RE: Participation Agreement SLICK BEND PROSPECT(S) - DeWitt County, Texas

West Chase Center

0000 Xxxx Xxxx Xxxx, Xxxxx 000

Xxxxxxx, Xxxxx 00000

Attn: Xx. Xxxx Xxxxxxx, President

RE:

Participation Agreement

SLICK BEND PROSPECT(S) -

XxXxxx County, Texas

Dear Xx. Xxxxxxx:

When accepted by you in the manner provided below, this letter will evidence the agreement between Southern Resource Company, A Texas Corporation, whose address is P. O. Xxx 0000, Xxxxxx Xxxxxxx, Xxxxx 00000-0000, (hereinafter called “Seller”) and Falcon Natural Gas Corp., whose address is West Chase Center, 0000 Xxxx Xxxx Xxxx., Xxxxx 000, Xxxxxxx, Xxxxx 00000, (hereinafter called “Purchaser”) with respect to Purchaser acquiring from Seller undivided interests in and to certain Oil, Gas and Mineral Leases to be acquired by Seller in the area(s)as shown on the plat attached hereto as Exhibit “B” and made a part hereof (hereinafter called “Said Leases”), and the participation by Seller and Purchaser in the acquisition of additional Leases within the AMI, and in the drilling of one or more xxxxx on the AMI, in the manner hereinafter described.

Seller has identified at least eleven (11) oil and gas prospects in the AMI hereinafter described, the location of which is identified on Exhibit “B” attached hereto. Said Leases cover the initial prospect area, which is outlined in Red on Exhibit “B.”

Seller agrees to sell forty-seven percent (47%) of 8/8th working interest in Said Leases to the Purchaser, subject to the terms and conditions in Said Leases, and the associated trade documents to which Seller must adhere, more particularly described herein. Seller represents that there will be no depth restrictions other than those specified in Said Leases (if any). The working interest in Said Leases offered for sale herein shall be burdened by its proportionate share of all royalties and overriding royalties previously reserved by or conveyed to third parties, provided that Purchaser’s net revenue interest in Said Leases shall be not less than its proportionate share of 75%, unless the landowner’s royalty equals or exceeds 25%, in which case Purchaser’s net revenue interest in Said Leases shall be not less than its proportionate share of 73%. Furthermore, should Seller enter into a farmout agreement wherein the farmor’s overriding royalty interest would further reduce the net revenue interest below 73%, Purchaser will be provided with said farmout agreement for it’s review and approval of same. Should Purchaser elect not to participate, then the farmout agreement shall not be part of this Participation Agreement.

II.

The parties hereto agree to commence operations for the drilling of an exploratory well (hereinafter called “Initial Test Well”) in search of oil and gas at a location and a depth as more fully described in this Participation Agreement, and to conduct such operations with Seller, as Operator, in accordance with this Agreement and the Operating Agreement described below. Seller and Purchaser (hereinafter collectively called “Participants”) agree that all drilling and/or other oil and gas operations (including operations in the Initial Test Well, Substitute Well or future “Development” xxxxx) undertaken by them (1) on any jointly held oil and/or gas interest, including any interests acquired pursuant to the Area of Mutual Interest (hereinafter called “AMI” and outlined in yellow on Exhibit “B”) provisions provided for below, or (2) on lands pooled with any such lands, shall, as among the Participants and as to their interests, be conducted pursuant to the terms and provisions of the Operating Agreement attached hereto Exhibit “D” (The “Operating Agreement”). The Operating Agreement shall become effective as of September 1, 2005. If there is any conflict between the terms and provisions of this Participation Agreement and the Operating Agreement, the terms and provisions of this Agreement shall control. As each subsequent prospect area is identified and defined, a separate Operating Agreement shall be executed, using the form attached as Exhibit “D,” modified to reflect the parties participating therein, their respective percentage interests and the geographical contract area covered thereby.

III.

