EXHIBIT 10.7
DEVELOPMENT AGREEMENT
THIS AGREEMENT, entered into and effective this 14th day of October, 1999
("Effective Date") is by and between GMX Resources Inc., (hereinafter referred
to as "GMX") and Xxxx Energy Services Limited, as managing partner of the Xxxx
Energy Partnerships (hereinafter referred to as "Xxxx") (sometimes collectively
referred to as the "Parties").
WHEREAS, GMX is a corporation engaged in oil and gas exploration and
development activities and represents that it is the owner of certain oil and
gas properties as listed on the attached Exhibit "A" which are known to the
Parties as the Leases (the "Leases"), and
WHEREAS, Xxxx desires to enter into a Development Agreement regarding
the hereinafter detailed program of work ("Work Program") to be conducted on the
Leases, this Agreement shall serve to set out the terms whereby said agreement
shall be made. Xxxx hereby represents that it has researched this investment.
Xxxx is a professional oil and gas entity engaged in oil and gas exploration and
development and as such is capable of properly evaluating same.
NOW THEREFORE, in consideration of the mutual promises and conditions
contained herein, and other good and valuable consideration, the receipt of
which is hereby acknowledged, the Parties agree as follows:
1. The Parties shall in accordance with the terms of this Agreement and
the joint operating agreement attached as Exhibit "C" to this Agreement
(the "JOA") conduct the program of drilling and development of two
xxxxx on the Leases as set forth in detail on the attached Exhibit "X"
("xxx Xxxxx"). The costs shown on Exhibit "B" are target AFE costs
based on the Turnkey Bid of Xxxxxxxxx Drilling, for drilling to the
required depths plus estimated third party and supervision costs. Xxxx
will be liable for its share of the costs plus cost overruns, not to
exceed in total 110% of the amounts shown in Exhibit "B". Overruns in
excess of 10% of the total AFE cost will be submitted as a
supplementary AFE for Tara's agreement before any such additional
expenditure is undertaken. Tara's notification to the Operator as to
whether its agrees to incur such additional cost, and (if it does so
approve) its payments therefor will be timely in conformance with this
Agreement and the JOA. The location of the Xxxxx will be as agreed by
the Parties.
2. Xxxx shall be liable for 85% of the cost of the Work Program, on a cost
basis described in Clause 1 above.
3. In discharge of its share of the cost of the Work Program, subject to
the conditions herein, Xxxx shall make (or cause to be made on its
behalf) the following payments ("Advances") to GMX or its designated
affiliate ("GMX"):
October 15, 1999 $792,900.00 in US$ AFE Costs
$ 45,000.00 in US$ G&G Costs
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$837,900.00 in US$ Total
4. Upon payment by Xxxx of the aforesaid Advances, GMX shall assign to
Xxxx (in the form of its U.S. affiliate Xxxx Energy Inc. as nominee for
Xxxx) an 85% working interest limited to the forty (40) acres
surrounding the "initial test xxxxx" (the xxxxx), and including the
location or locations of any twin xxxxx of the xxxxx, in the lands
described on Exhibit "A" attached hereto. Said assignment shall
comprise full working interest and net revenue interest rights for each
well and the forty (40) acres attributable to each well drilled
hereunder, limited to the depths penetrated by each well. Should the
Texas spacing units attributable to each well be greater than forty
(40) acres, then in no event will Xxxx earn a working interest or net
revenue interest for development purposes outside the forty (40) acres
surrounding said wellbore. GMX agrees that no offset well(s) will be
drilled closer than 1200 feet from the Xxxx wellbore(s) and in said
forty (40) acre tracts without approval from Xxxx and with Tara's
participation for its working interest share in accordance with the
JOA. Said assignment shall be made effective as of the Effective Date
and shall be subject to the JOA, which shall govern all operations on
the leases.
5. Payout:
(A) The period from the Advance Date (being the date of Tara's first
advance of funds to GMX in respect of the Work Program) until Tara's
Payout Date (as defined in the Appendix A, below) is referred to here
as "Payout Period." During the Payout Period Xxxx shall be entitled to
its 85% working interest, share of net revenues from the xxxxx funded
by the Advances, provided that during the Payout Period, in addition to
its 85% working interest share of such net revenues:
(i) Xxxx shall be entitled to increase its pre-Payout working
interest to 90% if Xxxx has not received 50% of payback of the
amount of the Advances before the date which is one year after
the Advance Date; and
(ii) Xxxx shall be entitled to increase its pre-Payout working
interest to 95% if Xxxx has not received 75% of payback of the
amount of the Advances before the date which is two years
after the Advance Date; and
(iii) Xxxx shall be entitled to increase its pre-Payout
working interest to 100% if the Payout Period exceeds three
years, from the expiry of such three years. In this case GMX
and Xxxx will consult as to the future of GMX's operatorship,
to apply the principle that a party not holding a current
working interest shall not be the operator.
Increases in Tara's pre-Payout working interest as described above will
take effect as from the first day of the next following month.
