the proposed transaction is structured as a
non-simultaneous, like-kind exchange under Section 1031 of the Internal
Revenue Code of 1986, as amended ("Code"), the Working interest that is
subject to this preferential right shall be separately valued in good
faith and the notice shall state the value attributed to the interest by
the prospective transferee. The other Parties shall then have an optional
prior right, for a period of thirty (30) days after receipt of the
notice, to elect to purchase or acquire on the same terms and conditions,
or on equivalent terms for a non-cash transaction, all of the Working
Interest that the Disposing Party is proposing to transfer. If this
preferential right is exercised by a Party, the purchasing or acquiring
Parties shall share the purchased or acquired interest in the proportions
that the Working Interest of each bears to the total Working interest of
all acquiring Parties, or in such proportions as the acquiring Parties
otherwise agree. This preferential right shall apply separately to each
Working Interest or part thereof covered by this Agreement, regardless of
whether it is included in the proposed transaction along with other oil
and gas interests, whether as a sale, farm out, or non-simultaneous,
like-kind exchange, and no provision in this Agreement shall be
interpreted to defeat this preferential right. Upon exercise of this
preferential right, the acquiring Parties shall agree to perform all
obligations of the prospective transferee under the proposed transaction
only for the Working Interest subject to the proposed transaction. This
preferential right, however, shall not exist or apply when a Party
proposes (a) to mortgage its interest; (b) to dispose of or transfer its
interest to a third party by (i) merger, (ii) reorganization, or
62
(iii) consolidation; (c) to sell all, or substantially all, of its
exploration and production properties located in the Gulf of Mexico,
Outer Continental Shelf of the United States of America; or (d) to
transfer the interest under a property exchange transaction other than a
non-simultaneous, likekind exchange under Section 1031 of the Code. If
the proposed transaction is not consummated within six (6) months after
receipt of the notice by the other Parties, the-Working Interest shall
again be governed by this Section 26.6 and the preferential right shall
again arise for the offered interest as herein described.
ARTICLE 27
ADMINISTRATIVE PROVISIONS
27.1 Term
This Agreement shall remain in effect so long as a Lease in the Contract
Area remains in effect and thereafter until (a) all ▇▇▇▇▇ have been
abandoned and plugged or turned over to the Parties owning an interest in
the Lease on which the ▇▇▇▇▇ are located; (b) all Platforms, Development
Facilities, and equipment have been disposed by the Operator in
accordance with Article 14 (Abandonment, Salvage, and Surplus); (c) all
Claims as defined in Article 19 (Liability, Claims, and Lawsuits) have
been settled or otherwise disposed of; and (d) there has been a final
accounting and settlement by all Parties. In accordance with Article 4.5
(Selection of Successor Operator), this Agreement will terminate if no
Party is willing to become Operator, effective after all conditions in
clauses (a) through (d) above have been completed. In accordance with
Article 15.2.1 (Unanimous Withdrawal), this Agreement will terminate if
all Parties elect to withdraw, effective after all conditions in clauses
(a) through (d) above have been completed. Termination of this Agreement
shall not relieve a Party of a liability or obligation accrued or
incurred before termination and is without prejudice to all continuing
confidentiality obligations or other obligations in this Agreement.
27.2 Waiver
A term, provision, covenant, representation, warranty, or condition of
this Agreement may be waived only by written instrument executed by the
Party waiving compliance. The failure or delay of a Party in the
enforcement or exercise of the rights granted under this Agreement shall
not constitute a waiver of said rights nor shall it be considered as a
basis for estoppel. Time is of the essence in the performance of this
Agreement and all time limits shall be strictly construed and enforced.
27.3 Waiver of Right to Partition
Each Party waives the right to bring an action for partition of its
interest in the Contract Area, ▇▇▇▇▇, Platform, Development Facilities,
63
and other equipment held under this Agreement, and covenants that during
the existence of this Agreement it shall not resort at any time to an
action at law or in equity to partition any or all of the Leases and
lands or personal. property subject to this Agreement.
27.4 Compliance With Laws and Regulations
This Agreement, and all activities or operations conducted by the Parties
under this Agreement, are expressly subject to, and shall comply with,
all laws, orders, rules, and regulations of all federal, state, and local
governmental authorities having jurisdiction over the Contract Area.
27.4.1 Severance of Invalid Provisions
If, for any reason and for so long as, a clause or provision of
this Agreement is held by a court of competent jurisdiction to be
illegal, invalid, unenforceable or unconscionable under a present
or future law (or interpretation thereof), the remainder of this
Agreement will not be affected by that illegality or invaldity. An
illegal or invalid provision will. be, deemed severed from this
Agreement, as if this Agreement had been executed without the
illegal or invalid provision. The surviving provisions of this
Agreement will remain in full force and effect unless the removal
of the illegal or invalid provision destroys the legitimate
purposes of this Agreement; in which event this Agreement shall be
null and void.
27.4.2 Fair and Equal Employment
Each of the Parties is an Equal Opportunity Employer, and the
equal opportunity provisions of 30 CFR 270 and 41 CFR 60-1, as
amended or modified, are incorporated in this Agreement by
reference. The affirmative action clauses concerning disabled
veterans and veterans of the Vietnam era (41 CFR 60-250) and the
affirmative action clauses concerning employment of the
handicapped (41 CFR 60-741) are also incorporated in this
Agreement by reference. In performing work under this Agreement,
the Parties shall comply with (and the Operator shall require each
independent contractor to comply with) the governmental
requirements in Exhibit "E" that pertain to non segregated
facilities.
27.5 Construction and Interpretation of this Agreement
27.5.1 Headings for Convenience
Except for the definition headings in Article 2 (Definitions), all
the table of contents, captions, numbering sequences, and
paragraph headings in this Agreement are inserted for convenience
only and do not define, expand or limit the scope, meaning, or
intent of this Agreement.
27.5.2 Article References
Except as otherwise provided in this Agreement, each reference to
an article of this Agreement includes all of the referenced
article and its sub-articles.
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27.5.3 Gender and Number
The use of pronouns in whatever gender or number is a proper
reference to the Parties to this Agreement though the Parties may
be individuals, business entities, or groups thereof. Reference in
this Agreement to the singular of a noun or pronoun includes the
plural and vice versa.
27.5.4 Future References
A reference to a Party includes such Party's successors and
assigns and, in the case of governmental bodies, persons
succeeding to their respective functions and capacities.
27.5.5 Currency
Any amounts due or payable under this Agreement- shall be paid in
United States currency.
27.5.6 Optional Provisions
In the event that any "Optional" provision of this Agreement is
not adopted by the Parties to this Agreement by a typed, printed
or handwritten indication, such provision shall not form a part of
this Agreement, and no inference shall be made concerning the
intent of the Parties in regard to the subject matter of the
"Optional" provision
27.5.7 Joint Preparation
This Agreement shall be deemed for all purposes to have been
prepared through the joint efforts of the Parties and shall not be
construed for or against one Party or the other as a result of the
preparation, submittal, drafting, execution or other event of
negotiation hereof.
27.5.8 Integrated Agreement
This Agreement contains the final and entire agreement of the
Parties for the matters covered by this Agreement and, as such,
supersedes all prior written or oral communications and
agreements. This Agreement may not be modified or changed except
by written amendment signed by the Parties.
27.5.9 Binding Effect
To the extent it is assignable, this Agreement shall bind and
inure to the benefit of the Parties and their respective
successors and assigns, and shall constitute a covenant running
with the land comprising the Contract Area. This Agreement does
not benefit or create any rights in a person or entity that is not
a Party to this Agreement.
27.5.10 Further Assurances
Each Party will take all actions necessary and will sign all
documents necessary to implement this Agreement. Except as
otherwise provided in this Agreement, within (30) days after their
receipt of a valid written request for those documents from a
Party, all other Parties shall prepare and execute the documents.
65
27.5.11 Counterpart Execution
This Agreement may be executed by signing the original or a
counterpart. If this Agreement is executed in counterparts, all
counterparts taken together shall have the same effect as if all
Parties had signed the same agreement. No Party shall be bound to
this Agreement until all Parties have executed a counterpart or
the original of this Agreement. This Agreement may also be
ratified by a separate instrument that refers to this Agreement
and adopts by reference all provisions of this Agreement. A
ratification shall have the same effect as an execution of this
Agreement.
27.6 Restricted Bidding
If more than one Party is ever on the list of restricted joint bidders
for Outer Continental Shelf. ("OCS") lease sales, as issued by the MMS
under 30 CFR 256.44, as amended, the Parties shall comply with all
statutes and regulations regarding restricted joint bidders on the OCS.
ARTICLE 28
AREA OF MUTUAL INTEREST
28.1 Area of Mutual Interest (AMI)
If either Party hereto, acting directly or through an agent, at any time
prior to the third anniversary of the effective date of this Agreement,
acquires, or has the right to acquire, by purchase, assignment, farmin,
option or otherwise, an interest in an oil and gas lease covering lands
listed on Exhibit "A" under the heading "Area of Mutual Interest (AMI)",
then the Party so acquiring or having the right to acquire ("Acquiring
Party") shall notify the other Party hereto in writing of the interest or
rights acquired, within ten (10) days after acquisition thereof. The
notice shall include all the terms and conditions of the interest or
rights acquired. Said Party so notified ("Notified Party") shall have the
option for a period of thirty (30) days after such notice is received to
acquire its proportionate share (equal to its Working Interest as listed
in Exhibit "A") in the acquired interest by reimbursing the Acquiring
Party for its proportionate share of the costs attributable to the
acquired interest and by assuming its proportionate share of the
Acquiring Party's obligations, if any, attributable to the acquired
interest. Failure of the Notifed Party to notify the Acquiring Party of
its election within said thirty (30) day period shall be deemed an
election not to participate.
Chevron U.S.A. Inc. and Ridgewood Energy Corporation, Manager Ridgewood
Energy Q Fund, LLC. hereby agree and acknowledge that this Agreement is
made subject to that certain Exploration Participation Agreement (EPA)
dated September 1, 2005 between Chevron U.S.A. Inc. and Ridgewood Energy
66
Corporation, Manager Ridgewood Energy Q Fund, LLC., and that in the event
of a conflict between the terms and provisions of this Agreement and the
EPA, the terms and provisions of the EPA shall control.
Chevron U.S.A. Inc. and Newfield Exploration Company hereby agree and
acknowledge that this Agreement is made subject to that certain
Exploration Participation Agreement (EPA) dated November 1, 2004 between
Chevron U.S.A. Inc. and Newfield Exploration Company, and that in the
event of a conflict between the terms and provisions of this Agreement
and the EPA, the terms and provisions of the EPA shall control.
IN WITNESS WHEREOF, this Agreement has been executed by the Parties as of the
day and year first above written.
WITNESSES: Chevron U.S.A. Inc.
[ILLEGIBLE SIGNATURE] By: /s/ ▇.▇. ▇▇▇▇
-------------------------------- ------------------------------
/s/ ▇▇▇▇▇ ▇▇▇▇ Title: Assistant Secretary
-------------------------------- ---------------------------
Newfield Exploration Company
________________________________ By:______________________________
________________________________ Title:___________________________
Ridgewood Energy Corporation, Manager
Ridgewood Energy Q Fund LLC.
/s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇ By: /s/ ▇.▇. ▇▇▇▇▇
--------------------------------- ------------------------------
/s/ ▇▇▇▇▇ ▇▇▇▇▇ Title: Executive Vice President
--------------------------------- ---------------------------
67
Exhibit "A"
Attached to and made a part of that certain Offshore Operating Agreement
effective as of October 1, 2005, between Chevron U.S.A. Inc.,
Newfield Exploration Company and Ridgewood Energy Corporation,
Manager Ridgewood Energy Q Fund, LLC, covering
Main Pass Blocks 221 and 222, Offshore, Gulf of Mexico:
1. Chevron U.S.A. Inc. (Chevron) is designated as Operator
2. Contract Area
Oil and Gas Lease of Submerged Lands bearing Serial No. OCS-G 26163,
dated, effective July 1, 2004, by and between the United States of
America, as Lessor, and Contango Offshore Exploration LLC as Lessee
covering all of Block 221, Main Pass Area, South and East Addition, OCS
Leasing Map, Louisiana Map No. 10A, covering approximately 4,994.55
acres, whereby 100% of the record title covering all of Block 221 was
assigned from Contango Offshore Exploration LLC to Chevron U.S.A. Inc.,
dated effective July 20, 2004.
Oil and Gas Lease of Submerged Lands bearing Serial No. OCS-G 26164,
dated effective July 1, 2004, by and between the United States of
America, as Lessor, and Chevron U.S.A. Inc. as Lessee covering all of
Block 222, Main Pass Area, South and East Addition, OCS Leasing Map,
Louisiana Map No. 10A, covering approximately 4,994.55 acres.
3. Division of Interest
Company Working Interest Percentage
-------------------------------------------------------------------------
Chevron U.S.A. Inc. (Chevron) 55.000% *
Cabot Oil & Gas Corporation (Cabot) 0.000% **
Newfield Exploration Company (Newfield) 10.000% ***
Ridgewood Energy Corporation (Ridgewood) 35.000% ****
--------
100.000%
* Chevron's interest is subject to three (3) separated Exploration
Participation Agreements between Cabot, Newfield and Ridgewood.
** Cabot's interest, rights and obligations are governed by the
Exploration Participation Agreement (EPA) dated November 1, 2004 between
Chevron and Cabot. Cabot has repudiated its obligations under the EPA and
has been placed in default by Chevron. As a defaulting party, Cabot is
not entitled to well information. Any Cabot working interest will be
determined in accord with the Alternative Dispute Resolution provisions
of the EPA. Any Cabot respective working interest percentages will be
born out of Chevron's 55% working interest.
JOA Exhibit "A"
*** Newfield's interest, rights and obligations is pursuant to the
Exploration Participation Agreement (EPA) dated November 1, 2004 between
Chevron and Newfield. The 10% working interest represents Newfield's
After Casing Point interest in the Contract Area as referenced in subject
EPA.
**** Ridgewood's interest, rights and obligations is pursuant to the
Exploration Participation. Agreement (EPA) dated September 1, 2005
between Chevron and Ridgewood. The 35% working interest represents
Ridgewood's After Casing Point interest in the Contract Area as
referenced in subject EPA.
4. Notification Addressees
Chevron U.S.A. Inc. *
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Tel.: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇
Gulf of Mexico-Land Manager
Newfield Exploration Company
▇▇▇ ▇. ▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇. ▇., ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: Gulf of Mexico - Land Manager
Ridgewood Energy Corporation
▇▇▇▇▇ ▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: W. ▇▇▇▇ ▇▇▇▇▇
*This address is temporary and will be amended as necessary by Letter Agreement.
JOA Exhibit "A"
Exhibit "B"
Attached to and made a part of that certain Offshore Operating Agreement
effective as of October 1, 2005, between Chevron U.S.A. Inc.,
Newfield Exploration Company and Ridgewood Energy Corporation,
Manager Ridgewood Energy Q Fund, LLC, covering
Main Pass Blocks 221 and 222, Offshore, Gulf of Mexico.
INSURANCE REQUIREMENTS
----------------------
1. Operator shall carry insurance as follows for the benefit and protection of
the Parties to this Agreement:
a) Worker's Compensation Insurance in accordance with laws of
governmental bodies having jurisdiction including, if applicable,
United States ▇▇▇▇▇▇▇▇▇ and Harbor Workers' Compensation Act with
Outer Continental Shelf Extension, Maritime Employers' Liability
(including, but not limited to, the ▇▇▇▇▇ Act and Death on the High
Seas Act) and Employers' Liability Insurance. Employers' Liability
Insurance shall provide coverage of $1,000,000 per accident.
b) Operator may include the aforesaid risks under its qualified
self-insurance program provided Operator complies with applicable
laws, and in such event Operator shall charge to the Joint Account a
premium determined by applying manual insurance rates to the payroll.
2. Operator shall not be obligated or authorized to obtain or carry on behalf
of the Joint Account any additional insurance covering the Parties or the
operations to be conducted hereunder without the consent and agreement of
all Parties. Such insurance, if authorized, shall contain waivers of
subrogation in favor of the other Parties. Each Party individually may
acquire at its own expense such insurance as it deems proper to protect
itself against claims, losses, damage to or destruction of property of
third parties, or personal injury or death of third persons arising out of
the joint operations. All uninsured. losses and all damages to jointly
owned property shall be borne by the Parties in proportion to their
respective interests.
3. Operator shall not carry physical damage insurance on jointly owned
property, it being understood and agreed that each Party will be
responsible for its own interest in such properties and will assume its
portion of any loss that occurs. Each Party hereby waives its rights of
recovery against all other Parties to the agreement, and agrees that all
insurance policies covering its interest in the jointly owned property will
be suitably endorsed to efectuate this waiver. Operator shall promptly
notify Non-operators in writing of all losses involving damage to a jointly
owned property in excess of $50,000.
4. Operator shall require all contractors engaged in operations under this
Agreement to comply with the applicable Worker's Compensation and
Employers' Liability laws and to maintain such other insurance and in such
amounts as Operator deems necessary.
5. In the event less than all Parties participate in an operation conducted
under the terms of this Agreement, then the insurance requirement and
costs, as well as all losses, liabilities and expenses incurred as the
result of such operation, shall be the burden of the Party or Parties
participating therein.
JOA - Exhibit "B"
Exhibit "C"
Attached to and made a part of that certain Offshore Operating Agreement
effective as of October 1, 2005, between Chevron U.S.A. Inc.,
Newfield Exploration Company and Ridgewood Energy Corporation,
Manager Ridgewood Energy Q Fund, LLC, covering ▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇-▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇▇, ▇▇▇▇ of Mexico.
ACCOUNTING PROCEDURE
OFFSHORE JOINT OPERATIONS
I. GENERAL PROVISIONS
1. Definitions
"Joint Property" shall mean the real and personal property subject to the
Agreement to which this Accounting Procedure is attached.
"Joint Operations" shall mean all operations necessary or proper for the
development, operation, protection and maintenance of the Joint Property.
"Joint Account" shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and which are to be shared
by the Parties.
"Operator" shall mean the party designated to conduct the Joint Operations.
"Non-Operators" shall mean the Parties of this Agreement other than the
Operator.
"Parties" shall mean Operator and Non-Operators.
"First Level Supervisors" shall mean those employees whose primary function
in Joint Operations is the direct supervision of other employees and/or
contract labor directly employed on the Joint Property in a field operating
capacity.
"Technical Employees" shall mean those employees having special and
specific engineering, geological or other professional skills, and whose
primary function in Joint Operations is the handling of specific
operating conditions and problems for the benefit of the Joint Property.
"Personal Expenses" shall mean travel and other reimbursable expenses of
Operator's employees.
"Material" shall mean personal property, equipment or supplies acquired or
held for use on the Joint Property.
"Controllable Material" shall mean Material which at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of Petroleum Accountants Societies.
"Shore Base Facilities" shall mean onshore support facilities that during
drilling, development, maintenance and producing operations provide such
services to the Joint Property as receiving and transshipment point for
supplies, materials and equipment; debarkation point for drilling and
production personnel and services; communication, scheduling and
dispatching center; other associated functions benefiting the Joint
Property.
"Offshore Facilities" shall mean platforms and support systems such as oil
and gas handling facilities, living quarters, offices, shops, cranes,
electrical supply equipment and systems, fuel and water storage and piping,
heliport, marine docking installations, communication facilities,
navigation aids, and other similar facilities necessary in the conduct of
offshore operations.
2. Statements and ▇▇▇▇▇▇▇▇
Operator shall ▇▇▇▇ Non-Operators on or before the last day of each month
for their proportionate share of the Joint Account for the preceding month.
Such bills will be accompanied by statements which identify the authority
for expenditure, lease or facility, and all charges and credits, summarized
by appropriate classifications of investment and expense except that items
of Controllable Material and unusual charges and credits shall be
separately identified and fully described in detail.
