LEASE ACQUISITION AND PARTICIPATION AGREEMENT
Alpena County Antrim Shale Project
Alpena County, Michigan
This Agreement is made and entered into on this 8th day of December, 2002,
between Aurora Energy, Ltd., X.X. Xxx 000, Xxxxxxxx Xxxx, Xxxxxxxx 00000-0000,
herein "Aurora", and Cadence Resources Corp. of 0 Xxxx Xxxx Xx. PO Box 2056.,
Xxxxx, Xxxxx, XX 00000, herein "Investor".
Whereas, Aurora has developed or will develop certain oil and/or gas
prospects in Alpena County, Michigan, and has acquired oil and gas leaseholds
and intends to acquire additional oil and gas leaseholds in Alpena County,
Michigan;
Whereas, Investor desires to acquire an interest in said oil and gas
leaseholds and the xxxxx to be permitted, drilled and operated thereon; and,
Whereas, Aurora and Investor desire to establish an Area of Mutual Interest
consisting of all of Alpena County, Michigan, and develop the same for the
production of hydrocarbons as provided for herein.
Now therefore, for and in consideration of the sums to be paid pursuant to
this Agreement, the mutual promises contained herein and the benefits to be
derived therefrom Aurora and Investor agree as follows:
Section 1. Area of Mutual Interest
1.01. The lands subject to this Agreement and deemed the "Area of Mutual
Interest" or "AMI" shall include all of Alpena County, Michigan. Projects known
as Treasure Island, Ravine Creek, and Gerhke have been committed to Xxxxx Fargo
Energy Capital and are excluded from this AMI although they are located in
Alpena County, Michigan. Also, as Aurora develops projects in Alcona County,
Michigan, they may at Aurora's option be included in the AMI. Notice of
inclusion will be subject to Investor's approval.
Section 2. Oil and Gas Leases
2.01. Aurora Leases. Aurora is the owner of the oil and gas leases set out
on Exhibit I attached hereto (the "Aurora Leases"). For and in consideration of
the sum provided for in Section 2.03 below, the receipt of which is
acknowledged, Xxxxxx xxxxx, assigns and sets over unto Investor an undivided
Twenty-two and one-half percent (22.5%) interest before payout on a well-by-well
basis and an undivided Twenty percent (20.0%) after payout on a well by well
basis, in and to each of the Aurora Leases; subject, however, to the terms and
provisions of this Agreement.
2.02. Subsequently Acquired Leases. It is understood by the parties that it
may be advisable to acquire additional leases within the AMI (Subsequently
Acquired Leases). Aurora, at its option, may acquire such Leases on such terms
and for such consideration as Xxxxxx xxxxx reasonable. On each monthly Joint
Interest Billing statement, Aurora shall provide Investor with an estimation of
Subsequently Acquired Leases to be obtained by Aurora in the next month,
including the acquisition costs for the same. Based on these estimated lease
acquisition costs Aurora shall include on each Joint Interest Billing, the
Investor's proportionate advance payment required for said lease acquisitions.
Reconciliation to Investor's Joint Interest Billing shall be made periodically
based on the actual costs of the leasing program. Investor shall participate in
such Subsequently Acquired Leases to the extent of an undivided twenty-two and
one-half percent (22.5%) interest before payout on a well by well basis and an
undivided twenty percent (20.0%) after payout on a well by well basis by paying
to Aurora twenty-five percent (25%) of the actual acquisition costs for the
Subsequently Acquired Leases. Payment by Investor shall be made within ten (10)
days of receipt of each Joint Interest Billing. For purposes of this section,
lease acquisition costs shall include but shall not be limited to lease bonus,
surface use fees and land and legal fees. If Investor does not make his payment
as required in this paragraph, he forfeits his interest to those leases
acquired.
2.03. Payment by Investor. Contemporaneous with the execution of this
Agreement, Investor shall pay to Aurora the sum of Forty-seven Thousand Five
Hundred Dollars ($47,500.00). Said sum shall be applied first to Investor's
proportionate share, based on twenty-five percent (25%), of the lease
acquisition costs of the Aurora Leases, then to Investor's proportionate share,
based on twenty-five percent (25%) of project development costs to the date
hereof. Any sums remaining thereafter will be applied to Investor's
proportionate share of the cost of the Test Well provided for in Section 3.01
below.
