DRILLING AND OPERATING AGREEMENT Indigo Dannic 2006 5-Well Number 1
Indigo
Dannic 2006 5-Well Number 1
THIS
AGREEMENT made and entered into on July ___, 2006 between Dannic Energy Corp.,
a
Pennsylvania Corporation with offices at ▇▇▇ ▇▇▇▇ ▇▇▇ ▇▇., ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
(the "Operator"), and the Developers listed in Exhibit "A" (individually
referred to as a "Developer" and collectively as the "Developers") with HUB
Energy, LLC as its Advisor.
W
I T N E
S S E T H:
WHEREAS,
Operator, by virtue of certain oil and gas leases, has certain rights to develop
oil and gas ▇▇▇▇▇ on the Drilling Sites (“Drilling Sites”) in areas identified
in Exhibit "B" (the "Drilling Areas"); and
WHEREAS,
the parties hereto have reached an agreement to drill and develop the Drilling
Sites as provided herein;
NOW,
THEREFORE, in consideration of the mutual covenants and agreements set forth
herein and intending to be legally bound hereby, the parties agree as
follows:
1.
Drilling and Operation of ▇▇▇▇▇; Assignment of ▇▇▇▇▇; Operator's Reservation
of
Overriding Royalty; Representations; Out-side Activities.
(a)
The
Operator, as Developer's independent contractor, a-grees to drill, complete
(or
plug and abandon) and operate five (5) ▇▇▇▇▇ in the Drilling Areas in accordance
with the terms and conditions of this Agreement.
(b)
Upon
completion of each well and payment in full by the Developers in accordance
with
Exhibit "C", Operator shall assign to the Developers the respective interest
shown in Exhibit "D" in the ▇▇▇▇▇ (“▇▇▇▇▇”) located on the Drilling Sites ,
which assignment shall be limited to the depth and area described in Exhibit
"A". Each well shall be individually identified on Exhibit “D”.
(c)
Various parties shall receive an overriding royalty equal to one-sixteenth
(1/16)
of all
gross revenues from all gas produced, saved and marketed from any well or ▇▇▇▇▇
drilled on the Drilling Sites, including any revenues received from any
compressor and/or pipeline facilities or portions thereof that are a part of
the
facilities for such ▇▇▇▇▇ or from which outside revenues are received. The
reservation of such royalty shall be absolute and shall not be affected by
(i)
Operator's resignation as Operator hereunder, (ii) the termination of this
Agreement, (iii) the performance or nonperformance by Operator of its duties
and
obligations under this Agreement, or (iv) the delegation by Operator of its
duties hereunder. This overriding royalty interest is in addition to the
customary 12.5% royalty interest due to the landowner.
(d)
It is
understood and agreed that the assignments described above and the oil and
gas
development activities contemplated by this Agreement relate only to the
Drilling Sites described in Exhibit "B" as well as those determined in
accordance with 1(f) and ▇▇▇▇▇ described in Exhibit “D”. Nothing contained in
this Agreement shall be interpreted to restrict in any manner the right of
each
of the parties hereto to conduct without participation of any other party hereto
any additional activities relating to exploration, development, drilling,
production or delivery of oil and gas on lands adjacent to or in the immediate
vicinity of the aforesaid Drilling Sites or elsewhere.
(e)
Operator represents and warrants to Developer that: (i) attached hereto as
Exhibit "E" will be true and correct copies of the Leases; (ii) to the best
knowledge of Operator, Operator is not currently in default with respect to
the
performance of any of the terms and conditions of the leases and presently
knows
no basis for claiming any such default by it; (iii) no consent or approval
of
any third party is currently required with respect to the assignment of the
Drilling Sites to Developer in the manner contemplated by this Agreement; and
(iv) each assignment of the Drilling Sites will effectively assign to the
Developer such right, title and interest of the Operator in and to the Drilling
Sites which such assignment purports to assign. Operator shall arrange for
a
title examination to be conducted on the Drilling Sites in order to obtain
appropriate abstracts, opinions, certificates and other information necessary
to
determine the adequacy of title to the applicable Lease and the fee title of
the
lessor to the property covered by the Lease. The results of such title
examination will be made available to any Developer upon request.
(f)
If
Operator determines, with respect to any Drilling Site, before operations
commence with respect to such Drilling Site, based upon available production
information for any other ▇▇▇▇▇ which may have been recently drilled in the
immediate area of such Drilling Site, or upon discovery of title defects, or
upon such other evidence as Operator may obtain, that it would not be in the
best interest of the parties hereto to drill a well on such Drilling Site,
then
Operator shall notify the Developers of such determination and such Drilling
Site shall thereupon be withdrawn from this Agreement. Operator shall attempt
to
acquire an additional drilling site(s) for the purpose of providing the
necessary number of drilling sites required to drill the number of ▇▇▇▇▇
specified in Section 1(a), but Operator shall notify, by certified mail,
Developers of each replacement drilling site. If a majority in interest of
the
Developers do not reject it in writing within seven (7) days after notification
from Operator, the new drilling site shall become subject to this Agreement.
If
rejected, Operator shall propose another drilling site in place of the rejected
drilling site.
2.
Interest of Parties
Exhibit
"D" lists the respective interests of Operator and each Developer in the net
revenues (after payment of royalties, overriding royalties, production payments,
share of development and operating ex-penses) and ownership of the ▇▇▇▇▇,
equipment and production with respect to the ▇▇▇▇▇ to be drilled hereunder,
except as otherwise provided in Section 20.
3.
