EXPLORATION AGREEMENT
HAY RANCH PROSPECT, NORTH HUMBOLDT PROSPECT, TOANO DRAW
PROSPECT and ANTELOPE VALLEY PROSPECT
ELKO AND EUREKA COUNTIES, NEVADA
THIS AGREEMENT (this "Agreement") is made and entered into this 18th
day of October 2000, the "Effective Date," by and between Foreland Corporation
("Foreland"), ▇▇▇ ▇▇▇▇▇ ▇▇▇▇., ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇, Farakel Company
("Farakel"), ▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇, and Deerfield
Production Corporation ("Deerfield"), ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇, ▇▇
▇▇▇▇▇, referred to collectively herein as "Parties" or individually as a
"Party."
WHEREAS, Foreland and Farakel have entered into a Letter of Intent
dated May 25, 2000, a copy of which is attached hereto as Schedule 1 (the
"Farakel Agreement") that provides for the exploration and development of oil
and gas in the Hay Ranch, North Humboldt, Toano Draw and Antelope Valley
Prospects, in Elko and Eureka Counties, Nevada (the "Prospects"). The leases and
lands that make up the Prospects are set forth on Exhibits A1 through A4,
respectively, which exhibits are attached hereto and made a part hereof. The
leases and lands described on Exhibits A1, A2, A3 and A4 shall be referred to
hereinafter as the "Subject Lands";
NOW, THEREFORE, in consideration of the mutual obligations and
covenants contained herein, and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Parties hereby
agree as follows:
1. DEERFIELD AGREEMENT. Deerfield and Foreland are parties to a letter
agreement dated May 1, 2000 as amended by Letter dated June 23, 2000, (the
"Deerfield Agreement"), a copy of which is attached hereto as Schedule 2,
which relates to a portion of the Subject Lands described in the Deerfield
Agreement as the proposed Hay Ranch Federal Unit, comprised of 5,345.96
acres. The Deerfield Agreement provides that Deerfield shall have no
obligation to Foreland or to the ▇▇▇▇▇▇▇▇ Group ("▇▇▇▇▇▇▇▇") thereunder if
Foreland and ▇▇▇▇▇▇▇▇ do not enter into a written agreement consistent with
the terms of the Deerfield Agreement by June 1, 2000.
Deerfield, Foreland and Farakel hereby agree that this Agreement is entered
into in lieu of an agreement between Foreland and Farakel, and each of
Foreland, Deerfield and Farakel agrees to be bound by all of the terms and
conditions of the Deerfield Agreement as if (a) Farakel was an original
party thereto and all references to ▇▇▇▇▇▇▇▇ in the Deerfield Agreement
were references to Farakel, and (b) an Agreement meeting all of the
requirements of Section 8 of the Deerfield Agreement was executed on or
before June 1, 2000. Notwithstanding anything to the contrary contained in
this Agreement, in the event of any conflict or discrepancy between the
terms or intent of the Deerfield Agreement and the terms of this Agreement,
the terms and intent of the Deerfield Agreement shall control.
2. REPRESENTATION: Foreland represents, but does not warrant, that Foreland
owns certain oil and gas leases lying within the North Humboldt, Toano Draw
and Antelope Valley Prospects. Furthermore, certain of the Subject Lands
are burdened by existing overriding royalty burdens that are shown on
Exhibits A2 through A4. Foreland further represents that none of the
Subject Lands are subject to any agreement with another party that
conflicts with the purposes of this Agreement with the exception of the
actual lease terms, existing royalty assignments, governmental regulations,
and the Deerfield Agreement. Under the terms of, and subject to the
conditions of the Deerfield Agreement, Farakel can earn interests in a
portion of the Subject Lands described in the Deerfield Agreement as the
proposed Hay Ranch Federal Unit, comprised of 5,345.96 acres, as more
particularly described on Exhibit E, attached hereto.
3. APPROVAL OF OPERATOR AND OPERATING AGREEMENT: The Parties agree that
Foreland is designated the initial Operator of the Subject Lands, and as
such, Foreland will be Operator of any well or ▇▇▇▇▇ drilled on the Subject
Lands by the Parties in accordance with the Operating Agreement executed by
the Parties. The Parties further agree to execute and adopt a separate
operating agreement for each Prospect in the form attached as Exhibit C to
this Agreement; provided, that with respect to any lands included within
the boundaries of the Hay Ranch Federal Unit, the federal unit operating
agreement shall control.