For and in consideration of Purchaser acquiring an interest in the subject prospect(s), Purchaser hereby agrees to the following:

Pay to Seller forty-seven percent (47%) of $70,000.00 or thirty-two thousand nine hundred and 00/100s dollars ($32,900.00) representing Purchaser’s proportionate share of the geological prospect(s) fee attributable to the initial prospect area. Purchaser shall pay the prospect fee for the initial prospect upon the signing of this Agreement. Such amount is non-refundable, unless Seller fails, for reasons other than circumstances beyond its control, to commence the drilling of the initial test well on the initial prospect area on or before June 1, 2006, in which case, upon (a) the return of such prospect fee, (b) delivery of an assignment of Purchaser’s interest in any oil and gas leases for which it has paid, (c) refund of any lease money advanced by Purchaser and not expended, and (d) refund of any dry-hole money paid by Purchaser (if any) and not expended, as provided in Article V, paragraph 1, this Agreement shall be deemed to be terminated, and Seller and Purchaser shall have no further obligation, responsibility, or recourse to each other under this Agreement; provided that any Operating Agreement covering such prospect area shall remain in effect in accordance with its terms, if there are oil and gas leases that are jointly owned by the parties; and provided further that Seller shall not be obligated to refund any prospect fee, or unexpended lease money, or to deliver any assignment of leases to Purchaser if Purchaser fails or refuses to participate in the drilling of the initial test well on said prospect. Within thirty (30) days after the log of the initial test well on the initial prospect, Purchaser shall be required to elect whether or not to continue to participate in the acquisition of leases and payment of prospect fees for subsequent prospects in the AMI. If Purchaser elects to continue, it shall pay to Seller its forty-seven percent (47%) of $280,000.00 or one hundred thirty-one thousand six hundred and 00/100s dollars ($131,600.00) representing Purchaser’s proportionate share of the geological prospect(s) fee attributable to four additional prospects (if obtainable); provided that if Seller notifies Purchaser in writing that Seller has received a bona fide written offer from an unrelated third party to participate in ten (10) additional prospects, by paying not less than forty-seven percent (47%) of $700,000, on terms that Seller is willing to accept, which offer shall be included in Seller’s notice to Purchaser, Purchaser shall be required to elect whether or not to meet said offer. If Purchaser elects not to continue (or fails to make an election, or fails to meet any such bona fide third party offer) within said time, Purchaser shall have no right to participate in any future development of the AMI, nor any right to a refund of monies theretofore paid, and this agreement shall terminate; provided that Purchaser shall retain all rights in the initial prospect area and under the Operating Agreement applicable to that prospect area. After initial test xxxxx on such four additional prospects have been drilled, Purchaser shall be required to make a further election whether or not to participate in up to six (6) additional prospects (if obtainable), and if so, Purchaser shall be required to pay forty-seven percent (47%) of $420,000, or one hundred ninety-seven thousand four hundred and no/100 dollars ($197,400.00), representing Purchaser’s proportionate share of the geological prospect fees attributable to six additional prospects. If Purchaser elects not to continue (or fails to make an election) within said time, Purchaser shall have no right to participate in any future development of the AMI, nor any right to refund of monies theretofore paid, and this agreement shall terminate; provided that Purchaser shall retain all its rights in the prospects in which it has participated, the leases for which it has paid its proportionate share, and all rights under the Operating Agreements applicable to those prospects. Provided, that it shall be a condition precedent to Purchaser’s obligation to make such elections that Seller shall identify the next four or six prospects which it proposes to acquire and the information available to Seller concerning the status of such areas, and Seller agrees to use its best efforts to acquire leases and/or farmins covering such areas on terms acceptable to the parties, if obtainable. Provided further that Seller shall refund the prospect fee for any prospect and any unexpended lease money advance by Purchaser that Seller does not drill within 120 days of Purchaser’s payment of such prospect fee, if the failure to drill is for reasons other than circumstances beyond its control, and provided further that Seller shall not be obligated to refund any prospect fee, or unexpended lease money, or to deliver any assignment of leases to Purchaser if Purchaser fails or refuses to participate in the drilling of the initial test well on any such prospect. Seller agrees to convene regular meetings of the working interest owners and provide information to the working interest owners in an attempt to reach consensus on the selection and ranking of prospects.

Pay to Seller fifty-eight point seventy-five percent (58.75%) of the actual cost of the oil, gas and mineral leases to be acquired along with Purchaser’s share of the actual direct cost attributable to the oil and gas lease acquisition in the initial prospect area which incorporates, but is not limited to, lease bonus consideration, landmans’ fees, drafting fees, legal fees, survey fees, etc. Seller will invoice Purchaser as leases are acquired, which invoices shall be supported by appropriate documentation of such actual direct costs. If Purchaser makes the elections to continue in the program pursuant to paragraph 1, Purchaser shall pay 58.75% of the actual cost attributable to oil and gas lease acquisition in the relevant prospects identified in such elections, which are selected and designated as provided herein. The amounts due and payable hereunder will be due within thirty (30) days receipt of the invoice.