Section 3. Development of AMI
3.01. Test Well. Aurora agrees to commence the drilling of ten xxxxx within
the AMI on or before December 31, 2002 (the "Test Well"). The Test Well shall be
in the Black Bean Antrim unit, located in X00X & X00X xx X0X & 0X, Xxxxxx
County, Michigan. Investor agrees to participate in the drilling of said Test
Well to the extent of an undivided five percent (25%), which will result on
Investor acquiring an undivided twenty-two and one-half percent (22.5%) working
interest before payout on a well by well basis and an undivided twenty percent
(20.0%) working interest after payout on a well by well basis pursuant to
Section 5.02 below. Within ten (10) days prior to the estimated spud date,
Investor shall pay its proportionate share of the estimated dry-hole costs for
the Test Well as set out on the AFE attached hereto and made a part hereof as
Exhibit II. In the event Investor elects to participate in the completion of the
Test
Well, Investor will pay its proportionate share of completion costs
simultaneously with making its election to participate in the completion of the
Test Well.
3.02. Subsequent Xxxxx. During the term of this Agreement, Aurora may
propose the drilling of a well or xxxxx within the AMI, other than the Test Well
(which consists of 10 xxxxx), to test any formation ("Subsequent Well"). The
Subsequent Well or Xxxxx may be proposed on a well-by-well or unit basis. Aurora
shall provide Investor with a summary of its intended operations and the
estimated development costs. Within twenty (20) days of receipt of the notice,
Investor shall notify Aurora of its election to participate or not participate
in the proposed Subsequent Well. Failure to respond within twenty (20) days
shall be deemed an election not to participate. Investor shall have the right to
participate in any proposed Subsequent Well to the extent of an undivided
twenty-five percent (25%) working interest, which will result in Investor
acquiring an undivided twenty-two and one-half percent (22.5%) working interest
before payout on a well by well basis and an undivided twenty percent (20.0%)
working interest after payout on a well by well basis pursuant to Section 5.02
below. In the event Investor elects not to participate in a Subsequent Well,
Aurora shall refund to Investor the leasehold acquisition costs paid by Investor
for those leases contained in the drilling unit for the Subsequent Well.
Investor shall then forthwith re-assign to Aurora its interest in the leases
contained in the drilling unit for the Subsequent Well, and Investor shall have
no further interest in said Subsequent Well. In the event Investor elects not to
participate in a Subsequent Well within an established pooled or unitized area
as provided for in Section 4.02 below in which Investor had previously
participated, the interest of Investor in that pooled or unitized area shall be
based on the xxxxx in which Investor has participated divided by the total
number of xxxxx in the pooled or unitized area, proportionately reduced by the
undivided interest in said xxxxx acquired by Investor hereunder.
3.03. Subsequent Operations. During the term of this Agreement, Aurora may
propose to rework, re-complete, deepen or sidetrack an existing well
(hereinafter collectively, "Subsequent Operations"). Aurora shall provide
Investor with a summary of its proposed Subsequent Operations and the estimated
costs. Within twenty (20) days of receipt of the notice, Investor shall notify
Aurora of its election to participate or not participate in the proposed
Subsequent Operations. Failure to respond within twenty (20) days shall be
deemed an election not to participate. In the event one (1) or more working
interest owners of the existing well elect not to participate, Aurora may
proceed with the Subsequent Operations provided that parties owning at least
fifty percent (50%) of the working interest in the existing well elect to
participate, but upon the following terms: Aurora shall purchase the working
interest of the working interest owners who elect not to participate in the
Subsequent Operations (the "Non-Consenting Parties"). The amount of compensation
to be paid for the Non-Consenting Parties' working interest in the existing well
shall be the one hundred percent (100%) of the NonConsenting Parties' capital
cost of the existing well less fifty percent (50%) of the revenue received by
the Non-Consenting Party for production from the existing well.
Notwithstanding anything set forth herein, parties having at least a fifty
percent (50%) working interest in the Aurora Leases and/or AMI, may propose a
Subsequent Well(s) and parties having at least a fifty percent (50%) working
interest in an existing well may propose Subsequent Operations. In such
instances, if Aurora elects not to participate, Aurora shall nevertheless
operate such well if requested by the working interest owners. In addition,
Aurora's working interest in such proposed Subsequent Well shall default to the
other working interest owners who elect to participate and Aurora's working
interest in an existing well for which Subsequent Operations are proposed shall
be purchased by the working interest owners who elect to participate in
accordance with the terms set forth in this Section.