Drilling of ▇▇▇▇▇
(a)
Except as otherwise provided in Exhibit "C", the price for each well shall
include all tangible and intangible costs which may be incurred in drilling
and
completing such well, including without limi-tation, the costs of site
preparation and restoration, permits and bonds, roadways, surface damages,
power
at the site, water, Operator's overhead and profit, rights-of-way, drilling
rigs, collection tanks and other equipment necessary or appropriate to dispose
of brine, equipment and material, costs of title examination, access rights,
logging, cementing, perforating, fracturing, casing, meter (other than utility
purchase meters), separator and geological and engineering services but shall
not cover the costs and expenses of:
2
(i)
services, equipment and any facilities necessary or appropriate for the
production and sale or disposal of oil and/or natural gas liquids;
and
(ii)
drilling through, casing and cementing a void in a coal
mine
or seam with respect to any well;
Any
such
extra costs shall be paid by the parties, in proportion to their respective
interests in the well with respect to which such expenses were incurred, based
on Exhibit "D" or, if not set forth therein, at Operator's invoice costs for
expenses incurred or third party services performed and materials furnished,
plus ten percent (10%), which ten percent shall be in lieu of any charge by
Operator for its profit or overhead,
(b)
Operator shall determine the timing of and the order of the drilling of the
▇▇▇▇▇. Any well drilled hereunder shall be drilled to a depth sufficient to
thoroughly test the ________ sand horizons, or to _________ feet, except in
the
case that the operator deems it prudent to drill to a depth of _______ feet,
or
sufficient depth, to test the ▇▇▇▇▇▇ Formation. The Operator shall have the
right to direct stoppage of work at any time prior to reaching the depth
specified herein whenever a natural open flow of gas occurs which is in a
sufficient quantity that continued operations are hazardous in the sole opinion
of Operator, or whenever the natural open flow is in excess of 5OO Mcf/day.
(c)
Operator shall have the exclusive right to pay for, own, use and
assign, any
pipeline and dehydration
facilities in connection with the ▇▇▇▇▇ being drilled hereunder; provided,
however, that sufficient capacity will be maintained for the delivery of gas
under this Agreement.
(d)
Operator shall determine whether or not to run the prod-uction casing for an
attempted completion or to plug and abandon the ▇▇▇▇▇ drilled hereunder, which
determination shall be final and binding on all parties after the well has
been
drilled to target depth. If any Developer shall request Operator to employ
any
procedures which cause delay or additional cost, then such Developer shall
pay
for all such additional costs.
(e)
If
Operator elects not to run production casing for an attempted completion, the
well shall be considered to be a dry hole under this Agreement. Operator will
plug and abandon the well in the manner as prescribed by regulations of the
appropriate governmental agencies and regulatory bodies. Operator shall furnish
a plugging report showing the well
has
been plugged. The charge for plugging and abandoning the well shall be paid
by
the Developers, and Operator shall refund the portion of the price of such
well
to the Developers set forth in Exhibit "F".
(f)
If
election is made by Operator to run production casing, Operator shall so advise
the Developers as soon as practical and the same shall be run and cemented
according to acceptable field practices for the area, and shall be perforated
at
points selected by Operator, and the fracturing treatment shall be performed
in
accordance with customary practices in the area.
(g)
This
Agreement shall not be construed as a guarantee as to the commercial
productivity of the ▇▇▇▇▇ covered by this Agreement. Operator shall not be
liable for or act as a guarantor of services or materials provided by third
parties or against any geological faults, geological accidents, or other
geological circumstances, which may appear during or subsequent to the
completion of any well hereunder which affects the commercial productivity
of
such well. Any costs and expenses of remedial work shall be considered operating
costs under Section 8.
3
4.
Operator Responsibilities
| (a) |
The
Operator shall conduct and direct and have full control of all operations
as permitted and required by this Agreement. Operator shall, in addition
to its other obligations hereunder:
|
| (i) |
determine
at all times when any well shall be completed, plugged and abandoned
or
remedial work performed and which sands to complete (whether upon
completion of drilling operations or
thereafter);
|
| (ii) |
manage
and conduct all field operations in connection with drilling, testing,
completing, recompleting, equipping, operating and producing of the
▇▇▇▇▇;
|
| (iii) |
maintain
all ▇▇▇▇▇, equipment, pipelines and facilities in good working order
during the useful life thereof; and
|
| (iv) |
perform
the necessary administrative and accounting
functions.
|
| (b) |
The
decision of Operator shall be final and conclusive, and shall be binding
upon all parties. Operator shall conduct all such operations in a good
and
workmanlike manner, but it shall have no liabilities as Operator to
any
party for losses sustained, or liabilities incurred, except such as
may
result from Operator’s gross negligence or willful
misconduct.
|
| 5. |
Employees
|
The
number of employees and their selection, hours of employment and compensation
shall be determined by Operator. All employees shall be employees of the
Operator.
| 6. |
Sale
of Production
|
| (a) |
Subject
to Sections 10 and 20 hereto, each Developer hereby reserves the exclusive
right to take in kind or separately dispose of his proportionate share
of
all oil and gas produced from the ▇▇▇▇▇ to be drilled hereunder, exclusive
of production which may be used in development and producing operations,
preparing and treating oil and gas for marketing purposes, production
unavoidably lost and production used to fulfill any free gas obligations
under the terms of the applicable lease.
|
| (i) |
If
any Developer exercises the right to take his share of oil and gas
in
kind, such Developer shall pay or deliver, or cause to be paid or
delivered to the Operator, all royalties and overriding royalties based
upon the highest price then being paid by industrial, utility, pipeline
or
other purchasers for gas of a like kind , at the point of delivery
to
either the purchaser or pipeline transporting facilities. Such price
shall
include all appropriate compression and transportation fees as the
case
may be;
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| (ii) |
In
the event Developer elects to separately dispose of his share of oil
and
gas, all royalties and overriding royalties shall be based on the contract
price includiong brokerage fees, if any, and transportation and
compression fees as long as the gas is in Operator’s possession prior to
the delivery point.
