PRODUCTION AND DELIVERY AGREEMENT
THIS PRODUCTION AND DELIVERY AGREEMENT (this "Agreement") is made and
entered into as of the _____ day of November, 1996 by and between MERCURY
EXPLORATION COMPANY, a Texas corporation ("Grantor"), and MCNIC OIL & GAS
f/k/a SUPPLY DEVELOPMENT GROUP, INC., a Michigan corporation ("Grantee").
WHEREAS, by a Conveyance of Production Payment of even date herewith,
from Grantor to Grantee (the "Conveyance"), Grantee has purchased and
acquired from Grantor and Grantor has sold and conveyed to Grantee, a
Production Payment in the Subject Interests which are described in Exhibit A
to the Conveyance;
WHEREAS, by a Purchase and Sale Agreement dated October 31, 1996 (the
"Purchase Agreement") Grantor agreed to sell and Grantee agreed to purchase
an undivided interest in the properties described in Exhibit A attached
thereto;
WHEREAS, each capitalized term defined in the Purchase Agreement and the
Conveyance used herein without definition shall have the respective meaning
given to such term in the Purchase Agreement and the Conveyance.
NOW, THEREFORE, in consideration of the mutual benefits and obligations
of the parties hereunder, Grantee and Grantor hereby agree as follows:
1. TAKING IN KIND: MARKETING.
(a) The Production Payment Oil shall be delivered (subject to the last
sentence of Section 1.07 of the Conveyance) free of cost, into the facilities
of the purchaser of such Oil at the relevant Delivery Point.
(b) All Production Payment Oil marketed by Grantor on behalf of
Grantee, if any, shall be sold pursuant to arm's length contracts with
parties not affiliated with Grantor, and shall contain terms negotiated by
Grantor as a prudent operator. Any such sale of Production Payment Oil from
the Subject Interests by Grantor shall always be subject to the right of
Grantee upon notice to Grantor, to take in kind and separately dispose of all
or any portion of Production Payment Oil which is deliverable to Grantee
pursuant to the Conveyance and shall not in any event exceed six (6) months.
(c) All proceeds received by Grantor from the sale of Production
Payment Oil sold on behalf of Grantee pursuant to sales agreements executed
or administered by Grantor shall be held in trust by Grantor for Grantee;
provided, however, Grantor shall pay such proceeds to Grantee immediately
upon Grantee's request, in the manner and to the account(s) or financial
institution(s) designated by Grantee from time to time. Grantor shall
diligently enforce the terms of all sale agreements under which Production
Payment Oil is sold on behalf of Grantee, including, without limitation, full
and prompt payment of all amounts due from such sales. In the event of any
late payment by any purchaser, Grantor shall remit to Grantee any interest or
penalties collected by Grantor with respect to the sale of Production Payment
Oil to such
purchaser. Grantee shall have the right at any time Grantee considers
necessary or advisable to direct the purchasers of any Production Payment Oil
to pay the proceeds thereof directly to Grantee by delivering to such
purchasers a letter in lieu of transfer order. In the event Grantee requests
such direct payment, Grantor shall cooperate in instructing the purchaser(s)
to pay such proceeds directly to Grantee and shall execute such additional
instruments as may be necessary or appropriate to allow such payment.
2. EXCLUSIVE CONTROL. Grantor, at its sole cost and expense, shall
gather or cause to be gathered all Production Payment Oil at the wellheads
where produced and transport the same to the Delivery Points, without any
charge or deduction to Grantee for costs. As between Grantor and Grantee,
Grantor shall be in exclusive control and possession of the Production
Payment Oil gathered at the wellheads and responsible for any loss, damage or
injury caused thereby until the same shall have been delivered to Grantee, or
to Grantee's credit, at the Delivery Points.
3. RATES OF PRODUCTION.
(a) Grantor shall prudently operate and produce the Leases and the
Xxxxx in accordance with good engineering practices and in accordance with
orders or field rules (if any) established by governmental authorities having
or asserting jurisdiction.