Section 4. Well Spacing, Pooling of Interests
4.01. Drilling Units. Each Test Well and Subsequent Well shall be drilled
on a permitted unit of a size authorized by the regulatory agency having
jurisdiction.
4.02. Pooling of Interests. At such time that Aurora has confirmed the
commercial feasibility of an area within the AMI, Aurora shall prepare and
record with the Aipena County, Michigan Register of Deeds a pooling declaration,
pooling agreement or unitization agreement which shall include those lands and
leases which, in the opinion of Aurora, are reasonable and necessary to comply
with this Agreement. Such declaration of agreement may provide for expansion of
the unit upon the terms and conditions deemed appropriate by Aurora.
Section 5. Net Revenue Interest; Aurora's Carried Working Interest
5.01. Net Revenue Interest. The net revenue interest to the working
interest of Investor shall be an eighty percent (.80) net revenue interest
unless the lease is less than eighty percent (.80) net revenue interest and in
which case the actual net revenue interest prevails, which ever is less.
5.02 Aurora's Carried Working Interest. Investor agrees that it shall carry
Aurora for a proportionate working interest in the Aurora Leases described in
Section 2.01, the Subsequently Acquired Leases described in Section 2.02, the
Test Well described in Section 3.01 and in any Subsequent Well described in
Section 3.02 within the AMI in which Investor participates. The carried working
interest in the Test Well and all Subsequent Xxxxx shall be to the point of
first sale (after the sales meter). Investor shall pay all costs of whatever
nature attributable to and associated with said carried working interest to the
point of first sale as provided herein. At such time that a well to which this
paragraph applies goes into production, Aurora shall pay its proportionate share
of lease operating expenses, including the cost of Lease Purchase agreements for
compressors and C02 reduction units. For
purposes of this Section and Sections 2.01, 2.02, 3.02 and 3.03, then, Investor
shall pay twenty-five percent (25%) of the actual costs and shall acquire an
undivided twenty-two and one-half percent (22.5%) working interest before payout
on a well by well basis and an undivided twenty percent (20.0%) working interest
after payout on a well by well basis.
5.03 Payout Defined. Payout shall be defined as the first of the month
following the point that Investor has recouped 100% of the actual costs invested
into said well. For the purpose of simplifying the calculation of payout, Aurora
shall treat any group of xxxxx that are commonly pooled with only one sales
meter, and no individual well meters, as a single well.
Section 6. Assignments
6.01. Assignment of the Aurora Leases. Contemporaneously with the payment
by Investor to Aurora of the sum provided in Section 2.01 herein, Aurora shall
assign to Investor an undivided twenty-two and one-half percent (22.5%) working
interest before payout on a well by well basis and an undivided twenty percent
(20.0%) working interest after payout on a well by well basis in and to the
Aurora Leases and subsequently acquired leasehold. Said assignment shall deliver
to Investor the net revenue interest provided for in Section 5.01 herein. The
assignment of said Leases shall be subject to all of the terms and conditions
contained in the leases assigned, this Agreement and the Joint Operating
Agreement as referenced in Section 8 herein.
6.02. Assignments of Subsequently Acquired Leases. Within sixty (60) days
after Investor has paid its proportionate share of the acquisition costs for the
Subsequently Acquired Leases, Aurora shall assign to Investor its proportionate
share of said leases. The Assignment shall be on the same terms and contain the
same limitations as provided for in Section 6.01 above.
Section 7. Warranty of Title
7.01. Aurora does not warrant title to any part of the AMI, nor does Aurora
make any warranty as to the status of the Aurora Leases or Subsequently Acquired
Leases, or to the extent of interests in oil and gas actually covered thereby,
except that Aurora hereby warrants that the Leases within the AMI are free and
clear of all liens, encumbrances, mortgages and defects of title created by,
through or under Aurora but not otherwise. Aurora agrees that no well shall be
drilled until title to the drilling unit therefore has been examined by a
licensed attorney.
Section 8. Operating Agreement
8.01. Operating Agreement. The terms and provisions of the A.A.P.L.
610-1989 Model Form Operating Agreement attached hereto as Exhibit III shall
govern
operations conducted with the AMI. Aurora shall be named operator for each well
within the AMI. Aurora may be removed as operator only upon a showing of gross
negligence.