Pay to Seller fifty-eight point seventy-five percent (58.75%) of the before casing point costs attributable to the drilling of the Initial Test Well to casing point (as hereinafter defined). Before casing point (or “Dryhole”) costs are more particularly described in column 173 of the A.F.E. attached as Exhibit “C”. This amount must be received within ten (10) days after notice has been given but not more than thirty (30) days prior to commencement of operations on the prospect for the Initial Test Well. All operations after casing point will be on a prorata working interest basis, as set out in Exhibit “A” to the Operating Agreement. Notwithstanding the foregoing, Seller shall not be required to perform hereunder nor shall Seller be liable for any cost or expense (except its 20% after casing point share) for so long as it is prevented or delayed from commencing or resuming normal operations that are the result from any Federal or state law or any order, rule or regulation of any governmental authority, any force majeure, including but not limited to, acts of God, inclement weather, floods, strikes, the scarcity or inability to obtain or to use equipment or material. Should such an event as referenced herein take place and, as a result thereof, Seller incurs any cost or expense related thereto, then the total cost of such an occurrence or event or will be borne pro-rata by Seller and Purchaser.

4.	The initial test well as it pertains to each prospect contemplated by this Agreement may be turnkeyed should the majority of working interest participants, inclusive of Seller’s interest, elect to do so.

Pay to Seller forty-seven percent (47%) share of the actual costs of completing and equipping said well, if an election is made at Casing Point by Purchaser for a completion attempt.

Casing point, as used herein, is defined as the point at which (a) a subsurface depth of 7,800-+ feet, or a depth sufficient to test the Xxxxxx Sand Formation as seen on the electric log in the Houston Natural Gas, E.L. Xxxxx, et al, #2 Well located in the X. X. Xxxxxxx Survey, Abstract 455, in XxXxxx County, Texas, at subsea (6935’) or its stratigraphic equivalent, which ever is the lesser depth (which depth is hereinafter called the “Objective Depth”) has been reached; and (b) first open hole electric log has been completed so as to enable the Purchaser to evaluate the likelihood of a successful completion in the test well’s probable producing zone.

Seller agrees, upon request of Purchaser, to establish a separate, interest-bearing account, designated by the well name, and not commingled with Seller’s own funds, to hold the monies advanced by Purchaser and other working interest owners for dry-hole and/or completion costs, and to use such funds only for purposes authorized under this Agreement.

IV.

Seller hereby agrees to assign to Purchaser an undivided forty-seven percent (47%) of 8/8th working interest in and of Said Leases upon execution of this Agreement and payment of Purchaser’s share of the geologic prospect fee and leasehold acquisition costs from the initial prospect. The assignment shall be in the form attached hereto as Exhibit “E,” and shall be without warranty, express or implied, except as to claims arising by, through or under Seller. If Purchaser elects to continue in the program as provided in Article III, paragraph 1 above, subsequent assignments shall be made to Purchaser as additional leases are acquired, and the costs thereof are invoiced to and paid by Purchaser.

Seller shall provide for Purchaser’s review upon written request prior to the spudding of the Initial Test Well (or any well completed by this Agreement), copies of the drillsite title information, oil and gas leases, easements, surface use agreements and any other documents or agreements relative to the title to the Slick Bend Prospect(s) which are within the possession or control of Seller.

Should Seller, after the date of this Agreement, obtain contractual rights to seismic data pertaining to the Prospect Area, Seller agrees to provide Purchaser, its representatives, heirs and assigns, with access to and the right to review such data. However, the costs attributable to the acquisition of such seismic data will be borne by Purchaser as to forty-seven percent (47%) of the actual costs associated with such acquisition. It should be understood that, in the event Purchaser does not become party to the associated licensing agreement pertaining to such acquisition, Purchaser cannot retain or possess the seismic tapes or original data. Seller agrees to afford Purchaser the opportunity to become such licensee, if Purchaser so desires.

Seller and Purchaser agree to the following terms for the drilling of the Initial Test Well to test each individual Prospect contemplated by this Agreement:

