DEVELOPMENT AGREEMENT INTRODUCTION
Exhibit 10.8
Execution
Version
INTRODUCTION
THIS DEVELOPMENT AGREEMENT (this “Development Agreement”) by and between ENERGY
CORPORATION OF AMERICA, a West Virginia corporation, with offices at ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇ (“Assignor”), and The Bank of New York Mellon
Trust Company, N.A., a national banking association organized under the laws of the State of New
York, with offices at ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇, as trustee (the
“Trustee”), acting not in its individual capacity but solely as trustee of the ECA
Marcellus Trust I, a statutory trust formed under the laws of the State of Delaware (the
“Trust”) under that certain Amended and Restated Trust Agreement dated as of July 7, 2010
(as the same may be amended from time to time, the “Trust Agreement”) is delivered to be
effective as of 7:00 a.m., Eastern Time, July 7 2010 (the “Effective Time”). All
capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in
Article I below.
WHEREAS, Assignor and Eastern Marketing Corporation, a wholly-owned subsidiary of Assignor
(“Eastern Marketing Corporation”) have entered into that certain Term Overriding Royalty
Interest Conveyance (PUD) dated effective as of July 7, 2010 (“Term Conveyance”). Assignor
and the Trustee have entered into that certain Perpetual Overriding Royalty Interest Conveyance
(PUD) dated effective as of July 7, 2010 (“Perpetual Conveyance” and together with the Term
Conveyance collectively the “Conveyances”). Eastern Marketing Corporation has assigned the
Term Conveyance to the Trustee; and
WHEREAS, in connection with the Conveyances, Assignor has agreed to undertake certain
obligations during the Term with respect to the Subject Interests and the Development ▇▇▇▇▇.
NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained and
for other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intended to be legally bound hereby, it is agreed as follows:
ARTICLE I
DEFINITIONS
DEFINITIONS
This Article I defines certain capitalized words, terms, and phrases used in this
Development Agreement. Certain other capitalized words, terms, and phrases used in this
Development Agreement are defined elsewhere in this Development Agreement.
“Additional Lease” is defined in each of the Conveyances, as applicable.
“Adjusted Development Well Amount” means the amount, for each Development Well drilled
or caused to be drilled by Assignor during the Term, equal to the result of:
(a) one (1), multiplied by
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(b) the Working Interest (stated as a decimal fraction or 1.00, where Assignor holds a 100%
Working Interest) that Assignor is required to bear in such Development Well, multiplied by
(c) the Adjusted Horizontal Well Factor.
For example, if Assignor holds an eighty-five percent (85%) Working Interest in a Development
Well and the Adjusted Horizontal Well Factor is 1, the computation would be:
1 x .85 x 1 = .85
therefore, such Development Well would have a .85 Adjusted Development Well Amount.
If Assignor holds an eighty-five percent (85%) Working Interest in a Development Well and the
Adjusted Horizontal Well Factor is 0.8, then the computation would be:
1 x .85 x 0.8 = .68
in which case such Development Well would have a .68 Adjusted Development Well Amount.
“Adjusted Horizontal Well Factor” means the amount, with respect to each Development
Well drilled or caused to be drilled horizontally to the Target Formation by Assignor during the
Term, obtained by dividing its Horizontal Lateral Distance by 2,500 feet.
For examples, if the Horizontal Lateral Distance of a Development Well is 2,000 feet, the
computation would be:
2,000 / 2,500 = 0.8
therefore, such Development Well would have a 0.8 Adjusted Horizontal Well Factor.
If the Horizontal Lateral Distance of a Development Well is 3,000 feet, then the computation
would be:
3,000 / 2,500 = 1.2
in which case such Development Well would have a 1.2 Adjusted Horizontal Well Factor.
With respect to any Development Well, the maximum Horizontal Lateral Distance taken into
account for purposes of determining the Adjusted Horizontal Well Factor for such Development Well
shall be 3,500 feet. In the event that Assignor commences the drilling of a Development Well, but
fails to drill beyond the midpoint of the curve, such Development Well will have an Adjusted
Horizontal Well Factor of zero (0).