3. Advances and Payments by Non-Operators
A. Unless otherwise provided for in the Agreement, the Operator may
require the Non-Operators to advance their share of estimated cash
outlay for the succeeding month's operation within fifteen (15) days
1
JOA - Exhibit "C"
after receipt of the billing or by the first day of the month for which the
advance is required, whichever is later. Operator shall adjust each monthly
billing to reflect advances received from the Non-Operators.
B. Each Non-Operator shall pay its proportion of all bills within fifteen
(15) days after receipt. If payment is not made within such time, the
unpaid balance shall bear interest monthly at the prime rate in effect
at Citibank, New York, New York on the first day of the month in which
delinquency occurs plus 1% or the maximum contract rate permitted by
the applicable usury laws of the jurisdiction in which the Joint
Property is located, whichever is the lesser, plus attorney's fees,
court costs, and other costs in connection with the collection of
unpaid amounts.
4. Adjustments
Payment of any such bills shall not prejudice the right of any Non-Operator
to protest or question the correctness thereof; provided, however, all
bills and statements rendered to Non-Operators by Operator during any
calendar year shall conclusively be presumed to be true and correct after
twenty-four (24) months following the end of any such calendar year, unless
within the said twenty-four (24) month period a Non-Operator takes written
exception thereto and makes claim-on Operator for adjustment. No adjustment
favorable to Operator shall be made unless it is made within the same
prescribed period. The provisions of this paragraph shall not prevent
adjustments' resulting from a physical inventory of Controllable Material
as provided for in Section V.
5. Audits
A. A Non-Operator, upon notice in writing to Operator and all other
Non-Operators, shall have the right to audit Operator's accounts and
records relating to the Joint Account for any calendar year within the
twenty-four (24) month period following the end of such calendar year,
provided, however, the making of an audit shall not extend the time
for the taking of written exception to and the adjustments of accounts
as provided for in Paragraph 4 of this Section I. Where there are two
or more Non-Operators, the Non-Operators shall make every reasonable
effort to conduct a joint audit in a manner which will result in a
minimum of inconvenience to the Operator. Operator shall bear no
portion of the Non-Operators' audit cost incurred under this paragraph
unless agreed to by the Operator. The audits shall not be conducted
more than once each year without prior approval of Operator, except
upon the resignation or removal of the Operator, and shall be made at
the expense of those Non-Operators approving such audit.
B. The Operator shall reply in writing to an audit report within 180 days
after receipt of such report.
6. Approval by Non-Operators
Where an approval or other agreement of the Parties or Non-Operators is
expressly required under other sections of this Accounting Procedure and if
the agreement to which this Accounting Procedure is attached contains no
contrary provisions in regard thereto, Operator shall notify all
Non-Operators of the Operator's proposal, and the agreement or approval of
a majority in interest of the Non-Operators shall be controlling on all
Non-Operators.
II. DIRECT CHARGES
Operator shall charge the Joint Account with the following items:
1. Rentals and Royalties
Lease rentals and royalties paid by Operator for the Joint Operations.
2. Labor
A. (1) Salaries and wages of Operator's field employees directly
employed on the Joint Property in the conduct of Joint
Operations.
(2) Salaries and wages of Operator's employees directly employed on
Shore Base Facilities or other Offshore Facilities serving the
Joint Property if such costs are not charged under Paragraph 7 of
this Section II.
(3) Salaries of First Level Supervisors in the field.
(4) Salaries and wages of Technical Employees directly employed on
the Joint Property if such charges are excluded from the Overhead
rates.
(5) Salaries and wages of Technical Employees either temporarily or
permanently assigned to and directly employed in the operation of
the Joint Property if such charges are excluded from the overhead
rates.
B. Operator's cost of holiday, vacation, sickness and disability benefits
and other customary allowances paid to employees whose salaries and
wages are chargeable to the Joint Account under Paragraph 2A of this
Section I. Such costs under this Paragraph 2B 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
2A of this Section I. If percentage assessment is used, the rate shall
be based on the Operator's cost experience.
2
JOA - Exhibit "C"
C. Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Operator's costs
chargeable to the Joint Account under. Paragraphs 2A and 2B of this
Section II. D, Personal Expenses of those employees whose salaries and
wages are chargeable to the Joint Account under Paragraph 2A of this
Section II.
3. Employee Benefits
Operator's current costs of established plans for employee's 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 2A and 2B of
this Section I 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 Joint Property
as provided under Section IV. Only such Material shall be purchased for or
transferred to the Joint Property as may be required for immediate use and
is reasonably practical and consistent with efficient and economical
operations. The accumulation of surplus stocks shall be avoided.
5. Transportation
Transportation of employees and Material necessary for the Joint Operations
but subject to the following limitations:
A. If Material is moved to the Joint Property from the Operator's
warehouse or other properties, no charge shall be made to the Joint
Account for a distance greater than the distance from the nearest
reliable supply store where like material is normally available or
railway receiving point nearest the Joint Property unless agreed to by
the Parties.
B. If surplus Material is moved to Operator's warehouse or other storage
point, no charge shall be made to the Joint Account for a distance
greater than the distance to the nearest reliable supply store where
like material is normally available, or railway receiving point
nearest the Joint Property unless agreed to by the Parties. No charge
shall be made to the Joint Account for moving Material to other
properties belonging to Operator, unless agreed to by the Parties.
C. In the application of subparagraphs A and B above, the option to
equalize or charge actual trucking cost is available when the actual
charge is $400 or less excluding accessorial charges. The $400 will be
adjusted to the amount most recently recommended by the Council of
Petroleum Accountants Societies.
6. Services
The cost of contract services, equipment and utilities provided by outside
sources, except services excluded by Paragraph 9 of Section II and
Paragraphs i and ii of Section M. The cost of professional consultant
services and contract services of technical personnel directly engaged on
the Joint Property if such charges are excluded from the overhead rates.
The cost of professional consultant services or contract services of
technical personnel directly engaged in the operation of the Joint Property
shall be charged to the Joint Account if such charges are excluded from the
overhead rates.
7. Equipment, Facilities and Affiliate Services Furnished by Operator
A. Operator shall charge the Joint Account for use of Operator-owned
equipment and facilities, including Shore Base and/or Offshore
Facilities, at rates commensurate with costs of ownership and
operation. Such rates may include labor, maintenance, repairs, other
operating expense, insurance, taxes, depreciation, abandonment,
reclamation and interest on gross investment less accumulated
depreciation not to exceed twelve percent 12% per annum. In addition,
for platforms and facilities only, the rate may include an element of
the estimated cost of dismantlement. Such rates shall not exceed
average commercial rates currently prevailing in the immediate area of
the Joint Property.
B. In lieu of charges in Paragraph 7A above, Operator may elect to use
average commercial rates prevailing in the immediate area of the Joint
Property. For automotive equipment, Operator may elect to use rates
published by the Petroleum Motor Transport Association.
8. Damages and Losses to Joint Property
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or other causes, except those resulting from
Operator's gross negligence or willful misconduct. Operator shall furnish
Non-Operator written notice of damages or losses incurred as soon as
practicable after the report thereof has been received by Operator.
3
JOA - Exhibit "C"
9. Legal Expense
Expense of handling, investigating and settling litigation or claims,
discharging of liens, payments of judgments and amounts paid for settlement
of claims incurred in or resulting from operations under the Agreement or
necessary to protect or recover the Joint Property, except that no charge
for services of Operator's legal staff or fees or expense of outside
attorneys shall be made unless previously agreed to by the Parties. All
other legal expense is considered to be covered by the overhead provisions
of Section III unless otherwise agreed to by the Parties, except as
provided in Section I, Paragraph 3.
10. Taxes
All taxes of every kind and nature assessed or levied upon or in
connection with the Joint Property, the operation thereof, or the
production therefrom, and which taxes have been paid by the Operator for
the benefit of the Parties. If the ad valorem taxes are based in whole or
in part upon separate valuations of each party's working interest, then
notwithstanding anything to the contrary herein, charges to the Joint
Account shall be made and paid by the Parties hereto in accordance with
the tax value generated by each party's working interest.
11. Insurance
Net premiums paid for insurance required to be carried for the Joint
Operations for the protection of the Parties. In the event Joint Operations
are conducted at offshore locations in which Operator may act as
self-insurer for Workers' Compensation and Employers' Liability, Operator
may include the risk under its self-insurance program in providing coverage
under State and Federal laws and charge the Joint Account at Operator's
cost not to exceed manual rates.
12. Communications
Costs of acquiring, leasing, installing, operating, repairing and
maintaining communication systems including. radio and microwave facilities
between the Joint Property and the Operator's nearest Shore Base Facility.
In the event communication facilities systems serving the Joint Property
are Operator-owned, charges to the Joint Account shall be made as provided
in Paragraph 7 of this Section H.
13. Ecological and Environmental
Costs incurred on the Joint Property as a result of statutory regulations
for archaeological and geophysical surveys relative to identification and
protection of cultural resources and/or other environmental or ecological
surveys as may be required by the Bureau of Land Management or other
regulatory authority. Also, costs to provide or have available pollution
containment and removal equipment plus costs of actual control and cleanup
and resulting responsibilities of oil spills as required by applicable laws
and regulations.
14. Abandonment and Reclamation
Costs incurred for abandonment and reclamation of the Joint Property,
including costs required by governmental or other regulatory authority.
15. Other Expenditures
Any other expenditure not covered or dealt with in the foregoing provisions
of this Section I, or in Section III and which is of direct benefit to the
Joint Property and is incurred by the Operator in the necessary and proper
conduct of the Joint Operations.
III. OVERHEAD
As compensation for administrative, supervision, office services and warehousing
costs, Operator shall charge the Joint Account in accordance with this Section
11.
Unless otherwise agreed to by the Parties, such charge shall be in lieu of costs
and expenses of all offices and salaries or wages plus applicable burdens and
expenses of all personnel, except those directly chargeable under Section I. The
cost and expense of services from outside sources in connection with matters of
taxation, traffic, accounting or matters before or involving governmental
agencies shall be considered as included in the overhead rates provided for in
this Section III unless such cost and expense are agreed to by the Parties as a
direct charge to the Joint Account.
i. Except as otherwise provided in Paragraph 2 of this Section III, the
salaries, wages and Personal Expenses of Technical Employees and/or
the cost of professional consultant services and contract services of
technical personnel directly employed on the Joint Property:
( ) shall be covered by the overhead rates.
4
JOA - Exhibit "C"
(X) shall not be covered by the overhead rates.
ii. Except as otherwise provided in Paragraph 2 of this Section III, the
salaries, wages and Personal Expenses of Technical Employees and/or costs
of professional consultant services and contract services of technical
personnel either temporarily or permanently assigned to and directly
employed in the operation of the Joint Property:
( ) shall be covered by the overhead rates.
(X) shall not be covered by the overhead rates.
1. Overhead - Drilling and Producing Operations
As compensation for overhead incurred in connection with drilling and
producing operations, Operator shall charge on either:
(X) Fixed Rate Basis, Paragraph IA, or
( ) Percentage Basis, Paragraph 1B
A. Overhead - Fixed Rate Basis
(1) Operator shall charge the Joint Account at the following rates
per well per month:
Drilling Well Rate $40,000 (Prorated for less than a full month)
Producing Well Rate $4,000
(2) Application of Overhead - Fixed Rate Basis for Drilling Well Rate
shall be as follows:
(a) Charges for drilling ▇▇▇▇▇ shall begin on the date when
drilling or completion equipment arrives on location and
terminate on the date the drilling or completion equipment
moves off location or rig is released, whichever occurs
first, except that no charge shall be made during suspension
of drilling operations for fifteen (15) or more consecutive
calendar days.
(b) Charges for ▇▇▇▇▇ undergoing any type of workover or
recompletion for a period of five (5) consecutive work days
or more shall be made at the drilling well rate. Such
charges shall be applied for the period from date workover
operations, with rig or other units used in workover,
commence through the date of rig or other unit release,
except that no charge shall be made during suspension of
operations for fifteen (15) or more consecutive calendar
days.
(3) Application of Overhead - Fixed Rate Basis for Producing Well
Rate shall be as follows:
(a) 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.
(b) 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.
(c) 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.
(d) A one-well charge shall be made for the month in which
plugging and abandonment operations are completed on any
well. This one-well charge shall be made whether or not the
well has produced except when drilling well rate applies.
(e) All other inactive ▇▇▇▇▇ (including but not limited to
inactive ▇▇▇▇▇ covered by unit allowable, lease allowable,
transferred allowable, etc.) shall not qualify for an
overhead charge.
(4) The well rates shall be adjusted as of the first day of April
each year following the effective date of the agreement to which
this Accounting Procedure is attached. The adjustment shall be
computed by multiplying the rate currently in use by the
percentage increase or decrease in the average weekly earnings of
Crude Petroleum and Gas Production Workers for the last calendar
year compared to the calendar year preceding as shown by the
index of average weekly earnings of Crude Petroleum and Gas
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.
B. Overhead - Percentage Basis
(1) Operator shall charge the Joint Account at the following rates:
(a) Development
_____ Percent (__%) of cost of Development of the Joint
Property exclusive of costs provided under Paragraph 9 of
Section II and all salvage credits.
(b) Operating
_____ Percent (__%) of the cost of Operating the Joint
Property exclusive of costs provided under Paragraphs I and
9 of Section II, all salvage credits, the value of injected
substances purchased for secondary recovery and all taxes
and assessments which are levied, assessed and paid upon the
mineral interest in and to the Joint Property.
5
JOA - Exhibit "C"
(2) Application of Overhead - Percentage Basis shall be as follows:
For the purpose of determining charges on a percentage basis
under Paragraph 111 of this Section III, development shall
include all costs in connection with drilling, redrilling, or
deepening of any or all ▇▇▇▇▇, and shall also include any
remedial operations requiring a period of five (5) consecutive
work days or more on any or all ▇▇▇▇▇; also, preliminary
expenditures necessary in preparation for drilling and
expenditures incurred in abandoning when the well is not
completed as a producer, and original cost of construction or
installation of fixed assets, the expansion of fixed assets and
any other project clearly discernible as a fixed asset, except
Major Construction as defined in Paragraph 2 of this Section III.
All other costs shall be considered as Operating except that
catastrophe costs shall be assessed overhead as provided in
Section III, Paragraph 3.
2. Overhead - Major Construction
To compensate Operator for overhead costs incurred in the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly discernible as a fixed asset or in the abandonment of fixed
assets and any associated reclamation required for the exploration;
development and operation of the Joint 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. If the Operator absorbs the engineering, design and drafting costs
related to the project:
(1) 5 % of total costs if such costs are more than $ 25,000 but less
than $100,000; plus
(2) 3 % of total costs in excess of $100,000 but less than
$11,000,000; plus
(3) 2.5 % of total costs in excess of $ 1,000,000.
B. If the Operator charges engineering, design and drafting costs related
to the project directly to the Joint Account:
(1) 4 % of total costs if such costs are more than $ 25,000 but less
than $100,000; plus
(2) 3 % of total costs in excess of $100,000 but less than
$1,000,000; plus
(3) 2 % of total costs in excess of $ 1,000,000.
Total costs shall mean the gross cost of any one project. For the purposes
of this paragraph, the component parts of a single project shall not be
treated separately and the cost of drilling and workover ▇▇▇▇▇ and
artificial life equipment shall be excluded.
On each project, Operator shall advise Non-Operator(s) in advance which of
the above options shall apply. In the event of any conflict between the
provisions of this paragraph and those provisions under Section II,
Paragraph 2 or Paragraph 6, the provisions of this paragraph shall govern.
3. Overhead - Catastrophe
To compensate Operator for overhead costs incurred in the event of
expenditures resulting from a single occurrence due to oil spill, blowout,
explosion, fire, storm, hurricane, or other catastrophes as agreed to by
the Parties, which are necessary to restore the Joint Property to the
equivalent condition that existed prior to the event causing the
expenditures, Operator shall either negotiate a rate prior to charging the
Joint Account or shall charge the Joint Account for overhead based on the
following rates:
(1) 5 % of total costs through $100,000; plus
(2) 3 % of total costs in excess of $100,000 but less than $1,000,000;
plus
(3) 2 % of total costs in excess of $1,000,000.
Expenditures subject to the overheads above will not be reduced by
insurance recoveries, and no other overhead provisions of this Section III
shall apply.
4. Amendment of Rates
The Overhead rates provided for in this Section III may be amended from
time to time only by mutual agreement between the Parties hereto if, in
practice, the rates are found to be insufficient or excessive.
IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS
Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for all Material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property;
however, at Operator's option, such Material may be supplied by the
Non-Operator. Operator shall make timely disposition of idle and/or surplus
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or sale to outsiders. Operator may purchase, but
6
JOA - Exhibit "C"
shall be under no obligation to purchase, interest of Non-Operators in surplus
condition A or B Material. The disposal of surplus Controllable Material not
purchased by the Operator shall be agreed to by the Parties.
1. Purchases
Material purchased shall be charged at the price paid by Operator after
deduction of all discounts received. In case of Material found to be
defective or returned to vendor for any other reasons, credit shall be
passed to the Joint Account when adjustment has been received by the
Operator.
2. Transfers and Dispositions
Material furnished to the Joint Property and Material transferred from the
Joint Property or disposed of by the Operator, unless otherwise agreed to
by the Parties, shall be priced on the following basis exclusive of cash
discounts:
A. New Material (Condition A)
(1) Tubular Goods Other than Line Pipe
(a) Tubular, goods, sized 2 3/8 inches OD and larger, except
line pipe, shall be priced at Eastern mill published carload
base prices effective as of date of movement plus
transportation cost using the 80,000 pound carload weight
basis to the railway receiving point nearest the Joint
Property for which published rail rates for tubular goods
exist. If the 80,000 pound rail rate is not offered, the
70,000 pound or 90,000 pound rail rate may be used. Freight
charges for tubing will be calculated from" Lorain, Ohio,
and casing from Youngstown, Ohio.
(b) For grades which are special to one mill only, prices shall
be computed at the mill base of that mill plus
transportation cost from that mill to the railway receiving
point nearest the Joint Property as provided above in
Paragraph 2.A.(1)(a). For transportation cost from points
other than Eastern ▇▇▇▇▇, the 30,000 pound Oil Field Haulers
Association interstate truck rate shall be used.
(c) Special end finish tubular goods shall be priced at the
lowest published out-of-stock price, f.o.b. Houston, Texas,
plus transportation cost, using Oil Field Haulers
Association interstate 30,000 pound truck rate, to the
railway receiving point nearest the Joint Property.
(d) Macaroni tubing (size less than 2 3/8 inch OD) shall be
priced at the lowest published out-of stock prices f.o.b.
the supplier plus transportation costs, using the Oil Field
Haulers Association interstate truck rate per weight of
tubing transferred, to the railway receiving point nearest
the Joint Property.
(2) Line Pipe
(a) Line pipe movements (except size 24 inch OD and larger with
walls 3/4 inch and over) 30,000 pounds or more shall be
priced under provisions of tubular goods pricing in
Paragraph A.(1) (a) as provided above. Freight charges shall
be calculated from Lorain, Ohio.
(b) Line pipe movements (except size 24 inch OD and larger with
walls 3/4 inch and over) less than 30,000 pounds shall be
priced at Eastern mill published carload base prices
effective as of date of shipment, plus transportation costs
based on freight rates as set forth under provisions of
tubular goods pricing in Paragraph from Lorain, Ohio.
A.(1)(a) as provided above. Freight charges shall be
calculated
(c) Line pipe 24 inch OD and over and 3/4 inch wall and larger
shall be priced f.o.b. the point of manufacture at current
new published prices plus transportation cost to the railway
receiving point nearest the Joint Property.
(d) Line pipe, including fabricated line pipe, drive pipe and
conduit not listed on published price lists shall be priced
at quoted prices plus freight to the railway receiving point
nearest the Joint Property or at prices agreed to by the
Parties.
(3) Other Material shall be priced at the current new price, in
effect at date of movement, as listed by a reliable supply store
nearest the Joint Property, or point of manufacture, plus
transportation costs, if applicable, to the railway receiving
point nearest the Joint Property.
