DRILLING AND OPERATING
AGREEMENT
DATED NOVEMBER 15, 2002
OPERATOR: Petrogen International Limited
NON-OPERATOR: Petrogen, Inc.
Page 1 of 30
DRILLING AND OPERATING AGREEMENT
THIS AGREEMENT is entered into by and between Petrogen International Limited
(hereinafter referred to as "Operator") and Petrogen, Inc. (hereinafter referred
to as "Non-operator" - where there are more than one non-operating Interest
owner at the time of contract or thereafter then such shall be included).
WITNESSETH:
WHEREAS: Non-Operator is the owner of oil and gas leases, drilling units and/or
oil and gas xxxxx in the lands identified in Exhibit "A" and intends to acquire
further such oil and gas interests in the future (such present and future oil
and gas interests are hereinafter referred to as the "Interests"), and the
parties hereto have reached an agreement for the operation of such Interests and
for the terms of drilling additional oil and gas xxxxx for the production of oil
and gas to the extent which the Non-Operator may specify on the terms of this
Agreement.
NOW THEREFORE, it is agreed as follows:
ARTICLE I
DEFINITIONS
A. The term "oil and gas" shall mean oil, gas, casinghead gas, gas
condensate, and all other liquid or gaseous hydrocarbons and other
marketable substances produced therewith, unless an intent to limit the
inclusiveness of this term is specifically stated.
B. The term "Contract Area" shall mean all of the oil and gas leases, oil
and gas xxxxx and oil and gas drilling units intended to be drilled
and/or operated for oil and gas purposes under this agreement. The
leases, initial drilling units and oil and gas xxxxx are described in
Exhibit "A".
Page 2 of 30
C. The term "Operator's costs" shall include all costs sustained by
Operator, directly or indirectly, plus a general administrative charge
amount of 10% of aggregate costs, and such costs shall include, without
limitation, all costs to service Interests (it being understood that
such Interest costs shall be directly borne by the Non-Operator unless
the Operator has specifically agreed to pay the same on behalf of the
Non-Operator), all costs of drilling and well establishment, all costs
of producing Production (as defined below), all maintenance, all
re-working, all transport, any and all taxes in relation to the
Interests or Production borne by Operator, any costs borne to defend
title to Interests, and all defense costs borne by Operator as a
consequence of its acting as Operator (excepting only liabilities
incurred by fraud or gross negligence). All costs shall be remitted to
Operator within 30 days of invoice and thereafter shall bear interest
at 1% per month. Any costs to be incurred of a capital nature or of a
nature (determined at the discretion of Operator) not normally
day-to-day operating costs may be determined by the Operator to be
pre-billed as to the estimated amount and the Operator shall be under
no obligation to effect such costs until its pre-bills have been
funded.
Unless the context otherwise clearly indicates, words used in the
singular include the plural, the plural includes the singular, the
neuter gender includes the masculine and the feminine.
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and make a part hereof.
Page 3 of 30
EXHIBIT "A" SHALL INCLUDE THE FOLLOWING INFORMATION:"
1) Identification of leases, drilling units/xxxxx initially subject to this
agreement,
2) Percentages or fractional interests of parties in the Contract
Area,
3) Address of parties for notice purposes.
EXHIBIT "B," ACCOUNTING PROCEDURE
If any provision of any exhibit is inconsistent with any provision
contained in the body of this agreement, the provision in the body of
this agreement shall prevail.
ARTICLE III.
INTERESTS OF PARTIES
INTEREST OF PARTIES IN COSTS AND PRODUCTION:
Exhibit "A" lists the parties and their respective percentage of
fractional interests in the leases, drilling units/xxxxx under this
agreement. Unless changed by other provisions of this agreement, all
costs and liabilities incurred in operations under this agreement by
the Operator shall be borne and paid by the Non-Operator who shall be
liable to recover costs from any other parties of interest who may have
an obligation to contribute to costs. All equipment and material
acquired in operations on the Contract Area shall be owned by the
Non-Operator or, depending upon specific contract between the
Non-Operator and other parties, the parties as their interests are
shown in Exhibit "A." If other parties do not have participating
interest it shall be assumed that ownership resides in the
Non-Operator. All production of oil and gas from the Contract Area,
subject to the payment of royalties and other costs to third parties,
Page 4 of 30
(such production after royalties and third party costs hereafter called
"Production") shall be owned by the parties in the same manner during
the term hereof: provided, however, this shall not be deemed an
assignment or cross-assignment of Interests covered hereby. As
principal consideration for the Operator's services, the Operator shall
receive a ten percent (10%) Carried Interest ("Operator's Interest") of
Production. The Operator may file notice of such Operator's Interest on
title to the Interests. Such Operator's Interest shall continue for the
period that the Operator remains operator and if the Operator assigns
its operations with the permission of the Non-Operator such shall
continue so long as the assignee remains operator or effects a valid
further assignment and such Operator's Interest shall be assignable so
long as the Operator or assignee has not been terminated as operator,
subject to the below right of first refusal.