(b) Subject to the provisions of Section 3(a) above, Grantor shall use
its best efforts to cause the Leases to produce each Month a sufficient
quantity of Oil to allow Grantee to recover the Scheduled Amount Production
Payment Oil for each Month during the term of the Conveyance.
4. QUALITY REQUIREMENTS. All Production Payment Oil delivered to
Grantee, or to Grantee's credit, shall satisfy the quality requirements and
specifications as set forth in first purchaser's agreements for acceptance
and purchase of Oil.
5. OPERATION OF SUBJECT INTERESTS. At all times from the date hereof
until the Termination Date, and whether or not Grantor is the operator of the
Subject Interests, Grantor, at Grantor's cost and expense, shall use its best
efforts consistent with a prudent operator standard to:
(i) cause the Subject Interests to be maintained in full force and
effect, and to be developed, protected against drainage by offset
operations, and continuously operated for the production of Oil
in a good and workmanlike manner as would a prudent operator (and
without regard to the burden of the Production Payment), all in
accordance with generally accepted industry practices, applicable
operating agreements, and all applicable federal, state and local
laws, rules and regulations, and shall otherwise comply with all
applicable laws, rules and regulations; provided, however,
Grantor shall have no obligation to maintain (or cause to be
maintained) any Subject Interest when a prudent operator under
the same or similar circumstances would not do so, and in such
situation,
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Grantor may release the relevant Lease or allow the same to lapse
or terminate in accordance with Section 7 of this Agreement;
(ii) pay, or use all reasonable efforts to cause to be paid, no later
than 30 days after such become due and payable, all rentals,
royalties and Production Burdens payable in respect of the
Subject Interests and all costs, expenses and liabilities
incurred in or arising from the operation or development of the
Subject Interests, or the producing, treating, gathering,
storing, marketing, or transporting of Oil therefrom prior to
delivery to Grantee, or the credit of Grantee, at the relevant
Delivery Point;
(iii) cause (for non-operated properties, use all reasonable efforts
to cause) all Xxxxx, machinery, equipment and facilities of any
kind now or hereafter located on the Subject Interests, and
necessary or useful in the operation thereof for the production
of Oil therefrom, to be provided and to be kept in good and
effective operating condition as would a prudent operator (and
without regard to the burden of the Production Payment), and
promptly make all useful or necessary repairs, renewals,
replacements, additions and improvements thereof or thereto;
(iv) give or cause to be given to Grantee written notice of every
adverse claim or demand made by any person affecting the Subject
Interests which is known to Grantor, the Oil produced therefrom,
the Production Payment and/or the Production Payment Oil in any
manner whatsoever, and of any suit or other legal proceeding
instituted with respect thereto, and at Grantor's expense cause
all necessary and proper steps to be taken with reasonable
diligence to protect and defend the Subject Interests, the Oil
produced therefrom, the Production Payment and/or the Production
Payment Oil against any such adverse claim or demand, including
(but not limited to) the employment of counsel for the
prosecution or defense of litigation and the contest, release or
discharge of such adverse claim or demand;
(v) cause the Subject Interests to be kept free and clear of liens,
charges and Encumbrances of every character;
(vi) pay, in accordance with Grantor's customary practices and before
failure to pay would give rise to any lien against any of the
Subject Interests, all operating expenses and all xxxxxxxx under
applicable joint operating agreements (except to the extent
contested in good faith);
(vii) maintain or cause to be maintained sufficient measurement,
storage and receiving facilities necessary to receive,
control, gather and deliver to the Delivery Points the
production of Oil from the Leases;
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(viii) consistent with a prudent operator standard, and with
applicable law, use its reasonable efforts to produce and
deliver to Grantee each Month the Scheduled Amounts of the
Production Payment Oil; and
(ix) not resign as operator of any of the Subject Interests operated
by Grantor until and unless such resignation and the successor
operator has been approved in writing by Grantee.