(4) Unused new Material, except tubular goods, moved from the Joint
Property shall be priced at the current new price, in effect on
date of movement, as listed by a reliable supply store nearest
the Joint Property, or point of manufacture, plus transportation
costs, if applicable, to the railway receiving point nearest the
Joint Property. Unused new tubulars will be priced as provided
above in Paragraph 2.A.(I) and (2).
B. Good Used Material (Condition B)
Material in sound and serviceable condition and suitable for reuse
without reconditioning:
(1) Material moved to the Joint Property At seventy-five percent
(75%) of current new price, as determined by Paragraph A.
(2) Material used on and moved from the Joint Property
7
JOA - Exhibit "C"
(a) At seventy-five percent (75%) of current new price, as
determined by paragraph A, if Material was originally
charged to the Joint Account as new Material or
(b) At sixty-five percent (65%) of current new price, as
determined by Paragraph A, if Material was originally
charged to the Joint Account as used Material.
(3) Material not used on and moved from the Joint Property' At
seventy-five percent (75%) of current new price as determined by
Paragraph A.
The cost of reconditioning, if any, shall be absorbed by the
transferring property.
C. Other Used Material
(1) Condition C
Material which is not in sound and serviceable condition and not
suitable for its original function until after. reconditioning
shall be priced at fifty percent (50%) of current new price as
determined by Paragraph A. The cost of reconditioning shall be
charged to the receiving property, provided Condition C value
plus cost of reconditioning does not exceed Condition B value.
(2) Condition D
Material, excluding junk, no longer suitable for its original
purpose, but usable for some other purpose shall be priced on a
basis commensurate with its use. Operator may dispose of
Condition D Material under procedures normally used by Operator
without prior approval of Non-Operators.
(a) Casing, tubing, or drill pipe used as line pipe shall be
priced as Grade A and B seamless line pipe of comparable
size and weight. Used casing, tubing or drill pipe utilized
as line pipe shall be priced of used line pipe prices.
(b) Casing, tubing or drill pipe used as higher pressure service
lines than standard line pipe, e.g., power oil lines, shall
be priced under normal pricing procedures for casing,
tubing, or drill pipe. Upset tubular goods shall be priced
on a non-upset basis.
(3) Condition E
Junk shall be priced at prevailing prices. Operator may dispose
of Condition E Material under procedures normally utilized by
Operator without prior approval of Non-Operators.
D. Obsolete Material
Material which is serviceable and usable for its original function but
condition and/or value of such Material is not equivalent to that
which would justify a price as provided above may be specially priced
as agreed to by the Parties. Such price should result in the Joint
Account being charged with the value of the service rendered by such
Material.
E. Pricing Conditions
(1) Loading or unloading costs may be charged to the Joint Account at
the rate of twenty-five cents (250) per hundred weight on all
tubular goods movements, in lieu of actual loading or unloading
costs sustained at the stocking point. The above rate shall be
adjusted as of the first day of April each year following January
1, 1985 by the same percentage increase or decrease used to
adjust overhead rates in Section II, Paragraph LA.(4). Each year,
the rate calculated shall be rounded to the nearest cent and
shall be the rate in effect. until the first day of April next
year. Such rate shall be published each year by the Council of
Petroleum Accountants Societies.
(2) Material involving erection costs shall be charged at applicable
percentage of the current knocked-down price of new Material.
3. Premium Prices
Whenever Material is not readily obtainable at published or listed prices
because of national emergencies, strikes or other unusual causes over
which the Operator has no control, the Operator may charge the Joint
Account for the required Material at the Operator's actual cost incurred
in providing such Material, in making it suitable for use, and in moving
it to the Joint Property; provided notice in writing is furnished to
Non-Operators of the proposed charge prior to billing Non-Operators for
such Material. Each Non-Operator shall have the right, by so electing and
notifying Operator within ten days after receiving notice from Operator,
to furnish in kind all or part of his share of such Material suitable for
use and acceptable to Operator.
4. Warranty of Material Furnished By Operator
Operator does not warrant the Material furnished. In case of defective
Material, credit shall not be passed to the Joint Account until adjustment
has been received by Operator from the manufacturers or their agents.
V. INVENTORIES
The Operator shall maintain detailed records of Controllable Material.
8
JOA - Exhibit "C"
1. Periodic Inventories, Notice and Representation
At reasonable intervals, inventories shall be taken by Operator of the
Joint Account Controllable Material. Written notice of intention to take
inventory shall be given by Operator at least thirty (30) days before any
inventory is to begin so that Non-Operators may be represented when any
inventory is taken. Failure of Non-Operators to be represented at an
inventory shall bind Non-Operators to accept the inventory taken by
Operator.
2. Reconciliation and Adjustment of Inventories
Adjustments to the Joint Account resulting from the reconciliation of a
physical inventory shall be made within six months following the taking of
the inventory. Inventory adjustments shall be made by Operator to the Joint
Account for overages and shortages, but, Operator shall be held accountable
only for shortages due to lack of reasonable diligence.
3. Special Inventories
Special inventories may be taken whenever there is any sale, change of
interest, or change of Operator in the Joint Property. It shall be the
duty of the party selling to notify all other Parties as quickly as
possible after the transfer of interest takes place. In such cases, both
the seller and-the purchaser shall be governed-by such inventory: In-
cases involving a change of Operator, all Parties shall be governed by
such inventory.
4. Expense of Conducting Inventories
A. The expense of conducting periodic inventories shall not be charged to
the Joint Account unless agreed to by the Parties.
B. The expense of conducting special inventories shall be charged to the
Parties requesting such inventories, except inventories required due
to change of Operator shall be charged to the Joint Account.
9
JOA - Exhibit "C"
Exhibit "D"
Attached to and made a part of that certain Offshore Operating Agreement
effective as of October 1, 200,5, between Chevron U.S.A. Inc.,
Newfield Exploration Company and Ridgewood Energy Corporation,
Manager Ridgewood Energy Q Fund, LLC, covering
Main Pass Blocks 221 and 222, Offshore, Gulf of Mexico.
NONDISCRIMINATION CLAUSE
During the performance of this Agreement, the "contractor" (meaning and
referring separately to each party hereto) agrees, unless exempt therefrom to
comply with all provisions of Executive Order 11246 which are incorporated
herein by reference, and (a) if contractor has more than 50 employees or
contracts with another party hereto in excess of $10,000, contractor must file
Standard Form 100 (EEO-1), (b) if contractor has 50 or more employees and a
contract of $50,000 or more, contractor is required to develop a written
"Affirmative Action Compliance Program" for each of its establishments according
to the Rules and Regulations published by the United States Department of Labor
in 41 CFR, Chapter 60. Further, contractor hereby certifies that it does not now
and will not maintain any facilities provided for its employees in a segregated
manner or permit its employees to perform their services at any location under
its control where segregated facilities are maintained, as such segregated
facilities are defined in Title 41, Chapter 60-1.8, Code of Federal Regulations,
revised as of January 1, 1969, unless exempt therefrom. Contractor further
warrants that no other law, regulation or ordinance of the United States, or any
state, or any governmental authority or agency has been violated in the
manufacture, procurement or sale of any good furnished, work performed or
service rendered pursuant to this contract.
Unless exempt by rules, regulations or orders of the United States Secretary of
Labor, issued pursuant to Section 204 of Executive Order 11246, dated September
24, 1965, during the performance of this contract, the contractor agrees as
follows:
"(1) The contractor will not discriminate against any employee or applicant for
employment because of race, color, religion, sex or national origin. The
contractor will take affirmative action to ensure that applicants are
employed and that employees are treated during employment, without regard
to their race, color, religion, sex or national original. Such action shall
include, but not be limited to, the following: Employment, upgrading,
demotion, transfer, recruitment or recruitment advertising; layoff or
termination; rates of pay or other forms of compensation; and selection for
training, including apprenticeship. The contractor agrees to post in
conspicuous places, available to employees and applicants for employment,
notices to be provided by the contracting officer setting forth the
provisions of this nondiscrimination clause."
"(2) The contractor will, in all solicitations or advertisements for employees
placed by or on behalf of the contractor, state that all qualified
applicants will receive consideration for employment without regard to
race, color, religion, sex or national origin."
1
JOA -- Exhibit "D"
"(3) The contractor will send to each labor union or representative of workers
with which he has a collective bargaining agreement or other contract or
understanding, a notice to be provided by the agency contracting officer,
advising the labor union or workers' representative of the contractor's
commitments under Section-202 of Executive, Order 11246 of September 24,
1965, and shall post copies of the notice in conspicuous places available
to employees and applicants for employment."
"(4) The contractor will comply with all provisions of Executive Order 11246 of
September 24, 1965, and of the rules, regulations and relevant, orders of,
the Secretary of Labor."
"(5) The contractor will furnish all information and reports required by
Executive Order 11246 of September 24, 1965, and by the rules, regulations
and orders of the Secretary of Labor, or pursuant thereto, and will permit
access to his books, records and accounts by the contracting agency and the
Secretary of Labor for purposes of investigating to ascertain compliance
with such rules, regulations and orders."
"(6) In the event of the contractor's noncompliance with the nondiscrimination
clauses of this contract or with any of such rules, regulations or orders,
this contract may be canceled, terminated or suspended in whole or in part
and the contractor may be declared ineligible for further Government
contracts in accordance with procedures authorized in Executive Order 11246
of September 24, 1965, or by rule, regulation or order of the Secretary of
Labor, or as otherwise provided by law."
"(7) The contractor will include the provisions of paragraph (1) through (8) in
every subcontract or purchase order unless exempted by rules, regulations
or orders of the Secretary of Labor issued pursuant to Section 204 of
Executive Order 11246 of September 24, 1965, so that such provisions will
be binding upon each subcontractor or vendor. The contractor will take such
action with respect to any subcontract or purchase order as the contracting
agency may direct as a means of enforcing such provisions including
sanctions for noncompliance; provided, however, that in the event the
contractor becomes involved in, or is result of such direction by the
contracting agency, the contractor may request the United States to enter
into such litigation to protect the interests of the United States."
"(8) Contractor agrees and covenants that none of its employees or employees of
its subcontractors who provided services pursuant to this contract are
unauthorized aliens, as defined in the Immigration, Reform and Control Act
of 1986."
2
JOA - Exhibit "D"
Exhibit "E"
Attached to and made a part of that certain Offshore Operating Agreement
effective as of October 1, 2005, between Chevron U.S.A. Inc.,
Newfield Exploration Company and Ridgewood Energy Corporation,
Manager Ridgewood Energy Q Fund, LLC, covering
Main Pass Blocks 221 and 222, Offshore, Gulf of Mexico.
GAS BALANCING AGREEMENT ("AGREEMENT")
1. Definitions
The following definitions shall apply to this Agreement:
2. "Arm's Length Agreement" shall mean any gas sales agreement with an
unaffiliated purchaser or any gas sales agreement with an affiliated
purchaser where the sales price and delivery conditions under such
agreement are representative of prices and delivery conditions
existing under other similar agreements in the area between
unaffiliated parties at the same time for natural gas of comparable
quality and quantity.
3. "Balancing Area" shall mean all of the acreage and depths subject to
the Operating Agreement.
4. "Full Share of Current Production" shall mean the Percentage Interest
of each Party in the Gas actually produced from the Balancing Area
during each month.
5. "Gas" shall mean all hydrocarbons produced or producible from the
Balancing Area, whether from a well classified as an oil well or gas
well by the regulatory agency having jurisdiction in such matters,
which are or may be made available for sale or separate disposition by
the Parties, excluding oil, condensate and other liquids recovered by
field equipment operated for the joint account. "Gas" does not include
gas used in joint operations, such as for fuel, recycling or
reinjection, or which is vented or lost prior to its sale or delivery
from the Balancing Area.
6. "Makeup Gas" shall mean any Gas taken by an Underproduced Party from
the Balancing Area in excess of its Full Share of Current Production,
whether pursuant to Section 2.3. or Section 3.1. hereof.
7. "Mcf" shall mean one thousand cubic feet. A cubic foot of Gas shall
mean the volume of gas contained in one cubic foot of space at a
standard pressure base and at a standard temperature base.
JOA - Exhibit "E"
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3787:CRR
8. "MMBtu" shall mean one million British Thermal Units. A British
Thermal Unit shall mean the quantity of heat required to raise
one pound avoirdupois of pure water from 58.5 degrees Fahrenheit
to 59.5 degrees Fahrenheit at a constant pressure of 14.73 pounds
per square inch absolute.
9. "Operator" shall mean the individual or entity designated under
the terms of the Operating Agreement or, in the event this
Agreement is not employed in connection with an operating
agreement, the individual or entity designated as the operator of
the well(s) located in the Balancing Area.
10. "Overproduced Party" shall mean any Party having taken a greater
quantity of Gas from the Balancing Area than the Percentage
Interest of such Party in the cumulative quantity of all Gas
produced from the Balancing Area.
11. "Overproduction" shall mean the cumulative quantity of Gas taken
by a Party in excess of its Percentage Interest in the cumulative
quantity of all Gas produced from the Balancing Area.
12. "Party" shall mean those individuals or entities subject to this
Agreement, and their respective heirs, successors, transferees
and assigns.
13. "Percentage Interest" shall mean the percentage or decimal
interest of each Party in the Gas produced from the Balancing
Area pursuant to the Operating Agreement covering the Balancing
Area.
14. "Royalty" shall mean payments on production of Gas from the
Balancing Area to all owners of royalties, overriding royalties,
production payments or similar interests.
15. "Underproduced Party" shall mean any Party having taken a lesser
quantity of Gas from the Balancing Area than the Percentage
Interest of such Party in the cumulative quantity of all Gas
produced from the Balancing Area.
16. "Underproduction" shall mean the deficiency between the
cumulative quantity of Gas taken by a Party and its percentage
Interest in the cumulative quantity of all Gas produced from the
Balancing Area.
17. "Winter Period" shall mean the months of November and December in
one calendar year and the months of January, February and March
in the succeeding calendar year.
JOA - Exhibit "E"
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3787:CRR
1. Balancing Area
1.1. If this Agreement covers more than one Balancing Area, it shall be
applied as if each Balancing Area were covered by separate but
identical agreements. All balancing hereunder shall be on the
basis of Gas taken from the Balancing Area measured in MMBtus.
1.2. In the event that all or part of the Gas deliverable from a
Balancing Area is or becomes subject to one or more lawful prices,
any Gas not subject to price controls shall be considered as
produced from a single Balancing Area and Gas subject to each
price category shall, be considered produced from a separate
Balancing Area.
2. Right of Parties to Take Gas
2.1. Each Party desiring to take Gas will notify the Operator, or cause
the Operator to be notified, of the volumes nominated, the name of
the transporting pipeline and the pipeline contract number (if
available) and meter station relating to such delivery,
sufficiently in advance for the Operator, acting with reasonable
diligence, to meet all nomination and other requirements. Operator
is authorized to deliver the volumes so nominated and confirmed
(if confirmation is required) to the transporting pipeline in
accordance with the terms of this Agreement.
2.2. Each Party shall make a reasonable, good faith effort to take its
Full Share of Current Production each month, to the extent that
such production is required to maintain leases in effect, to
protect the producing capacity of a well or reservoir, to preserve
correlative rights, or to maintain oil production.
2.3. When a Party fails for any reason to take its full Share of
Current Production (as such Share may be reduced by the right of
the other parties to make up for Underproduction as provided
herein), the other Parties shall be entitled to take any Gas which
such Party fails to take. To the extent practicable, such Gas
shall be made available initially to each Underproduced Party in
the proportion that its Percentage Interest in the Balancing Area
bears to the total Percentage Interests of all Underproduced
Parties desiring to take such Gas. If all such Gas is not taken by
the Underproduced Parties, the portion not taken shall then be
made available to the other Parties in the proportion that their
respective Percentage Interests in the Balancing Area bear to the
total Percentage Interests of such Parties.
2.4. All Gas taken by a Party in accordance with the provisions of this
Agreement, regardless of whether such Party is underproduced or
JOA - Exhibit "E"
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3787:CRR
overproduced, shall be regarded as Gas taken for its own account
with title thereto being in such taking. Party.
2.5. Notwithstanding the provisions of Section 2.3. hereof, no
Overproduced Party shall be entitled in any month to take any Gas
in excess of three hundred percent (300%) of its Percentage
Interest of the Balancing Area's then-current Maximum Monthly
Availability; provided, however, that this limitation shall not
apply to the extent that it would preclude production that is
required to maintain lease in effect, to protect the producing
capacity of a well or reservoir, to preserve correlative rights,
or to maintain oil production. "Maximum Monthly Availability"
shall mean the maximum average monthly rate of production at which
Gas can be delivered from the Balancing Area, as determined by the
Operator, considering the maximum efficient well rate for each
well within the Balancing Area, the maximum allowable(s) set by
the appropriate regulatory agency, mode of operation, production
facility capabilities and pipeline pressures.
2.6. In the event that a Party fails to make arrangements to take its
Full Share of Current Production required to be produced to
maintain leases in effect, to protect the producing capacity of a
well or reservoir, to preserve correlative rights, or to maintain
oil production, the Operator may sell any part of such Party's
Full Share of Current Production that such Party fails to take for
the account of such Party and render to such Party, on a current
basis, the full proceeds of the sale, less any reasonable
marketing, compression, treating, gathering or transportation
costs incurred directly in connection with the sale of such Full
Share of Current Production. In making the sale contemplated
herein, the Operator shall be obligated only to obtain such price
and conditions for the sale as are reasonable under the
circumstances and shall not be obligated to share any of its
markets. Any such sale by Operator under the terms hereof 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 year.
Notwithstanding the provisions of Article 2.4. hereof, Gas sold by
Operator for a Party under the provisions hereof shall be deemed
to be Gas taken for the account of such Party.
3. In-Kind Balancing
3.1. Effective the first day of any calendar month following at least
thirty (30) days' prior written notice to the Operator, any
Underproduced Party may begin taking, in addition to its Full
Share of Current Production and any Makeup Gas taken pursuant to
Section 2.3. of this Agreement, a share of current production
determined by multiplying thirty-seven and one-half percent
(37.5%) of the Full Shares of Current Production of all
Overproduced Parties by a fraction, the
JOA - Exhibit "E"
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3787:CRR
numerator of which is the Percentage Interest of such
Underproduced Party and the denominator of which is the total of
the Percentage Interests of all Underproduced Parties desiring to
take Makeup Gas. In no event will an Overproduced Party be
required to provide more than thirty-seven and one-half percent
(37.5%) of its Full Share of Current Production for Makeup Gas.
The Operator will promptly notify all Overproduced Parties of the
election of an Underproduced Party to begin taking Makeup Gas.
3.2. Notwithstanding the provisions of Section 3.1., the average
monthly amount of Makeup Gas taken by an Underproduced Party
during the Winter Period pursuant to Section 3.1. shall not exceed
the average monthly amount of Makeup Gas taken by such
Underproduced Party during the six (6) months immediately
preceding the Winter Period.
4. Statement of Gas Balances
4.1. The Operator will maintain appropriate accounting on a monthly and
cumulative basis of the volumes of Gas that each Party is entitled
to receive and the volumes of Gas actually taken or sold for each
Party's account. Within forty-five (45) days after the month of
production, the Operator will furnish a statement for such month
showing (1) each Party's Full Share of Current Production, (2) the
total volume of Gas actually taken or sold for each Party's
account, (3) the difference between the volume taken by each Party
and that Party's Full Share of Current Production, (4) the
Overproduction or Underproduction of each Party, and (5) other
data as recommended by the provisions of the Council of Petroleum
Accountants Societies Bulletin No. 24, as amended or supplemented
hereafter. Each Party taking Gas will promptly provide to the
Operator any data required by the Operator for preparation of the
statements required hereunder.
4.2. If any Party fails to provide the data required herein for four
(4) consecutive production months, the Operator, or where the
Operator has failed to provide data, another Party, may audit the
production and Gas sales and transportation volumes of the
non-reporting Party to provide the required data. Such audit shall
be conducted only after reasonable notice and during normal
business hours in the office of the Party whose records are being
audited. All costs associated with such audit will be charged to
the account of the Party failing to provide the required data.