ARTICLE IV.
OPERATOR
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR
For the commercial productive life of the Contract Area and
other Interests for oil and gas, Operator shall be the operator of the
Interests and shall conduct and direct and have full control over all
operations on the Interests as permitted and required by, and within
the limits of, this Agreement. This powers of the Operator under this
Agreement shall be interpreted widely and to the benefit of the
Operator and shall encompass all such powers as are common in the
industry and necessary or incidental to the Operator's abilities and
duties to operate the Interests and shall include, but not be limited
by, rights of egress and ingress to the Interests, the right to use all
Page 5 of 30
properties of the Non-Operator and Interest owners in relation to
operations on the Interest, the right to exclude persons from the
interest including the Non-Operator (except for appointments for
examinations made with reasonable notice), the right to sell Production
and give good title to the same, the right to engage contract for
drilling, well maintenance, sales and other such matters necessary to
maintain the Interest and conduct Production, and every other matter
the Operator may deem reasonably necessary or advantageous to act as
operator. Operator shall conduct all such operations in a good and
workmanlike manner, but it shall have no liability as Operator to the
Non-Operator for losses sustained or liabilities incurred, except such
as may result from gross negligence or willful misconduct.
B. RESIGNATION OF OPERATOR AND SELECTION OF SUCCESSOR:
1. RESIGNATION OF OPERATOR: Operator may resign at any time by giving
60 days written notice thereof to Non-Operator. If Operator terminates
its legal existence or, by operation of law, is not longer capable of
serving as Operator, it shall cease to be Operator without any action
by Non-Operator, except the selection of a successor. If Operator
becomes bankrupt or is placed in receivership and Operator is unable to
maintain its plugging bond, it shall cease to be the Operator. Such
resignation or termination shall not become effective until 7:00 a.m.
on the first day of the calendar month following the expiration of
ninety (90) days after the giving of notice of its resignation by
Operator or termination as Operator as provided herein, unless a
successor Operator has been selected and assumes the duties of Operator
at an earlier date. Operator, after the effective date of its
resignation or termination, shall be bound by the terms hereof as a
Non-Operator if it is a holder of interests in the Interest. A change
Page 6 of 30
of corporate name or structure of Operator or transfer of Operator's
interest or change of ownership of Operator shall not be the basis for
termination of Operator.
2. Selection of Successor Operator: Upon the resignation or
termination of Operator, a successor Operator shall be selected by
the vote of the parties owning an interest in the Interest at the
time such successor Operator is selected and on the basis of the
percentage ownership of the Interest at such time.
C. EMPLOYEES
The number of employees used by Operator in conducting operations
hereunder, their selection, and the hours of labor and the compensation for
services performed, shall be determined by Operator, and all such employees
shall be the employees of Operator.
ARTICLE V.
ACCESS TO INTERESTS AND WELL PLUGGING
A. ACCESS TO CONTRACT AREA AND INFORMATION
Each party shall have access to the Interests at all reasonable times,
at its sole risk, to inspect or observe operations, and shall have
access at reasonable times to information pertaining to operations
thereof, including Operator's books and records relating thereto.
Operator, upon request, shall furnish Non-Operator with copies of all
forms or reports filed with governmental agencies. The cost of
gathering and furnishing information to Non-Operator shall be charged
to the Non-Operator.
B. PLUGGING AND ABANDONMENT OF XXXXX:
Any well which has been completed as a producer shall not be plugged
and abandoned without the consent of the majority of ownership of
parties having an interest. If such majority parties consent to such
Page 7 of 30
abandonment, the well shall be plugged and abandoned in accordance with
applicable regulations and at the cost, risk and expense of the
Interest owners. If, within thirty (30) days after receipt of notice of
the proposed abandonment of such well, parties do not agree to the
abandonment of such well, the party wishing to continue its operation
shall tender to the other parties its proportionate share of the value
of the well's salvable material and equipment, determined in accordance
with the provisions of Exhibit "B", less the estimated cost of
salvaging and the estimated cost of plugging and abandoning. The
abandoning party shall assign to the non-abandoning party, without
warranty, express or implied, as to title or as to quantity, quality,
or fitness for use of the equipment and material, all of its interest
in the well and related equipment, together with its interest in the
drilling unit as to, but only as to, the intervals of the formation or
formations then open to production. The payment by, and the assignment
to, the assignee shall be based upon the respective percentages of
participation in the Interests for that well. There shall be no
readjustment of interests in the remaining xxxxx or portion of the
Interests. Should the Interest owners determine to abandon a well or
xxxxx and Operator wishes to continue production or re-work such well
or xxxxx then the Interest owners shall assign their interests in such
xxxxx to the Operator as above, mutatis mutandis.