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4. FARAKEL PARTICIPATION IN THE NORTH HUMBOLDT, TOANO DRAW AND ANTELOPE VALLEY
PROSPECTS: Farakel agrees to pay Foreland a monthly payment of $36,000, on
or before the 1st day of each calendar month for five (5) months, beginning
November 15, 2000, in order to pay lease rentals, prospect development
costs and overhead. In consideration of such payment, Foreland shall grant
to Farakel the right to explore the North Humboldt, Toano Draw and Antelope
Valley Prospects for a period of eighteen (18) months, subject to the
following conditions: On or before the expiration of the initial five (5)
month period, as defined below, Farakel must commit to either the drilling
of an initial test well or a 3-D seismic survey and analysis of each such
Prospect. Thus, if Farakel elects not to commit to drill a well or conduct
a 3-D seismic study on a given Prospect by the end of the initial
five-month period, then Farakel shall forfeit its rights with respect to
that Prospect. For the purposes of this provision, the initial five-month
period shall be deemed to commence on the date that the initial well on the
Hay Ranch Prospect is completed as a producer or a dry hole. Foreland may
re-market any prospect for which Farakel does not commit to drill or
conduct a 3-D seismic study within the initial five-month period.
The drilling of each initial test well with respect to the North Humboldt,
Toano Draw and Antelope Valley Prospects shall earn Farakel (i) an
assignment of 75% of Foreland's right, title and interest in and to all
depths in the 160 acre quarter section on which the well is located and in
the 8 surrounding 160 acre quarter sections and (ii) an assignment of 50%
of Foreland's right, title and interest to all depths in the remaining
acreage within the AMI for such Prospect, as described on Exhibits B1
through B4, lying outside of the nine 160 acre quarter sections described
above.
5. PARTICIPATION IN HAY RANCH INITIAL TEST WELL: Foreland and Farakel agree
that on or before the 1st day of September, 2000, Foreland will commence
drilling operations in the
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Hay Ranch Prospect on an initial test well and drill said well to a
sufficient depth to test at least 500 feet of the Devonian Carbonate
section or to 8500 feet, whichever is the lesser depth, unless production
is established at a lesser depth and the Parties mutually agree to stop
drilling and attempt completion at such depth. The well will be located in
the SE/4NE/4 of Section 16, T.29N., R.52E., Eureka County, Nevada. Farakel
shall pay 100% of the cost of the drilling and completing of such well to
the tanks, including the costs of all pipe, pumping units, line and other
equipment necessary to deliver oil to the tanks (but not including the
costs of the tanks themselves) or gas to the pipeline. If the cost of the
initial test well (or the second well contemplated under the Deerfield
Agreement) at any time exceeds 115% of the dry hole cost as represented in
the applicable AFE, Farakel shall have the right to request that Foreland
cease operations and plug and abandon the well. However, Deerfield and
Foreland shall have the option, but not the obligation, to continue
operations under the terms of the operating agreement. If either Deerfield
or Foreland (or both) agree to continue, then the electing parties shall
assume responsibility for all costs effective at 12:01 a.m. on the day that
Deerfield and/or Foreland elect to continue (the "Effective Time"), in
which case Farakel shall become a non-consenting party pursuant to the
terms of the operating agreement with respect to all expenses incurred
subsequent to the Effective Time.
With respect to the Hay Ranch Prospect, the drilling of the initial test
well shall earn Farakel the interests described in the Deerfield Agreement,
subject to the terms and conditions of the Deerfield Agreement.