6. INSURANCE: DAMAGE OR LOSS.
(a) Grantor shall maintain or cause to be maintained, at its sole cost and
expense and with financially sound and reputable insurers, insurance covering
the Leases and all pipelines, Xxxxx, and facilities located thereon and in which
Grantor owns an interest against such liabilities, casualties, risks and
contingencies, and in such types as is customary in the case of independent oil
companies engaged in the development and operation of similar properties located
in the same state. Such insurance shall name Grantee as an additional insured
as Grantee's interests appear. Grantor shall furnish certificates of such
insurance to Grantee and shall obtain endorsements to such policies providing
that the relevant insurer shall notify Grantee not less than thirty (30) days
prior to the expiration or termination of any such policy of insurance.
(b) In the event of any damage to or loss of any pipeline, well, equipment
or facility on or benefiting the Leases and in which Grantor owns an interest,
Grantor (at no cost to Grantee) shall promptly redrill, rebuild, reconstruct,
repair, restore or replace such damaged or lost property, unless to do so would
not be economically feasible (without regard to the burden of the Production
Payment, but taking into account insurance proceeds and recoveries).
7. ABANDONMENT OF XXXXX. Until the termination of the Production
Payment, Grantor shall not, without first obtaining the written consent of
Grantee, abandon any Well or surrender, abandon or release any Lease or Subject
Interest or any part thereof; provided, however, that, without the consent of
Grantee:
(i) If and when, in Grantor's reasonable judgment exercised in good
faith and as would a prudent operator not burdened by the
Production Payment, any Well becomes no longer capable of
producing Oil in paying quantities (without regard to the burden
of the Production Payment) and it would not be economically
feasible (without regard to the burden of the Production Payment)
to restore the productivity of such Well by reworking,
reconditioning, deepening, plugging back, or otherwise, Grantor
shall have the right to abandon such Well;
(ii) Grantor shall have the right to surrender and release any Subject
Interest or part thereof when, in the reasonable judgment of
Grantor exercised in good faith and as would a prudent operator
not burdened by the Production Payment, there is no Well located
thereon which is capable of producing Oil in paying quantities
and the drilling of an additional well
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thereon would not, in Grantor's reasonable opinion, be
economically feasible (without regard to the burden of the
Production Payment); and
(iii) Grantor shall have the right to plug any Well if required by
applicable law, rule or regulation or the terms of any Lease.
8. DRILLING OF REPLACEMENT XXXXX. Grantor covenants and agrees that, in
the event that any Well shall for any reason (other than depletion of the
reserves otherwise recoverable from such well) be no longer capable of producing
Oil in paying quantities, Grantor shall promptly drill a replacement Well,
unless in Grantor's reasonable judgment, exercised in good faith and as would a
prudent operator not burdened by the Production Payment, the drilling of such
replacement Well would not be economically feasible or unless in Grantee's
reasonable judgment the Scheduled Amount of the Production Payment Oil, plus
additional quantities necessary to cover all reasonable costs of production, can
be delivered in accordance with the Conveyance without drilling such replacement
well.
9. INFORMATION.
(a) At all times from the date hereof until the termination of the
Production Payment, Grantor, at its own expense, shall furnish to Grantee
monthly the following reports and information:
(i) Grantor shall furnish a report showing the gross production of
Oil from each Well or Lease, the gross production of Oil
attributable to the Subject Interests, the quantity of Oil sold
for Grantor's account or taken in kind by Grantor, the price
received for such Oil, the quantity of Production Payment Oil (if
any) sold for Grantee's account, the quantity of Production
Payment Oil delivered in kind to Grantee, the Taxes paid by
Grantor on production from the Subject Interests (including the
Production Payment), the cumulative amount of Production Payment
Oil delivered to Grantee to date, the number of Xxxxx operated.
Xxxxx drilled and Xxxxx abandoned for the month prior to the
month for which production of Oil is being indicated in. Grantor
shall use its best efforts to furnish such report to Grantee by
the fourth business day, but in no event later than the tenth
day, of the succeeding month;
(ii) Upon request by Grantee, Grantor shall furnish a certificate
executed by an executive officer of Grantor certifying that, to
the best of his knowledge after reasonable investigation, Grantor
is in compliance in all material respects with the terms of the
Conveyance and this Agreement, or if not, specifying in
reasonable detail any exceptions thereto; and
(iii) Upon request, Grantor shall furnish such other information as
Grantee may reasonably request.