Thereafter, the abandoning party shall have no further
responsibility, liability, or interest in the operation of or
production from the well in the interval or intervals then open other
than any royalties retained in any lease made under the terms of this
Article. Upon request, Operator shall continue to operate the assigned
well for the account of the Non-Operator at the rates and charges
contemplated by this agreement, plus any additional costs and charges
Page 8 of 30
which may arise as the result of the separate ownership of the assigned
well.
ARTICLE VI.
EXPENDITURES AND LIABILITY OF PARTIES
A. LIABILITY OF PARTIES
The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations as set forth
in this agreement. Interests owners shall each be severally liable for
their respective proportionate share of the costs of operating the
Interests. Accordingly, the liens granted among the parties in Article
VI.B of Schedule "B" are given to secure only the debts of each
severally. It is not the intention of the parties to create, nor shall
this Agreement be construed as creating, a mining or other partnership
or association, or to render the parties liable as partners.
B. LIENS AND PAYMENT DEFAULTS:
Non-Operator, and any other Interest owner by this Agreement or
collateral agreement grants to Operator a lien upon its oil and gas
rights and property in the Contract Area and Interests, and a security
interest in its share of Production when extracted and its interest in
all equipment, to secure payment of its share of all Operator's cost of
operating the Interest, together with interest thereon at the rate
provided in the Accounting Procedure attached hereto as Exhibit "B". To
the extent that Operator has a security interest under an applicable
Uniform Commercial Code Operator shall be entitled to exercise the
rights and remedies of a secured party under the Code. The bringing of
a suit and the obtaining of judgment by Operator for the secured
indebtedness shall not be deemed an election of remedies or otherwise
Page 9 of 30
affect the lien rights or security interest as security for the payment
thereof until actually collected by Operator. In addition, upon default
by any Non-Operator in the payment of its share of expense, Operator
shall have the right , without prejudice to other rights or remedies,
to collect from the purchaser of Production the proceeds from the sale
of such Non-Operator's share until the amount owed by such
Non-Operator, plus interest has been paid. Each purchaser shall be
entitled to rely upon Operator's written statement concerning the
amount of any default.
If Non-Operator fails or is unable to prepay the estimated
total costs of operating the Interests within thirty (30) days after
rendition of a statement therefore by Operator, Operator shall be
entitled to withhold payment of Non-Operator's share of the proceeds
from sale of oil and gas from the Interest until said amount is paid in
full.
Operator is authorized and directed to market all Production
from the Interests for the benefit of itself and Non-Operator Interest
owners. Operator shall be responsible for collecting the entire amount
of the proceeds due from the purchasers(s). Unless Non-Operator has
prepaid the costs of operating the Interests, Operator may deduct from
the proceeds from the sale of Production the Operator's percentage of
Production and the costs of operating the Interests due from the
Interest Owners, and, in that event, Operator shall pay the net
proceeds to Interest owners within 45 days after receipt of payment
from the purchaser(s).
C. PAYMENTS AND ACCOUNTING
Except as otherwise specifically provided in this Agreement,
Operator shall promptly pay and discharge expenses incurred in
operation of the Interests pursuant to this Agreement and shall charge
Page 10 of 30
the amount thereof to a Joint Account (if the Operator elects to
establish such account, otherwise the Operator shall effect financial
matters through an Operator account specifically established for the
Interests) upon the expense basis provided in the Accounting Procedure
attached hereto as Exhibit "B". Operator shall keep an accurate record
of the Joint Account, showing expenses incurred and charges and credits
made and received.
Operator, at its election, shall have the right, from time to
time, to demand and receive from the Non-Operator payment of the
estimated amount of the expenses to be incurred in operations hereunder
during the next succeeding month, which right may be exercised only by
submission to Non-Operator of an itemized statement of such estimated
expenses of AFE (Authorization for Expenditure), together with an
invoice therefore. Each such statement and invoice for the payment in
advance of estimated expenses shall be submitted on or before the 20th
day of the next preceding month. Non-Operator shall pay to Operator the
amount of such estimate within fifteen (15) days after such estimate
and invoice is received. If Non-Operator fails to pay said estimate
within said time, the amount due shall bear interest as provided in
Exhibit "B" until paid. Proper adjustment shall be made monthly between
advances and actual expenses.
1. DRILLING OF XXXXX. Operator shall be responsible for obtaining all
permits and other approvals necessary to drill and operate any
well in the Interests. Operator shall not undertake to drill and
complete any well in the Interests without first providing
Non-Operator with an AFE for such well. Within fifteen days after
receipt of such AFE Non-Operator shall be required to prepay the
AFE estimate of all of the drilling and completion expenses as
provided herein.