“Affiliate” means, for any specified Person, another Person that controls, is
controlled by, or is under common control with, the specified Person. “Control,” in the
preceding sentence, refers to the possession by one Person, directly or indirectly, of the right or
power to direct or cause the direction of the management and policies of another Person, whether
through the ownership of voting securities, by contract or otherwise.
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“AMI Area” means that area depicted on the map set forth on Exhibit B as the
AMI Area.
“Assignor” is defined in the Introduction to this Development Agreement and also
includes all permitted successors and assigns of Assignor.
“Assignor’s Net Share of Gas” means the share of Subject Gas from each Development
Well that is attributable to Assignor’s Net Revenue Interest in that Development Well.
“Conveyances” is defined in the introductory paragraph of this Development Agreement.
“Development Well” means any Gas well spudded after March 23, 2010 that is located on
the Subject Development Lands.
“Development Agreement” is defined in the introductory paragraph of this Development
Agreement.
“Drilling Support Lien” is defined in Section 2.08(b).
“Drilling Obligation Completion Date” means the date that is the earlier of the date
that the Total Drilling Target has been reached or March 31, 2013, as such date may be extended
pursuant to Section 2.01(c); provided, however, that Assignor has delivered to the Trustee
(a) a certificate executed by the President or any Vice President of Assignor certifying that
Assignor’s drilling obligation was satisfied as of such date and (b) such other documentation as
the Trustee may reasonably request to establish satisfaction of Assignor’s drilling obligation
hereunder.
“Eastern Marketing Corporation” is defined in the introductory paragraph of this
Development Agreement.
“Effective Time” is defined in the introductory paragraph of this Development
Agreement.
“Farmout Agreements” means any farmout agreement, participation agreement, exploration
agreement, development agreement or any similar agreement.
“Gas” means natural gas and all other gaseous hydrocarbons, excluding condensate,
butane, and other liquid and liquefiable components that are actually removed from the Gas stream
by separation, processing, or other means. Any oil and gas lease or other similar instrument that
covers Gas shall be considered a “Gas lease” hereunder, even if it also covers other substances.
“Horizontal Lateral Distance” means the distance of a horizontal well measured from
the midpoint of the curve to the end of the lateral.
“Net Revenue Interest” means the interest, stated as a decimal fraction, in Subject
Gas production from a Development Well that Assignor is entitled to take with respect to Assignor’s
Subject Interest in that Development Well and the associated Subject Development Lands, subject
only to the Permitted Production Burdens (treated in each case as a reduction in interest rather
than as a cost).
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“Party,” when capitalized, refers to Assignor or Trustee. “Parties,” when
capitalized, refers to Assignor and Trustee.
“Permitted Production Burdens” means (a) all Production Burdens that affected the
Subject Interests when they were acquired by Assignor and (b) all Production Burdens that were
created by Assignor; in each case, provided that the total Permitted Production Burdens for any
Development Well shall not exceed twelve and one half percent (12.5%) (proportionately reduced to
Assignor’s Working Interest in such Development Well).
“Perpetual Conveyance” is defined in the introductory paragraph of this Development
Agreement.
“Person” means any natural person, corporation, partnership, trust, estate, or other
entity, organization, or association.
“Prior Reversionary Interest” means any contract, agreement, Farmout Agreement, lease,
deed, conveyance or operating agreement that exists as of the Effective Time or that burdens the
Subject Interests at the time such Subject Interests are acquired, that by the terms thereof
requires a Person to convey a part of the Subject Interest to another Person or to permanently
cease production of any Development Well including, any operating agreements, oil and gas leases,
coal leases, and other similar agreements or instruments affecting the Subject Interests.
“Production Burdens” means, with respect to any Subject Development Lands, Subject
Interests, or Subject Gas, all royalty interests, overriding royalty interests, production
payments, net profits interests, Prior Reversionary Interests and other similar interests that
constitute a burden on, are measured by, or are payable out of the production of Gas or the
proceeds realized from the sale or other disposition thereof.