Seller has agreed, and does hereby agree, to the drilling of the Initial Test Well to test the initial prospect contemplated by this Agreement as to Purchaser’s interest at an approximate location mutually agreeable to the majority working interest participation, inclusive of Seller’s interest. A surveyed drillsite location will be provided once the survey is in the possession of Seller. If Purchaser elects to continue in the program pursuant to Article III, paragraph 1, as each subsequent prospect is presented to Purchaser, Purchaser shall make its election whether or not to participate in the drilling of an initial test well thereon, and if it does not so elect, Purchaser shall forfeit all right, title and interest in all oil and gas lease(s) covering that specific prospect and shall have no right to participate in the drilling or development of such prospect; provided that Purchaser must elect to participate in the drilling of an initial test well on the second prospect area in order to be entitled to continue to participate in the drilling of subsequent test xxxxx in the AMI; and provided further that Purchaser’s failure to participate in an initial test well after participating in the initial test well for the second prospect area shall not affect its right to participate in initial test xxxxx on subsequent prospects. If Purchaser elects to participate, and pays its agreed share of the costs associated therewith, Seller shall commence or cause to be commenced the drilling of said well(s), and continue thereafter with due diligence and in a good and workmanlike manner to drill same of the Objective Depth; but shall not be obligated to do so if in Seller’s opinion, there is insufficient working interest participation, or for any other reason, provided that Seller shall refund to Purchaser any dry-hole costs theretofore paid by Purchaser, and shall assign to Purchaser its undivided forty-seven percent (47%) interest in all leases in such prospect area in which Purchaser has participated, and refund any lease money advanced by Purchaser and not expended. In such event Purchaser, at its option, may withdraw from participating by giving Seller written notice, at which point this Agreement will terminate. Once the reimbursement of the drilling monies, assignment of leasehold interests and refund of any unexpended lease money referenced herein have taken place, this Agreement shall be deemed to be terminated as to such prospect area, and Seller and Purchaser shall have no further obligation, responsibility, or recourse to each other under this Agreement as to such area; provided that any Operating Agreement covering such prospect area shall remain in effect in accordance with its terms.

The initial test well on each prospect or any substitute therefor, shall (if the Seller and Purchaser agree) be drilled and logged on a turnkey or day work basis at the sole cost, risk and expense of the Seller. If the parties do not agree to conduct the operations on a turnkey basis, Seller shall conduct such operations on an actual cost basis and Purchaser shall be responsible for its 58.75% share thereof. Operator firmly agrees, in its operations, to abide by and fully comply with all State and Federal laws and regulations, together will all rules and regulations of any governmental agency having jurisdiction of the area or field in which such operations are performed.

In connection with the drilling of each test well in which it participates, Purchaser shall have full and complete access to the location, xxxxxxx floor, drillers’ logs, electrical logs, cores and any and all information gained by the drilling of such test xxxxx, and shall receive sufficient notice twenty four (24) hours prior to any testing, logging, or coring in order to have a representative present during each such operations and such notice, together with any progress drilling reports to be given to Purchaser or such representative as Purchaser may from time to time designate, at the above address or at such location or address as Purchaser may hereafter furnish.

4.	Seller will be relieved of its turnkey obligations (if turnkey operations are conducted) as specified herein upon successful acquisition of the first open hole electric log from surface through the Objective Depth.

All operations on any well on any prospect after the Initial Test Well on that prospect shall be conducted on a non-promoted basis, Purchaser paying only its forty seven percent (47%) share of the actual costs thereof, unless Purchaser and Seller agree to conduct such operations on a turnkey or other basis.

VI.

The liabilities of the parties hereto shall be several and not joint, and each party shall be responsible only for its proportionate share of the costs and liabilities incurred. It is not the purpose or intention of the parties hereto to create any partnership, tax partnership, joint venture, mining partnership, association, agency or any such relationship among the parties, whereby one party is held liable for the acts or omissions of the other party, and neither this Participation Agreement, the Joint Operating Agreement (Exhibit “D” attached) nor the operations conducted hereunder shall be construed or considered as creating any such relationship.

VII.

Seller will maintain insurance more particularly described in Exhibit “D” to the Joint Operating Agreement, Purchaser shall bear its proportionate share of the costs of such insurance (inclusive of deductibles if it is necessary to utilize said insurance). With the exception of minimum limits set by state and federal regulators, Purchaser may elect not to be covered by and of Seller’s insurance coverage provided for in the joint account by providing Operator with written notice and certificate of insurance, wherein Purchaser grants Operator/Seller with a waiver of subrogation, and is added as an additional insured to Purchaser’s policy(s).

VIII.

This letter agreement may not be amended except by an instrument in writing signed by all of the parties hereto.

IX.