8.02. Option Agreement. It is understood between the parties that this
agreement applies to Investors participation in 100 xxxxx in Alpena County,
Michigan and that in the event that the Investor actually participates by
funding the first 70 xxxxx, that the investor is granted the right to
participate in an additional 100 xxxxx, making its total potential participation
of 25% of 200 xxxxx.
Section 9. Acknowledgments, Representations and Agreements of Investor
9.01. Acknowledgement of Investor. Investor acknowledges that it has been
advised as follows:
a. The interests represented by this Agreement have not been registered
under the Securities Act of 1933, as amended, nor under the Michigan Uniform
Securities Act, or any other state securities laws. A transfer, sale or other
disposition of such interests may be made only if such transfer, sale or other
disposition is exempt from the registration requirements of the Securities Act
of 1933, as amended, and of applicable state securities laws or if such
registration requirements are complied with.
b. That Aurora's reliance upon such exemptions for private or limited
offerings is based, in part, upon the representations and agreements of Investor
contained herein.
c. That the re-offer and resale of the interests represented by this
Agreement is limited, in that no transfer, sale or other disposition of such
interest may be made, unless the transfer, sale or other disposition is exempt
from the registration requirements of the Securities Act of 1933, as amended,
and of the Michigan Uniform Securities Act and any other applicable state
securities acts, or unless such registration requirements are complied with.
9.02. Representations and Agreements.
a. Investor represents that it has had such previous experience in business
and financial matters and in oil and gas matters in particular, that it is fully
capable of evaluating the risks and merits of an investment of this nature, and
that it is in a position to bear the financial risks of such investment,
including limited liquidity during an indeterminate period of time and the
possible loss of all funds invested.
b. Investor represents that it was not formed for the purpose of purchasing
securities of Aurora, and that it invests not more than 10% of its assets in the
securities of Aurora, and Investor further acknowledges that Aurora was not
affiliated with the organization of Investor or the solicitation of its
investors.
c. Investor represents that it is acquiring an interest under this
Agreement for its own account and not for the account of others and not for the
resale thereof, except only as may have been specifically approved by Investor
and Aurora in writing.
d. Investor agrees that it will sell, assign, transfer, pledge, encumber or
otherwise dispose of his interest under this Agreement or any part thereof, only
if the sale, assignment, transfer, pledge, encumbrance or other disposition is
exempt from the registration requirements of federal securities laws and the
Michigan Uniform Securities Act and any other applicable state securities laws
or such registration requirements have been complied with.
e. Investor acknowledges that it understands the meaning and legal
consequences of the representations and agreements contained in this section and
hereby agrees to indemnify Aurora and hold Aurora harmless from and against any
and all loss, damage or liability due to or arising out of the untruth or breach
of any such representation or agreement.
Section 10. Miscellaneous Provisions
10.01. No Partnership. It is not the intention of the parties hereto to
create, nor shall this instrument be construed as creating a mining or other
partnership or association which might render the parties liable as partners.
Each of the parties hereby elects, under the authority of Section 761(a) of the
Internal Revenue Act of 1986, to be excluded from the application of all the
provisions of Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue
Act of 1986 or provision of similar import in any subsequent Internal Revenue
Code of the United States. If the income tax laws of the state in which the
property covered hereby is located contain, or may hereafter contain, provisions
similar to those contained in the Subchapter of the Internal Revenue Act of 1986
above referred to under which a similar election is permitted, each of the
parties agrees that such election shall be exercised. Investor authorizes and
directs Aurora to execute such an election with the proper governmental office
or agency. If requested by Aurora to do so, Investor agrees to execute and join
in such an election.
10.02. Force Majeure. If either party is rendered unable, wholly or in
part, by force majeure to carry out its obligations under this Agreement, other
than the obligations to make money payments, that party shall give to the other
party prompt written notice of the force majeure with reasonably full
particulars concerning it; thereupon, the obligation of the party giving the
notice, so far as it is affected by the force majeure, shall be suspended
during, but no longer than, the continuance of the force majeure. The affected
party shall use all reasonable diligence to remove the force majeure situation
as quickly as practicable.
The requirement that any force majeure shall be remedied with all
reasonable dispatch shall not require the settlement of strikes, lockouts or
other labor difficulty by the party involved contrary to its wishes. How all
such difficulties shall be handled shall be entirely within the discretion of
the party concerned.