5. Payments on Production
5.1. Each Party taking Gas shall pay or cause to be paid all production
and severance taxes due on all volumes of Gas actually taken by
such Party.
JOA - Exhibit "E"
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3787:CRR
5.2. [_] (Alternative I -- Sales) Each Party shall pay or cause to be
paid Royalty due with respect to Royalty owners to whom it is
accountable based on the volume of Gas actually taken for its
account.
[_] (Alternative 2 - Entitlements) Each Party shall pay or cause
to be paid all Royalty due with respect to Royalty owners to whom
it is accountable as if such Party were taking its Full Share of
Current Production, and only its Full Share of Current Production.
5.3. In the event that any governmental authority requires that Royalty
payments be made on any other basis than that provided for in this
Section 5., each Party agrees to make such Royalty payments
accordingly, commencing on the effective date required by such
governmental authority, and the method provided for herein shall
be thereby superseded.
6. Cash Settlements
6.1. Upon the earlier of the plugging and abandonment of the last
producing interval in the Balancing Area, the termination of the
Operating Agreement or any pooling or unit agreement covering the
Balancing Area, or at any time no Gas is taken from the Balancing
Area for a period of twelve (12) consecutive months, any Party may
give written notice calling for cash settlement of the Gas
production imbalances among the Parties. Such notice shall be
given to all Parties in the Balancing Area.
6.2. Within sixty (60) days after the notice calling for cash
settlement under Section 6.1., the Operator will distribute to
each Party a Final Gas Settlement Statement detailing the quantity
of Overproduction owed by each Overproduced Party to each
Underproduced Party and identifying the month to which such
Overproduction is attributed, pursuant to the methodology set out
in Section 6.4.
6.3. Within sixty (60) days after receipt of the Final Gas Settlement
Statement, each Overproduced Party will pay to each Underproduced
Party entitled to settlement the appropriate cash settlement,
accompanied by appropriate accounting detail. At the time of
payment, the Overproduced Party will notify the Operator of the
Gas imbalance settled by the Overproduced Party's payment.
6.4. The amount of the cash settlement will be based on the proceeds
received by the Overproduced Party under an Arm's Length Agreement
for the Gas taken from time to time by the Overproduced Party in
excess of the Overproduced Party's Full Share of Current
Production. Any Makeup Gas taken by the Underproduced Party prior
to monetary settlement hereunder will be applied to offset
Overproduction chronologically in the order of accrual.
6.5. The values used for calculating the cash settlement under Section
6.4. will include all proceeds received for the sale of the Gas by
the Overproduced Party calculated at the Balancing Area, after
deducting
JOA - Exhibit "E"
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3787:CRR
any production or severance taxes paid and any Royalty actually
paid by the Overproduced Party to an Underproduced Party's Royalty
owner(s), to the extent said payments amounted to a discharge of,
said Underproduced Party's Royalty, obligation, as well as any
reasonable marketing, compression, treating, gathering or
transportation costs incurred directly in connection with the sale
of the Overproduction.
6.6. For Overproduction processed for the account of the Overproduced
Party at a gas processing plant for the extraction of liquid
hydrocarbons, the full quantity of the Overproduction will be
valued for purposes of cash settlement at the prices received by
the Overproduced Party for the sale of the residue gas
attributable to the Overproduction without regard to proceeds
attributable to liquid hydrocarbons which may have been extracted
from the Overproduction.
6.7. To the extent the Overproduced Party did not sell all
Overproduction. under an Arm's Length Agreement, the cash
settlement will be based on the weighted average price received by
the Overproduced Party for any gas sold from the Balancing Area
under Arm's Length Agreements during the months to which such
Overproduction is attributed. In the event that no sales under
Arm's Length Agreements were made during any such month, the cash
settlement for such month will be based on the spot sales prices
published for the applicable geographic area during such month in
a mutually acceptable pricing bulletin.
6.8. Interest per annum at the then-current prime rate of Citibank
N.A., New York, New York, as published under "Money Rates" by the
Wall Street Journal, or the maximum lawful rate of interest
applicable to the Balancing Area, whichever is less, will accrue
for all amounts due under Section 6.1., beginning the first day
following the date payment is due pursuant to Section 6.3. Such
interest shall be borne by the Overproduced Party in the
proportion that its respective delays beyond the deadlines set out
in Sections 6.2. or 6.3. contributed to the accrual of the
interest.
6.9. In lieu of the cash settlement required by Section 6.3., an
Overproduced Party may deliver to the Underproduced Party an offer
to settle its Overproduction in-kind and at such rates,
quantities, times and sources as may be agreed upon by the
Underproduced Party. If the Parties are unable to agree upon the
manner in which such in-kind settlement gas will be furnished
within sixty (60) days after the Overproduced Party's offer to
settle in kind, which period may be extended by agreement of said
Parties, the Overproduced Party shall make a cash settlement as
provided in Section 6.3. The making of an in-kind settlement offer
under this Section 6.9. will not delay the accrual of interest on
the cash settlement should the Parties fail to reach agreement on
an in-kind settlement.
JOA - Exhibit "E"
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3787:CRR
6.10. At any time during the term of this Agreement, any Overproduced
Party may, in its sole discretion, make cash settlement(s) with
the Underproduced Parties covering all or part of its outstanding
Gas imbalance, provided that such settlements must be made with
all Underproduced Parties proportionately based on. The relative
imbalances of the Underproduced Parties, and provided further
that such settlements may not be made more often. than once every
twenty-four (24) months. Such settlements will be calculated in
the same manner provided above for final cash settlements. The
Overproduced Party will provide Operator a detailed accounting of
any such cash settlement within thirty (30) days after the
settlement is made.
7. Testing
Notwithstanding any provision of this Agreement to the contrary, any
Party shall have the right, from time to time, to produce and take up to
one hundred percent (100%) of a well's entire Gas stream to meet the
reasonable deliverability test(s) required by such Party's Gas purchaser,
and the right to take any Makeup Gas shall be subordinate to the right of
any Party to conduct such tests; provided, however, that such tests shall
be conducted in accordance with prudent operating practices only after
thirty (30) days' prior written notice to the Operator and shall last no
longer than twenty-four (24) hours.
8. Operating Costs
Nothing in this Agreement shall change or affect any Party's obligation
to pay its proportionate share of all costs and liabilities incurred in
operations on or in connection with the Balancing Area, as its share
thereof is set forth in the Operating Agreement, irrespective of whether
any party is at any time selling and using Gas or whether such sales or
use are in proportion to its Percentage Interest in the Balancing Area.
9. Liquids
The Parties shall share proportionately in and own all liquid
hydrocarbons recovered with Gas by field equipment operated for the joint
account in accordance with their Percentage Interests in the Balancing
Area.
10. Audit Rights
Notwithstanding any provision in this Agreement or any other agreement
between the Parties hereto, and further notwithstanding any termination
or cancellation of this Agreement, for a period of two (2) years from the
end of the calendar year in which any information to be furnished under
Section 4. or 6. hereof is supplied, any Party shall have the right to
audit the records of any other Party regarding quantity, including but
not limited to
JOA - Exhibit "E"
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3787:CRR
information regarding Btu content. Any Underproduced Party shall have the
right for a period of two (2) years from the end of the calendar year in
which any cash settlement is received pursuant to Section 6. to audit the
records of any Overproduced Party as to all matters concerning values,
including but not limited to information regarding prices and disposition
of Gas from the Balancing Area. Any such audit shall be conducted at the
expense of the Party or Parties desiring such audit, and shall be
conducted, after reasonable notice, during normal business hours in the
office of the Party whose records are being audited. Each Party hereto
agrees to maintain records as to the volumes and prices of Gas sold each
month and the volumes of Gas used in its own operations, along with the
Royalty paid on any such. Gas used by a Party In its own operations. The
audit rights provided for in this Section 10. shall be in addition to
those provided for in Section 4.2. of this Agreement.
11. Miscellaneous
11.1. As between the Parties, in the event of any conflict between the
provisions of this Agreement and the provisions of any gas sales
contract, or in the event of any conflict between the provisions
of this Agreement and the provisions of the Operating Agreement,
the provisions of this Agreement shall govern.
11.2. Each Party agrees to defend, indemnify and hold harmless all other
Parties from and against any and all liabilities for any claims,
which may be asserted by any third party which now or hereafter
stands in a contractual relationship with such indemnifying Party
and which arise out of the operation of this Agreement or any
activities of such indemnifying Party under the provisions of this
Agreement, and does further agree to save the other Parties
harmless from all judgments or damages sustained and costs
incurred in connection therewith.
11.3. Except as otherwise provided in this Agreement, Operator is
authorized to administer the provisions of this Agreement, but
shall have no liability to the other Parties for losses sustained
or liability incurred which arise out of or in connection with the
performance of Operator's duties hereunder, except such as may
result from Operator's gross negligence or willful misconduct.
Operator shall not be liable to any Underproduced Party for the
failure of any Overproduced Party (other than Operator) to pay any
amounts owed pursuant to the terms hereof.
11.4. This Agreement shall remain in full force and effect for as long
as the Operating Agreement shall remain in force and effect as to
the Balancing Area, and thereafer until the Gas accounts between
the Parties are settled in full, and shall inure to the benefit of
and be binding upon the Parties hereto, and their respective
heirs, successors, legal representatives and assigns, if any. The
Parties hereto agree to give
JOA - Exhibit "E"
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3787:CRR
notice of the existence of this Agreement to any successor in
interest of any such Party and to provide that any such successor
shall be bound by this Agreement, and shall further make any
transfer of any interest subject to the Operating Agreement, or
any part thereof, also subject to the terms of this Agreement.
11.5. Unless the context clearly indicates otherwise, words used in the
singular include the plural, the plural includes the singular, and
the neuter gender includes the masculine and the feminine.
11.6. This Agreement shall bind the Parties in accordance with the
provisions hereof, and nothing herein shall be construed or
interpreted as creating any rights in any person or entity not a
signatory hereto, or as being a stipulation in favor of any such
person or entity.
11.7. If contemporaneously with this Agreement becoming effective, or
thereafer, any Party requests that any other Party execute an
appropriate memorandum or notice of this Agreement in order to
give third parties notice of record of same and submits same for
execution in recordable form, such memorandum or notice shall be
duly executed by the Party to which such request is made and
delivered promptly thereafer to the Party making the request. Upon
receipt, the Party making the request shall cause the memorandum
or notice to be duly recorded in the appropriate real property or
other records affecting the Balancing Area.
11.8. In the event Internal Revenue Service regulations require a
uniform method of computing taxable income by all Parties, each
Party agrees to compute and report income to the Internal Revenue
Service as if such Party were taking its Full Share of Current
Production during each relevant tax period in accordance with such
regulations, insofar as same relate to entitlement method tax
computations.
12. Assignment and Rights upon Assignment
12.1. Subject to the provisions of Section 12.2. and 12.3. hereof, and
notwithstanding anything in this Agreement or in the Operating
Agreement to the contrary, if any Party assigns (including any
sale, exchange or other transfer) any of its working interest in
the Balancing Area when such Party is an Underproduced or
Overproduced Party, the assignment or other act of transfer shall,
insofar as the Parties hereto are concerned, include all interest
of the assigning or transferring Party in the Gas, all rights to
receive or obligations to provide or take Makeup Gas and all
rights to receive or obligations to make any monetary payment
which may ultimately be due hereunder, as applicable. Operator and
each of the other Parties hereto shall thereafer treat the
assignment accordingly, and the assigning or transferring Party
shall look solely to its assignee or other
JOA - Exhibit "E"
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3787:CRR
transferee for any interest in the Gas or monetary payment that
such Party may have or to which it may be entitled, and shall
cause its assignee or other transferee to assume its obligations
hereunder.
12.2. Notwithstanding anything in this Agreement (including but not
limited to the provisions of Section 12.1. hereof) or in the
Operating Agreement to the contrary, and subject to the provisions
of Section 12.3. hereof, in the event an Overproduced Party
intends to sell, assign, exchange or otherwise transfer any of its
interest in a Balancing Area, such Overproduced Party shall notify
in writing the other working interest owners who. are Parties
hereto in such Balancing Area of such fact at least sixty (60)
days prior to closing the transaction. Thereafer, any
Underproduced Party may demand from such Overproduced Party in
writing, within thirty (30) days after receipt of the Overproduced
Party's notice, a cash settlement of its Underproduction from the
Balancing Area. The Operator shall be notified of any such demand
and of any cash settlement pursuant to this Section 12., and the
Overproduction and Underproduction of each Party shall be adjusted
accordingly. Any cash settlement pursuant to this Section 12.
shall be paid by the Overproduced Party, accompanied by
appropriate accounting detail, on or before the earlier to occur
(1) of sixty (60) days after receipt of the Underproduced Party's
demand or (2) at the closing of the transaction in which the
Overproduced Party sells, assigns, exchanges or otherwise
transfers its interest in a Balancing Area on the same basis as
otherwise set forth in Sections 6.3. through 6.7., and shall bear
interest at the rate set forth in Section 6.8. hereof, beginning
sixty (60) days after the Overproduced Party's sale, assignment,
exchange or transfer of its interest in the Balancing Area for any
amounts not paid. Provided, however, if any Underproduced Party
does not so demand such cash settlement of its Underproduction
from the. Balancing Area, such Underproduced Party shall look
exclusively to the assignee or other successor in interest of the
Overproduced Party giving notice hereunder for the satisfaction of
such Underproduced Party's Underproduction in accordance with the
provisions of Section 12.1. hereof.
12.3. The provisions of this Section 12. shall not be applicable in the
event any Party mortgages its interest or disposes of its interest
by merger, reorganization, consolidation or sale of substantially
all of its assets to a subsidiary or parent company, or to any
company in which any parent or subsidiary of such party owns a
majority of the stock of such company.
13. Counterparts
This Agreement may be executed in counterparts, each of which when taken
with all other counterparts shall constitute a binding agreement between
the Parties hereto; provided, however, that if a Party or Parties owning
JOA - Exhibit "E"
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3787:CRR
a Percentage Interest in the Balancing Area equal to or greater than
[percent] percent therein fail(s) to execute this Agreement on or before
[date], this Agreement shall not be binding upon any Party and shall be
of no further force and effect.
JOA - Exhibit "E"
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3787:CRR
IN WITNESS WHEREOF, this agreement shall be effective as of [date].
ATTEST OR WITNESS: OPERATOR
_________________________________
_________________________________ By:______________________________
_________________________________ _________________________________
Type or print name
Title ___________________________
Date ____________________________
Tax ID or S.S. No. ______________
ATTEST OR WITNESS: NON-OPERATORS
_________________________________
_________________________________ By:______________________________
_________________________________ _________________________________
Type or print name
Title ___________________________
Date ____________________________
Tax ID or S.S. No. ______________
_________________________________
_________________________________ By:______________________________
_________________________________ _________________________________
Type or print name
Title ___________________________
Date ____________________________
Tax ID or S.S. No. ______________
JOA -- Exhibit "E"
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3787:CRR
Exhibit "F"
Attached to and made a part of that certain Offshore Operating Agreement
effective as of October 1, 2005, between Chevron U.S.A. Inc.,
Newfield Exploration Company and Ridgewood Energy Corporation,
Manager Ridgewood Energy Q Fund, LLC, covering
Main-Pass Blocks 221 and 222, Offshore, Gulf of Mexico.
TAX PARTNERSHIP PROVISIONS
OF THE___________________________________
PARTNERSHIP
(For Name of Tax Reporting Partner and Special Elections, See Secs. 8 and 9)
Table of Contents
1. GENERAL PROVISIONS .........................................................1
1.1 DESIGNATION OF DOCUMENTS ...............................................1
1.2 RELATIONSHIP OF THE PARTIES ............................................1
1.3 PRIORITY OF PROVISIONS OF THIS EXHIBIT .................................1
1.4 SURVIVORSHIP ...........................................................1
2. TAX REPORTING PARTNER AND TAX MATTERS PARTNER ..............................2
2.1 TAX REPORTING PARTNER ..................................................2
2.2 IF SMALL PARTNERSHIP EXCEPTION FROM TEFRA NOT APPLICABLE ...............2
3. INCOME TAX COMPLIANCE AND CAPITAL ACCOUNTS .................................3
3.1 TAX RETURNS ............................................................3
3.2 FAIR MARKET VALUE CAPITAL ACCOUNTS .....................................3
3.3 INFORMATION REQUESTS ...................................................3
3.4 BEST EFFORTS WITHOUT LIABILITY .........................................4
4. TAX AND FMV CAPITAL ACCOUNT ELECTIONS ......................................4
4.1 GENERAL ELECTIONS ......................................................4
4.2 DEPLETION ..............................................................4
4.3 ELECTION OUT UNDER CODE ss.761(a) ......................................4
4.4 CONSENT REQUIREMENTS FOR SUBSEQUENT TAX OR FMV CAPITAL
ACCOUNT ELECTIONS ......................................................4
5. CAPITAL CONTRIBUTIONS AND FMV CAPITAL ACCOUNTS .............................5
5.1 CAPITAL CONTRIBUTIONS ..................................................5
5.2 FMV CAPITAL ACCOUNTS ...................................................5
6. PARTNERSHIP ALLOCATIONS ....................................................6
6.1 FMV CAPITAL ACCOUNT ALLOCATIONS
6.2 TAX RETURN AND TAX BASIS CAPITAL ACCOUNT ALLOCATIONS ...................7
7. TERMINATION AND LIQUIDATING DISTRIBUTION ...................................8
7.1 TERMINATION OF THE PARTNERSHIP .........................................8
7.2 BALANCING OF FMV CAPITAL ACCOUNTS ......................................8
7.3 DEEMED SALE GAIN/LOSS CHARGE BACK ......................................8
7.4 DEFICIT MAKE-UP OBLIGATION AND BALANCING CASH CONTRIBUTIONS ............8
7.5 DISTRIBUTION TO BALANCE CAPITAL ACCOUNTS ...............................8
7.6 FMV DETERMINATION ......................................................9
JOA - Exhibit "F"
7.7 FINAL DISTRIBUTION .....................................................9
8. TRANSFERS, INDEMNIFICATION, AND CORRESPONDENCE .............................9
8.1 TRANSFER OF PARTNERSHIP INTERESTS ......................................9
8.2 CORRESPONDENCE .........................................................9
9. ELECTIONS AND CHANGES TO. ABOVE PROVISIONS ................................10
9.1 OPERATOR NOT THE TRP ..................................................10
9.2 SPECIAL TAX ELECTIONS .................................................10
9.3 CHANGE OF MAJORITY FOR OTHER TAX ELECTIONS ............................10
Page 2
JOA -- Exhibit "F"
1. GENERAL PROVISIONS
1.1 DESIGNATION OF DOCUMENTS.
This exhibit is referred to in, and is part of that Agreement identified above
and, if so provided, a part of any agreement to which the Agreement is an
exhibit. Such agreement(s) (including all exhibits thereto, other than this
exhibit) shall be hereinafer referred to as the "Agreement;" and this exhibit is
hereinafer referred to as the "Exhibit" or the "Tax Partnership Provisions" (the
"TPPs"). Except as may be otherwise provided in this Exhibit, terms defined and
used 'in the Agreement shall have the same meaning when used herein. o
1.2 RELATIONSHIP OF THE PARTIES.
The parties to the Agreement shall be hereinafter referred to as "Party" or
"Parties." The Parties understand and agree that the arrangement and
undertakings evidenced by the Agreement result in a partnership for purposes of
Federal income taxation and certain State income tax laws which incorporate or
follow Federal income tax principles as to tax partnerships. Such partnership
for tax purposes is hereinafter referred to as the "Partnership." For every
other purpose of the Agreement the Parties understand and agree that their legal
relationship to each other under applicable State law with respect to all
property subject to the Agreement is one of tenants in common, or undivided
interest owners, or lessee(s)-sublessee(s) and not a partnership; that the
liabilities of the Parties shall be several and not joint or collective; and
that each Party shall be responsible solely for its own obligations.
