INSTRUCTIONS FOR USE OF GAS BALANCING AGREEMENT FORM
A.A.P.L. FORM 610-E — GAS BALANCING AGREEMENT — 1992
INSTRUCTIONS FOR USE OF GAS BALANCING AGREEMENT FORM
GENERAL
This Gas Balancing Agreement form is intended to be
used as Exhibit "E" to the 1977, 1982 and 1989 A.A.P.L. Form 610 Model Form Operating Agreements.
It is also generally suitable for use with other forms of operating agreements.
However, before using this form, both
it and the operating agreement in question should be reviewed and revised as required to ensure consistency.
If
this form is used as an exhibit to an A.A.P.L. Form 610 Model Form Operating Agreement or
other operating agreement, the provisions
in Section 15 (Counterparts), the “IN WITNESS
WHEREOF” paragraph on page 6 and the signature lines and acknowledgments
on page 7
should be omitted.
This
Gas Balancing Agreement may also be executed as a separate agreement for properties
covered by an existing
operating agreement where there is no gas balancing agreement or where
the one employed is deemed inadequate. In that
event, the properties subject to the form will have
to be described, and the provisions of Section 15 (Counterparts), the “IN
WITNESS WHEREOF”
on page 6 and the signature lines and acknowledgments will have to be employed.
The
description of the area covered by the Agreement may be included in the definition of the
Balancing Area in Section
1.02. Care should be taken in drafting this description,
however, because it may be desirable to cover more than one Balancing
Area. Such a definition
might, for example, read as follows:
Each well subject to that Operating
Agreement dated ______________________________________,
covering___________________________________
that produces gas or is allocated a share of gas production.
If a single well is completed in two
or more reservoirs, such well shall be considereda separate well with respect to,
but only with
respect to, each reservoir from which the gas production is not commingled in the wellbore.
This Gas Balancing Agreement contains both “alternative” and “optional” provisions. In the case of alternative provisions, it will generally be necessary to select one alternative in order to make the Gas Balancing Agreement effective. Provisions which are designated as optional (or as Option 1, 2, etc.) may or may not be used. Note that, in order for an Alternative or Option to be selected and effective, it must be checked. If, however, an Alternative is not selected,“Alternative 1” in each instance will be deemed to have been adopted by the Parties, but if an Option is not selected, it will not form a part of the Gas Balancing Agreement. See Section 12.6.
HEADING — Indicate the applicable Operating Agreement and other information. If the Gas Balancing Agreement is to be used without an Operating Agreement, the heading on page 1 should be modified appropriately, and the following references to the “Operating Agreement” should be deleted or modified appropriately: Section 1.12; Section 7.1; Section 9; Section 12.4; Section 13.1; and Section 13.2.
SECTION 1.02- Select the Balancing Area to be used, or insert a description of the Balancing Area. As a general rule, the use of a mineral lease as a Balancing Area will only be appropriate in certain situations involving offshore ▇▇▇▇▇.
SECTION 1.16 — This definition should be used only if one of the optional seasonal limitation provisions in Section 4.2 is employed. The specific months during which makeup is to be restricted should be included, e.g., “the months of November, December, and the following January and February.”
SECTION 2.1 — The parties should decide whether the basis of balancing in the Balancing Area will be in Mcfs or MMBtus. One of the two Alternatives stipulated MUST be selected to avoid an automatic election that Alternative 1 applies.
SECTION 2.2 — Since most gas is now decontrolled, the primary purpose of this provision is to provide for separate application of the form to different price categories in the event that price controls are imposed in the future by governmental entity.
SECTION 3.5 — This provision is intended to limit Overproduction in order to keep a Party from getting too far out of balance. It should be noted that this Section will only have an impact if a Party owns less than a 1/3 working interest in the Balancing Area, since under it a party owning a 1/3 interest will be entitled to take 300%, x 1/3 = 100%.
SECTION 4.1 - Select the number of days' notification that an Underproduced Party must give prior to making up Gas. Also, indicate the percentage of each Overproduced Parties' Gas that Underproduced Parties will be allowed to make up. The percentages should be identical.