(B) At Tara's Payout Date, GMX shall be entitled to a reversionary
interest, such that Xxxx shall retain an after-payout working interest
("APO Interest") in accordance with the following formula:
The APO Interest shall be equal to 0.9% (zero point nine
percent) for every month of the Payout Period during the first
nine months of the Payout Period, and 2.7% (two point seven
percent) per month thereafter, until the end of the Payout
Period. (For example, if it takes 12 months for Tara's
investment to pay out, Xxxx will retain 9 months x 0.9% plus 3
months x 2.7% = 16.2% in total after payout and GMX will have
the remainder).
6. Xxxx shall be entitled to its full working interest share of production
revenues and Xxxx shall continue to hold the relevant working interests
on a conventional basis, GMX being entitled to a reversion at Tara's
Payout, as described above, and subject to the JOA. Xxxx shall be
entitled
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(subject to the other terms of this Development Agreement) to assign,
charge or otherwise dispose of any or all of its interests without
being subject to pre-emption or other preferential rights.
7. It is hereby agreed and understood that GMX shall diligently and
prudently conduct the Work Program as soon as reasonably possible,
having regard to operational circumstances and results encountered. If
the actual results of any significant part of the Work Program are
materially different from those contemplated by the Parties at the date
hereof, the Parties shall consult in good faith to assess whether the
Work Program should be modified so as to improve the prospective
economic performance of the Leases, and shall seek to agree such
modification for such purpose. In the event that the interim results
indicate that the prospective oil or gas volumes producible from future
xxxxx are likely to be less than 80% of those proved reserves figures
estimated by Xxxxxxx (attached as exhibit D) and Associates for Xxxx,
the Work Program shall be amended to remove such future xxxxx
therefrom, unless the Parties otherwise agree. For the avoidance of
doubt, any amendment of the Work Program in accordance with this Clause
shall constitute an amendment of the AFE shown in Exhibit "B" for the
purposes of both this Agreement and the JOA.
8. In the event that the work program is curtailed (I.E. SPUDDING OR
COMPLETION) any unspent funds from the Advance shall be refunded to
Xxxx. In the event of any conflict between this Clause and the JOA, the
provisions of this Clause shall prevail. GMX (as Operator) agrees that
it will commence operations on the Leases under this Development
Agreement and agrees to diligently proceed with said operations in a
workmanlike manner until all operations in respect of the Work Program
have been completed. Periodic reports at not less than monthly
intervals, and more frequently during active operations, shall be made
to Xxxx and GMX, as Operator will be available to review the work done
at the request of Xxxx.
9. The Parties agree that Xxxx has no responsibility to MW Oil Investment
Company, Inc. for any fees in respect of this Agreement.
10. References in this Agreement to "Xxxx" shall, where they refer to the
holding of real property, be taken as references to holdings by Xxxx
Energy Inc., which is a wholly-owned subsidiary of Xxxx Energy Services
Ltd., managing partner of the Xxxx Energy Partnerships. Xxxx Energy
Inc., which is a Delaware corporation, holds lease interests on behalf
of the Partnerships.
11. Conditions:
11.1 Xxxx shall be under no obligation to participate in any well which
is not classed as PUD at the time of drilling. In the event that any
well proposed to be drilled pursuant to this Agreement ceases for any
reason to have PUD status, GMX shall have the opportunity of providing
a substitute location, which shall be accepted if satisfactory to Xxxx
and providing it has PUD status.
11.2 The Xxxxx must be drilled within three months of the Advance Date,
otherwise unspent funds shall be refunded to Xxxx.
12. Covenants and Warranties of GMX:
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12.1 GMX states that neither the execution and delivery of this
Agreement or the consummation of the transactions contemplated herein
will constitute any material breach or default under any contract or
agreement to which GMX is a party.
12.2 GMX states that there are no liens, claims, suits, actions or
other proceedings that are currently pending before any court or
governmental agency as of the date of this Agreement to which GMX is a
party and which might result in material impairment or loss of GMX's
title to any part of the lands described in Exhibit "A" or that might
materially hinder or impede the operation of the leases thereon. GMX
shall promptly notify Xxxx of any such proceeding following the date of
this Agreement with respect to which GMX receives actual notice.
12.3 GMX states that there are no bankruptcy, reorganization or
arrangement Proceedings pending, or being contemplated by or threatened
against GMX.
12.4 GMX states that there is no liens or encumbrances burdening its
interest in the Leases.
12.5 GMX states that it is not aware of any environmental hazardous
wastes on the Leases and that to the best knowledge of its knowledge
and belief it is fully in compliance with local, state and federal laws
in relation to the environmental condition of the Leases; however, it
is understood that GMX does not currently have an Environmental
Assessment Report covering the said property and should Xxxx so desire
such a report, then Xxxx shall arrange or shall have arranged same at
its own cost.