Page 11 of 30
2. RECOMPLETION OR PLUG BACK: Without the consent of the majority of
the Interest owners, no well shall be recompleted or plugged back,
it being understood that the consent to the recompletion or
plugging back of a well shall include consent to all necessary
expenditures in conducting such operations and completing and
equipping of said well, including necessary tankage and/or surface
facilities.
3. OTHER OPERATIONS: Operator shall not undertake any single project
reasonably estimated to require an expenditure in excess of
Twenty-five Thousand Dollars ($25,000) without Interest owners
approval by majority except in connection with a well, the
reworking, deepening, recompleting, or plugging back of which has
been previously authorized by or pursuant to this agreement;
provided, however, that, in case of explosion, fire, flood or
other sudden emergency, whether of the same or different nature,
Operator may take such steps and incur such expenses as in its
opinion are required to deal with the emergency to safeguard life
and property but Operator, as promptly as possible, shall report
the emergency to the Non-Operator. If Operator prepares AFE for
its own use, Operator, upon request by Non-Operator, shall furnish
copies of its AFE for any single project costing in excess of
Twenty Five Thousand Dollars ($25,000).
D. ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS:
For the account of each party, Operator shall pay or deliver,
or cause to be paid or delivered, all royalties to the extent of
the full amount due based upon the Production from the xxxxx.
Page 12 of 30
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:
Rentals, shut-in well payments, free gas and minimum royalties
which may be required under the terms of any lease for any well shall
be paid as a working interest owner expense from Production.
F. TAXES
Beginning with the first calendar year after the effective
date hereof, Operator shall render for ad valorem taxation all property
subject to this agreement which by law should be rendered for such
taxes, and it shall pay from Production (if no Production then
Non-Operator shall be liable) all such taxes assessed thereon before
they become delinquent. If the assessed valuation of any leasehold
estate is reduced by reason of its being subject to outstanding excess
royalties, overriding royalties or production payments, the reduction
in ad valorem taxes resulting therefrom shall inure to the benefit of
the owner or owners of such leasehold estate, and Operator shall adjust
the charge to such owner or owners so as to reflect the benefit of such
reduction.
If Operator considers any tax assessment improper, Operator
may, at its discretion, protest within the time and manner prescribed
by law, and prosecute the protest to a final determination, unless all
parties agree to abandon the protest prior to final determination.
During the pendency of administrative or judicial proceedings, Operator
may elect to pay, under protest, all such taxes and any interest and
penalty. When any such protested assessment shall have been finally
determined, Operator shall pay the tax for the Joint Account, together
with any interest and penalty accrued, and Non-Operator's share of the
total cost may then be assessed against the Non-Operator.
Page 13 of 30
Each party shall pay or cause to be paid all Production,
severance, gathering and other taxes imposed upon or with respect to
the production or handling of such party's share of oil and/or gas
produced under the terms of this agreement.
G. INSURANCE
At all times while operations are conducted hereunder, Operator shall
comply with the Workers' Compensation Law of the States of Interests.
Operator shall also carry or provide insurance for the benefit of the
Joint Account of the parties and of the Interests in accordance with
reasonable practice. Operator shall require all contractors engaged in
work on or for the Interests to comply with the Workers' Compensation
Law of the State where the operations are being conducted and to
maintain such other insurance as Operator may require.
ARTICLE VII.
WAIVER OF RIGHT TO PARTITION
Each party hereto owning an undivided interest in the Interests waives
any and all rights it may have to partition and have set aside to it in
severalty its undivided interest therein.
ARTICLE VIII.
PREFERENTIAL RIGHT TO PURCHASE, AREA OF INTEREST AND RIGHT OF FIRST REFUSAL
Should any party desire or attempt to sell all or any part of its
interests under this Agreement, or its rights and interests in the
Interests, it shall give written notice thereof to the other parties
(including the Operator) within five (5) days, with full information
concerning its proposed sale, which shall include the name and address
Page 14 of 30
of the prospective purchaser (who must be ready, willing and able to
purchase), the purchase price, and all other terms of the offer. The
party hereof wishing to purchase shall then have an optional prior
right (pro rata if more than one party wishes to accept the offer) for
a period of ninety (90) days (30 days if disposal is for finance
purposes by farm-out, partnership, joint venture, or any other finance
vehicle) after receipt of notice to purchase, on the same terms and
conditions, the interest which the other party proposes to sell.
However, there shall be no preferential right to purchase in those
cases where any party wishes to mortgage its interests, or to dispose
of its interests by merger, reorganization, consolidation, or sale of
all or substantially all of its assets to a subsidiary or parent
company or to a subsidiary of a parent company, or any company in which
any one party owns a majority of the stock.