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4
| (b) |
Any
extra expenditure incurred in taking in kind or separate disposition
by
any Developer of its proportionate share of the production shall be
borne
by the Developer, and such Developer shall reimburse Operator for any
loss
of income that Operator incurs by reason of such separate
disposition.
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| (c) |
If
any Developer fails or neglects to make the arrangements necessary
to take
in kind or separately dispose of his proportionate share of oil and
gas
produced from any well covered by this Agreement within thirty (30)
days
following completion of such well, the Operator shall have the right
but
not the obligation, to sell such oil and gas to others at any time
and
from time to time, for the account of the Developer at the best price
reasonably obtainable under the circumstances. Any such purchase or
sale
by the Operator shall be subject to the right of the Developer to exercise
its right to take in kind or to separately dispose of its share of
oil and
gas not previously delivered to any purchaser or committed to any
purchaser. Any such purchase or sale by Operator of any Developer’s share
of oil and gas shall be only for such reasonable periods of time as
are
consistent with the minimum needs of the industry under the particular
circumstances, but in no event for a period in excess of one and one-half
years.
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| (d) |
With
respect to operations hereunder, Developers agree to release Operator
from
any and all losses, damages, injuries, claims and causes of action
arising
out of, incident to or resulting directly or indirectly from Operator’s
interpretation or application of rules, rulings, regulations or orders
of
the Department of Energy or predecessor or successor agencies to the
extent such interpretation or application was made in good faith. Each
Developer further agrees to reimburse Operator for any amounts applicable
to such Developer’s share of production that Operator may be required to
refund, rebate or pay as a result of any such incorrect interpretation
or
application, together with any interest and penalties
thereon.
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7.
Production Proceeds
(a)
To
facilitate the collection and disbursement of the proceeds from the sale of
oil
and gas from any well covered by this Agreement, each Developer hereby
irrevocably appoints Operator as his exclusive agent to collect any and all
proceeds from the sale of such oil and gas whether such sale is made by the
Developer or the Operator on behalf of the Developer and hereby agrees to name
Operator as such agent in any contract for the separate disposition of such
oil
and gas. Any person or persons making payment to Operator shall be released
from
any and all liability with regard to the proceeds of such sale.
5
(b)
Operator shall make a diligent effort to collect all payments due but shall
have
no liability with regard to any nonpayment of proceeds from the sale of such
oil
and gas.
(c)
All
monies collected by Operator shall be held in trust for the account of all
parties.
(d)
Subject to Sections 10 and 20 hereof, Operator shall disburse, no later than
the
twenty-eighth (28th) day of the month following the month in which proceeds
of
sale are received, the entire proceeds of such sale, less payment of lessor's
royalties and any overriding royalties, production payments, operating expenses
or other charges under Section 8 and delinquent advance payments under Section
9; provided, however, if Operator enters into a take-or-pay contract which
provides a credit to the purchaser for any payments by it for failing to take
delivery, Operator shall have the right, but not the obligation, to deposit
all
or a portion of such payments in escrow, Operator shall have the right to retain
such monies in escrow or disburse them from time to time to such person or
persons as it determines are entitled thereto. If Operator disburses such monies
to any person who is later determined to be not entitled thereto Operator shall
have no liability to Developers or any other persons with respect thereto other
than to use its best efforts to recover such monies for the account of the
person who is lawfully entitled thereto, Ac-cordingly, Developers hereby release
Operator from any and all claims, liabilities and damages related to or arising
out of such payments or disbursements provided that Operator acted in good
faith.
8.
Operating Fees and Costs
(a)
Commencing at the time that a well drilled hereunder begins to produce, Operator
shall be entitled to an operating fee of $300 per month for each well being
operated under this Agreement in lieu of direct charges by Operator for its
services or the use of its equipment for the normal operation and maintenance
of
such ▇▇▇▇▇. Such operating fee shall be subject to annual adjustments as
provided in Subsection (b) below and shall cover all normal, regularly recurring
operating expenses for the production and sale of oil and/or natural gas,
including without limi-tation, well tender, routine maintenance and minor
adjustments, reading meters, recording production, maintaining appropriate
books
and records, preparing reports to the Developers, and collecting and disbursing
revenues, but shall not cover the costs and expenses of:
(i)
lease
rentals and royalties, including shut-in ▇▇▇-alties not deducted under Section
7
above which have been paid by the Operator for the ▇▇▇▇▇ covered by this
Agreement;
(ii)
All
taxes of every kind and nature, including, without limitation, ad valorem taxes,
assessed or levied upon or in connection with the operation thereof, or the
production there-from, and which taxes have been paid by the Operator for the
benefit of the Developers;
(iii)
materials purchased or furnished by Operator for use on the ▇▇▇▇▇;
(iv)
transportation of materials, including brine, except where employees of Operator
transport material in the normal course of operation;
(v)
tubing, bailing or cleaning out a well and other services requiring equipment
which is necessary to the efficient operation of a well;
6
(vi)
services, equipment and facilities necessary or ap-propriate for the production
and sale or disposal of oil and/or natural gas liquids;
(vii)
services of attorneys, accountants, geologists, pe-troleum engineers or other
professionals relating to operations hereunder.
(viii)
any applications, filings or reports to either the gas purchaser(s) or
governmental agencies.