13. Covenants and Warranties of Xxxx:
13.1 Xxxx states that neither the execution and delivery of this
Agreement nor the consummation of the transaction contemplated hereby
will constitute a material breach or a default under any contract or
agreement to which Xxxx is a party.
13.2 Xxxx states that there are no bankruptcy proceedings pending,
being contemplated by or threatened against Xxxx.
13.3 Xxxx shall indemnify and hold harmless GMX from any and all
claims, costs, expenses, liabilities or causes of action to or by third
parties arising from the activities attributable to its undivided
interest in the Leases which occur on or after the date of this
Agreement.
13.4 Xxxx states that it has the requisite power to acquire an interest
in the Leases and that the execution, delivery and performance of this
Agreement and the transaction contemplated hereby have been duly and
validly authorized by all necessary requisite corporate action.
14. All ad valorem, property, production, severance, windfall profit and
similar taxes and assessments (other than income taxes) based on or
measured by the ownership of property or the production of hydrocarbons
or the receipt of the proceeds therefrom, shall be apportioned and
prorated between GMX and Xxxx as of the effective date of the
assignments to be made pursuant to this Agreement.
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15. The Parties agree in principle that following completion of the Work
Program Xxxx Energy Inc. shall take over all rights and obligations of
Xxxx hereunder, and that such rights and obligations will thereafter be
embodied by amendment in the JOA and that this Agreement shall then
thereupon terminate.
16. Xxxx will pay to GMX a fee in respect of geological and geophysical
work to be done by GMX on the Leases in the amount of $22,500 for each
of the Xxxxx that may be drilled, and such amounts are shown separately
on Exhibit "B".
17. Xxxx confirms that, subject to and following satisfactory technical and
economic results from the Xxxxx, Xxxx will discuss with GMX applying
the principles of this Agreement to the drilling of further xxxxx to be
funded in like manner. This Clause does not represent a commitment by
Xxxx or GMX to proceed with such further drilling, nor a commitment by
Xxxx to retain available or to allocate funds for such activity.
18. Notwithstanding anything to the contrary herein, the Interests shall be
proportionately reduced, on a lease by lease basis, to the extent GMX
owns less than the entire leasehold estate created by such lease, and
to the extent such lease covers less than the entire oil and gas
mineral fee estate in and under the land covered by such lease.
Proper Names and Addresses of the parties and the respective Contact
names and telephone numbers under this Agreement are as follows:
Operator: GMX Resources Inc.
Xxx Xxxxxx Xxxxx, Xxxxx 000
0000 Xxxxx Xxxxxxxx
Xxxxxxxx Xxxx, Xxxxxxxx 00000
Operations; Xxx Xxxxxxxxx, Xx., ext. 11
All Other; Xxx Xxxxxxxxx, ext. 16
Phone # 000-000-0000
Fax # 000-000-0000
Non-Operator: Xxxx Energy Services Limited
c/o Quinn & Associates
0000 Xxxxxxxx, Xxxxx 000
Xxxxxx, Xxxxxxxx 00000
Contact: Xxx Xxxxxx
Phone # 000-000-0000
Fax # 000-000-0000
This Agreement shall extent to and bind the respective successors and
assigns, heirs, and any personal representatives of the Parties hereto and the
terms and provisions hereof shall constitute covenants running with the land and
leasehold estates covered hereby. This contract shall be governed by the laws of
the State of Oklahoma.
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IN WITNESS WHEREOF, the Parties have signed this Agreement as of this
date first above written.
GMX RESOURCES INC.
/s/ Xxx X. Xxxxxxxxx
---------------------------------
OFFICER
XXXX ENERGY SERVICES LIMITED
/s/ Xxxxxx X. Xxxxxx
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Authorized Signatory
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APPENDIX A
PAYOUT DATE:
Cash outflows (treated as negative numbers) in respect of the funds provided by
Xxxx and cash inflows from the net proceeds of sale of Tara's share of monthly
production from all xxxxx financed by such funds (treated on a pooled basis),
less operating costs and production taxes for Tara's interest in such xxxxx,
together with any proceeds from disposal or advance payments (all treated as
positive numbers) are to be summarized periodically to arrive at a monthly net
cash flow for Xxxx from the Advance Date (being the date of Tara's first advance
of funds to GMX in respect of the operations in question) up to the latest
available monthly figures. When the cumulative monthly net cash flow from the
Advance Date first calculates so as to result in a positive number, the Payout
Date shall be deemed to have occurred on the first day of the month following
the latest month included in such calculation. Month herein means the 12 months
of the calendar year.
In the event that the Advances are paid to GMX by more than one advance of
funds, interest at 4.5% per annum shall be calculated on each such Advance
(other than the first Advance), between and including the Advance Date (being
the date of the first Advance) and the date upon which the Advance in question
is transmitted to GMX, and the interest so calculated shall be treated for the
purposes of the payout calculation and included in such calculation as if such
interest were proceeds received by Xxxx out of the net revenues of the Xxxxx so
funded by the Advances. Such interest calculation shall use a 360-day year.