There shall be an `area of interest' extending five miles from
the outer boundaries of the Interests such that should the Operator or
an Interest owner acquire oil or gas interests in such area of interest
it shall be deemed to have acquired the same on behalf of the other
parties and the same subject to this Agreement, subject to payment by
the other parties of cost (pro rata if less than all) within 30 days of
notice and accounting by the acquiring party. If the non-acquiring
parties do not pay within the 30 day notice period then they shall have
no right to such interest. This right shall not extend to any
acquisition of Interest by a party where parties have had an
opportunity to bid.
The Operator shall have no other accountability to the
Interest owners regarding any acquisitions it may make in respect to
any other oil and gas interests whatsoever and it is specifically
Page 15 of 30
acknowledged by the Interest owners that the Operator may or shall
aggressively acquire such interests solely for its own account.
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
This agreement is not intended to create, and shall not be
construed to create, a relationship of partnership or an association
for profit between or among the parties hereto. Notwithstanding any
provisions herein that the rights and liabilities hereunder are several
and not joint or collective, or that this agreement and operations
hereunder shall not constitute a partnership, if, for Federal income
tax purposes, this agreement and the operations hereunder are regarded
as a partnership, each party hereby affected elects to be excluded from
the application of all of the provisions of Subchapter "K", Chapter 1,
Subtitle "A", of the Internal Revenue Code of 1954 as permitted and
authorized by Section 761 of the Code and the regulations promulgated
thereunder (all as may also be amended or replaced). Operator is
authorized and directed to execute on behalf of each party hereby
affected such evidence of this election as may be required by the
Secretary of the Treasury of the United States of the Federal Internal
Revenue Service, including specifically, but not by way of limitation,
all of the returns, statements, and the data required by Federal
Regulations. Should there be any requirement that each party hereby
affected give further evidence of this election, each such party shall
execute such documents and furnish such other evidence as may be
required by the Federal Internal Revenue Service or as may be necessary
to evidence this election. No such party shall give any notices or take
any other action inconsistent with the election made hereby. If any
present or future income tax laws of the state or states in which the
Page 16 of 30
Contract Area is located or any future income tax laws of the United
States contain provisions similar to those in Subchapter "K", Chapter
1, Subtitle "A", of the Internal Revenue Code of 1954, under which an
election similar to that provided by Section 761 of the Code is
permitted, each party hereby affected shall make such election as may
be permitted or required by such laws. In making the foregoing
election, each such party states that the income derived by such party
from Operations hereunder can be adequately determined without the
computation of partnership taxable income.
ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single damage claim or suit arising
from operations hereunder. If the claim cannot be settled for an amount
acceptable to Operator, Operator shall assume the further handling of
the claim or suit. Also, costs and expense of handling, settling, or
otherwise discharging such claim or suit shall be at the expense of the
Joint Account. If a claim is made against any party or if any party is
sued on account of any matter arising from operations hereunder over
which such individual has no control because of the rights given
Operator by this agreement, the party shall immediately notify
Operator, and the claim or suit shall be treated as any other claim or
suit involving hereunder.
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force
majeure to carry out its obligations under this agreement, other than
the obligation to make money payments, that party shall give to the
other party prompt written notice of the force majeure with reasonably
Page 17 of 30
full particulars concerning in; thereupon, the obligations of the party
giving the notice, so far as they are 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 here employed, shall mean an act
of God, strike, lockout, or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm,
flood, explosion, governmental action, governmental delay, restraint or
inaction, unavailability of equipment, and any other cause, whether of
the kind specifically enumerated above or otherwise, which is not
reasonable within the control of the party claiming suspension.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties, and
required by any of the provisions of this agreement, unless otherwise
specifically provided, shall be given in writing by United States mail,
Fedex, UPS, Western Union telegram, postage or charges prepaid, or by
teletype or facsimile or e-mail, and addressed to the party to whom the
notice is given at the addresses listed on Exhibit "A". The originating
notice given under any provision hereof shall be deemed given only when
Page 18 of 30
received by the party to whom such notice is directed, and the time for
such party to give any notice in response thereto shall run from the
date the originating notice is received. The second or any responsive
notice shall be deemed given when deposited in the United States mail
or with the Western Telegraph Company, Fedex or UPS with postage or
charges prepaid, or when sent by facsimile or teletype. Each party
shall have the right to change its address at any time, and from time
to time, by giving written notice hereof to the other party.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the
oil and gas drilling units and xxxxx so long as any of the oil and gas
xxxxx subject to this agreement remain or are continued in operation as
to any part of the Interests, whether by production, extension, renewal
or otherwise, and/or so long as oil and/or gas Production continues
from any well in commercial paying quantities.