Any
such
extra costs shall be paid by the parties, in proportion to their respective
interests in the well with respect to which such expenses were incurred, based
on Operator's invoice costs for expenses incurred or third party services
performed and materials furnished, plus ten percent (10%), which ten percent
shall be in lieu of any charge by Operator for its profit or overhead, except
(i) that the charges for maintenance, repair and operation of gathering lines
and compression and dehydration facilities shall be at a rate established by
Operator, in its sole discretion, at the time of installation of such
facilities, provided such rate is competitive with like facilities in the
industry and (ii) that the charges for professional services shall be at cost,
which shall be reasonable under the circumstances.
| (b) |
The
operating fee shall be adjusted as of the first day of April of each
year
following the effective date of this Agreement. The adjustment shall
be
computed by multiplying the then applicable operating fee by the
percentage increase or decrease in the average weekly earnings of “Crude
Petroleum, Natural Gas and Natural Gas Liquids” workers for the last
calendar year compared to the preceding calendar year as published
by the
United States Department of Labor, Bureau of Labor Statistics, and
shown
in the Employment and Earnings Publications, Monthly Establishment
Data,
Hours and Earnings Statistical Table C-2, Index Average Weekly earnings
of
“Crude Petroleum, Natural Gas and Natural Gas Liquids” workers, SIC Code
#131.2, or any successor index thereto, since January 1st
in
the year in which this Agreement was executed, in the case of the first
adjustment, and since the previous adjustment date in the case of each
subsequent adjustment. The adjusted operating fee shall be the operating
fee currently in use, plus or minus the computed
adjustment.
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| (c) |
The
monthly operating fee shall be charged as
follows:
|
| (i) |
An
active well producing for any portion of the month shall be charged
for
the entire month
|
| (ii) |
Gas
▇▇▇▇▇ shall be charged if directly connected to a permanent sales outlet
even though temporary shut-in due to overproduction or failure of the
purchaser to take the production
|
| (iii) |
A
producing oil and/or gas well permanently shut down but on which plugging
operations are deferred shall not be charged after the time shut down
is
effected
|
| (iv) |
A
well being plugged back, drilled deeper, or which is undergoing any
type
of workover that requires the use of a drilling rig capable of drilling
shall not be charged for that period of time during which the well
does
not produce
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| (d) |
Except
as otherwise provided herein, the Operator shall promptly pay and
discharge all costs and expenses incurred in operations pusuant to
this
Agreement and charge each of the Developers with his respective share
of
such costs and expenses. Each Developer shall pay to the Operator all
such
costs and expenses within 15 days after the receipt of th invoice from
Operator.
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7
9. Advance
Payment
(a) The
operator, at its election, shall have the right from time to time to demand
and
receive payment in advance from the Developers of their respective shares of
the
estimated costs to be incurred in operations hereunder during any month or
in
plugging and abandoning any ▇▇▇▇▇ which right may be exercised by submission
to
each Developer of an AFE statement of such estimated costs, together with an
invoice forits share thereof. Each such statement and invoice shall be submitted
on or before the twentieth day of the month preceding the month for which the
advance is requested. Each Developer shall pay the amount shown on such invoice
within fifteen days after the date thereof. Proper adjustments shall be made
monthly between advances and actual costs (including the allowance for
Operator's overhead), so that each Developer shall bear and pay its
proportionate share of actual costs incurred, and no more.
{b)
The
Operator shall have the right to withhold all or a portion of production
payments and place such amounts in an escrow account for the purpose of plugging
and abandoning the ▇▇▇▇▇ covered by this Agreement, which right may be exercised
by submission to each Developer of an itemized statement of such estimated
plugging costs. Thereafter, Operator shall annually submit to Developers an
itemized statement of the estimated plugging cost and amount then on deposit.
Operator shall disburse all proceeds, which accumulate in excess of estimated
plugging costs (including the allowance for Operator's overhead), as set forth
in Section 7.
10.
Operator's Remedies
In
the
event any Developer fails to pay its share of advances, costs and expenses
hereunder, the Operator shall have the following remedies:
| (i) |
Developer
shall pay interest monthly on the unpaid balance at the prime rate
in
effect at PNC Bank, Pittsburgh, Pennsylvania, on the first day of the
month in which delinquency occurs plus Two (2%) Percent, plus attorney's
fees, court costs and other costs in connection with the collection
of
unpaid amounts, and Operator shall further have the right, without
prejudice to any other rights or remedies
to:
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(ii)
withhold payment of any working interest under this Agreement or any other
account due such Developer; or
(iii)
when operations are being conducted under Paragraph 20 (Additional Operations)
the Operator may elect to treat such Developer as a "Non-Consenting" party
with
respect to such well for any unpaid amount. In the event that Operator exercises
its rights under this clause, the defaulting Developer shall be deemed to have
relinquished to Operator, and Operator shall be deemed to own, such Developer's
interest in any such well or ▇▇▇▇▇ provided; however, that Operator shall assume
the obli-gations of the defaulting Developer with respect to such well or
▇▇▇▇▇.
8
11.
Term
of Agreement
(a)
This
Agreement shall remain in full force and effect for as long as any well covered
by this Agreement is producing oil or gas hereunder in "paying quantities".
Each
party shall be responsible for any existing obligation at the time this
Agreement terminates. For purposes of this Agreement, the term "paying
quantities" shall mean a well producing sufficient volumes of oil and/or gas
to
yield a reasonable profit over and above the operating costs, maintenance,
royalties, overriding royalties and marketing the oil and/or gas.
(b)
The
Operator shall notify the Developer whenever the 1OO% net working interest
proceeds equal $500.00 or less for an unrestricted oil and/or gas well
production period.