The Seller makes no representations or warranties, expressed or implied, as to the quality, accuracy, completeness or materiality of any information pertaining to the prospect or associated well information disclosed to Purchaser in determining his/its decision on whether or not to participate in this prospect. The Purchaser expressly acknowledges the inherent risks associated with the acquisition, processing and interpretation of any geological, geophysical and engineering data, and that any reliance on or use of any such information provided or produced by Seller is at the sole risk of Purchaser. The Seller, its Affiliated Companies, their officers, directors and employees, shall have no liability whatsoever with respect to the use of or reliance upon any information received by the Purchaser from Seller pertaining to the lands more particularly described in Exhibit “A” or “A-1” to the Joint Operating Agreement. The Parties agree that, to the extent required by the applicable law to be operative, the disclaimers of certain warranties contained in this Participation Agreement and associated Joint Operating Agreement are “conspicuous” disclaimers for the purposes of any applicable law, rule or order. All information provided or produced by Seller is presented by the Seller to the Purchaser without representations, recourse, covenant, or warranty of any kind, and the Seller, does hereby expressly disclaims all representations and warranties of any kind including without limitation warranties of title, whether express, implied, or statutory. WITHOUT LIMITATION OF THE GENERALITY OF THE IMMEDIATELY PRECEDING SENTENCE, SELLER EXPRESSLY DISCLAIMS AND NEGATES (A) ANY IMPLIED OR EXPRESS WARRANTY OF THE MERCHANTABILITY, (B) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS OF A PARTICULAR PURPOSE AND (C) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS.

If any provision of this letter agreement shall be held illegal or invalid, this Participation Agreement shall be construed and enforced as if such illegal or invalid provision had not been contained herein.

XI.

The provisions hereof constitute the complete agreement of the parties hereto with respect to the subject matter hereof and supersede and extinguishes all previous agreements, whether written or oral, with respect to the lands described herein.

XII.

This Participation Agreement is made and entered into in Texas, is performable in Nueces County, Texas, and is governed by the laws of the State of Texas. The exclusive venue of any action arising hereunder is in Nueces County, Texas.

XIII.

This agreement is made subject to all valid, applicable Federal State and local laws, rules, orders and regulations of any duly constituted Federal State or local regulatory body of authority having jurisdiction thereof, and all development and other operations hereunder shall be in conformity therewith.

XIV.

The provisions hereof shall inure to the benefit of and are binding upon the parties hereto, their respective heirs, successors and assigns.

If the terms and conditions of this Participation Agreement are satisfactory and set forth your understanding of our agreement, please so indicate by executing and returning the enclosed original of this Participation Agreement. If there is a conflict in the language between this Agreement and the Joint Operating Agreement, this Agreement shall prevail.

		Yours Very Truly,

		SOUTHERN RESOURCE COMPANY,
		A Texas corporation

	By:	/s/ Xxxxx X. Xxxxxxx
		Xxxxx X. Xxxxxxx President

ACCEPTED AND AGREED to this the 28^th day of November, 2005.

FALCON NATURAL GAS CORP.


By:	/s/ Xxxx Xxxxxxx
	Xxxx Xxxxxxx, President Tax ID #: 00-0000000

EXHIBIT “A”

ATTACHED HERETO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED SEPTEMBER 1, 2005, BY AND BETWEEN SOUTHERN RESOURCE COMPANY, A TEXAS CORPORATION, and FALCON NATURAL GAS CORP..

Lands Subject to this agreement:

All Oil, Gas and Mineral Leases and associated documents outlined more particularly in Exhibit “A-1” attached hereto and made a part of this Participation Agreement (said exhibit shows no Leases at the present time because none have yet been acquire, and said exhibit shall be amended as Said Leases are acquired)

Restrictions, if any, as to Depth or Formations:

None other than those specified in the Oil & Gas Leases attached hereto as Exhibit “A-1”.

Percentages and Address of the Parties to this Agreement:

	Southern Resource Company, et al P. O. Xxx 0000 Xxxxxx Xxxxxxx, XX 00000 53% Working Interest		Falcon Natural Gas Corp. West Chase Center 0000 Xxxx Xxxx Xxxx, #000 Xxxxxxx, XX 00000 47% Working Interest

Oil and Gas Leases Subject to this Agreement:

The leases subject to this Agreement are outlined in RED on Exhibit “B.” The Area of Mutual Interest (“AMI”) is outlined in yellow on Exhibit “B” attached hereto and made a part hereof.

	/s/ Xxxxx X. Xxxxxxx		/s/ Xxxx Xxxxxxx
	Xxxxx X. Xxxxxxx, President		Xxxx Xxxxxxx, President

	SOUTHERN RESOURCE COMPANY,		FALCON NATURAL GAS CORP.
	A TEXAS CORPORATION

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RE: Participation Agreement SLICK BEND PROSPECT(S) - DeWitt County, Texas

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