It is agreed, however, that the termination of this agreement
shall not relieve any party hereto from any liability which has accrued
or attached prior to the date of such termination.
ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. REGULATIONS AND ORDERS
This agreement shall be subject to the laws of the State of Colorado,
to the valid rules, regulations, and orders of any duly constituted
regulatory body of said state; and to all other applicable federal,
Page 19 of 30
state, and local laws, ordinances, rules, regulations and orders.
B. GOVERNING LAW
The essential validity of this agreement and all matters pertaining
thereto, including, but not limited to, matters of performance,
non-performance, breach, remedies, procedures, rights, duties and
interpretation or construction shall be governed and determined by the
law of the State of Colorado.
ARTICLE XV.
MISCELLANEOUS
This agreement shall be binding upon and shall inure to the
benefit of the parties hereto and to their respective heirs,
successors, legal representatives, and permitted assigns.
This instrument may be executed in any number of counterparts,
each of which shall be considered an original for all purposes.
IN WITNESS WHEREOF, this agreement shall be effective as of the Date
herein first set forth.
OPERATOR
/s/ XXX X. XXXXXXXX
NON-OPERATOR
/s/
Page 20 of 30
EXHIBIT "A"
Attached to and made a part of
Drilling and Operating Agreement
OPERATOR
Petrogen International Ltd
0000 XX Xxxxxxx, Xxxxx 0000
Xxxxxxx, Xxxxx 00000
XXX
Phone: 000-000-0000
Fax: 000-000-0000
NON-OPERATOR
Petrogen, Inc.
0000 XX Xxxxxxx, Xxxxx 0000
Xxxxxxx, Xxxxx 00000
XXX
Phone: 000-000-0000
Fax: 000-000-0000
Page 21 of 30
EXHIBIT "B"
Attached to and made a part of
Drilling and Operating Agreement
ACCOUNTING PROCEDURE
JOINT OPERATIONS
I. GENERAL PROVISIONS
1. DEFINITIONS
"Joint Property" shall mean the real and personal property subject to the
agreement to which this Accounting Procedure is attached.
"Joint Operations" shall mean all operations necessary or proper for the
drilling, completion, operation, protection and/or maintenance of the Joint
Property.
"Joint Account" shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and which are to be shared
by the Parties.
"Parties" shall mean Operator and Non-Operator, which latter includes all
non-operator Interest owners.
"Personal Expenses" shall mean travel and other reasonable reimbursable
expenses of Operator's employees.
"Material" shall mean personal property, equipment or supplies acquired or
held for use on the Joint Property.
2. STATEMENT AND XXXXXXXX
Operator shall collect all Production proceeds from the purchaser(s),
deduct all expenses, and on a monthly basis, Operator shall submit a
statement to Non-Operator showing its proportionate share of the Joint
Account for the preceding month. Such statements will identify the well
and all charges and credits, summarized by appropriate classifications
of investment and expense except that unusual charges and credits shall
be separately identified and fully described in detail.
Page 22 of 30
3. ADJUSTMENTS
Payment of any drilling, completion or operating expenses shall not
prejudice the right of Non-Operator to protest or question the
correctness thereof or to conduct an audit of the Joint Account.
4. AUDITS
Non-Operator, upon notice in writing to Operator shall have the right
to audit Operator's accounts and records relating to the Joint Account.
If not requested within one (1) year after the end of a fiscal year,
Non-Operator shall be deemed to have waived the right to audit that
year's statements.
5. APPROVAL BY NON-OPERATOR
Where an approval or other agreement of the Parties of Non-Operator is
expressly required under other sections of this Accounting Procedure
and if the agreement to which this Accounting Procedure is attached
contains no contrary provisions in regard thereto, Operator shall
notify Non-Operator of the Operator's proposal, and the agreement or
approval of the Non-Operator shall be controlling on all Parties.
6. ADVANCES BY NON-OPERATOR
As requested by Operator, Non-Operator shall advance or prepay all
estimated drilling, completion, and/or operating expenses projected to
be incurred by the Joint Account for a period up to six (6) months. In
that event, Operator shall account for all drilling costs completion
costs, and/or operating expenses on a monthly basis as they are
incurred. If, upon completion of the drilling and/or completion of the
well or the end of the six (6) month operating period, Non-Operator is
due a credit, such credit shall be paid with any other credits due
therein. If there is an amount due for the costs of drilling and/or
completing a well, Non-Operator shall pay any invoice therefore within
thirty (30) days of receipt. It being the intent that Non-Operator
shall pay no more than its share of the actual costs, including
Operator's overhead, to drill and/or complete the well Prepayments of
projected operating expenses shall be credited to the Non-Operator's
share of the Joint Account. It being the intent that the Non-Operator
shall ultimately bear only its proportionate share of any operating
Page 23 of 30
expenses, with Operator ultimately bearing its proportionate share of
such operating expenses from net production proceeds.