(c)
In
the event any six (6) continuous production periods are insufficient to pay
all
costs and expenses under Section 11(a) hereof, and (i) no restrictions are
imposed upon the productivity of such well; or (ii) no other operations are
proposed under this Agreement; then Operator shall schedule the well for
plugging and abandonment at the sole cost and expense of the Developers.
Operator shall then proceed to plug and abandon any such well, subject to
suitable weather and the availability of equipment, upon receipt in advance
of
the estimated costs thereof as set forth in Sections 7 and 9 hereof. Operator
shall bear no responsibility or obligation for any cost related thereto. The
termination of this Agreement or the abandonment of any well shall not relieve
the Developers from any liability, which has accrued or attached prior to the
date of such termination.
(d)
In
lieu of plugging and abandoning such well under Section 11(c) hereof Operator
shall have the right, but not the obligation, to takeover the well or sell
the
well and the appropriate equipment and materials at a purchase price determined
by Operator.
(i)
In
the event Operator elects to takeover or sell such well the Operator will return
the purchase price and any escrow monies accrued for such well to the
Developers, or apply to any accounts due Operator, less $ 10,000.00 which shall
remain in Operator’s escrow bonding account for the plugging and abandonment
liability.
In
either
event the Developers shall assign their interest as directed by Operator,
without warranty, express or implied, as to title, quantity, quality or fitness
for use of the equipment and material, together with their interests in the
well, equipment, material and the lease to the land upon which the well is
located, free and clear of all liens and encumbrances, and each Developer
appoints the Operator as its attorney-in--fact with full power of substitution
to execute, deliver and record the appropriate assignment or other instrument
of
transfer for and on behalf of the Developer. This power-of-attorney is coupled
with an interest and shall be irrevocable. Upon such assignment the well shall
be removed from this Agreement provided, however, such removal shall not relieve
De-velopers from any liability, which has accrued or attached prior to the
date
of such removal. Furthermore, Operator agrees to hold the Developers harmless
from and against any and all liabilities in connection with plugging and
abandonment of any such ▇▇▇▇▇.
12.
Audit
(a)
Any
Developer, upon ten (10) days' written request to the Operator, shall have
the
right to audit, during normal business hours, the Operator's books and records
relating to the receipts, disbursements and accounting of any and all ▇▇▇▇▇
covered by this Agreement.
(b)
The
Operator shall, upon written request, furnish any Developer with copies of
all
well logs, production records and any other pertinent data.
9
13.
Assignment/Delegation By Operator
Operator
shall have the sole and absolute right to pledge or assign its interest in
the
▇▇▇▇▇, production, equipment or leasehold interests covered hereby and to
delegate its duties hereunder to another operator, without notice to
Developers.
14.
Assignment by Developer
(a)
Any
Developer shall have the sole and absolute right to
assign
any interest it acquires pursuant to this Agreement. Such assignment may be
made
with or without notice to Operator; provided, however, until such time as
Operator has received written notice and copies of such assignment, it may
deal
solely with such Developer and need not recognize any party claiming through
or
under such Developer.
(b)
If
the interest of any Developer is subsequently divided among and owned by
co-owners, Operator may, at its discretion, require such co-owners to appoint
a
single trustee or agent with full authority to receive notices, reports, and
distribution of the proceeds of production; to approve expenditures; to receive
▇▇▇▇▇▇▇▇ for and approve and pay all costs, expenses and liabilities incurred
hereunder; to exercise any rights granted
to such co-owners hereunder; to grant any approvals or author-izations required
or contemplated; and to deal generally with, and with power to bind, such
co-owners with respect to all activities and operations contemplated by this
Agreement; provided, however, that each such co-owner shall continue to have
the
right to enter into all contracts for sale of their respective share of oil
and
gas produced from the ▇▇▇▇▇ covered by this Agreement.
15.
Liability of Developers
| (a) |
The
liability of the Developers shall be several, not joint or collective.
Each Developer shall be liable only to the extent of his respective
share
of the development, operating or other expenses for the ▇▇▇▇▇ covered
by
this Agreement.
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| (b) | It is not the intention of the parties to create, nor shall this Agreement be construed as creating, a mining or other partnership or association, or to render them liable as partners or joint venturers for any purpose. Operator shall be deemed to be an independent contractor, |
16.
Provision Concerning Taxation
(a)
Each
of the parties elects, under the authority of Section 761(a) of the Internal
Revenue Code of 1954, as amended (the "Code"), to be excluded from the
application of all of the provisions of subchapter K of Chapter 1 of Subtitle
A
of the Code. If the income tax laws of the state or states in which the property
covered hereby is located may contain, or may hereafter contain, provisions
similar to those contained in Subchapter K of the Code, under which a similar
election is permitted, each of the Developers authorizes and directs the
Operator to execute such election or elections on its behalf and to file the
election with the proper government office or agency. Beginning with the first
taxable year of operations hereunder, each party agrees that the deemed election
provided by Section 1.761-2(b) (2) (ii) of the Regulations under the Code will
apply; and no party will file an application under Section 1.761-2(b) (3) (i)
and (ii) of said Regulations to revoke said election. If requested by the
Operator to do so, each Developer agrees to execute and join in such an
election.
10
(b)
If
any tax assessment is considered unreasonable by the Operator, it may at its
discretion protest such valuation within the time and manner prescribed by
law,
and prosecute the protest to a final determination When any such protested
valuation shall have been finally determined, the Operator shall pay the
assessment for the Developers, together with any interest and penalty accrued,
and the total cost, including all costs relating to prosecution of the protest,
shall then be assessed against the Developers, and be paid by them, as provided
herein.