SECTION 4.2 — The form sets out two Options for imposing seasonal limitations on making up Gas. It should be noted that it is NOT required that any seasonal limitation be included. If Option 1 is selected, select the number of months prior to the Winter Period that will be used to determine how much Gas an Underproduced Party may make up during the Winter Period. This number and the number of months in the Winter Period (as defined in Section 1.16) should add up to 12 or less. If Option 2 is selected, indicate the percentage of an Overproduced Party’s Gas that an Underproduced Party may make up during the Winter Period. This percentage should be lower than the percentage set out in Section 4.1.
SECTION 4.3 — Select the percentage of an Overproduced Party’s Gas which it should be required to make available for make up once it has produced all of its share of ultimately recoverable reserves. This percentage should be greater than the percentage set out in Section 4.1.
SECTION 6.2 — One of the two Alternatives stipulated MUST be selected as the basis upon which Royalty is to be calculated and paid in order to avoid an automatic election that Alternative 1 applies.
SECTION 7.3 — One of the two Alternatives stipulated for payment of amounts due under a cash settlement MUST be selected in order to avoid an automatic election that Alternative 1 applies. Note that Section 7.3.1 is optional, and may ONLY be used with Section 7.3, Alternative 2.
SECTION 7.4 — One of the two alternatives stipulated for determining proceeds received by an Overproduced Party for cash settlement purposes MUST be selected in order to avoid an automatic election that Alternative 1 applies.
SECTION 7.5.1 through 7.5.2 — Before selecting any of these provisions, the Parties should review the relevant gas processing arrangements for the Gas. Section 7.5.2, Option 1, contemplates that all wellhead MMBtus of Overproduction(will be valued at the gas price per MMBtu received by the Overproduced Party, without regard to whether any of the gas may have been processed. Section 7.5.2, Option 2, on the other hand, would include any enhanced or impaired values resulting from processing in calculating a valuation for the Overproduction. Note that if Section 7.5.2, Option 1, is selected, and residue gas to be sold on an MMBtu basis, it will be necessary to measure the number of MMBtus produced at the well (even if the A.A.P.L. FORM 610-E — GAS BALANCING AGREEMENT — 1992 parties have elected to balance on Mcfs), in order to determine the total value of Overproduction.
SECTION 7.7 — Select the interest rate payable for unpaid amounts owed pursuant to a cash settlement.
SECTION 7.9 — In the event that the parties anticipate that Overproduction may be subject to a potential refund by an appropriate governmental authority, the Parties may choose this provision.
SECTION 7.10- If the Parties adopt this provision, an Overproduced Party may make a cash settlement with Underproduced Parties for all or part of outstanding gas imbalances as often as once every twenty-four (24) months.
SECTION 8 — Select the number of days’ prior notification required for well tests, as well as the length of such tests.
SECTION 12.9 — Select the appropriate method for computing and reporting income to the Internal Revenue Service based on the “entitlements” or “sales” methods.
SECTION 13 — The purpose of this Section is to stipulate the rights of Parties in the event that any Party sells, exchanges, transfers or assigns its interest in the Balancing Area. Section 13.2 gives the Underproduced Party an option to demand a cash settlement if an Overproduced Party sells its interest, and the number of days’ notice and response should be selected to implement this procedure.
SECTION 14 — This provision is intended to provide the Parties an opportunity to modify or supplement any of the Gas balancing Agreement’s provisions.
SECTION 15 — This provision is to be utilized ONLY if the Gas Balancing Agreement is NOT agreed to contemporaneously with the execution of an A.A.P.L. Form 610 Model Form Operating Agreement or another suitable operating agreement. If the Gas Balancing Agreement is agreed to contemporaneously with any such operating agreement, Section 15 should be omitted. Otherwise, the Parties must determine the appropriate Percentage Interest which must execute the form to make it effective and the date by which such interests must execute it.
SIGNATURE ELEMENT — The “IN WITNESS WHEREOF,” signature and attest/witness elements are ONLY to be utilized if the Gas Balancing Agreement is NOT agreed to contemporaneously with the execution of an A.A.P.L. Form 610 Model Form Operating Agreement or another suitable operating agreement. If the Gas Balancing Agreement is agreed to contemporaneously with any such operating agreement, the “IN WITNESS WHEREOF,” signature and attest/witness elements should be omitted. Otherwise, these items should be completed in an appropriate fashion, and any appropriate amendment made to the heading of the Gas Balancing Agreement.