The term "force majeure" as herein employed shall mean an act of God,
strike, lockout or other industrial disturbance, act of public enemy, war,
blockade, public riot, lightening, fire, storm, flood, explosion, any
governmental action, any governmental delay, restraint or inaction,
unavailability of equipment, delay in setting gas meters by utilities, delay in
getting pipelines laid for the transportation of gas, delays caused by filing
with FERC, the Indiana Public Utilities Commission, or any other governmental
agency, and any other cause, whether of the kind specifically enumerated above
or otherwise, which is not reasonably within the control of the party claiming
suspension.
10.03. Sale of Gas. Investor has the right to take in kind or separately
dispose of its proportionate share of gas from the AMI. Any expenditure incurred
in the taking in kind or separate disposition by Investor of its share of
production shall be borne by Investor. If Investor fails to make arrangements to
take its share of gas in kind or separately dispose of the same, Aurora shall
have the option to market Investor's share of gas produced within the AMI,
subject to revocation at will by Investor.
Investor shall give Aurora fifteen (15) days advance notice of its
intent to take and market its share of gas and the period of time during which
Investor will take and market its gas. Any changes in Investor's election to
take and market its gas will be effective only after fifteen (15) days advance
notice to Aurora.
10.04. Term of Agreement. This Agreement shall remain in force so long as
any lease within the AMI remains in effect and for an additional period of
ninety (90) days thereafter. In the event, within said ninety (90) day period a
well is drilled, reworked or re-completed on or within the AMI, the Agreement
shall remain in force so long as such well or xxxxx are capable of producing and
for an additional period of ninety (90) days thereafter.
10.05. Notices. Unless otherwise agreed upon, where provisions are made for
Notice or concurrence of any kind, such notice shall be addressed as follows:
If to Aurora: X.X. Xxx 000
Xxxxxxxx Xxxx, XX 00000-0000
Attention: Xxxxxxx X. Xxxxxx
If to Investor: X.X. Xxx 0000
Xxxxx Xxxxx, XX 00000
Attention: Xxxxxx X. Xxxxxx
Notices of change of address of either party shall be effective upon written
notification to the other party mailed to the addresses shown above.
10.06. Complete Agreement. This Agreement, including the exhibits hereto,
embodies the complete and full agreement of the parties hereto; and no
alterations, modifications or changes herein shall be effective or binding upon
the parties unless the same are concurred in writing by the parties.
10.07. Access to Information. Investor shall be entitled to all drilling
and production reports and shall have access, upon reasonable notice to Aurora,
to all drill sites and facilities. Such information shall be confidential and
not disclosed to third parties without the prior written approval of Aurora.
10.08. Successors. The terms, covenants and conditions of this Agreement
shall be binding upon and shall inure to the benefit of the successors and
assigns of the parties hereto.
10.09. Applicable Law. Notwithstanding the place where this Agreement may
be executed by either of the parties hereto, the parties expressly agree that
all the terms of provisions hereof shall be construed under the laws of the
State of Michigan.
10.10. Alteration. Except as otherwise provided for herein, this Agreement
cannot be amended, altered or any of its provisions waived on behalf of either
party, except in writing by a duly authorized agent of either party.
10.11. Severability. If any part of this Agreement is held to be invalid or
unenforceable under the laws of any jurisdiction where this Agreement is to be
governed or sought to be enforced, the remaining provisions shall be enforceable
to the maximum extent permitted by law; provided, that such remaining provisions
effectuate fully the intent of the parties as manifested herein.
10.12. Drafting of Agreement. In the event a dispute arises between the
parties in a court of law or otherwise as to the meaning or interpretation of
this Agreement or the rights and responsibilities of the parties created
hereunder, this Agreement shall be deemed to have been drafted by all parties
hereto.
In witness whereof, the parties have executed this Lease Acquisition and
Participation Agreement on the date first written above.
Witnesses:
/s/ Xxxxxxx X. Xxxxxxx /s/ Xxxx Xxxxxx
---------------------------- ----------------------------------------
For: Aurora Energy, Ltd.
By: Xxxx Xxxxxx
Its: Vice President
/s/ Xxxxxx Xxxxxx /s/ Xxxx X. Xxxx
---------------------------- ----------------------------------------
For: Cadence Resources Corp.
By: Xxxx Xxxx
Its: Vice President
Schedule "A" omitted