17.
Insurance
(a)
At
all times while operations are conducted hereunder, the Operator shall comply
with the workmen's compensation laws of the state(s) where operations are being
conducted. Operator shall also carry or provide such insurance for the benefit
of the Developers as may be outlined in Exhibit "G" attached hereto. Operator
shall require all contractors engaged in work on or for the ▇▇▇▇▇ covered by
this Agreement to comply with the workmen's compensation laws of the state(s)
where operations are being conducted and to maintain such other insurance as
is
required of the Operator in Exhibit "G".
(b)
Operator shall carry employer's liability and other in-surance as required
by
the laws of the State of Pennsylvania.
(c)
If
the parties hereto or any of them shall insure their respective risks beyond
the
specific limits of insurance required to be carried by the Operator under the
terms of this Agreement, the benefits of such insurance shall inure to the
parties procuring and maintaining the same, respectively, and the cost of such
insurance shall be borne by such parties, respectively, without reimbursement
from the other and without an accounting therefor.
(d)
It is
further understood and agreed that the Operator is not a guarantor of the
financial responsibility of the insurer with whom such insurance is carried,
and
that except for gross negligence or willful misconduct, Operator shall not
be
liable to Developers for any loss suffered on account of the insufficiency
of
the insurance carried or the insolvency of the insurer with whom it is carried.
Operator shall not be liable to Developers for any loss by reason of Operator's
inability to procure or maintain such insurance. Operator agrees that if at
any
time during the life of this Agreement it is unable to obtain or maintain such
insurance it shall immediately notify Developers in writing of such
fact.
18.
Claims and Lawsuits
(a)
If
any party to this Agreement is sued on an alleged cause of action arising out
of
the operations hereunder, it shall give prompt written notice of the suit to
the
other parties. The Operator shall defend all such actions, and the defense
of
lawsuits shall be under the general direction of Operator's
attorneys.
(b)
Any
suit may be settled during litigation by the Operator. All expenses incurred
in
the defense of suits, together with the amount paid to discharge any final
judgment, shall be considered costs of operations and shall be charged to and
paid by all parties in proportion to their interests provided that any such
claim or claims do not result from the Operator's gross negligence or willful
misconduct and/or are not covered by Operator's insurance.
(c)
Damage claims caused by and arising out of operations conducted for the joint
account of the Developers shall be handled by the Operator and its attorneys.
The settlement of claims of this kind shall be within the discretion of the
Operator and, if settled, the sums paid in settlement shall be charged as
expense to and be paid by all Developers in proportion to their respective
interests, except such claims caused by or arising out of the gross negligence
or willful misconduct of the Operator which are not covered by the Operator's
insurance.
11
19.
Force
Majeure
(a)
If
Operator is rendered unable, wholly or in part, by force majeure to carry out
its obligations under this Agreement, then the Operator shall give to all
Developers prompt written notice (by certified mail) of the force majeure with
reasonably full particulars concerning it; thereupon, the obligations of the
Operator, so far as it is affected by the force majeure, shall be suspended
during but no longer than, the continuance of the force majeure. Operator shall
use all possible diligence to remove the force majeure as quickly as
possible.
(b)
The
requirement that any force majeure shall be remedied with all reasonable
dispatch shall not require the settlement of strikes, lockouts, or other
difficulty by the Operator, contrary to its wishes, which shall be entirely
within the discretion of the Operator.
(c)
The
term "force majeure" as used herein shall mean an act of God, strike, lockout,
or other industrial disturbance, act of the public enemy, war, blockade, riot,
lightning, fire, storm, flood, explosion, governmental restraint, unavailability
of equipment, geologic accident, and any other cause whether of the kind
specifically enumerated above or otherwise, which is not reasonably within
the
control of the Operator.
20.
Additional Operations
(a)
Any
party may submit a written proposal to (i) drill a new well or ▇▇▇▇▇ on any
Drilling Site, or (ii) to rework, recomplete or complete any sands which were
not completed at the initial completion, deepen or plug back any existing well
or ▇▇▇▇▇ on a Drilling Site, all subject to the terms and conditions set forth
below.
| (b) |
Operator
shall act in a fiduciary capacity to approve or disapprove any proposal
submitted by a Developer under Subsection (a) above if the Operator
approves any proposed operation, it shall give each Developer thirty
(30)
days prior written notice indicating the proposed operation, the work
to
be performed, the location, the proposed depth, objective formation
and
the estimated cost of operation. The charge for performing work under
Subsection (a) above shall be Operator's cost plus ten (10%) percent.
Before the expiration of the notice period, each Devel-oper shall give
notice to the Operator indicating whether or not such Developer wishes
to
participate in any of the operations by the Operator under this
Subsection. If any Developer elects not to participate or fails to
notify
the Operator of its intention to participate within the time prescribed,
he shall thereafter be deemed to be a "nonconsenting Party" and he
shall
not participate in any of the operations covered under this Section
20.