1.3 PRIORITY OF PROVISIONS OF THIS EXHIBIT.
If there is a conflict or inconsistency, whether direct or indirect, actual or
apparent, between the terms and conditions of this Exhibit and the terms and
conditions of the Agreement, or any other exhibit or any part thereof the terms
and conditions of this Exhibit shall govern and control.
1.4 SURVIVORSHIP.
1.4.1 Any termination of the Agreement shall not affect the continuing
application of the TPPs for the termination and liquidation.
1.4.2 Any termination of the Agreement shall not affect the continuing
application of the TPPs for the resolution of all matters regarding Federal and
State income tax reporting.
1.4.3 These TPPs shall inure to the benefit of, and be binding upon, the Parties
hereto and their successors and assigns.
1.4.4 The effective date of the Agreement shall be the effective date of these
TPPs. The Partnership shall continue in full force and effect from, and after
such date, until termination and liquidation.
Page 1
JOA - Exhibit "F"
2. TAX REPORTING PARTNER AND TAX MATTERS PARTNER
2.1 TAX REPORTING PARTNER.
The Operator (or the Party listed in Sec. 9.1) as the Tax Reporting Partner
("TRP") is responsible for compliance with all tax reporting obligations of the
Partnership, see Sec. 3.1, below. In the event of any change in the TRP, the
Party serving as TRP at the beginning of a given taxable year shall continue as
TRP with respect to all matters concerning such year.
2.2 IF SMALL PARTNERSHIP EXCEPTION FROM TEFRA NOT APPLICABLE.
If the Partnership does not qualify for the "small partnership exception"
from, or if the Partnership elects (see infra Elections at Secs. 4.1 and
9.2) to be subject to, ss.ss.6221 et seq., Subchapter C of Chapter 53 of
Subtitle A (the "TEFRA rules") of the Internal Revenue Code (the "Code")
the TRP shall also be the Tax Matters Partner as defined in Code
ss.6231(a) (the "TMP") and references to the TRP shall then include
references to the TMP and vice versa.
2.2.1 The TMP shall not be required to incur any expenses for the
preparation for, or pursuance of administrative or judicial proceedings,
unless the Parties agree on a method for sharing such expenses.
2.2.2 The Parties shall furnish the TMP, within two weeks from the
receipt of the request, the information the TMP may reasonably request to
comply with the requirements on furnishing information to the Internal
Revenue Service.
2.2.3 The TMP shall not agree to any extension of the statute of
limitations for making assessments on behalf of the Partnership without
first obtaining the written consent of all Parties. The TMP shall not
bind any other Party to a settlement agreement in tax audits without
obtaining the written concurrence of any such Party.
2.2.4 Any other Party who enters in a settlement agreement with the
Secretary of the Treasury with respect to any partnership items, as
defined in Code ss. 6231(a)(3), - shall notify the other Parties of the
terms within ninety (90) days from the date of such settlement.
2.2.5 If any Party intends to file a notice of inconsistent treatment
under Code ss. 6222(b), such Party shall, prior to the fling of such
notice, notify the TMP of the (actual or potential) inconsistency of the
Party's intended treatment of a partnership item with the treatment of
that item by the Partnership. Within one week of receipt the TMP shall
remit copies of such notification to the other Parties. If an
inconsistency notice is fled solely because a Party has not received
Page 2
JOA - Exhibit "F"
a Schedule K-1 in time for fling of its income tax return, the TMP need
not be notified.
2.2.6 No Party shall file pursuant to Code ss.6227 a request for an
administrative adjustment- of partnership items (the "RFAA") 'without
first. notifying all other Parties.. If all other Parties agree with the
requested adjustment, the TMP shall file the RFAA on' behalf of the
Partnership. If unanimous consent is not. obtained within thirty (30)
days from such notice, or within the period required to timely file the
RFAA, if shorter, any Party, including the TMP, may file a RFAA on its
own behalf.
2.2.7 Any Party intending to file with respect to any partnership item,
or any other tax matter involving the Partnership, a petition under Code
ss.ss.6226, 6228, or any other provision, shall notify the other Parties
prior to such fling of the nature of the contemplated proceeding. In the
case where the TMP is the Party intending to file such petition, such
notice shall be given within a reasonable time to allow the other Parties
to participate in the choice of the forum for such petition. If the
Parties do not agree on the appropriate forum, then the forum shall be
chosen by majority vote. Each Party shall have a vote in accordance with
its percentage interest in the Partnership for the year under audit. If a
majority cannot agree, the TMP shall choose the forum. If a Party intends
to seek review of any court decision rendered as a result of such
proceeding, the Party shall notify the other Parties prior to seeking
such review.
3. INCOME TAX COMPLIANCE AND CAPITAL ACCOUNTS
3.1 TAX RETURNS.
The TRP shall prepare and file all required Federal and State partnership income
tax returns. Not less than thirty (30) days prior to the return due date
(including extensions), the TRP shall submit to each Party for review a copy of
the return as proposed.
3.2 FAIR MARKET VALUE CAPITAL ACCOUNTS.
The TRP shall establish and maintain for each Party fair market value ("FMV")
capital accounts and tax basis capital accounts. Upon request, the TRP shall
submit to each Party along with a copy of any proposed partnership income tax
return an accounting of such Party's FMV capital accounts as of the end of the
return period.
3.3 INFORMATION REQUESTS.
In addition to any obligation under Sec. 2.2.2, each Party agrees to furnish to
the TRP not later than sixty (60) days before the return due date (including
extensions) such information relating to the operations conducted under the
Agreement as may be required for the proper preparation of such returns.
Similarly, each Party agrees to furnish timely to the TRP, as requested, any the
information and data necessary for the preparation and/or filing of other
required reports and notifications, and for the computation of the capital
accounts. As provided in Code ss.6050K(c), a Party transferring its interest
must notify the TRP to allow compliance with Code ss.6050K(a) (see also Sec.
8.1).
Page 3
JOA - Exhibit "F"
3.4 BEST EFFORTS WITHOUT LIABILITY.
The TRP and the other Party(ies) shall use its/their best efforts to comply with
responsibilities o outlined in this Section,. and with - respect to the service
as TMP as outlined Sec. 2.2, and in doing so shall incur no liability to any
other Party.
4. TAX AND FMV CAPITAL ACCOUNT ELECTIONS
4.1 GENERAL ELECTIONS.
For both income tax return ad capital account purposes, the Partnership shall
elect:
a) to deduct when-incurred intangible drilling and development costs ("IDC");
b) to use the maximum allowable accelerated tax method and the shortest
permissible tax life for depreciation;
c) the accrual method of accounting;
d) to report income on a calendar year basis; and the Partnership shall also
make any elections as specially noted in Sec. 9.2, below.
4.2 DEPLETION.
Solely for FMV capital account purposes, depletion shall be calculated by using
simulated cost depletion within the meaning of Treas. Reg. ss.
1.704-1(b)(2)(iv)(k)(2), unless the use of simulated percentage depletion is
elected in Sec. 9.2, below. The simulated cost depletion allowance shall be
determined under the principles of Code ss.612 and be based on the FMV capital
account basis of each Lease. Solely for purposes of this calculation, remaining
reserves shall be determined consistently by the TRP.
4.3 ELECTION OUT UNDER CODE ss.761(a).
4.3.1 The TRP shall notify all Parties' of an intended election to be excluded
from the application of Subchapter K of Chapter 1 of the Code not later than
sixty (60) days prior to the filing date or the due date (including extensions)
for the Federal partnership income tax return, whichever comes earlier. Any
Party that does not consent must provide the TRP with written objection within
thirty (30) days of such notice. Even after an effective election-out the TRP's
rights and obligations, other than the relief from tax return fling obligations
of the partnership, continue.
4.3.2 After an election-out, to avoid an unintended impairment of the
election-out: The Parties will avoid, without prior coordination, any
operational changes which would terminate the qualification for the election-out
status; all Parties will monitor the continuing qualification of the Partnership
for the election-out status and will notify the other Parties if, in their
opinion, a change in operations will jeopardize the election-out; and, all
Parties will use, unless agreed to by them otherwise, the cumulative gas
balancing method as described in Treas. Reg. ss. 1.761-2(d)(2).
4.4 CONSENT REQUIREMENTS FOR SUBSEQUENT TAX OR FMV CAPITAL ACCOUNT ELECTIONS.
Page 4
JOA - Exhibit "F"
Unless stipulated differently in Sec. 9.3, future elections, in addition to or
in amendment of those in this agreement, must be approved by the affirmative
vote of two (2) or more Parties owning a majority of the working interest based
upon post-Payout ownership.
5. CAPITAL CONTRIBUTIONS AND FMV CAPITAL ACCOUNTS
The provisions of this Sec. 5 and any other provisions of the TPPs relating to
the maintenance of the capital accounts are intended to comply with Treas. Reg.
ss. 1.704-1(b) and shall be interpreted and applied in a manner consistent with
such regulations.
5.1 CAPITAL CONTRIBUTIONS.
The respective capital contributions of each Party to the Partnership shall be
(a) each Party's interest in the oil and gas lease(s), including all associated
lease and well equipment, committed to the Partnership, and (b) all amounts of
money paid by each Party in connection with the acquisition, exploration,
development, and operation of the lease(s), and all other costs characterized as
contributions or expenses borne by such Party under the Agreement. The
contribution of the leases and any other properties committed to the Partnership
shall be made by each Party's agreement to hold legal title to its interest in
such leases or other property as nominee of the Partnership.
5.2 FMV CAPITAL ACCOUNTS.
The FMV capital accounts shall be increased and decreased as follows:
5.2.1 The FMV capital account of a Party shall be increased by:
(i) the amount of money and the FMV (as of the date of contribution) of any
property contributed by such Party to the Partnership (net of liabilities
assumed by the Partnership or to which the contributed property is subject);
(ii) that Party's share of Partnership items of income or gain, allocated in
accordance with Sec. 6.1; and
(iii) that Party's share of any Code ss.705(a)(1)(B) item.
5.2.2 The FMV capital account of a Party shall be decreased by:
(i) the amount of money and the FMV of property distributed to a Party (net of
liabilities assumed by such Party or to which the property is subject);
(ii) that Party's Sec. 6.1 allocated share of Partnership loss and deductions,
or items thereof; and,
(iii) that Party's share of any Code ss.705(a)(2)(B) item.
5.2.3 "FMV" when it applies to property contributed by a Party to the
Partnership shall be assumed, for purposes of 5.2.1, to equal the adjusted tax
basis, as defined in Code ss. 1011, of that property unless the Parties agree
otherwise as indicated in Sec. 9.2.
5.2.4 As provided in Treas. Reg. ss.1.704-1(b)(2)(iv)(e), upon distribution of
Partnership property to a Party the capital accounts will be adjusted to reflect
Page 5
JOA - Exhibit "F"
the manner in which the unrealized income, gain, loss and deduction inherent in
distributed property (not previously reflected in the capital accounts) would be
allocated among the Parties if there were a disposition of such property at its
FMV as of the time of distribution. Furthermore, if so agreed to in Sec. 9.2,
under the rules of Treas. Reg. ss. 1.704 1 (b)(2)(iv)(f), the FMV
capital accounts shall be revalued at certain times to reflect value changes of
the Partnership property.
6. PARTNERSHIP ALLOCATIONS
6.1 FMV CAPITAL ACCOUNT ALLOCATIONS.
Each item of income, gain, loss, or deduction shall be allocated to each Party
as follows:
6.1.1 Actual or deemed income from the sale, exchange, distribution or other
disposition of production shall be allocated to the Party entitled to such
production or the proceeds from the sale of such production. The amount received
from the sale of production and the amount of the FMV of production taken in
kind by the Parties are deemed to be identical; accordingly, such items may be
omitted from the adjustments made to the Parties' FMV capital accounts.
6.1.2 Exploration cost, IDC, operating and maintenance cost shall be allocated
to each Party in accordance with its respective contribution, or obligation to
contribute, to such cost.
6.1.3 Depreciation shall be allocated to each Party in accordance with its
contribution, or obligation to contribute, to the cost of the underlying asset.
6.1.4 Simulated depletion shall be allocated to each Party in accordance with
its FMV capital account adjusted basis in each oil and gas property of the
Partnership.
6.1.5 Loss (or simulated loss) upon the sale, exchange, distribution,
abandonment or other disposition of depreciable or depletable property shall be
allocated to the Parties in the ratio of their respective FMV capital account
adjusted bases in the depreciable or depletable property.
6.1.6 Gain (or simulated gain) upon the sale, exchange, distribution, or other
disposition of depreciable or depletable property shall be allocated to the
Parties so that the FMV capital account balances of the Parties will most
closely reflect their respective percentage or fractional interests under the
Agreement.
6.1.7 Costs or expenses of any other kind shall be allocated to each Party in
accordance with its respective contribution, or obligation to contribute, to
such costs or expense.
6.1.8 Any other income item shall be allocated to the Parties in accordance with
the manner in which such income is realized by each Party.
Page 6
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6.2 TAX RETURN AND TAX BASIS CAPITAL ACCOUNT ALLOCATIONS.
6.2.1 Unless otherwise expressly provided in this Sec. 6.2, the allocations of
the Partnership's items of income, gain, loss, or deduction for tax return and
tax basis capital account purposes shall follow the principles of the
allocations under Sec, 6.1. However, the Partnership's gain or loss on the
taxable disposition of a Partnership property in excess of the. gain or loss
under Sec. 6.1, if any, is allocated to the contributing Party to the extent of
such Party's pre-contribution gain or loss.
6.2.2 The Parties recognize that under Code ss.613A(c)(7)(D) the depletion
allowance is to be computed "separately by each Party. For this purpose, each
Party's share of the adjusted tax basis in each oil and gas property shall be
equal to its contribution to the adjusted tax basis of such property.
6.2.3 Under Codess.613A(c)(7)(D) gain or loss on the disposition of an oil and
gas property is to be computed separately by each Party. According to Treas.
Reg. ss. 1.7041 (b)(4)(v), the amount realized shall be allocated as follows:
(i) An amount that represents recovery of adjusted simulated depletion basis is
allocated (without being credited to the capital accounts) to the Parties in the
same proportion as the aggregate simulated depletion basis was allocated to such
Parties under Sec. 5.2; and (ii) any remaining realization is allocated in
accordance with Sec. 6.1.6.
6.2.4 Depreciation shall be allocated to each Party in accordance with its
contribution to the adjusted tax basis of the depreciable asset.
6.2.5 In accordance with Treas. Reg. ss.1.1245-1(e), depreciation recapture
shall be allocated, to the extent possible, among the Parties to reflect their
prior sharing of the depreciation.
6.2.6 In accordance with the principles of Treas. Reg. ss.1.1254-5, any
recapture of IDC is determined and reported by each Party separately. Similarly,
any recapture of depletion shall be computed separately by each Party, in
accordance with its depletion allowance computed pursuant to Sec. 6.2.2.
6.2.7 For Partnership properties with FMV capital account values different from
their adjusted tax bases the Parties intend that the allocations described in
this Section 6.2 constitute a "reasonable method" of allocating gain or loss
under Treas. Reg. ss.1.704 3 (a)(1).
6.2.8 Take-in-kind. If checked "Yes" in Sec. 9.2, below, each Party has the
right to determine the market for its proportionate share of production. All
items of income, deductions, and credits arising from such marketing of
production shall be recognized by the Partnership and shall be allocated to the
Party whose production is so marketed.
Page 7
JOA - Exhibit "F"
7. TERMINATION AND LIQUIDATING DISTRIBUTION .
7.1 TERMINATION OF THE PARTNERSHIP.
7.1.1 Upon termination, as provided in Code ss.708(b)(1)(A), the business shall
be wound up and concluded, and the assets shall. be distributed to the Parties
as described below by the end of such calendar year (or, if later, within ninety
(90) days after the date of such termination). The assets shall be valued and
distributed to the Parties in the order provided in Sees. 7.1.2, 7.5, and 7.7.
7.1.2 First, all cash representing unexpended contributions by any Party and
any property in which no interest has been earned by any other Party under the
Agreement shall be returned to the contributor.
7.2 BALANCING OF FMV CAPITAL ACCOUNTS.
Second, the FMV capital accounts of the Parties shall be determined as described
hereafter. The TRP shall take the actions specified under Sees. 7.2 through 7.5
in order to cause the ratios of the Parties' FMV capital accounts to reflect as
closely as possible their interests under the Agreement. The ratio of a Party's
FMV capital account is represented by a fraction, the numerator of which is the
Party's FMV capital account balance and the denominator of which is the sum of
all Parties' FMV capital account balances. This is hereafter referred to as the
"balancing of the FMV capital accounts" and, when completed, the FMV capital
accounts of the Parties shall be referred to as "balanced."
7.3 DEEMED SALE GAIN/Loss CHARGE BACK.
The FMV of all Partnership properties shall be determined and the gain or loss
for each property, which would have resulted if sold -at such FMV, shall be
allocated in accordance with Sees. 6.1.5 and 6.1.6.
7.4 DEFICIT MAKE-UP OBLIGATION AND BALANCING CASH CONTRIBUTIONS.
If hereafter a Party has a negative FMV capital account balance, that is a
balance of less than zero, in accordance with of Treas. Reg.
ss.1.704-1(b)(2)(ii)(b)(3) such Party is obligated to contribute, by the end of
the taxable year or, if later, within 90 days from the Partnership's
liquidation, an amount of money to the Partnership sufficient to achieve a zero
balance FMV capital account (the `Deficit Make-Up Obligation"). Moreover, any
Party may contribute an amount of cash to the Partnership to facilitate the
balancing of the FMV capital accounts. If after these adjustments the FMV
capital accounts are not balanced, Sees. 7.5 shall apply.
7.5 DISTRIBUTION TO BALANCE CAPITAL ACCOUNTS.
7.5.1 If all Parties agree, any cash or an undivided interest in certain
selected properties shall be distributed to one or more Parties as necessary for
the purpose of balancing the FMV capital accounts.
Page 8
JOA -- Exhibit "F"
7.5.2 Distribution of undivided interests. Unless Sec. 7.5.1 applies, an
undivided interest in each and every property shall be distributed to one or
more Parties in accordance with the ratios of their FMV capital accounts.
7.6 FMV DETERMINATION.
If a property is to be valued for purposes of balancing the capital accounts and
making a distribution under this Sec. 7, the Parties must first attempt to agree
on the FMV of the property; failing such an agreement, the TRP shall cause a
nationally recognized independent engineering firm to prepare an appraisal of
the FMV of such property.
7.7 FINAL DISTRIBUTION.
After the FMV capital accounts of the Parties have been adjusted pursuant to
Sees. 7.2 to 7.5, all remaining property and interests then held by the
Partnership shall be distributed to the Parties in accordance with their
positive FMV capital account balances.
8. TRANSFERS, INDEMNIFICATION, AND CORRESPONDENCE
8.1 TRANSFER OF PARTNERSHIP INTERESTS.
Transfers of Partnership interests shall be governed by the Agreement. A Party
transferring its interest, or any part thereof shall notify the TRP in writing
within two weeks after such transfer.
8.2 CORRESPONDENCE.
All correspondence relating to the preparation and fling of the Partnership's
income tax returns and capital accounts shall be sent to:
(Attach separate list, if necessary)
--------------------------------------------------------------------------------
TRP "Attention to:" reference
--------------------------------------------------------------------------------
Chevron U.S.A. Inc. Attention: Partnership Compliance
Tax Department
P. O. Box 6028 (94583-0728)
▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇ (▇▇▇▇▇) ▇▇▇
▇▇▇▇▇, ▇▇
--------------------------------------------------------------------------------
Other Parties:
Page 9
JOA - Exhibit "F"
9. ELECTIONS AND CHANGES TO ABOVE PROVISIONS
9.1 OPERATOR NOT THE TRP.
With respect to Sec. 2.1, (insert name of Party to be TRP instead of Operator,
or indicate "N/A") N/A is designated as TRP.