6. OPERATIONS BY LESS THAN ALL PARTIES: Notwithstanding anything contained
herein to the contrary, whenever the drilling of a well is to be conducted
by less than all parties pursuant to the provisions of Article VI.B. of the
Operating Agreement, the following shall apply: Upon commencement of actual
drilling operations for any well drilled in a Prospect subsequent to the
initial test well in such Prospect previously referred to ("Subsequent
▇▇▇▇▇"), the Non-Consenting Party shall be deemed to have relinquished 100%
of its leasehold interest in
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the well and in the governmental surveyed quarter section in which said
well is located and in the surrounding eight governmental surveyed quarter
sections. However, the relinquished leasehold shall not include an existing
well capable of producing oil or gas in paying quantities which is owned by
one or more of the Parties hereto, and the governmental surveyed quarter
section in which it is located or the drillsite spacing unit for such well
as determined by the applicable governmental authority or 160 acres,
whichever is greater. In the event a Subsequent Well is an earning well for
any oil and gas rights, the Non-Consenting Party shall have also
relinquished 100% of any and all interest to be earned by the drilling of
said well.
7. CONFIDENTIALITY PROVISION: The Parties agree that all seismic, geological,
geophysical and well data acquired from the effective date hereof until
June 30, 2003 shall be treated as confidential and the exclusive property
of the Parties hereto. No seismic, geological, geophysical or well data
shall be shown, conveyed, furnished, given or sold to third Parties without
the prior written consent of all Parties who participated in the
acquisition of such data. The sale of any data shall be for the joint
account of the Parties who participated in the acquisition of such data and
the proceeds from any such sale shall be promptly distributed to the
Parties in the proportion that each shared in the cost thereof. These
restrictions shall not apply to information which is required to be
disclosed by law or the rules of any governmental agency having
jurisdiction or is furnished to a bona fide affiliate, bona fide
prospective purchaser, mortgagee, prospective mortgagee, lender,
prospective lender, attorney or consultant for evaluation or reserve
determination purposes nor shall they apply to the distribution of periodic
drilling status reports to PI and/or Dwight's (unless any party including
third parties to this Agreement participating in the well objects in
writing to the Operator to said release) and well sample data which may be
released to a bona fide sample library (unless any party participating in
the well objects in writing to the Operator to said release); provided,
that the disclosing Party advises the party receiving such data of the
confidentiality obligations under this Agreement and shall be responsible
for any disclosures by such party that would constitute a breach of this
Section 7 if made by a Party hereto. These restrictions shall not apply to
transfer of data
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between any Party hereto and any wholly owned subsidiary, partnership or
other entity which is solely controlled by any Party hereto or which is a
successor to any Party hereto through acquisition or merger, and/or owns or
controls in excess of 50% of the common stock of said Party. Any person who
is furnished information pursuant to this section must agree in writing to
be bound by the confidentiality provisions of this Agreement and not to use
any of the information for its own benefit.
8. AREAS OF MUTUAL INTEREST: Foreland and Farakel hereby agree to create Areas
of Mutual Interest ("AMIs") for the Prospects as shown on Exhibits B1
through B4. The AMIs shall remain in full force and effect until June 30,
2003. If, during the term of the AMIs, either Foreland or Farakel acquires
or has the opportunity to acquire an Acquired Interest (as defined below)
it will notify the other Party of such acquisition or opportunity,
including in such notice a description of the interest and the terms and
conditions upon which it has been or can be acquired at actual cost and net
revenue as delivered to acquiring party. The notified Party will have a
period of 15 days after receipt of the notice of acquisition in which it
may elect by responsive notice received by the acquiring Party within such
period to acquire its proportionate share of the interest described in the
notice of acquisition. A failure to elect affirmatively to participate
within the period herein provided will constitute conclusive election of
the notified party not to participate in the interest described in the
notice of acquisition, and such party will have no further rights hereunder
in respect of such Acquired Interest. An election to participate will
constitute the binding obligation of the electing Party to pay or otherwise
discharge its proportionate share of the costs and/or obligations of
acquisition described in the acquisition notice and such party shall be
entitled to receive upon discharge of such obligation their percentage part
of the Acquired Interest.
An Acquired Interest is any acquisition from a third party of an interest
in an oil and gas lease (federal, state or fee), or extension or renewal
thereof, fee mineral interest or option to lease, any royalty or overriding
royalty interest, farmin acquisitions, acreage contributions received in
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consideration for the drilling of a well within the AMI, or an interest
obtained under any third party contract or agreement relating to the AMI
after the date of this Agreement. Under no circumstances shall the
provisions of this paragraph be deemed to apply to the sale or transfer of
any interest among the parties to this Agreement nor sale of any interest
to a third party, nor is any Preferential Right of Purchase to be implied
hereby.