“Reasonably Prudent Operator Standard” means the standard of conduct of a reasonably
prudent oil and gas operator in the AMI Area under the same or similar circumstances, acting with
respect to its own property and disregarding the existence of the Royalty Interest as a burden on
such property.
“Royalty Interest” means, collectively, the Royalty Interest created under each of the
Conveyances.
“Subject Development Lands” means the lands subject to or covered by the oil and gas
leases described in Exhibit A to each of the Conveyances and included in the AMI Area,
insofar and only insofar as they cover the Target Formation, subject to the exceptions, exclusions
and reservations (including depth limitations) set forth on such Exhibit A, as such exhibit
may be modified pursuant to Section 2.06, and/or other reservations and exceptions
contained in the Conveyances.
“Subject Gas” means Gas in and under, and that may be produced, saved, and sold from a
Development Well, insofar and only insofar as such Gas is produced from the Target Formation,
subject to the following:
(a) “Subject Gas” excludes Gas that is:
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(i) lost in the production, gathering, or marketing of Gas;
(ii) used (A) in conformity with ordinary and prudent operations on the Subject Development
Lands, including drilling and production operations with respect to such Development Well or (B) in
connection with plant operations (whether on or off the Subject Development Lands) for processing
or compressing the Subject Gas;
(iii) taken by a Third Person to recover costs, or some multiple of costs, paid or incurred by
that Third Person under any operating agreement, unit agreement, or other agreement in connection
with nonconsent operations conducted (or participated in) by that Third Person;
(iv) retained by a Third Person for gathering, transportation, processing or marketing
services related to the Subject Gas in lieu of or in addition to cash payment for such services, to
the extent such agreement is permitted under the Conveyances; and
(v) in excess of the percentage attributable to Assignor’s Net Share of Gas taken by Assignor
to recover costs, or some multiple of costs, paid or incurred by Assignor under any operating
agreement, unit agreement, or other agreement in connection with nonconsent operations conducted
(or participated in) by Assignor.
(b) “Subject Gas” includes Gas, not otherwise excluded above, that is sold or exchanged for
other Gas, or otherwise disposed of for valuable consideration.
“Subject Interests” means Assignor’s undivided interests as of the date hereof in the
Subject Development Lands, whether as lessee under Gas leases, as an owner of the Subject Gas (or
the right to extract such Gas), or otherwise, by virtue of which undivided interests Assignor has
the right to conduct exploration, drilling, development, and Gas production operations on the
Subject Development Lands, or to cause such operations to be conducted, or to participate in such
operations by paying and bearing all or any part of the costs, risks, and liabilities of such
operations, to drill, test, complete, equip, operate, and produce Development ▇▇▇▇▇ to exploit the
Gas. “Subject Interests” includes all extensions of, and all renewals of Gas leases covering, the
Subject Development Lands (or any portion thereof) obtained by Assignor, or any Affiliate thereof,
within six (6) months after the expiration or termination of any such Gas lease. “Subject
Interests” do not include (a) Assignor’s rights to substances other than Gas; (b) Assignor’s rights
to Gas under contracts for the purchase, sale, transportation, storage, processing, or other
handling or disposition of Gas; (c) Assignor’s interests in, or rights to Gas with respect to,
pipelines, gathering systems, storage facilities, processing facilities, or other equipment or
facilities, other than the Development ▇▇▇▇▇; or (d) subject to the offset provision as set forth
in Section 1.03(c) of the Perpetual Conveyance or Section 1.04(c) of the Term Conveyance, any
additional, or enlarged interests in the Development ▇▇▇▇▇, Subject Development Lands or Subject
Gas, beyond those reflected in Exhibit A to each of the Conveyances or any Additional
Lease, extensions and renewals covered by the preceding sentence. “Subject Interests” may be owned
or claimed by Assignor by virtue of grants or reservations in deeds, Gas leases, or other
instruments, or by virtue of operating agreements, pooling or unitization agreements or orders, or
other kinds of instruments, agreements, or documents, legal or equitable, recorded or unrecorded.