9.2 SPECIAL TAX ELECTIONS.
With respect to Sec. 4.1, the Parties agree (if not applicable insert "N/A" or
strike):
-----------------------------------------------------------------------------------------------
e) that the Partnership shall elect to account for dispositions of depreciable NO
assets under the NO general asset method to-the extent permitted by Code
168(i)(4);
-----------------------------------------------------------------------------------------------
f) that the Partnership shall elect under Code ss.754 to adjust the basis of Upon
Partnership property, with the adjustments provided in Code ss.734 for a any
distribution of property and in Code ss.743 for a transfer of a partnership Party's
interest. In case of distribution of property the TRP shall adjust all tax basis written
capital accounts. In the case of a transfer of a partnership interest the request
acquiring party(ies) shall establish and maintain its (their) tax basis capital
account(s);
-----------------------------------------------------------------------------------------------
g) that the Partnership shall elect under Code ss.6231 to be subject to the NO
TEFRA rules.
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
With respect to Sec. 4.2, Depletion the Parties agree that the Partnership shall NO
use simulated percentage depletion instead of simulated cost depletion.
-----------------------------------------------------------------------------------------------
With respect to Sec. 5.2.4, under the rules of Treas. Reg. NO
ss.1.704-1(b)(2)(iv)(f) the Parties agree that the FMV capital accounts shall be
revalued to reflect value changes of the Partnership property upon the
occurrence of the events specified in (5)(i) through (iii) of said
-1(b)(2)(iv)(f) regulations.
-----------------------------------------------------------------------------------------------
With respect to Sec. 6.2.8, the income attributable to take-in-kind production NO
will be reflected on the tax return.
-----------------------------------------------------------------------------------------------
With respect to Sec. 5.2.3 the FMV for the listed properties are determined as
follows (▇▇▇▇ as "N/A" if not applicable; use separate sheet if necessary)
--------------------------------------------------------------------------------
Property Description FMV
--------------------------------------------------------------------------------
To be determined prior to the execution of the
Joint Operating Agreement.
9.3 CHANGE OF MAJORITY FOR OTHER TAX ELECTIONS.
Instead of the Sec. 4.4 majority for other tax elections, a majority shall be
considered if consisting of (specify or line out blanks)
THE END
Page 10
JOA - Exhibit "F"
Exhibit "G"
Attached to and made a part of that certain Offshore Operating Agreement
effective as of October 1, 2005, between Chevron U.S.A. Inc., Newfield
Exploration Company and Ridgewood Energy Corporation, Manager Ridgewood Energy Q
Fund, LLC, covering Main Pass Blocks 221 and 222, Offshore, Gulf of Mexico.
MEMORANDUM OF OPERATING AGREEMENT
AND FINANCING STATEMENT
-----------------------
(LOUISIANA)
To be filed in the conveyance records and in the mortgage records
and as a non-standard financing statement in accordance with
Paragraph 6.0 herein.
1.0 This Memorandum of Operating Agreement and Financing Statement
(Louisiana) (this "Memorandum") is effective as of the effective date of
the Operating Agreement referred to in Paragraph 2.0 below and is
executed by the undersigned, duly authorized representative of
_________________, a _______________ corporation, whose taxpayer
identification number is _______________ and whose address is
_________________________ (the "Operator"), and the undersigned, duly
authorized representative of _____________________, a limited liability
company, whose taxpayer identification number is _______________________
and whose address is ____________________ (the "Non-Operating Party").
2.0 The Operator and the Non-Operating Party are parties to that certain
Offshore Operating Agreement dated effective ______________________ (the
"Operating Agreement") which Operating Agreement provides for the
development and production of crude oil, natural gas and associated
substances from the OCS blocks, or portions thereof, described in Exhibit
"A" of the Operating Agreement and in Attachment "1" to this Memorandum,
or covered by the Leases (hereinafter called the "Contract Area") and
which designates ________________________, as the Operator, to conduct
such operations for itself and the Non-Operating Party.
3.0 Among other provisions, the Operating Agreement (a) provides for certain
liens, mortgages, pledges and security interests to secure payment by the
parties. of their respective share of costs and performance of other
obligations under the Operating Agreement, (b) contains an Accounting
Procedure, which establishes, among other things, interest to be charged
on indebtedness, certain costs, and other expenses under the Operating
Agreement at the rate set forth therein, (c) includes non-consent clauses
which establish that parties who elect not to participate in certain
operations shall be deemed to have relinquished their interest in
production until the carrying consenting parties recover their costs of
such operations plus a specified amount, (d) grants each party to the
Operating Agreement the right to take in kind its proportionate share of
all oil and gas produced from the Contract Area, and (e) includes a
volumetric Gas Balancing Agreement which is attached as Exhibit "E" to
the Operating Agreement.
4.0 The Operator hereby certifies that a true and correct copy of the
Operating Agreement is on file and is available for inspection by third
parties at the offices of the Operator at the address set forth in this
Memorandum.
5.0 In addition to any other security rights and remedies provided for by law
with respect to services rendered or materials and equipment furnished
under the Operating Agreement, for and in consideration of the covenants
and mutual undertakings of the Operator and the Non-Operating Party set
forth in the Operating Agreement, the Operator and the Non-Operating
Party hereby agree as follows:
1
JOA - Exhibit "G"
5.1 Each Non-operator hereby grants to the Operator a mortgage,
hypotheca, and pledge of and over all of its rights, titles, and
interests in and to (a) the Contract Area, (b) the Hydrocarbons
in, on, under, and that may be produced from the lands within the
Contract Area, and (c) ail. other immovable property susceptible
of mortgage situated within the Contract Area. This mortgage is
given to secure the complete and timely performance of and payment
by each Non-operator of all obligations and indebtedness of every
kind and nature, whether now owed by such Non-operator or
hereafter arising, pursuant to this Agreement., To the extent
susceptible under applicable law, this mortgage and the security
interests granted in favor of the Operator herein shall secure the
payment of all costs and other expenses properly charged to such
Party, together with (A) interest-on such indebtedness, costs, and
other expenses at the rate set forth in the Accounting Procedure
or the maximum rate allowed by law, whichever is the lesser, (B)
reasonable attorneys' fees, (C) court costs, and (D) other
directly related collection costs. If any Non-operator does not
pay such costs and other expenses or perform its obligations under
the Operating Agreement when due, the Operator shall have the
additional right to notify the purchaser or purchasers of the
defaulting Non-operator's Hydrocarbon production and collect such
costs and other expenses out of the proceeds from the sale of the
defaulting Non-operator's share of Hydrocarbon production until
the amount owed has been paid. The Operator shall have the right
to offset the amount owed against the proceeds from, the sale of
such defaulting Non-operator's share of Hydrocarbon production.
Any purchaser of such production shall be entitled to, rely on the
Operator's statement concerning the amount of costs and other
expenses owed by the defaulting Non-operator and payment made to
the Operator by any purchaser shall be binding and conclusive as
between such purchaser and such defaulting Non-operator.
The maximum amount for which the mortgage herein granted by each
Non-operator shall be deemed to secure the obligations and
indebtedness of such Non-operator to the Operator as stipulated
herein is hereby fixed in an amount equal to $25,000,000.00 (the
"Limit of the Mortgage of each Non-operator"). Except as provided
in the previous sentence (and then only to the extent such
limitations are required by law), the entire amount of obligations
and indebtedness of each Non-operator to the Operator is secured
hereby without limitation. Notwithstanding the foregoing Limit of
the Mortgage of each Non-operator, the liability of each
Non-operator under this Agreement and the mortgage and security
interest granted hereby shall be limited to (and the Operator
shall not be entitled to enforce the same against such
Non-operator for, an amount exceeding) the actual obligations and
indebtedness [including all interest charges, costs, attorneys'
fees, and other charges provided for in the Operating Agreement]
outstanding and unpaid and that are attributable to or charged
against the interest of such Non-operator pursuant to the
Operating Agreement.
5.2 To secure the complete and timely performance of and payment by
each Non-operator of all obligations and indebtedness of every
kind and nature, whether now owed by such Non-operator or
hereafter arising, pursuant to the Operating Agreement, each Non
operator hereby grants to the Operator a continuing security
interest in and to all of its rights, titles, interests, claims,
general intangibles, proceeds, and products thereof, whether now
existing or hereafter acquired, in and to (a) all Hydrocarbons
produced from the lands or offshore blocks covered by the Contract
Area or attributable to the Contract Area when produced, (b) all
accounts receivable accruing or arising as a result of the sale of
such Hydrocarbons (including, without limitation, accounts arising
from gas imbalances or from the sale of Hydrocarbons at the
wellhead), (c) all cash or other proceeds from the sale of such
Hydrocarbons once produced, and (d) all Platforms and Development
Facilities, ▇▇▇▇▇, fixtures, other corporeal property, whether
movable or immovable, whether now or hereafter placed on the lands
or offshore blocks covered by the Contract Area or maintained or
used in connection with the ownership, use or exploitation of the
Contract Area, and other surface and sub-surface equipment of any
kind or character located on or attributable to the Contract Area
and the cash or other proceeds realized from the sale, transfer,
disposition or conversion thereof. The interest of the
Nonoperators in and to the oil and gas produced from or
attributable to the Contract Area when extracted and the accounts
receivable accruing or arising as the result of the sale thereof
shall be financed at the wellhead of the well or ▇▇▇▇▇ located on
the Contract Area.
2
JOA - Exhibit "G"
To the extent susceptible under applicable law, the security
interest granted by each Nonoperator hereunder covers: (A) all
substitutions, replacements, and accessions to the property of
such Non-operator described herein and is intended to cover all of
the rights, titles and interests of such Non-operator in all
movable property now or hereafter located upon o r used in
connection with the Contract Area, whether corporeal or
incorporeal; (B) all rights' under any gas balancing agreement,
farmout rights, option farmout rights, acreage and cash
contributions, and conversion rights of such Non-operator in
connection with the Contract Area, or the Hydrocarbons produced
from- or attributable to the Contract 'Area, whether now owned and
existing or hereafer acquired or arising, including, without
limitation,' all interests of each Non-operator in any
partnership, tax partnership, limited partnership, association,
joint venture, or other entity or enterprise that holds, owns, or
controls any interest in the Contract Area; and (C) all rights,
claims, general intangibles, and proceeds, whether now existing or
hereafter acquired, of each Non-operator in and to the contracts,
agreements, permits, licenses, rights-of-way, and similar rights
and privileges that relate to or are appurtenant to the Contract
Area, including the following:
(1) all of its rights, titles, and interests, whether now owned
and existing or hereafter acquired or arising, in, to, and
under or derived from any present or future operating,
farmout, bidding, pooling, unitization, and communitization
agreements, assignments, and subleases, whether or not
described on Attachment "1," to the extent, and only to the
extent, that such agreements, assignments, and subleases
cover or include any of its rights, titles, and interests,
whether now owned and existing or hereafer acquired or
arising, in and to all or any portion of the Contract Area,
and all units created by any such pooling, unitization, and
communitization agreements and all units formed under
orders, regulations, rules, or other oficial acts of any
governmental authority having jurisdiction, to the extent
and only to the extent that such units cover or include all
or any portion of the Contract Area;
(2) all of its rights, titles, and interests, whether now owned
and existing or hereafter acquired or arising, in, to, and
under or derived from all presently existing and future
advance payment agreements, and oil, casinghead gas, and
gas sales, exchange, and processing contracts and
agreements, including, without Limitation, those contracts
and agreements that are described on Attachment "1," to the
extent, and only to the extent, those contracts and
agreements cover or include all or any portion of the
Contract Area; and
(3) all of its rights, titles, and interests, whether now owned
and existing or hereafter acquired or arising, in, to, and
under or derived from all existing and future permits,
licenses, rights-of-way, and similar rights and privileges
that relate to or are appurtenant to the Contract Area.
5.3 This Memorandum (including a carbon, photographic, or other
reproduction thereof and hereof) shall constitute a non-standard
form of financing statement under the terms of Chapter 9 of the
Louisiana Commercial Laws, La. R.S. 10:9-101 et seq. (the "Uniform
Commercial Code," as adopted in the State of Louisiana) and, as
such, for the purposes of the security interest in favor of the
Operator, may be filed for record in the office of the Clerk of
Court of any parish in the State of Louisiana, with the Operator
being the secured party and the Non-Operating Party being the
debtors with respect to such filing.
5.4 The Operator hereby grants to each Non-operator a mortgage,
hypotheca, and pledge of and over all of its rights, titles, and
interests in and to (a) the Contract Area; (b) the Hydrocarbons
in, on, under, and that my be produced from the lands within the
Contract Area; and (c) all other immovable property or other
property susceptible of mortgage situated within the Contract
Area. This mortgage is given to secure the complete and timely
performance of and payment by the Operator of all obligations and
indebtedness of every kind and nature, whether now owed by the
Operator or hereafer arising, pursuant to this Agreement. To the
extent susceptible under applicable law, this mortgage and the
3
JOA - Exhibit "G"
security interests granted in favor of each Non-operator herein
shall secure the payment of all costs and other expenses properly
charged to the Operator, together with (A) interest on such
indebtedness, costs, and other expenses at the rate set forth in
the Accounting Procedure or the maximum rate allowed by law,
whichever is the lesser, (B) reasonable attorneys' fees, (C) court
costs, and (D) other directly related collection costs. If the
Operator does not pay such costs and other expenses or perform its
obligations under the Operating Agreement when due, the
Non-operators shall have the additional right to notify the
purchaser or purchasers of the Operator's Hydrocarbon production
and collect such costs and other expenses out of the proceeds from
the sale of the Operator's share of Hydrocarbon production until
the amount owed has been paid. The Non operators shall have the
right to offset the amount owed against the proceeds from the sale
of the Operator's share of Hydrocarbon production. Any purchaser
of such production shall be entitled to rely on the Non-operators'
statement concerning the amount of costs and other expenses owed
by the Operator and payment made to the Non-operators by any
purchaser shall be binding and conclusive as between such
purchaser and the Operator.
The maximum amount for which the mortgage herein granted by the
Operator shall be. deemed to secure the obligations and
indebtedness of the Operator to all Non-operators as stipulated
herein is hereby fixed in an amount equal to $25,000,000.00 in the
aggregate (the "Limit of the Mortgage of the Operator"). Except as
provided in the previous sentence (and then only to the extent
such limitations are required by law), the entire amount of
obligations and indebtedness of the Operator to the Non-operators
is secured hereby without limitation. Notwithstanding the
foregoing Limit of the Mortgage of the Operator, the liability of
the Operator under the Operating Agreement and the mortgage and
security interest granted hereby shall be limited to (and the
Non-operators shall not be entitled to enforce the same against
the Operator for, an amount exceeding) the actual obligations and
indebtedness [including all interest charges, costs, attorneys'
fees, and other charges provided for in the Operating Agreement]
outstanding and unpaid and that are attributable to or charged
against the interest of the Operator pursuant to this Agreement.
5.5 To secure the complete and timely performance of and payment by
the Operator of all obligations and indebtedness of every kind and
nature, whether now owed by the Operator or hereafter arising,
pursuant to the Operating Agreement, the Operator hereby grants to
each Non-operator a continuing security interest in and to all of
its rights, titles, interests, claims, general intangibles,
proceeds, and products thereof, whether now existing or hereafter
acquired, in and to (a) all Hydrocarbons produced from the lands
or offshore blocks covered by the Contract Area or included within
the Contract Area or attributable to the Contract Area when
produced, (b) all accounts receivable accruing or arising as a
result of the sale of such Hydrocarbons (including, without
limitation, accounts arising from gas imbalances or from the sale
of Hydrocarbons at the wellhead), (c) all cash or other proceeds
from the sale of such Hydrocarbons once produced, and (d) all
Platforms and Development Facilities, ▇▇▇▇▇, fixtures, other
corporeal property whether movable or immovable, whether now or
hereafer placed on the offshore blocks covered by the Contract
Area or maintained or used in connection with the ownership, use
or exploitation of the Contract Area, and other surface and
sub-surface equipment of any kind or character located on or
attributable to the Contract Area and the cash or other proceeds
realized from the sale, transfer, disposition or conversion
thereof. The interest of the Operator in and to the Hydrocarbons
produced from or attributable to the Contract Area when extracted
and the accounts receivable accruing or arising as the result of
the sale thereof shall be financed at the wellhead of the well or
▇▇▇▇▇ located on the Contract Area. To the extent susceptible
under applicable law, the security interest granted by the
Operator hereunder covers: (A) all substitutions, replacements,
and accessions to the property of the Operator described herein
and is intended to cover all of the rights, titles and interests
of the Operator in all movable property now or hereafer located
upon or used in connection with the Contract Area, whether
corporeal or incorporeal; (B) all rights under any gas balancing
agreement, farmout rights, option farmout rights, acreage and cash
contributions, and conversion rights of the Operator in connection
with the Contract Area, the Hydrocarbons produced from or
4
JOA -- Exhibit "G"
attributable to the Contract Area, whether now owned and existing
or hereafter acquired or arising, including, without limitation,
all interests of the Operator in any partnership, tax partnership,
limited partnership, association, joint venture, or other entity
or enterprise that holds, owns, or controls any interest in the
Contract Area; and (C) all rights, claims, general intangibles,
and proceeds, whether now existing or hereafer acquired, of the
Operator in and to the contracts, agreements, permits, licenses,
rights-of-way, and similar rights and privileges that relate to or
are appurtenant to the Contract Area, including the following:
(1) all of its rights, titles, and interests; whether now owned
and existing or hereafter acquired or arising, in, to, and
under or derived from any present or future operating,
farmout, bidding, pooling, unitization, and communitization
agreements, assignments, and subleases, whether or not
described in Attachment "1," to the extent, and only to the
extent, that such agreements, assignments, and subleases
cover or include any of its rights, titles, and interests,
whether now owned and existing or hereafter acquired .4r
arising, in and to all or any portion of the Contract Area,
and all units created by any such pooling, unitization, and
communitization agreements and all units formed under
orders, regulations, rules, or other official acts of any
governmental authority having jurisdiction, to the extent
and only to the extent that such units cover or include all
or any portion of the Contract Area;
(2) all of its rights, titles, and interests, whether now owned
and existing or hereafer acquired or arising, in, to, and
under or derived from all presently existing and future
advance payment agreements, and oil, casinghead gas, and
gas sales, exchange, and Development contracts and
agreements, including, without limitation, those contracts
and agreements that are described on Attachment "1," to the
extent, and only to the extent, those contracts and
agreements cover or include all or any portion of the
Contract Area; and
(3) all of its rights, titles, and interests, whether now owned
and existing or hereafter acquired or arising, in, to, and
under or derived from all existing and future permits,
licenses, rights-of-way, and similar rights and privileges
that relate to or are appurtenant to any of the Contract
Area.
5.6 For the purposes of the security interest in favor of the
Non-Operating Party, this Memorandum (including a carbon,
photographic, or other reproduction thereof and hereof) may be
filed as a non-standard form of financing statement pursuant to
the Uniform Commercial Code in the office of the Clerk of Court of
any parish in the State of Louisiana, with the Non-Operating Party
being the secured parties and the Operator being the debtor with
respect to such filing.
6.0 To serve as notice of the existence of the Operating Agreement as a
burden on the title of the Operator and the Non-Operating Party to their
interests in and to the Contract Area and for purposes of satisfying
otherwise relevant recording and filing requirements of applicable law,
this Memorandum is to be fled or recorded, as the case may be, in (a) the
conveyance records of the parish or parishes in which the offshore blocks
covered by the Contract Area are located or adjacent pursuant to La. R.S.
9:2731 et seq., (b) the mortgage records of such parish or parishes, and
(c) the appropriate Uniform Commercial Code records. All parties to the
Operating Agreement are identified on Attachment "1" hereto.
7.0 If performance of any obligation under the Operating Agreement or payment
of any indebtedness created thereunder does not occur or is not made when
due under the Operating Agreement or upon default of any covenant or
condition of the Operating Agreement, in addition to any other remedy
afforded by law, each party to the Operating Agreement and any successor
to such party by assignment, operation of law, or otherwise, shall have,
and is hereby given and vested with, the power and authority to foreclose
the mortgage, pledge, and security interest established in its favor
herein and in the Operating Agreement in the manner provided by law and
to exercise all rights of a secured party under the Uniform Commercial
Code.