A.A.P.L. FORM 610-E — GAS BALANCING AGREEMENT — 1992 NOTE: Instructions For Use of Gas Balancing Agreement MUST be reviewed before finalizing this document.
EXHIBIT “E”
GAS BALANCING AGREEMENT (“AGREEMENT”)
ATTACHED TO AND MADE PART OF THAT CERTAIN
OPERATING AGREEMENT DATED APRIL 12, 2004 BY AND BETWEEN PARTY , AS OPERATOR AND NESS ENERGY INTERNATIONAL, INC. , AS NON-OPERATOR ("OPERATING AGREEMENT")RELATING TO THE AREA, ▇▇▇▇▇▇ COUNTY/PARISH, STATE OF TEXAS
.1. DEFINITIONS
The following definitions shall apply to this Agreement:
1.01“ 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.
1.02“ Balancing Area” shall mean (select one):
|X|
each well subject to the Operating Agreement that produces Gas or is allocated a share of
Gas production. If a
single
well is completed in two or more producing intervals, each producing interval from which
the Gas
production
is not commingled in the wellbore shall be considered a separate well.
|_| all of the acreage and depths subject to the Operating Agreement.
|_|
1.03 “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.
1.04
“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.
1.05“ 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 3.3 or Section 4.1 hereof.
1.06 “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.
1.07 “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.
1.08 “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.
1.09 “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.
1.10 “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.
1.11 “Party”
shall mean those individuals or entities subject to this Agreement, and their respective
heirs, successors,
transferees
and assigns.
1.12 “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.
1.13 “Royalty”
shall mean payments on production of Gas from the Balancing Area to all owners of
royalties, overriding
royalties,
production payments or similar interests.
1.14 “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.
1.15 “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.
1.16 |_| (Optional) "Winter Period" shall mean the month(s) of
November and December
in one
calendar year and the month(s) of
January through March in the succeeding calendar year.
2. BALANCING AREA
2.1
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 (Alternative 1)
|X| Mcfs or (Alternative 2) |_| MMBtus.
2.2
In the event that all or part of the Gas deliverable from a Balancing Area is or becomes
subject to one or more
maximum lawful prices, any Gas not
subject to price controls shall be considered as produced from a single Balancing Area
and Gas subject to each maximum
lawful price category shall be considered produced from a separate Balancing Area.
3. RIGHT OF PARTIES TO TAKE GAS
3.1
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.
3.2
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.
3.3
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.
3.4
All Gas taken by a Party in accordance with the provisions of this Agreement, regardless
of whether such Party is
underproduced or overproduced, shall
be regarded as Gas taken for its own account with title thereto being in such taking
Party.
3.5
Notwithstanding the provisions of Section 3.3 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 leases
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.
3.6
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 3.4 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.
4. IN-KIND BALANCING
4.1 Effective the first day of any calendar month following atleast
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 3.3 of this Agreement, a share of current production determined
by multiplying Fifty
, percent
( 50%) of the Full Shares of Current Production of all Overproduced
Parties by
a fraction, the 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
Fifty
percent ( 50% ) 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.
4.2
|_| (Optional — Seasonal Limitation on Makeup — Option 1) Notwithstanding
the provisions of Section 4.1, the
average monthly amount of Makeup Gas
taken by an Underproduced Party during the Winter Period pursuant to Section 4.1
shall not exceed the average monthly amount
of Makeup Gas taken by such Underproduced Party during the
(
) months immediately preceding the Winter Period.
4.2
|_| (Optional — Seasonal Limitation on Makeup — Option 2) Notwithstanding
the provisions of Section 4.1, no
Overproduced Party will be required to provide more than
percent (
%)
of its Full Share of Current Production for Makeup Gas
during the Winter Period.
4.3
|X| (Optional) Notwithstanding any other provision of this Agreement, at such time
and for so long as Operator, or
(insofar as concerns production by
the Operator) any Underproduced Party, determines in good faith that an Overproduced
Party has produced all of its share
of the ultimately recoverable reserves in the Balancing Area, such Overproduced Party may
be required to make available for
Makeup Gas, upon the demand of the Operator or any Underproduced Party, up to
Seventy-five
percent ( 75% ) of such
Overproduced Party's Full Share of Current Production.
5. STATEMENT OF GAS BALANCES
5.1
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.