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The Subject Interests are subject to the Permitted Encumbrances (as defined in each of the
Conveyances).
“Target Formation” means what is generally referred to as the Marcellus Shale
formation and for purposes of this Development Agreement defined as that formation located from the
bottom of the ▇▇▇▇▇ Formation (as seen by ECA Kemsod #1 Well, API number 37-059-25209), at a depth
of 7,881 feet to the top of the Huntersville Chert Formation (as seen by the ECA Kemsod #1 Well,
API number 37-059-25209), at a depth of 8,204 feet.
“Term” means that period from the Effective Time to the Drilling Obligation Completion
Date.
“Term Conveyance” is defined in the introductory paragraph of this Development
Agreement.
“Third Person” means a Person other than Assignor or Trustee.
“Total Drilling Target” means that number of Development ▇▇▇▇▇ where the cumulative
total of all the Adjusted Development Well Amounts for such Development ▇▇▇▇▇ drilled by or caused
to be drilled by Assignor equals at least 52.
“Trust” is defined in the Introduction to this Development Agreement.
“Trust Agreement” is defined in the Introduction to this Development Agreement.
“Trustee” is defined in the Introduction to this Development Agreement and also
includes all successor and substitute trustees under the Trust Agreement.
“Working Interest” means with respect to any Development Well, the interest, stated as
a decimal fraction, in and to such Development Well that is burdened with the obligation to bear
and pay costs and expenses of maintenance, development and operations on or in connection with such
Development Well.
ARTICLE II
DEVELOPMENT OF THE SUBJECT DEVELOPMENT LANDS
DEVELOPMENT OF THE SUBJECT DEVELOPMENT LANDS
Section 2.01 Drilling Program.
(a) Obligation to Drill. During the Term, Assignor shall, subject to the terms of this
Article II, drill, or cause to be drilled, at Assignor’s sole cost, such number of
Development ▇▇▇▇▇ that is necessary to achieve the Total Drilling Target prior to the Drilling
Obligation Completion Date.
(b) Meaning of “Drill.” For purposes of this Section 2.01, to “drill” means to spud a
Development Well, and thereafter to drill that Development Well diligently to the Target Formation
in accordance with the Reasonably Prudent Operator Standard.
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(c) Extension of “Drilling Obligation Completion Date.” If Assignor has not reached the Total
Drilling Target by March 31, 2013, the Drilling Obligation Completion Date shall be automatically
extended to March 31, 2014.
Section 2.02 Obligation to Complete and Equip. Assignor shall, at Assignor’s sole cost attempt to
complete each Development Well in the Target Formation that reasonably appears to Assignor, acting
in accordance with the Reasonably Prudent Operator Standard, to be capable of producing Gas in
quantities sufficient to pay completion, equipping, and operating costs. Assignor shall, at
Assignor’s sole cost, equip for production each Development Well that is successfully completed
and, when it is equipped and connected to a gathering line or pipeline, shall commence production.
Assignor shall plug and abandon, at Assignor’s sole cost, all Development ▇▇▇▇▇ that are
unsuccessful.
Section 2.03 Termination. After the drilling obligations in Section 2.01(a) have been
satisfied in addition to all other obligations under this Development Agreement, this Development
Agreement shall terminate and shall forthwith become null and void as of such date.
Section 2.04 Costs and Expenses of Development ▇▇▇▇▇. All costs associated with or paid or
incurred in connection with the drilling, testing, completing, and equipping for production,
operating and/or plugging and abandoning of the Development ▇▇▇▇▇ shall be borne solely by
Assignor, but Assignor may use any Subject Gas in such operations without any duty to account to
Trustee or the Trust under any of the Royalty Interests or Conveyances.
Section 2.05 Operations of Development ▇▇▇▇▇. Assignor shall operate at least 90% of the
Development ▇▇▇▇▇ during the period from the Effective Time to the date that is at the end of the
fourth full calendar quarter following the Drilling Obligation Completion Date.