II. DIRECT CHARGES
Operator shall charge the Joint Account with the following items:
1. MATERIAL
Material purchased or furnished by Operator for use on the joint
property as provided under Section IV. Only such Material shall be
purchased for or transferred to the Joint Property as may be
required for immediate use and is reasonable practical and
consistent with efficient and economical operations. The
accumulation of surplus stocks shall be avoided.
2. TRANSPORTATION
Transportation of material necessary for the Joint Operations but
subject to the following limitations:
A. If material is moved to the Joint Property from the
Operator's warehouse or other properties, no charge
shall be made to the Joint Account for a distance
greater than the distance from the nearest reliable
supply store to where like material is normally
available, unless agreed to by the Parties.
B. If surplus Material is moved to Operator's warehouse or
other storage point, no charge shall be made to the
Joint Account for a distance greater than the distance
from the nearest reliable supply store unless agreed to
by the Parties. No charge shall be made to the Joint
Account for moving Material to other properties
belonging to Operator, unless agreed to by the Parties.
3. SERVICES
The cost of contract services, equipment and utilities provided by
outside sources, except services excluded by Paragraph 6 of Section II
and Paragraph 1, ii of Section III, and the cost of professional
consultant services and contract services of technical personnel
directly engaged on the Joint Property shall be charged to the Joint
Account. The cost of professional consultant services or contract
services of technical personnel not directly engaged on the Joint
Property shall not be charged to the Joint Account unless previously
agreed to by the parties.
Page 24 of 30
4. EQUIPMENT AND FACILITIES FURNISHED BY OPERATOR
A. Operator shall charge the Joint Account for use of Operator owned
equipment and facilities at rates commensurate with costs of ownership
and operation. Such rates shall include costs of maintenance, repairs,
other operating expense, insurance, taxes, and depreciation. Such rates
shall not exceed average commercial rates currently prevailing in the
immediate area of the Joint Property.
B. In lieu of charges in Paragraph 4A above, Operator may elect to use
average commercial rates prevailing in the immediate area of the Joint
Property less 20%.
5. DAMAGES AND LOSSES TO JOIN PROPERTY
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident or other cause, except those resulting
from Operator's gross negligence or willful misconduct shall be charged
to the Joint Account. Operator shall furnish Non-Operator written
notice of damages or losses incurred as soon as practicable after a
report thereof has been received by Operator.
6. LEGAL EXPENSE
Expense of handling, investigating and settling litigation or claims,
discharging of third-party liens, payment of judgments and amounts paid
for settlement of claims incurred in or resulting from operations under
the agreement or necessary to protect or recover the Joint Property.
All other legal expense is considered to be covered by the overhead
provisions of Section III unless otherwise agreed to by the Parties.
7. TAXES
All taxes of every kind and nature assessed or levied upon or in
connection with the Joint Property, the operation thereof, or the
production therefrom, and which taxes have been paid by the Operator
for the benefit of the parties.
8. INSURANCE
Net premiums paid for insurance required to be carried for the Joint
Operations for the protection of the Parties. In the event Joint
Operations are conducted in a state in which Operator may act as
Page 25 of 30
self-insurer for Workmen's Compensation and/or Employers Liability
under the respective state's laws, Operator may, at its election,
include the risk under its self-insurance program and in that event,
Operator shall include a charge not to exceed normal rates.
9. INTEREST
To the extent interest may be charged on any delinquent payments due
under the Agreement, interest shall be payable at 1% per month.
III. OVERHEAD
1. OVERHEAD - FIXED RATE
A. (1) As compensation for administrative, supervision, office services
and warehousing costs, Operator shall charge the Joint Account for
producing operations on a fixed rate basis at the rate of $________ per
well per month. Unless otherwise agreed to by the parties, such charge
shall be in lieu of costs and expenses of all offices and salaries or
wages plus applicable burdens and expenses of all personnel. The cost
and expense of services from outside sources in connection with matters
of taxation, traffic, accounting or matters before or involving
governmental agencies directly affecting the Joint Property shall be
direct charged to the Joint Account and shall not be considered as
included in this Overhead rate unless otherwise agreed to by the
parties.
(2) The Overhead rate shall be applied as follows:
(a) An active well produced for any portion of the
month shall be charged only for the portion of the month it
produced.
(b) All inactive xxxxx shall not qualify for an
overhead charge.
(3) The well rates may be adjusted as of the first day of
April each year following the effective date of the agreement to which
this Accounting Procedure is attached. The adjustment shall be computed
by multiplying the rate currently in use by the percentage increase or
decrease in the average weekly earnings of Crude Petroleum and Gas
Fields Production Workers as published by the United States Department
of Labor, Bureau of Labor Statistics. The adjusted rates shall be the
rates currently in use, plus or minus the computed adjustment.