Those parties who do elect to participate in the operations covered
under
this Section 20 shall be deemed to be "Consenting Parties" and shall
participate in the benefit of the operations hereunder, and the work
shall
be commenced by the Operator and completed with due diligence subject
to
the availability of equipment.
|
| (c) |
The
entire cost and risk of conducting such operations shall be borne by
the
Consenting Parties in the proportions that their respective interest
bear
to the total interest of all Consenting Parties. Consenting Parties
shall
keep the leasehold estates involved in such operations free and clear
of
all liens and encumbrances of every kind created by or arising from
the
operations of the Consenting Parties. If an operation results in a
dry
hole, the Consenting Parties shall plug and abandon the well and restore
the surface location at their sole cost, risk and expense. If any well
drilled, reworked, recompleted, completed, deepened or plugged back
under
the provisions of this Section results in the production of oil and/or
gas
in paying quantities, the Consenting Parties shall complete and equip
the
well to produce at their sole cost and risk, and such well shall be
operated by the Operator at the expense and for the account of the
Consenting Parties. Upon commencement of operations for the drilling,
reworking, recompleting, completing, deepening or plugging back of
any
such well by Consenting Parties in accordance with the provisions of
this
Section, each Nonconsenting Party shall be deemed to have relinquished
to
Consenting Parties, and the Consenting Parties shall own and be entitled
to receive, in proportion to their respective interests, all of such
Non-Consenting Party's interest in the well, its leasehold operating
rights, and share of production therefrom until the proceeds or market
value thereof (after deducting production costs, taxes, royalties,
overriding royalties and other interests payable out of or measured
by the
production from such well accruing with respect to such interest until
its
reverts) shall equal the total of the
following:
|
12
(i)
300%
of each such Nonconsenting Party's share of the cost of any newly acquired
surface equipment beyond the wellhead connections (including, without
limitation, stock tanks, sepa-rators, treaters, pumping equipment and piping),
plus 300% of each such Nonconsenting Party's share of the cost of operation
of
the well commencing with first production and continuing until each such
Nonconsenting Party's relinquished interest shall revert to it under this
Section, it being agreed that each Nonconsenting Party's share of such costs
and
equipment will be that interest which would have been chargeable to each
Non-consenting Party had it participated in the well from the beginning of
the
operation; and
(ii)
300%
of that portion of the costs and expenses of drilling, reworking, recompleting,
deepening or plugging back, testing and completing, and 300% of that portion
of
the cost of newly acquired equipment in the well (to and including the wellhead
connections), which would have been chargeable to such Nonconsenting Party
if it
had participated therein.
(d)
In
the case of any reworking, completing, recompleting, plugging back or deeper
drilling operation, the Consenting Parties shall be permitted to use, free
of
cost, all casing, tubing and other equipment in the well, but the ownership
of
all such equipment shall remain unchanged; and upon abandonment of a well after
such reworking, com-pleting, recompleting, plugging back or deeper drilling,
the
Consenting Parties shall account for all such equipment to the owners thereof,
with each party receiving its proportionate part in kind or in
value.
(e)
Within sixty (60) days after the completion of any oper-ation under this
Section, the party conducting the operations for the Consenting Parties shall
furnish each Nonconsenting Party with an inven-tory of the equipment in and
connected to the well, and an itemized statement of the cost of drilling,
deepening, reworking, plugging back, testing, completing, recompleting and
equipping the well for production or, at its option, the Operator, in lieu
of an
itemized statement of such costs of operation, may submit a detailed statement
of monthly ▇▇▇▇▇▇▇▇, Each month thereafter, during the time the Consenting
Parties are being reimbursed as provided above, the Operator shall furnish
the
Nonconsenting Parties with an itemized statement of all costs and liabilities
incurred in the operation of the well, together with a statement of the quantity
of oil and gas produced from it and the amount of proceeds realized from the
sale of the well's working interest production during the preceding month.
Any
amount realized from the sale or other disposition of equipment newly acquired
in connection with any such operation which would have been owned by a
Nonconsenting Party had it participated therein shall be credited against the
total unreturned costs of the work done and of the equipment purchased, in
determining when the interest of such Nonconsenting Party shall revert to it
as
above; provided, however, if there is a credit balance it shall be paid to
such
Nonconsenting Party.
13
(f)
If
and when the Consenting Parties recover from a Non-consenting Party's
relinquished interest the amounts provided for above, the relinquished interest
of such Nonconsenting Party shall automatically revert to it and from and after
such reversion such Nonconsenting Party shall own the same interest in such
well, the operating rights and working interest therein, the material and
equipment in or pertaining thereto, and the production therefrom as such
Nonconsenting Party would have owned had it participated in the drilling,
reworking, deepening, recompleting, completing or plugging back of said well.
Thereafter, such Nonconsenting Party shall be charged with and shall pay its
proportionate part of the further cost of the operation of said well in
accordance with the terms of this Agreement.
21.
Notices
All
notices authorized or required between the parties, and required by any of
the
provisions of this Agreement, shall, unless otherwise specifically provided,
be
given in writing by United States Certified Mail and
addressed to the party to whom the notice is given at the addresses listed
in
this Agreement. All notices under this Agreement required to be given to the
Developers by the Operator shall be deemed given when the Operator deposits
such
notice with the U.S. Certified Mail. All notices under this Agreement required
to be given to the Operator by the Developers shall be deemed given when
received by the Operator. Each party shall have the right to change its address
at any time, and from time to time, by giving written notice to the
others.
22.
Miscellaneous
(a)
Each
Developer certifies that he has the authority to execute this Agreement and
that
he will indemnify Operator for any damages, costs and expenses that may be
caused by any lack of authority and furthermore each Developer agrees to take
all steps necessary to obtain such authority.
(b)
This
Agreement sets forth the entire understanding between the parties with respect
to the subject matter hereof. There are no restrictions, agreements, promises,
representations, warranties, cove-nants or undertakings other than those
expressly set forth herein. This Agreement supercedes all prior negotiations,
agreements and understandings between the parties, whether written or oral,
with
respect to the subject matter hereof.
(c)
The
provisions of this Agreement may be waived, altered, amended, or supplemented,
in whole or in part, only by an amendment signed by the parties
hereto.