Section 2.06 Additional Leases. To the extent that there are any Additional Leases prior to
Assignor’s satisfaction of Assignor’s drilling requirements in Section 2.01, such
Additional Lease, without any further action hereunder, shall become part of the Subject Interests
and Subject Development Lands hereunder at such time.
Section 2.07 Title Due Diligence. Prior to commencing the drilling of any Development Well,
Assignor will perform such title due diligence and such title curative work as would be performed
by an oil and gas operator drilling a well and acting in accordance with the Reasonably Prudent
Operator Standard.
Section 2.08 ▇▇▇▇▇.
(a) Prior to the Drilling Obligation Completion Date, Assignor shall not, and shall cause its
Affiliates not to, nor permit any other Person within its control to, drill and complete any well
in the Target Formation of the AMI Area that will not be a Development Well hereunder.
(b) Assignor hereby covenants and agrees to enter into a Mortgage, Assignment, Security
Agreement, Fixture Filing and Financing Statement (the “Drilling Support Lien”) in order
that Assignor shall have granted a lien and security interest creating a valid,
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perfected first
priority lien and security interest in and to any of the undeveloped portions of the Subject
Development Lands or any Additional Lease located in the AMI Area designated the “▇▇▇▇▇▇ County
AMI” on Exhibit B solely in order to secure the performance of Assignor’s development obligations
under Section 2.01 above. Notwithstanding the preceding, for purposes of the Drilling
Support Lien only, the maximum amount recoverable by virtue of the mortgage upon a failure by
Assignor to satisfy its obligations under Section 2.01 shall be $91,000,000, and such
amount shall automatically be reduced by an amount that is equal to the product of $1,750,000
multiplied by the cumulative total of all Adjusted Development Well Amounts for all Development
▇▇▇▇▇ drilled under this Development Agreement as Assignor completes its development obligations
under Section 2.01. In addition, upon Assignor’s request and at Assignor’s expense, the
lien and security interest created by the Drilling Support Lien shall be released as to each
Development Well and the drilling unit associated therewith as the same is completed in accordance
with this Development Agreement.
(c) Subsequent to the satisfaction of Assignor’s drilling requirements in Section
2.01, neither Assignor nor any of its Affiliates shall drill and complete any well that will
have a perforated segment that will be within 500 feet of any perforated interval of any
Development Well or such other ▇▇▇▇▇ conveyed to the Trustee by Assignor as of the date hereof
which produces oil or gas from the Target Formation.
(d) If Assignor fails to achieve the Total Drilling Target by March 31, 2014, Assignor shall
be in default of its obligations under this Agreement and Trustee shall be entitled to pursue, in
its sole discretion, any and all remedies available pursuant to Article III of the Drilling Support
Lien.
ARTICLE III
OTHER PROVISIONS
OTHER PROVISIONS
Section 3.01 Successors and Assigns. Subject to the limitation and restrictions on the assignment
or delegation by the Parties of their rights and interests under this Development Agreement, this
Development Agreement binds and inures to the benefit of Assignor, Trustee, the Trust and their
respective successors, assigns, and legal representatives.
Section 3.02 Governing Law. THIS DEVELOPMENT AGREEMENT SHALL BE CONSTRUED UNDER AND GOVERNED BY
THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW
PRINCIPLES THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.
Section 3.03 Construction of Development Agreement. In construing this Development Agreement, the
following principles shall be followed:
(a) no consideration shall be given to the captions of the articles, sections, subsections, or
clauses, which are inserted for convenience in locating the provisions of this Development
Agreement and not as an aid in its construction;
(b) no consideration shall be given to the fact or presumption that one Party had a greater or
lesser hand in drafting this Development Agreement;
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(c) the word “includes” and its syntactical variants mean “includes, but is not limited to”
and corresponding syntactical variant expressions;
(d) a defined term has its defined meaning throughout this Development Agreement, regardless
of whether it appears before or after the place in this Development Agreement where it is defined;
(e) the plural shall be deemed to include the singular, and vice versa; and
(f) each exhibit, attachment, and schedule to this Development Agreement is a part of this
Development Agreement, but if there is any conflict or inconsistency between the main body of this
Development Agreement and any exhibit, attachment, or schedule, the provisions of the main body of
this Development Agreement shall prevail.