Page 26 of 30
IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES,
TRANSFERS AND DISPOSITIONS
Operator is responsible for Joint Account Material and shall make
proper and timely charges and credits for all material movements
affecting the Joint Property. Operator shall provide all Material for
use on the Joint Property; however, at Operator option, such Material
may be supplied by the Non-Operator. Operator shall make timely
disposition of idle an/or surplus Material, such disposal being made
either through sale to Operator or Non-Operator, division in kind, or
sale to outsiders. Operators may purchase, but shall be under no
obligation to purchase the interest of Non-Operator in surplus
condition A or B material.
1. PURCHASES
Material purchased shall be charged at the price paid by Operator after
deduction of all discounts received. In case of material found to be
defective or returned to vendor for any other reason credit shall be
passed to the Joint Account when adjustment has been received by the
Operator.
2. TRANSFERS AND DISPOSITIONS
Material furnished to the Joint Property and Material transferred from
the Joint Property or disposed of by the Operator, unless otherwise
agreed to by the Parties, shall be priced on the following basis
exclusive of cash discounts.
A. New Material (Condition A)
New Material shall be priced at the current new price, in
effect at the date of movement, as quoted by a reliable supply
store near the Joint Property where such Material is normally
available.
Page 27 of 30
B. Good Used Material (Condition B)
Material in sound and serviceable condition and suitable for
reuse without reconditioning:
1) Material moved to the Joint Property
(a) At seventy-five percent (75%) of current new
price, as determined by Paragraph 2A of this Section IV.
2) Material moved from the Joint Property.
(a) At seventy-five percent (75%) of current new
price, as determined by Paragraph 2A of this Section IV, if
Material was originally charged to the Joint Account as new
Material,
Or
(b) At sixty-five percent (65%) of current new price,
as determined by paragraph 2A of this Section IV, if Material
was originally charged to the Joint Account as good used
Material at seventy-five percent (75%) or current new price.
The cost of reconditioning, if any, shall be absorbed by the
transferring property.
A. Other Used Material (Condition C and D)
(1) Condition C
Material which is not in sound and serviceable
condition and not suitable for its original function until after
reconditioning shall be priced at fifty percent (50%) of current
new price as determined by Paragraph 2A of this Section IV. The
cost of reconditioning shall be charged to the receiving property,
provided Condition C value plus cost of reconditioning does not
exceed Condition value.
(2) Condition D
All other Material, including junk, shall be priced
at a value
commensurate with its use or at prevailing prices. Material no
longer suitable for its original purpose but usable for some other
purpose, shall be priced on a basis comparable with that of items
normally used for such other purpose. Operator may dispose of
Condition D Material under procedures normally utilized by the
Operator without prior approval of Non- Operators.
B. Obsolete Material
Material which is serviceable and usable for its
original function but condition and/or value of such
material is not equivalent to that which would
Page 28 of 30
justify a price as provided above may be specially
priced as agreed to by the parties. Such price should
result in the Joint Account being charged with the
value of the service rendered by such material.
3. PREMIUM PRICES
Whenever Material is not readily obtainable at published or listed
prices because of national emergencies, strikes or other unusual
causes over which the Operator has no control, the Operator may
charge the Joint Account for the required Material at the
Operator's actual cost incurred in providing such material, in
making it suitable for use, and in moving it to the Joint
Property.
V. INVENTORIES
The Operator shall maintain detailed records of Material.
1. PERIODIC INVENTORIES, NOTICE AND REPRESENTATION
At reasonable intervals, Inventories shall be taken by Operator of
the Joint Account Material. Written notice of intention to take
inventory shall be given by Operator at least thirty (30) days
before any inventory is to begin so that Non-Operator may be
represented when any inventory is taken.
2. RECONCILIATION AND ADJUSTMENT OF INVENTORIES
Reconciliation of a physical inventory with the Joint Account
shall be made, and a list of overages and shortages shall be
furnished to the Non-Operator within six months following the
taking of the inventory. Inventory adjustments shall be made by
Operator with the Joint Account for overages and shortages.
3. SPECIAL INVENTORIES
Special Inventories may be taken whenever there is any sale or
change of interest in the Joint Property. It shall be the duty of
the party selling to notify all other Parties as quickly as
possible after the transfer of interest takes place. In such
cases, both the seller and the purchaser shall be governed by such
inventory.
Page 29 of 30
4. EXPENSE OF CONDUCTION PERIODIC INVENTORIES
The expense of conducting periodic inventories shall be charged to
the Joint Account.
Page 30 of 30