Deerfield hereby agrees to be bound by the terms of this paragraph 8, but
only as to the area within the boundaries of the proposed Hay Ranch Federal
Unit, as above described.
9. PROPORTIONATE REDUCTION: If it is found that Foreland or Deerfield owns an
interest in any of the Subject Lands that covers less than the entire
mineral estate, then any interest earned or assigned under this Agreement
shall be proportionately reduced to reflect the actual leasehold ownership.
10. TITLE DEFECTS AND ADJUSTMENTS: Title defects shall refer to those defects
or irregularities that would cause Farakel to receive less than the net
acres or net revenue interest set forth on Exhibit A or which create a lien
or encumbrance on any portion of the Properties in favor of a party other
than Energy Income Fund, L.P., a Delaware limited partnership ("EIF").
Title defects shall not refer to such defects or irregularities in the
title to the Properties that are not likely to interfere with the
operation, value or use of the Properties (or portion thereof) or that
would not be considered material in accordance with industry standards. To
assist in title examination, Foreland shall supply Farakel with copies of
leases, assignments, title memos and related documentation in Foreland's
possession. If Farakel earns interests from Deerfield in the Hay Ranch
Prospect pursuant to paragraph 5 above, Deerfield agrees to cause EIF to
release its liens on the interests assigned to Farakel pursuant to
paragraph 5 and the Deerfield Agreement.
As soon as is reasonably practicable, but in no event later than August 1,
2000, Farakel shall provide Foreland with a notice of title defects stating
its objections, if any, to the title. Foreland may undertake to satisfy
some, all, or none of the title objections at Foreland's sole cost and
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expense. If any such title defect cannot be or is not cured by Foreland
within thirty (30) days of notice, then the portion of the Property
affected will be excluded from the prospect, unless such defect is waived
by Farakel, and Foreland and Farakel will negotiate in good faith to
determine whether an adjustment to the terms of the consideration paid by
Farakel should be made to reflect the removal of the excluded property. All
title defects not made known to Foreland by Farakel within the time
provided shall be deemed to be waived by Farakel and, as between Foreland
and Farakel (but not Deerfield), shall become joint loss items under the
Operating Agreement. Deerfield makes no representation or warranty with
respect to its title to or interest in any of the Subject Interests and
shall have no liability to Foreland or Farakel with respect to any title
defect or the cure thereof.
11. JOINT ASSUMPTION OF OBLIGATIONS: Foreland and Farakel will jointly assume
and shall timely perform and discharge all duties and obligations of the
owners of the Subject Lands at and after the Effective Date, including, but
not limited to: restoration of the surface, environmental and pollution
clean up, and plugging and abandonment of any and all ▇▇▇▇▇.
12. PAYMENT OF LEASE RENTALS: Foreland shall diligently attempt to advance and
pay all costs and expenses incurred in connection with the maintenance of
the Subject Lands with respect to delay rentals, shut-in payments and
minimum royalties owing on account of any lease. Foreland shall not be
liable to Farakel for failure to properly pay any rentals, shut-in payments
or minimum royalties where such failure is due to inadvertence, mistake or
clerical error.
13. RECORDING COSTS: Farakel shall be solely responsible for all filing and
recording of documents related to the transfer or assignment of the
Properties to Farakel and for all fees, and other costs of whatever kind
connected therewith.
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14. AMENDMENTS AND SEVERABILITY: No alterations, modifications, amendments, or
changes in this Agreement shall be effective or binding unless the same
shall be in writing and signed by Foreland and Farakel and, where
applicable, Deerfield. The invalidity of any one or more covenants or
provisions of this Agreement shall not affect the validity of this
Agreement as a whole, and in case of any such invalidity, this Agreement
shall be construed as if such invalid provision had not been included
herein.