(d)
No
failure or delay on the part of any party in exercising any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or
partial exercise of any such power, right or privilege preclude any other or
further exercise thereof or of any other right, power or privilege. All rights
and remedies existing under this Agreement are cumulative to, and not exclusive
of, any rights or remedies otherwise available.
(e)
The
parties shall from time to time do and perform such other and further acts
and
execute and deliver any and all such other and further instruments as may be
required by law or reasonably requested by either party to establish, maintain
and protect the respective rights and remedies of
the
other
and to carry out and effect the intents and purposes of this
Agreement.
14
(f)
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of Pennsylvania without giving effect to the rules governing conflict
of
laws.
(g)
This
Agreement may be executed in one or more counterparts, each of which shall
be
deemed an original, but all of which together shall constitute one and the
same
Instrument and the provisions of this Agreement shall be binding on the
signatory parties hereto, whether executed by all or a part of the
Developers.
(h)
All
article, section or paragraph headings contained in this Agreement and the
order
of articles, sections and paragraphs are for convenience only and shall in
no
way limit or otherwise affect the interpretation of any of the terms or
provisions hereof.
(i)
All
pronouns, singulars, plurals and any variations thereof shall be deemed to
refer
to the masculine, feminine, neuter, singular or plural as the identity of the
person or persons may require.
(j)
This
Agreement shall be binding upon and shall inure to the benefit of the
undersigned parties and their respective heirs, personal representatives,
successors and assigns.
23.
Other
Provisions
Bankruptcy:
If Operator becomes insolvent, bankrupt or is placed in receivership, it shall
be deemed to have resigned without any action by Developers, except the
selection of a successor. If a petition for relief under the federal bankruptcy
laws is filed by or against Operator, and the removal of Operator is prevented
by the federal bankruptcy court, all Developers and Operator shall comprise
an
interim operating committee to serve until Operator has elected to reject or
assume this agreement pursuant to the Bankruptcy Code, and an election to reject
this agreement by Operator as a debtor in possession, or by a trustee in
bankruptcy, shall be deemed a resignation as Operator without any action by
Developers, except the selection of a successor During the period of time the
operating Committee controls operations, all actions shall require the approval
of two (2) or more parties owning a majority interest based on ownership as
shown on Exhibit "D". In the event there are only two (2) parties to this
agree-ment, during the period of time the operating committee controls
operations, a third party acceptable to Operator, Developer and the federal
bankruptcy court shall be selected as a member of the operating committee,
and
all actions shall require the approval of two (2) members of the operating
committee without regard for their interest based on Exhibit “D “.
15
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement or have caused
this Agreement to be executed by their duly authorized officers on the date
first written above.
Indigo
Dannic 2006 5-Well Number 1
| ATTEST: | Dannic Energy, Corp. | |
| _______________________ | _______________________ | |
| Secretary | Its: | |
| WITNESS: | DEVELOPER: | |
| Indigo Energy Partners, LP | ||
| _______________________ | _______________________ | |
| By: Indigo-Energy, Inc., General Partner | ||
| WITNESS: | HUB Energy, LLC | |
| _______________________ | _______________________ | |
| By: ▇▇▇▇ ▇▇▇▇▇▇▇▇ |
16
EXHIBIT
“A"
Developers
|
Developers
|
Amount
Contributed
|
Working
Interest
%
|
|
Indigo
Energy Partners,
LP
|
$1,071,029.55
|
75.0%
|
17
Exhibit
“B”
Drilling
Areas
(Maps
to be Provided)
18
Exhibit
“C”
Cost
per well
The
turnkey price per well shall be (A) Three ▇▇▇▇▇ at $290,969.64 and (B) two
▇▇▇▇▇
at $277,565.24. In exchange for the turnkey price, Dannic Energy, LLC will
provide one oil and/or gas well complete to the pipeline in accordance with
the
terms of this Drilling and Operating Agreement. In general, the turnkey cost
shall include: the price for each well shall include all tangible and intangible
costs which may be incurred in drilling and completing such well, including
without limi-tation, the costs of site preparation and restoration, permits
and
bonds, roadways, surface damages, power at the site, water, Operator's overhead
and profit, rights-of-way, drilling rigs, collection tanks and other equipment
necessary or appropriate to dispose of brine, equipment and material, costs
of
title examination, access rights, logging, cementing, perforating, fracturing,
casing, meter (other than utility purchase meters), separator and geological
and
engineering services but shall not cover the costs and expenses of those items
explained in Section 3 of this Drilling and Operating Agreement.
19
Exhibit
“D”
Individual
Interests and Well Assignments
Each
individual Developer will be assigned the Working and Net Revenue Interests
attributable by nature of the amount contributed and stated on Exhibit “A”. Each
well will be noted along with the corresponding lease.
The
Assignment Document will specify the assignment of ▇▇▇▇▇ and a 500 foot radius
for ▇▇▇▇▇ drilled less than 4,000 feet and a 1,000 foot radius for ▇▇▇▇▇ drilled
in excess of 4,000 feet. The well radius will not extend beyond the boundary
of
the lease, or the assigned area of any previously drilled well by Operator
or
assigns.
Only
shallow oil and gas production and drilling rights are to be assigned under
this
Agreement. As used herein, the word “shallow” with reference to oil and gas or
oil and gas sands or horizons as may be encountered from the surface down to
and
including a depth of _______ feet below the surface or 100 feet below the lowest
______ horizon , whichever is deeper.
20
Exhibit
“E”
All
Leases will be attached along with a summary
21
Exhibit
“F”
Costs
to
be refunded should a well be deemed to be a “Plug and Abandon” well before being
completed.
22
Exhibit
“G”
Insurance
Requirements of Operator
23