5.2
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.
6. PAYMENTS ON PRODUCTION
6.1
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.
6.2
|_| (Alternative 1 — 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.
6.2.1
|_| (Optional — For use only with Section 6.2 — Alternative I —
Entitlement) Upon written request of a Party
taking less than its Full Share of
Current Production in a given month (“Current Underproducer”), any Party taking
more than
its Full Share of Current Production
in such month (“Current Overproducer”) will pay to such Current Underproducer an
amount each month equal to the
Royalty percentage of the proceeds received by the Current Overproducer for that portion
of
the Current Underproducer’s Full
Share of Current Production taken by the Current Overproducer; provided, however, that
such payment will not exceed the Royalty percentage that is common
to all Royalty burdens in the Balancing Area. Payments
made pursuant to this Section 6.2.1
will be deemed payments to the Underproduced Party’s Royalty owners for purposes of
Section 7.5.
6.2
|X| (Alternative 2 — 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.
6.3
In the event that any governmental authority requires that Royalty payments be made on any
other basis than that
provided for in this Section 6, 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.
7. CASH SETTLEMENTS
any
7.1
Upon the earlier of the plugging and abandonment of / 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.
7.2
Within sixty (60) days after the notice calling for cash settlement under Section 7.1, 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 7.4.
7.3
|X| (Alternative I — Direct Party-to-Party Settlement) 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.
7.3
|_| (Alternative 2 — Settlement Through Operator) Within sixty (60) days after
receipt of the Final Gas Settlement
Statement, each Overproduced Party
will send its cash settlement, accompanied by appropriate accounting detail, to the
Operator.
The Operator will distribute the monies so received, along with any settlement
owed by the Operator as an
Overproduced Party, to each
Underproduced Party to whom settlement is due within ninety (90) days after issuance of
the
Final Gas Settlement Statement. In
the event that any Overproduced Party fails to pay any settlement due hereunder, the
Operator may turn over responsibility
for the collection of such settlement to the Party to whom it is owed, and the Operator
will have no further responsibility
with regard to such settlement.
7.3.1
|_| (Optional — For use only with Section 7.3, Alternative 2 — Settlement
Through Operator) Any Party shall have
the right at any time upon thirty
(30) days’ prior written notice to all other Parties to demand that any settlements
due such
Party for Overproduction be paid
directly to such Party by the Overproduced Party, rather than being paid through the
Operator.
In the event that an Overproduced Party pays the Operator any sums due to an
Underproduced Party at any time
after thirty (30) days following the
receipt of the notice provided for herein, the Overproduced Party will continue to be
liable
to such Underproduced Party for any
sums so paid, until payment is actually received by the Underproduced Party.
7.4
|X| (Alternative 1 — Historical Sales Basis) 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.
7.4
|_| (Alternative 2 — Most Recent Sales Basis) 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 volume of Gas that constituted Overproduction
by the Overproduced Party from the Balancing
Area. For the purpose of implementing the cash settlement provision of the
Section 7, an Overproduced Party will
not be considered to have produced any of an Underproduced Party’s share of Gas until
the Overproduced Party has produced
cumulatively all of its Percentage Interest share of the Gas ultimately produced from the
Balancing Area.
7.5
The values used for calculating the cash settlement under Section 7.4 will include all
proceeds received for the sale of the
Gas by the Overproduced Party
calculated at the Balancing Area, after deducting 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.
7.5.1
|X| (Optional - For Valuation Under Percentage of Proceeds Contracts) For Overproduction sold under a
gas
purchase contract providing for
payment based on a percentage of the proceeds obtained by the purchaser upon resale of
residue gas and liquid hydrocarbons
extracted at a gas processing plant, the values used for calculating cash settlement will
include proceeds received by the
Overproduced Party for both the liquid hydrocarbons and the residue gas attributable to
the
Overproduction.
7.5.2 |X| (Optional - Valuation for Processed Gas - Option 1) 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.
7.5.2
|_| (Optional - Valuation for Processed Gas - Option 2) For Overproduction processed for the account
of the
Overproduced Party at a gas
processing plant for the extraction of liquid hydrocarbons, the values used for
calculating cash
settlement will include the proceeds
received by the Overproduced Party for the sale of the liquid hydrocarbons extracted from
the Overproduction, less the actual
reasonable costs incurred by the Overproduced Party to process the Overproduction and to
transport, fractionate and handle the
liquid hydrocarbons extracted therefrom prior to sale.