15. ASSIGNABILITY, SUCCESSOR AND ASSIGNS: No assignment shall be made by
Foreland or Farakel, in whole or in part, of its rights and obligations
under this Agreement unless such assignment is approved, in writing, by all
Parties to this Agreement. Such approval shall not be unreasonably
withheld. The terms, covenants and conditions hereof shall be binding upon
and shall inure to the benefit of Deerfield, Foreland and Farakel and their
respective successors and assigns; and such terms, covenants and conditions
shall be covenants running with the land and with each subsequent transfer
or assignment of the Properties. Farakel reserves the right to assign a
portion of its interest to certain internal partners. Farakel will provide
the names and interest to be assigned prior to the assignments being made.
16. NOTICES: Any notice, communication, request, or response required or
permitted by this Agreement shall be in writing. Notice may be given by any
reasonable means, including facsimile, hand delivery (including overnight
courier) and U.S. mail. Except as otherwise provided in this Agreement,
notice shall be effective when actually received by the party being
notified. The addresses of the parties for the purposes of Notice are:
Foreland Corporation Farakel Company Deerfield Production Corp.
2561 So. ▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Fax: (▇▇▇)▇▇▇-▇▇▇▇ Fax: (▇▇▇) ▇▇▇-▇▇▇▇ Fax: (▇▇▇) ▇▇▇-▇▇▇▇
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17. RELATIONSHIP OF THE PARTIES: This Agreement does not create a partnership,
mining partnership, joint venture, relationship of trust or agency or any
other entity or relationship that makes one party liable for the acts or
omissions of any other party.
18. DATA REQUIREMENTS: Two copies of all Geological data, as described on
Exhibit D hereto, on any well drilled hereunder shall be furnished to
Farakel and on any well in the Hay Ranch AMI one copy to Deerfield by
Foreland. Farakel and Deerfield, and their respective employees and
representatives, shall at all times, at their own risk and expense, have
complete access to the well locations and ▇▇▇▇▇▇▇ floor on prospects in
which they own an interest.
19. FEDERAL UNIT: Foreland agrees to take the necessary action to finalize the
formation of the Hay Ranch Federal Unit prior to commencement of the
drilling of the initial test well on the Hay Ranch Prospect, which federal
unit will include a portion of the lands within the Hay Ranch AMI (Exhibit
A1). Farakel agrees to ratify and join said federal unit. The Hay Ranch
Federal Unit Operating Agreement will be the Rocky Mountain Mineral Law
Foundation Form 2 (Divided Interest) Agreement and will control over any
other operating agreement with respect to acreage within the Hay Ranch
Federal Unit. The same form of operating agreement, attached hereto as
Exhibit "C," shall be executed by the Parties and used to govern operations
on all non-Hay Ranch Federal Unit acreage subject to this Agreement.
20. REASSIGNMENT: As between Deerfield and Farakel, with respect to any
interests earned by Farakel pursuant to paragraph 5 and the Deerfield
Agreement, and as between Foreland and Farakel, with respect to any other
interests earned by Farakel hereunder, in the event either party, its
successors or assigns, hereafter desires to surrender, let expire or
abandon all or any portion of the lease acreage described in Exhibit A, the
Surrendering Party agrees to give the other party at least 60 days notice
in writing of its intention to so surrender. Such Surrendering Party shall,
if requested to do so, reassign said lease acreage insofar as it covers the
portion
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being surrendered, expiring or abandoned to the other acreage insofar as it
covers the portion being surrendered, expiring or abandoned to the other
party free of any encumbrances suffered by, through or under the
Surrendering Party.
21. HEADINGS: Titles and headings in this Agreement are included solely for
ease of reference and are not to be considered in interpretation or
construction of this Assignment.
22. GOVERNING LAW: This contract shall be governed by and construed under the
laws of the State of Nevada, excluding any conflict of law rules that may
require the application of the laws of another jurisdiction.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year set forth below, but effective as of the Effective Date.
FORELAND CORPORATION
By: s/▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Its: Vice-President
Date: 10/24/00
FARAKEL COMPANY
By: s/▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Its: Director
Date: 9/29/2000
By: s/▇▇▇▇▇ ▇▇▇▇▇
Its: President
Date: 10/18/00
DEERFIELD PRODUCTION
CORPORATION
By: s/▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Its: Vice-President
Date: 10/21/00
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