Section 3.04 No Waiver. Failure of either Party to require performance of any provision of this
Development Agreement shall not affect either Party’s right to require full performance thereof at
any time thereafter, and the waiver by either Party of a breach of any provision hereof shall not
constitute a waiver of a similar breach in the future or of any other breach or nullify the
effectiveness of such provision.
Section 3.05 Relationship of Parties. This Development Agreement does not create a partnership,
mining partnership, joint venture, or relationship of trust or agency between the Parties.
Section 3.06 Further Assurances. Each Party shall execute, acknowledge, and deliver to the other
Party all additional instruments and other documents reasonably required to evidence or effect any
transaction contemplated by this Development Agreement.
Section 3.07 The 7:00 A.M. Convention. Except as otherwise provided in this Development Agreement, each calendar day, month, quarter,
and year shall be deemed to begin at 7:00 a.m. Eastern Time on the stated day or on the first day
of the stated month, quarter, or year, and to end at 7:00 a.m. Eastern Time on the next day or on
first day of the next month, quarter, or year, respectively.
Section 3.08 Counterpart Execution. This Development Agreement may be executed in any number of
counterparts with the same effect as if all parties to this Development Agreement had signed the
same document. All counterparts shall be construed together and shall constitute one and the same
instrument.
Section 3.09 Limitation of Liability. It is expressly understood and agreed by the parties hereto
that (a) this Development Agreement is executed and delivered by the Trustee not individually or
personally, but solely as Trustee in the exercise of the powers and authority conferred and vested
in it and (b) under no circumstances shall the Trustee be liable for the breach or failure of any
obligation, representation, warranty or covenant made or undertaken by the Trust under this
Development Agreement. It is further expressly understood and agreed by the parties hereto that
neither the Trust nor the Trustee, in its capacity as Trustee or individually, shall have any
authority over, or responsibility or liability for, the drilling of the Development ▇▇▇▇▇ or any of
the other business or commercial activities contemplated by this Development
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Agreement, all of
which are hereby agreed to be the sole responsibility of Assignor, and Assignor hereby agrees to
and hereby does indemnify and agree to hold harmless each of the Trust and the Trustee, in its
capacity as Trustee and individually, from and against any and all damages, liabilities, expenses,
fines, judgments, amounts paid in settlement, reasonable attorneys fees and costs of investigation,
and other expenses reasonably incurred by any of them in connection with or as a result of any of
the business or commercial activities contemplated by this Development Agreement or any other
matter arising out of this Development Agreement or any such matter. Assignor further agrees to
advance any such attorneys fees, costs of investigation and other expenses described above as they
are incurred.
Section 3.10 Severability. If any provision of this Development Agreement or the application
thereof to any party to this Development Agreement or circumstance shall be held invalid or
unenforceable to any extent, the remainder of this Development Agreement and the application of
such provision to the other party to this Development Agreement or circumstances shall not be
affected thereby and shall be enforced to the greatest extent permitted by law.
[Remainder of page intentionally left blank.]
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IN WITNESS WHEREOF, each Party has caused this Development Agreement to be executed in its
name and behalf and delivered on the date or dates stated in the acknowledgment certificates
appended to this Development Agreement, to be effective as of the Effective Time.
| ENERGY CORPORATION OF AMERICA |
||||
| By: | /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ | |||
| Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ | ||||
| Title: Senior Vice President | ||||
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| ECA MARCELLUS TRUST I |
||||
| By: The Bank of New York Mellon Trust Company, N.A. | ||||
| By: | /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ | |||
| Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ | ||||
| Title: Authorized Signatory | ||||
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