7.6
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.
7.7 Interest compounded at the rate of Eight percent ( 8
%) per annum will accrue for all amounts due under Section 7.1 beginning
the first day following the date
payment is due pursuant to Section 7.3. Such interest shall be borne by the Operator or
any
Overproduced Party in the proportion
that their respective delays beyond the deadlines set out in Sections 7.2 and 7.3
contributed to the accrual of the
interest.
7.8
In lieu of the cash settlement required by Section 7.3, 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 7.3. The making of
an
in-kind settlement offer under this
Section 7.8 will not delay the accrual of interest on the cash settlement should the
Parties
fail to reach agreement on an in-kind
settlement.
7.9
|X| (Optional — For Balancing Areas Subject to Federal Price Regulation) That
portion of any monies collected by an
Overproduced Party for Overproduction
which is subject to refund by orders of the Federal Energy Regulatory Commission or
other governmental authority may be
withheld by the Overproduced Party until such prices are fully approved by such
governmental authority, unless the
Underproduced Party furnishes a corporate undertaking, acceptable to the Overproduced
Party, agreeing to hold the
Overproduced Party harmless from financial loss due to refund orders by such governmental
authority.
7.10|X|
(Optional — Interim Cash Balancing) 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.
8. 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
Seventy-two
( 72 ) hours.
9. 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.
10. 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.
11. 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 5 or 7 hereof is supplied, any Party shall have the right to audit
the records of any other Party
regarding quantity, including but not limited to 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 7 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 11 shall be in addition to
those provided for in Section 5.2 of this Agreement.
12. MISCELLANEOUS
12.1 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.
12.2 Each
Party agrees to defend, indemnify and hold harmless all other Parties from and against any
and all liability 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.
12.3 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.
12.4 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
thereafter 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 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.
12.5 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.
12.6 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 such event. In the event that any “Alternative” provision of this
Agreement is not
so adopted by the Parties,
Alternative 1 in each such instance shall be deemed to have been adopted by the Parties as
a result
of any such omission. In those cases
where it is indicated that an Optional provision may be used only if a specific
Alternative
is selected: (i) an election to
include said Optional provision shall not be effective unless the Alternative in question
is selected;
and (ii) the election to include said
Optional provision must be expressly indicated hereon, it being understood that the
selection of an Alternative either
expressly or by default as provided herein shall not, in and of itself, constitute an
election to
include an associated Optional
provision.
12.7 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.
12.8 If
contemporaneously with this Agreement becoming effective, or thereafter, 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 thereafter 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.
12.9 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 (select one) |_| 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; or |_| based on the quantity of Gas taken for its account in accordance with
such regulations, insofar as same
relate to sales method tax computations.
13. ASSIGNMENT AND RIGHTS UPON ASSIGNMENT
13.1 Subject
to the provisions of Sections 13.2 (if elected) and 13.3 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
thereafter treat the assignment
accordingly, and the assigning or transferring Party shall look solely to its assignee or
other
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.
13.2 |X|
(Optional — Cash Settlement Upon Assignment) Notwithstanding anything in this
Agreement (including but not
limited to the provisions of Section
13.1 hereof) or in the Operating Agreement to the contrary, and subject to the provisions
of Section 13.3 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
Thirty ( 30
) days prior to closing the
transaction.
Thereafter, any Underproduced Party may demand from such Overproduced Party in
writing, within
Fifteen
( 15 ) 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 13, and the
Overproduction and Underproduction of each Party shall be adjusted accordingly. Any cash
settlement pursuant to this Section
13 shall be paid by the Overproduced Party on or before the earlier to occur (i) of sixty
(60)
days after receipt of the
Underproduced Party’s demand or (ii) 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 7.3 through 7.6 hereof, and
shall bear interest at the rate set forth in Section 7.7 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 13.1
hereof.
13.3 The
provisions of this Section 13 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.
14. OTHER PROVISIONS
NONE
15. 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 a Percentage Interest
in
the Balancing Area equal to or greater than a
percent ( %) therein fail(s) to
execute this
Agreement on or before
, this Agreement shall not be binding upon any Party and shall be of
no further force and effect.