5
JOA - Exhibit "G"
8.0 Upon expiration of the Operating Agreement and the satisfaction of all
obligations and indebtedness arising thereunder, the Operator, on behalf
of all parties to the Operating Agreement, shall file of record an
appropriate release and termination of all security and other rights
created under the Operating Agreement and this Memorandum executed by all
parties to the Operating Agreement. Upon the filing of such release and
termination instrument, all benefits and obligations under this
Memorandum shall terminate as to all parties who have executed or
ratified this Memorandum. In addition, at any time prior to the filing of
such release and termination instrument, each of the Operator and the
Non-Operating Party shall have the right to (i) file a. continuation
statement pursuant to the Uniform Commercial Code with respect to any
financing statement filed in their favor under the terms of this
Memorandum and (ii) reinscribe this act in the appropriate mortgage
records.
9.0 It is understood and agreed by the parties hereto that if any part, term,
or provision of this Memorandum is held by the courts to be illegal or in
conflict with any law of the state where made, the validity of the
remaining portions or provisions shall not be affected, and the rights
and obligations of the parties shall be construed and enforced as if the
Memorandum did not contain' the particular part, term, or provision held
to be invalid.
10.0 This Memorandum shall be binding upon and shall inure to the benefit of
the parties hereto and their respective legal representatives, successors
and permitted assigns. The failure of one or more persons owning an
interest in the Contract Area to expcute this Memorandum shall not in any
manner affect the validity of the Memorandum as to those persons who
execute this Memorandum.
11.0 A party having an interest in the Contract Area may ratify this
Memorandum by execution and delivery of an instrument of ratification,
adopting and entering into this Memorandum, and such ratification shall
have the same effect as if the ratifying party had executed this
Memorandum or a counterpart thereof. By execution or ratification of this
Memorandum, such party hereby consents to its ratification and adoption
by any party who acquires or may acquire any interest in the Contract
Area.
12.0 This Memorandum may be executed or ratified in one or more counterparts
and all of the executed or ratified counterparts shall together
constitute one instrument. For purposes of recording in each of the
records described in Paragraph 6 above, duplicate copies of this
Memorandum with individual signature pages attached thereto may be filed
of record, one copy of each to be indexed in the name of the Operator, as
grantor, and one copy of each to be indexed in the name of each
Non-Operating Party, as grantor, and duplicate copies of this Memorandum
with individual signature pages attached thereto may be filed in the
appropriate Uniform Commercial Code records, one filing for the Operator,
as secured party, and another fling for the Non-Operating Party, as
secured parties. The respective addresses of the Operator, as both
secured party and debtor, and the Non-Operating Party, as both debtors
and secured parties, at which information with respect to the security
interests created in the Operating Agreement may be obtained, are set
forth in Paragraph 1.0 of this Memorandum.
13.0 The Operator and the Non-Operating Party hereby agree to execute,
acknowledge and deliver or cause to be executed, acknowledged and
delivered, any instrument or take any action necessary or appropriate to
efectuate the terms of the Operating Agreement or any Exhibit,
instrument, certificate or other document pursuant thereto.
14.0 Whenever the context requires, reference herein made to the single number
shall be understood to include the plural, and the plural shall likewise
be understood to include the singular, and specific enumeration shall not
exclude the general, but shall be construed as cumulative.
6
JOA - Exhibit "G"
EXECUTED on the dates set forth below each signature but effective as of the
________ day of __________, 20__.
OPERATOR:
---------
WITNESSES:
____________________
__________________________________ By:_____________________________
Title:__________________________
__________________________________ Date:___________________________
NON-OPERATING PARTY:
-------------------
WITNESSES:
____________________
__________________________________ By:_____________________________
Title:__________________________
__________________________________ Date:___________________________
▇
▇▇▇ - ▇▇▇▇▇▇▇ "▇"
▇▇▇▇▇▇▇▇▇▇▇▇▇▇
OPERATOR:
STATE OF _____________
PARISH/COUNTY OF ______________________
On this ________ day of ______, 200_, before me, appeared _____________,
to me personally known, who, being by me duly sworn, did say that he is the
____________________ of _____________, a ___________ corporation, and that the
foregoing instrument was signed on behalf of the corporation by authority of its
Board of Directors and that ____ acknowledged the instrument to be the free act
and deed of the corporation.
_________________________
NOTARY PUBLIC in and for
the State of ____________
My Commission expires:____________
ACKNOWLEDGMENT
NON-OPERATING PARTY
STATE OF _____________
PARISH/COUNTY OF ______________________
On this ________ day of ______, 20__, before me, appeared _____________,
to me personally known, who, being by me duly sworn, did say that he is the
____________________ of _____________, a ___________ limited liability company,
and that the foregoing instrument was signed on behalf of the company by
authority of its members and that _______ acknowledged the instrument to be the
free act and deed of the limited liability company.
_________________________
NOTARY PUBLIC in and for
the State of ____________
My Commission expires:____________
▇
▇▇▇ - ▇▇▇▇▇▇▇ "▇"
▇▇▇▇▇▇▇▇▇▇ "1" TO EXHIBIT "G"
Attached to and made a part of the
Memorandum of Operating Agreement and Financing Statement (Louisiana)
effective _______________,by and between
__________________, as Operator, and
__________________, as Non-Operator.
I. DESCRIPTION OF LANDS AND LEASES WITHIN THE CONTRACT AREA
--------------------------------------------------------
II. OPERATOR
--------
III. PARTIES REPRESENTATIVES, ADDRESSES, AND INTERESTS CONTRIBUTED
-------------------------------------------------------------
9
JOA - Exhibit "G"
Exhibit "H"
Attached to and made a part of that certain Offshore Operating Agreement
effective as of October 1, 2005, between Chevron U.S.A. Inc.,
Newfield Exploration Company and Ridgewood Energy Corporation,
Manager Ridgewood Energy Q Fund, LLC, covering
Main Pass Blocks 221 and 222, Offshore, Gulf of Mexico.
Dispute Resolution Procedure
----------------------------
I. OVERVIEW
--------
A. Description and Goals. Arbitration as used in this statement is a
procedure whereby an Arbitration Panel ("Panel") resolves any claim(s),
controversy(ies) or dispute(s) between Chevron U.S.A. Inc and Ridgewood Energy
Corporation (hereinafer referred to singularly as "Party" and collectively as
"Parties") arising out of, relating to or in connection with the Exploration
Participation Agreement (hereinafter "Agreement") including the interpretation,
validity, termination or breach thereof.
(i) Binding. The arbitration process is binding on the Parties and
this arbitration is intended to be a final resolution of the dispute(s)
between the Parties as described above, to the same extent as a final
judgment of a court of competent jurisdiction. Each Party hereby expressly
covenants that it shall not resort to court remedies except as provided for
herein, and for preliminary relief in aid of arbitration.
(ii) Violation. A Party who violates the covenants in Section l.A.(i)
shall pay all legal costs incurred by the other Party in connection with
the enforcement thereof. Suits, actions or proceedings in connection with
violations of the covenants in Section I.A.(i) shall be instituted in the
United States District Court for the Eastern District of Louisiana, and
pursuant to Title IX of the United States Code. Each Party waives any
option or objection which it may now or thereafer have to the laying of the
venue in any such suit, action or proceeding and irrevocably submits to the
jurisdiction of such court in any such suit, action or proceeding.
B. Duty to Negotiate. The Parties shall inform one another promptly
following the occurrence or discovery of any item or event which might
reasonably be expected to result in a dispute in connection with the Agreement.
The Parties will attempt to resolve satisfactorily any such matters.
C. Notice of Unresolved Dispute. Should a dispute arise which the Parties
cannot resolve satisfactorily, either Party may deliver to the other Party a
written notice of the dispute with supporting documentation as to the
circumstances leading to the dispute (the "Notice of Dispute"). The Parties,
within ten (10) Business Days from delivery of such notice, shall then each
appoint a management representative ("Management Representative") who has no
prior direct involvement with the subject matter of the Notice of Dispute and
who is duly authorized to investigate, negotiate and settle the dispute. The
Management Representative for each Party shall meet and confer as often as they
1
JOA - Exhibit "H"
deem reasonably necessary for a period not exceeding thirty (30) days following
the delivery of the Notice of Dispute in good faith negotiations to resolve the
dispute amicably. The parties in their sole discretion may also agree to utilize
the service of a mediator pursuant to` a joint engagement. Unless otherwise
provided herein, all such notices shall be served in accordance with the
provisions of the Agreement.
II. ARBITRATION PROCESS
-------------------
A. Arbitration. If the Parties are unable to resolve the dispute within
thirty (30) days following the receipt of the Notice of Dispute, the matter
shall be submitted to arbitration in accordance with the procedures set forth
below.
B. Initiation of Arbitration. The arbitration shall be initiated by either
party delivering to the other a Notice of Intention to Arbitrate as provided for
in Section 6 of the Commercial Arbitration Rules and the Supplementary
Procedures for Large, Complex Disputes of the American Arbitration Association
(collectively, the "AAA Guidelines")
C. Governing Procedures. Except as expressly provided herein, the
arbitration shall be conducted in accordance with applicable New York law
regarding arbitration. To the extent that a matter is not addressed by this
Agreement or New York law, the arbitration shall be conducted with reference to
the AAA Guidelines. The action of a majority of the members of the arbitration
Panel shall govern and their decision in writing shall be final and binding on
the Parties hereto.
(i) Conflicts. In the event of a conflict between the AAA Guidelines
and this Dispute Resolution Procedure, this Procedure shall govern.
(ii) Governing Law. The Panel shall apply the governing substantive
law chosen by the Parties to the Agreement.
D. Arbitration Panel. There shall be three arbitrators, all of whom shall
be independent and impartial, and experienced in arbitration proceedings. For
those disputes involving the transfer of, or title to, any real property rights
or interests, including but not limited to mineral rights, or involving the
development of a mineral interest or the marketing of mineral production, each
arbitrator shall be experienced in the oil and gas industry and knowledgeable or
specializing as to the subject matter involved in the dispute. The arbitrators
shall be chosen as follows: each Party shall have thirty (30) days from the
delivery of a Notice of Intention to Arbitrate to designate an arbitrator and
notify the other Party of the name of such arbitrator. If such other Party shall
fail to name a second arbitrator within thirty (30) days, then the Party who
first served the notice may, within three (3) days after written notice to the
other Party, apply to the American Arbitration Association as the Appointing
Authority, for the appointment of such second arbitrator for or on behalf of the
other Party, and in such case the arbitrator appointed by the Appointing
Authority shall meet the criteria set forth in this Section II.D. and shall act
as if named by the other Party.
2
JOA - Exhibit "H"
(i) Selection of Third Arbitrator. The two (2) arbitrators chosen
as provided for above shall, within thirty (30) days after the
appointment of the second arbitrator, choose the third arbitrator who
shall meet the criteria set forth in this Section II.D., and in the event
of their failure. to do so within said thirty (30) days, either of the
Parties hereto may in like manner, within three (3) days after written
notice to the other Party, apply to the Appointing Authority for the
appointment of a third arbitrator: The third arbitrator shall then
disclose any and all conflicts of interest and any business relationship
that he or she has with any Party. Following that disclosure, the Parties
shall agree to appoint the chosen third arbitrator or to continue the
selection process in the same manner. The three (3) arbitrators selected
shall constitute the Panel. The third arbitrator shall-serve as Chairman.
of the Panel.
(ii) Conflicts. All arbitrators, prior to their appointment shall
disclose to the. Parties, and to the other members of the Panel all
actual or perceived conflicts of interest and business relationships
involving the dispute or the Parties, including but not limited to, any
professional or social relationships, present or past, with any Party (or
its affiliates), including any Party's (or its affiliates) directors,
officers, and supervisory personnel and counsel. Any Party may challenge
in writing the appointment or continued service of any arbitrator for
lack of independence, partiality, or any other cause likely to impair
such arbitrator's ability to effectively participate in the proceedings
or render a fair and equitable decision. Where such challenge is made,
the Appointing Authority shall uphold or dismiss the challenge. In the
event a challenge is upheld, the arbitrator as to whom the challenge was
upheld shall cease to be a member of the Panel. A replacement will be
selected in the same manner as the original arbitrator was selected. If
an arbitrator resigns or becomes unable or unwilling to continue to serve
on the Panel, a replacement shall be selected in the same manner as that
arbitrator was chosen.
(iii) Multi-Party Arbitrations. Where more than two Parties are
involved in the dispute ("Multi-Party Arbitration"), all Parties shall
jointly name and agree as the appointment of the two arbitrators meeting
the criteria set forth in Section N.D. above. The third arbitrator shall be
appointed as set forth in Section ll.D.(i) above. If the Parties cannot
agree as to the choice of the two arbitrators within the said thirty (30)
days, either of the Parties hereto may in like manner, within three (3)
days after written notice to the other Party, apply to the Appointing
Authority for the appointment of the two arbitrators meeting the criteria
set forth in Section II.D. above.
(iv) Management of the Arbitration. The Panel shall actively manage
the proceedings as it deems best so as to make the same expeditious,
economical, and less burdensome and adversarial than litigation.
E. Confidentiality All documents, briefs, testimony, transcripts, as well
as, all Panel decisions shall be confidential, except that, upon prior written
consent of both Parties, such information may be divulged to third parties who
agree in writing to keep such information confidential if such disclosure is
deemed necessary pursuant to common business practice or is required by law.
Likewise, the views, suggestions, admissions, proposals, and other information
exchanged in the arbitration are confidential and are inadmissible in any other
proceeding.
3
JOA - Exhibit "H"
F. Costs and Expenses. Each side shall be solely responsible for all costs,
fees and expenses. incurred by its party-appointed arbitrator. The fees, costs,
and expenses of the third arbitrator and any other incidental costs incurred in
connection with: the arbitrator proceeding shall be borne equally by the
Parties. Each Party is solely responsible for its own attorneys' fees and
expenses incurred in the arbitration. In the event of a Multi-Party arbitration,
all costs and expenses shall be borne equally by all Parties.
G. Submissions. Within thirty (30) days after the selection of the Panel,
each Party shall provide the Panel. with a short and plain submission defining
the issues to be, decided and the nature of the relief that the Panel may award
(the "Submission"). This Submission shall explicitly authorize the Arbitration
Panel to decide these issues. This authorization shall stay in force for six (6)
months from this Submission. If the Parties are unable to reach consensus as to
the issues involved, the Panel in its sole discretion shall frame the issues
through a reasonable procedure. The Panel will render decisions on the specific
issues established and shall fashion any remedy that the Panel deems appropriate
so long as that remedy is consistent with the Parties' Submissions hereunder.
Any money judgment entered by the Panel shall be payable in U.S. dollars.
H. Transcriptions. The presentations and argument will be transcribed for
the benefit of the Panel and the Parties.
I. Discovery. Commencing thirty (30) days after the receipt of the opposing
Party's Submission, each Party may serve upon the other Party up to fifteen (15)
requests for the production of documents, including sub-parts. The requests
shall be made in good faith and not be served for the purpose of delay or
harassment. Each request shall describe the type of document(s) sought and each
request shall be limited to documents that are relevant to a claim or defense in
the arbitration proceeding, or reasonably calculated to lead to the discovery of
admissible evidence. The requests need not be served all at once but may be
served in stages.
(i) The Party served with a request under this provision shall provide
the adverse Party with copies of the requested documents, and identify the
request to which each document is responsive, within twenty (20) days of
the receipt of the request. If the Party served with a request objects to
the production of any of the requested documents, it shall nevertheless
produce within the permitted time all documents responsive to any request
that is not objected to by that Party.
(ii) A Party that is served with a request may challenge the
propriety of the request within the time permitted for response by a
short written objection which shall be forwarded to the adverse Party and
to each member of the Panel. The adverse Party shall submit its response,
if any, to the objecting Party and each member of the Panel within five
(5) days of receipt of the objection. The Panel shall consider the
request, the objection, and the response, if any, and decide whether the
production shall be allowed or denied or whether the request should be
modified within ten (10) days after the submission of the adverse Party's
response.
4
JOA - Exhibit "H"
J. Presentations. No later than twenty-five (25) days prior to the date
that presentations to the Panel are to begin, each Party will submit to the
Panel and serve on the other Party a written position statement. The original
statement of each Party shall not exceed thirty-five '(35) typewritten
letter-sized pages. Each Party shall have the. right to . submit reply
statements no .later than fifteen (15) days prior -to. the date of the
presentation. Such reply statements shall- not exceed fifteen (15) typewritten
letter-sized pages.
(i) All documents and affidavits that a Party intends to use during
its presentation shall be submitted to the Panel and served on the other
Party with the position and reply statements. All demonstrative exhibits
shall be exchanged five (5) days in advance of the presentations,
(ii) The presentations to the Panel shall extend for such time as the
Panel agrees, to be appropriate. In the absence of any agreement, the
presentations for both Parties shall extend for no longer than two (2) days
and shall be concluded within six (6) months after selection of the Panel.
Presentations of each Party shall occur successively with no intervening
delay.
(iii) Each Party shall make an oral and/or documentary presentation of
its position in such order and in accordance with the time schedule
established by the Panel. The Panel may question each of the presenters
during or following any and all presentations.
The Panel shall determine a reasonable time and location for the presentations.
K. Decision and Award. The Panel shall promptly (within sixty (60) days of
conclusion of the presentations or such longer period as the Parties may
mutually agree) determine the claims of the Parties and render their final
decision in writing. All decisions and awards shall be decided by a majority of
the Panel. The decision shall state with specificity the findings of fact and
conclusions of law on which it rests. The decision rendered by the Panel may be
enforced in any federal court having jurisdiction to do so and may only be
appealed pursuant to Section L below. The decision shall be served upon each of
the Parties by facsimile transmission and by first class mail. If there be no
majority as to any part of the award, such part of the award shall be made by
the third arbitrator.
(i) If applicable law allows pre-award interest, the Panel may, in
their discretion, grant pre-award interest and, if so, such interest may be
at commercial rates during the relevant period. The Panel may award all or
a part of a Party's reasonable attorney's fees and costs of arbitration,
taking into account the final result of the arbitration, the conduct of the
Parties and their counsel in the course of the arbitration, and other
relevant factors. The Panel shall not award consequential or punitive
damages.
(ii) Within ten (10) days of receipt of the award either side may
submit a Motion to Modify the award. A response shall be due within fifteen
(15) days thereafer and the Panel shall rule thereon within fifteen (15)
days after receipt of the response.
5
7 JOA -- Exhibit "H"
(iii) Judgment on the award may be entered in a United States District
Court for the federal district within which the decision was made at any
time within one year after the decision is made.
L. Vacation of Award and Appeal. The Parties. agree that an award made by
the Panel may only be vacated or confirmed. by a federal court of proper
jurisdiction. as established above. The Parties agree that an award made-by the
Panel may be vacated by a court only if the award was procured by or through
fraud or corruption or because the Panel refused to hear evidence material to
the controversy or otherwise so conducted the hearing as to substantially
prejudice the rights of a Party. An appeal from an order or judgment pursuant to
this Section II.L. shall be instituted in the United States District Court for
the Eastern District of Louisiana. Each Party .waives any option or objection
which it may now or thereafer have to the laying of the venue of any such suit,
action or proceeding and irrevocably submits to the jurisdiction of the court in
any such suit, action or proceeding. Each Party agrees that a remedy at law for
a violation of this Section II.L. may not be adequate and therefore agrees that
the remedies of specific performance and injunctive relief shall be available in
the event of any violation in addition to any other right or remedy at law or in
equity to which any Party may be entitled.
M. Res Judicata. To the extent permitted by law, any decision of the Panel
shall not be resjudicata or have any binding effect in any unrelated litigation
or arbitration.
6
JOA - Exhibit "H"
Exhibit "I"
Attached to and made a part of that certain Offshore Operating Agreement
effective as of October l, 2005, between Chevron U.S.A. Inc.,
Newfield Exploration Company and Ridgewood Energy Corporation,
Manager Ridgewood Energy Q Fund, LLC, covering
Main Pass Blocks 221 and 222, Offshore, Gulf of Mexico.
ARTICLE 8.6 ET SEQ.
SHELF OPERATING AGREEMENT
(LOUISIANA)
Security Rights; Default; Unpaid Charges; Carved-out Interests.
8.6 Security Rights (LA).
In addition to any other security rights and remedies provided by law
with respect to services, rendered or materials and equipment furnished
under this Agreement, for and in consideration of the covenants and
mutual undertakings of the Operator and the Non-operators herein, the
Parties shall have the following security rights:
8.6.1 Mortgage in Favor of the Operator.
Each Non-operator hereby grants to the Operator a mortgage, hypotheca,
and pledge of and over all of its rights, titles, and interests in and to
(a) the Contract Area, (b) the Hydrocarbons in, on, under, and that may
be produced from the lands within the Contract Area, and (c) all other
immovable property susceptible of mortgage situated within the Contract
Area. This mortgage is given to secure the complete and timely
performance of and payment by each Non-operator of all obligations and
indebtedness of every kind and nature, whether now owed by such
Non-operator or hereafter arising, pursuant to this Agreement. To the
extent susceptible under applicable law, this mortgage and the security
interests granted in favor of the Operator herein shall secure the
payment of all costs and other expenses properly charged to such Party,
together with (A) interest on such indebtedness, costs, and other
expenses at the rate set forth in Exhibit "C" attached hereto (the
"Accounting Procedure") or the maximum rate allowed by law, whichever is
the lesser, (B) reasonable attorneys' fees, (C) court costs, and (D)
other directly related collection costs. If any Non-operator does not pay
such costs and other expenses or perform its obligations under this
Agreement when due, the Operator shall have the additional right to
notify the purchaser or purchasers of the defaulting Non-operator's
Hydrocarbon production and collect such costs and other expenses out of
the proceeds from the sale of the defaulting Non-operator's share of
Hydrocarbon production until the amount owed has been paid. The Operator
shall have the right to offset the amount owed against the proceeds from
the sale of such defaulting Non-operator's share of Hydrocarbon
production. Any purchaser of such production shall be entitled to rely on
the Operator's statement concerning the amount of costs and other
expenses owed by the defaulting Non-operator and payment made to the
Operator by any purchaser shall be binding and conclusive as between such
purchaser and such defaulting Non-operator.
JOA -- Exhibit "I"
7
The maximum amount for which the mortgage herein granted by each
Non-operator shall be deemed to secure the obligations and indebtedness
of such Non-operator to the Operator as stipulated herein is hereby fixed
in an amount equal to $25,000,000.00 (the "Limit of the Mortgage of each
Non-operator"). Except as provided in the previous sentence (and then
only to the extent such limitations are required by law), the, entire
amount of obligations and indebtedness of each 'Non-operator to the
Operator is secured hereby without limitation. Notwithstanding the
foregoing Limit of the Mortgage of each Non-operator, the liability of
each Non-operator under this Agreement and the mortgage and security
interest granted hereby shall be limited to (and the Operator shall not
be entitled to enforce the same against such Non-operator for, an amount
exceeding) the o .actual obligations and indebtedness- [including all
interest. charges, costs, attorneys' fees, and other charges provided for
in this Agreement or in the Memorandum of Operating Agreement and
Financing Statement (Louisiana), as such term is defined in Article
8.6.1.4 (Recordation) hereof] outstanding and unpaid and that are
attributable to or charged against the interest of such Non-operator
pursuant to this Agreement.
8.6.1.1 Security Interest in Favor of the Operator.
To secure the complete and timely performance of and payment by
each Non-operator of all obligations and indebtedness of every
kind and nature, whether now owed by such Non-operator or
hereafter arising, pursuant to this Agreement, each Non-operator
hereby grants to the Operator a continuing security interest in
and to all of its rights, titles, interests, claims, general
intangibles, proceeds, and products thereof, whether now existing
or hereafter acquired, in and to (a) all Hydrocarbons produced
from the lands or offshore blocks covered by the Contract Area or
attributable to the Contract Area when produced, (b) all accounts
receivable accruing or arising as a result of the sale of such
Hydrocarbons (including, without limitation, accounts arising
from gas imbalances or from the sale of Hydrocarbons at the
wellhead), (c) all cash or other proceeds from the sale of such
Hydrocarbons once produced, and (d) all Platforms and Development
Facilities, ▇▇▇▇▇, fixtures, other corporeal property, whether
movable or immovable, whether now or hereafter placed on the
lands or offshore blocks covered by the Contract Area or
maintained or used in connection with the ownership, use or
exploitation of the Contract Area, and other surface and
sub-surface equipment of any kind or character located on or
attributable to the Contract Area and the cash or other proceeds
realized from the sale, transfer, disposition or conversion
thereof. The interest of the Non-operators in and to the oil and
gas produced from or attributable to the Contract Area when
extracted and the accounts receivable accruing or arising as the
result of the sale thereof shall be financed at the wellhead of
the well or ▇▇▇▇▇ located on the Contract Area. To the extent
susceptible under applicable law, the security interest granted
by each Non-operator hereunder covers: (A) all substitutions,
replacements, and accessions to the
JOA - Exhibit "I"
2
property of such Non-operator described herein and is intended to
cover all of the rights, titles and interests of such Non-operator
in all movable property now or hereafter located upon or used in
connection with the Contract Area, whether corporeal or
incorporeal; (8) all rights under any gas balancing agreement,
farmout rights, option farmout rights, acreage and cash
contributions, and conversion rights of such Non-operator in
connection with the Contract Area, or the Hydrocarbons produced
from or attributable to the. Contract Area, whether . now owned
and. existing or hereafter acquired or arising, including,
without limitation, all interests of each Non-operator in any
partnership, tax partnership, limited partnership, association,
joint venture, or other entity or enterprise that holds, owns, or
controls any interest in the Contract Area; and (C) all rights,
claims, general intangibles, and proceeds, whether now existing or
hereafter acquired, of each Non-operator in and to the contracts,
agreements, permits, licenses, rights-of-way,- and similar rights
and privileges that relate to or are appurtenant to the Contract
Area, including the following:
1) all of its rights, titles, and interests, whether
now owned and existing or hereafter acquired or
arising, in, to, and under or derived from any
present or future operating, farmout, bidding,
pooling, unitization, and communitization
agreements, assignments, and subleases, whether or
not described in Exhibit "A," to the extent, and
only to the extent, that such agreements,
assignments, and subleases cover or include any of
its rights, titles, and interests, whether now owned
and existing or hereafer acquired or arising, in and
to all or any portion of the Contract Area, and all
units created by any such pooling, unitization, and
communitization agreements and all units formed
under orders, regulations, rules, or other official
acts of any governmental authority having
jurisdiction, to the extent and only to the extent
that such units cover or include all or any portion
of the Contract Area;
2) all of its rights, titles, and interests, whether
now owned and existing or hereafter acquired or
arising, in, to, and under or derived from all
presently existing and future advance payment
agreements, and oil, casinghead gas, and gas sales,
exchange, and processing contracts and agreements,
including, without limitation, those contracts and
agreements that are described on Exhibit "A," to the
extent, and only to the extent, those contracts and
agreements cover or include all or any portion of
the Contract Area; and
3) all of its rights, titles, and interests, whether
now owned and existing or hereafter acquired or
arising, in, to, and under or derived from all
existing and future permits, licenses,
rights-of-way, and similar rights and privileges
that relate to or are appurtenant to the Contract
Area.
8.6.1.2 Mortgage in Favor of the Non-operators.
The Operator hereby grants to each Non-operator a mortgage,
JOA - Exhibit"I"
3
hypotheca, and pledge of and over all of its rights, titles, and
interests in and to (a) the Contract Area; (b) the Hydrocarbons
in, on, under, and that my be produced from the lands within the
Contract Area; and (c) all other immovable property or other
property susceptible of mortgage situated within the Contract
Area.
This mortgage is given to secure the complete and timely
performance of and payment by the Operator of all
obligations and indebtedness of every kind and nature,
whether now owed by the Operator or hereafter arising,
pursuant to this Agreement. To the extent susceptible under
applicable law, this mortgage and the security interests
granted in favor of each Non-operator herein shall secure
the payment of all costs and other expenses properly
charged to the Operator, together with (A) interest on such
indebtedness, costs, and other expenses at the rate set
forth in Exhibit "C" or the maximum rate allowed by law,
whichever is the lesser, (B) reasonable attorneys' fees,
(C) court costs, and (D) other directly related collection
costs. If the Operator does not pay such costs and other
expenses or perform its obligations under this Agreement
when due, the Non-operators shall have the additional right
to notify the purchaser or purchasers of the Operator's
Hydrocarbon production and collect such costs and other
expenses out of the proceeds from the sale of the
Operator's share of Hydrocarbon production until the amount
owed has been paid. The Non-operators shall have the right
to offset the amount owed against the proceeds from the
sale of the Operator's share of Hydrocarbon production. Any
purchaser of such production shall be entitled to rely on
the Non-operators' statement concerning the amount of costs
and other expenses owed by the Operator and payment made to
the Non-operators by any purchaser shall be binding and
conclusive as between such purchaser and the Operator. The
maximum amount for which the mortgage herein granted by the
Operator shall be deemed to secure the obligations and
indebtedness of the Operator to all Non-operators as
stipulated herein is hereby fixed in an amount equal to
$25,000,000.00 in the aggregate (the "Limit of the Mortgage
of the Operator"). Except as provided in the previous
sentence (and then only to the extent such limitations are
required by law), the entire amount of obligations and
indebtedness of the Operator to the Non-operators is
secured hereby without limitation. Notwithstanding the
foregoing Limit of the Mortgage of the Operator, the
liability of the Operator under this Agreement and the
mortgage and security interest granted hereby shall be
limited to (and the Non-operators shall not be entitled to
enforce the same against the Operator for, an amount
exceeding) the actual obligations and indebtedness
[including all interest charges, costs, attorneys' fees,
and other charges provided for in this Agreement or in the
Memorandum of Operating Agreement and Financing Statement
JOA -- Exhibit" I"
4
(Louisiana), as such term is defined in Article 8.6.1.4
hereof] outstanding and unpaid and that are attributable to
or charged against the interest of the Operator pursuant to
this Agreement.
8.6.1.3 Security Interest in Favor of the Non-operators.
To secure the complete and timely performance of and payment by
the Operator of all obligations and indebtedness of every kind and
nature, whether now owed by the Operator or hereafer arising,
pursuant to this Agreement, the Operator hereby grants to each
Non-operator a continuing security interest in and to all of its
rights, titles, interests, claims, general intangibles, proceeds,
and products thereof, whether now existing or hereafter acquired,
in and to (a) all Hydrocarbons produced from the lands or offshore
blocks covered-by the Contract Area or included within-the
Contract Area or attributable to the Contract Area when produced,
(b) all accounts receivable accruing or arising as a result of the
sale of such Hydrocarbons (including, without limitation, accounts
arising from gas imbalances or from the sale of Hydrocarbons at
the wellhead), (c) all cash or other proceeds from the sale of
such Hydrocarbons once produced, and (d) all Platforms and
Development Facilities, ▇▇▇▇▇, fixtures, other corporeal property
whether movable or immovable, whether now or hereafer placed on
the offshore blocks covered by the Contract Area or maintained or
used in connection with the ownership, use or exploitation of the
Contract Area, and other surface and sub-surface equipment of any
kind or character located on or attributable to the Contract Area
and the cash or other proceeds realized from the sale, transfer,
disposition or conversion thereof. The interest of the Operator in
and to the Hydrocarbons produced from or attributable to the
Contract Area when extracted and the accounts receivable accruing
or arising as the result of the sale thereof shall be financed at
the wellhead of the well or ▇▇▇▇▇ located on the Contract Area. To
the extent susceptible under applicable law, the security interest
granted by the Operator hereunder covers: (A) all substitutions,
replacements, and accessions to the property of the Operator
described herein and is intended to cover all of the rights,
titles and interests of the Operator in all movable property now
or hereafer located upon or used in connection with the Contract
Area, whether corporeal or incorporeal; (B) all rights under any
gas balancing agreement, farmout rights, option farmout rights,
acreage and cash contributions, and conversion rights of the
Operator in connection with the Contract Area, the Hydrocarbons
produced from or attributable to the Contract Area, whether now
owned and existing or hereafter acquired or arising, including,
without limitation, all interests of the Operator in any
partnership, tax partnership, limited partnership, association,
joint venture, or other entity or enterprise that holds, owns, or
controls any interest in the Contract Area; and (C) all rights,
claims, general intangibles, and proceeds, whether now existing or
hereafer acquired, of the Operator in and to the contracts,
agreements, permits, licenses, rights-of-way, and similar rights
and privileges that relate to or are appurtenant to the Contract
Area, including the following:
JOA - Exhibit "I"
5
(a) all of its rights, titles, and interests, whether
now owned and existing or hereafter acquired or
arising, in, to, and under or derived from any
present or future operating, farmout, bidding,
pooling, unitization, and communitization
agreements, assignments, and subleases, whether or
not described in Exhibit "A," to the extent, and
only to the extent, that such agreements,
assignments, and subleases cover or include any of
its rights, titles, and interests, whether now owned
and existing or hereafter acquired or arising, in
and to all or any portion of the Contract Area, and
all units created by any such pooling, unitization,
and communitization agreements and all units formed
under orders, regulations, rules, or other official
acts of any governmental authority having
jurisdiction, to the extent and only to the extent
that such units cover or include all or any portion
of the Contract Area;
(b) all of its rights, titles, and interests, whether
now owned and existing or hereafter acquired or
arising, in, to, and under or derived from all
presently existing and future advance payment
agreements, and oil, casinghead gas, and gas sales,
exchange, and Development contracts and agreements,
including, without limitation, those contracts and
agreements that are described on Exhibit "A," to the
extent, and only to the extent, those contracts and
agreements cover or include all or any portion of
the Contract Area; and
(c) all of its rights, titles, and interests, whether
now owned and existing or hereafter acquired or
arising, in, to, and under or derived from all
existing and future permits, licenses,
rights-of-way, and similar rights and privileges
that relate to or are appurtenant to any of the
Contract Area.
8.6.1.4 Recordation.
To provide evidence of, and to further perfect the Parties'
security rights created hereunder, upon request, each Party shall
execute and acknowledge the Memorandum of Operating Agreement and
Financing Statement (Louisiana) attached as Exhibit "G" (the
"Memorandum of Operating Agreement and Financing Statement
(Louisiana)") in multiple counterparts as appropriate. The Parties
authorize the Operator to file the Memorandum of Operating
Agreement and Financing Statement (Louisiana) in the public
records set forth below to serve as notice of the existence of
this Agreement as a burden on the title of the Operator and the
Non-operators to their interests in the Contract Area and for
purposes of satisfying otherwise relevant recording and filing
requirements of applicable law and to attach an original of the
Memorandum of Operating Agreement and Financing Statement
(Louisiana) to a standard UCC-1 in mutually agreeable forms for
fling in the UCC records set forth below to perfect the security
interests created by the Parties in this Agreement. Upon the
acquisition of a leasehold interest in the Contract Area, the
JOA -- Exhibit "I"
6
Parties shall, within five business days following request by one
of the Parties hereto, execute and furnish to the requesting Party
for recordation such a Memorandum of Operating Agreement and
Financing Statement (Louisiana) describing such leasehold
interest. Such Memorandum of Operating Agreement and Financing
Statement (Louisiana) shall be amended from time to time upon
acquisition of additional leasehold interests in the Contract
Area, and the Parties shall, within five business days following
request by one of the Parties hereto, execute and furnish to the
requesting Party for recordation any such amendment.
The Memorandum of Operating Agreement and Financing Statement
(Louisiana) is to be filed or recorded, as the case may be, in (a)
the conveyance records of the parish or parishes. adjacent to the
lands or offshore blocks covered by the Contract Area or contained
within the Contract Area pursuant to La. R.S. 9:2739 et seq., (b)
the mortgage records of such parish or parishes, and (c) the
appropriate Uniform Commercial Code records.
8.6.2 Default.
If any Party does not pay its share of the charges authorized under this
Agreement when due, the Operator may give the defaulting Party notice
that unless payment is made within thirty (30) days from delivery of the
notice, the non-paying Party shall be in default. A Party in default
shall have no further access to the rig, Platform or Development
Facilities, any Confidential Data or other maps, records, data,
interpretations, or other information obtained in connection with
activities or operations hereunder or be allowed to participate in
meetings. A Party in default shall not be entitled to vote or to make an
election until such time as the defaulting Party is no longer in default.
The voting interest of each non-defaulting Party shall be counted in the
proportion its Participating Interest share bears to the total
non-defaulting Participating Interest shares. As to any operation
approved during the time a Party is in default, such defaulting Party
shall be deemed to be a Non-participating Party, except where such
approval is binding on all Parties or Participating Parties, as
applicable. In the event a Party believes that such statement of charges
is incorrect, the Party shall nevertheless pay the amounts due as
provided herein, and the Operator shall attempt to resolve the issue as
soon as practicable, but said attempt shall be made no later than sixty
(60) days after receiving notice from the Party of such disputed charges.
8.6.3 Unpaid Charges.
If any Participating Party fails to pay its share of the costs and other
expenses authorized under this Agreement in accordance with Exhibit "C"
or to otherwise perform any of its obligations under this Agreement when
due, the Party to whom such payment is due, in order to take advantage of
the provisions of this Article 8.6, shall notify the other Party by
certified or registered U.S. Mail that it is in default and has thirty
(30) days from the receipt of such notice to pay. If such payment is not
made timely by the non-paying Party after the issuance of such notice to
pay, the Party requesting such payment may take immediate steps to
diligently pursue collection of the unpaid costs and other expenses owed
JOA - Exhibit "1"
7
by such Participating Party and to exercise the mortgage and security
rights granted by this Agreement. The bringing of a suit and the
obtaining of a judgment by any Party for the secured indebtedness shall
not be deemed an election of remedies or otherwise affect the security
rights granted herein. In. addition to any other remedy afforded by law,
each Party shall have, and is hereby given and vested with, the power and
authority to foreclose the lien, mortgage, pledge, and security interest
established hereby in its favor in the manner provided by law, to
exercise the Power of Sale provided for herein, if applicable, and to
exercise all rights of a secured party under the Uniform Commercial Code
as adopted by the state in which the Contract Area is located or such
other states as such Party may deem appropriate. The Operator shall keep
an accurate account of amounts owed by the nonperforming Party (plus
interest and collection costs) and any amounts collected with respect to
amounts owed by the nonperforming Party. In-the event there become three
or more Parties to this. Agreement, then if any nonperforming Party's
share of costs remains delinquent for a period of sixty (60) days, each
other Participating Party shall, upon the Operator's request, pay the
unpaid amount of costs in the proportion that its Working Interest bears
to the total non-defaulting Working Interests. Each Participating Party
paying its share of the unpaid amounts of a nonperforming Party shall be
subrogated to the Operator's mortgage and security rights to the extent
of the payment made by such Participating Party.
8.6.4 Carved-out Interests.
Any agreements creating any overriding royalty, production payment, net
proceeds interest, net profits interest, carried interest or any other
interest carved out of a Working Interest in the Contract Area shall
specifically make such interests inferior to the rights of the Parties to
this Agreement. If any Party whose Working Interest is so encumbered does
not pay its share of costs and other expenses authorized under this
Agreement, and the proceeds from the sale of its Hydrocarbon production
pursuant to this Article 8.6 are insufficient to pay such costs and
expenses, then subject to the provisions of Article 16.2, the security
rights provided for in this Article 8.6 may be applied against the
carved-out interests with which the defaulting or nonperforming Party's
interest in the Contract Area is burdened. In such event, the rights of
the owner of such carved-out interest shall be subordinated to the
security rights granted by this Article 8.6.
JOA - Exhibit "I"
8