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(b) Grantee shall have the right, at its sole expense, to audit the books
and records of Grantor from time to time with respect to the Subject Interests,
including, without limitation, all information with respect to quantities of Oil
produced from the Leases and the payment by Grantor of all costs and expenses
incurred in connection with the Subject Interests. Such audits shall be
conducted by Grantee so as to result in a minimum disruption in the ongoing
business and affairs of Grantor and shall be conducted during normal business
hours at Grantor's offices or at the offices where Grantor maintains the records
relating to the items set forth above. This audit right shall be a free and
unrestricted right, subject to the limitations above set forth, and shall
survive the termination of the Production Payment, except that no audit shall
cover a period beginning more than two years prior to the date of the
commencement of the audit. If, as a result of any such audit, it is determined
that any amount is due Grantee as a result of the failure of Grantor to deliver
properly all Production Payment Oil, or the proceeds thereof, to Grantee in
accordance with the terms of the Conveyance and this Agreement, Grantor shall
deliver to Grantee the proceeds attributable to the Production Payment Oil not
delivered or which Grantor failed to remit, plus interest at the highest rate
allowed under applicable law from the date that such proceeds should have been
paid in accordance with the terms of the Conveyance and this Agreement to the
date of payment.
10. ACCESS TO SUBJECT INTERESTS. Grantor shall permit the duly authorized
representatives of Grantee, at any reasonable time, but at Grantee's risk and
expense, to make such inspection of the Subject Interests and the assets used in
the operation thereof as such representatives shall deem proper.
11. REMEDIES OF GRANTEE. At any time and from time to time until the
termination of the Production Payment, if Grantor shall fail to perform or
observe any of the covenants or agreements provided herein, the Purchase
Agreement or in the Conveyance to be performed or observed by Grantor, Grantee,
in addition to Grantee's right to recover damages and all other remedies
available to Grantee at law or in equity, may, if such failure shall continue
unremedied after 45 days after written notice thereof is delivered to Grantor:
(i) perform or cause not to be performed on behalf of and at the
expense of Grantor, any obligation which has not been performed
or observed by Grantor, in which event Grantee may advance funds
and incur and pay bills for expenses for such purpose and shall
be reimbursed out of the proceeds attributable to Grantor's
interest in the Subject Interests, together with interest on the
unpaid amounts thereof at the highest rate allowed under
applicable law from the date of such advance or payment by
Grantee until the date reimbursed by Grantor;
(ii) upon written notice to Grantor and only as to a default in
performance of obligations of Grantor other than those existing
under Section 9 succeed to and exercise any and all rights of the
Grantor as the owner of the Subject Interests, and use in
connection therewith all property of Grantor as may be useful or
appropriate for the production, treating, storing or
transportation of Oil prior to delivery to the Delivery Points,
and all other properties and rights of a similar character then
held by Grantor and
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situated upon or useful or held for future use in connection with
the exploration, development or operation of the Subject
Interests for the production, treating, storing, or
transportation of Oil prior to delivery to the Delivery Points
and Grantee, and shall have the right, on behalf and for the
account of Grantor, to sell and utilize all of the Oil
attributable to Grantor's interest in the Subject Interests and
to reimburse Grantee for any amounts so expended by Grantee, and
Grantor shall reimburse Grantee upon demand for all amounts so
expended by Grantee, to the extent such amounts are not paid out
of Grantor's interest in the proceeds of such Oil, together with
interest on such amounts at the highest rate allowed under
applicable law from the date expended to the date repaid;
(iii) pay any of the costs, expenses, Taxes (which Taxes are not being
contested in good faith by Grantor) or other amounts which
Grantor has agreed to pay under the Conveyance which have become
delinquent, and to be reimbursed out of the proceeds of the Oil
attributable to the Grantor's interest in the Subject Interests,
together with interest on the unliquidated amounts thereof at the
highest rate allowed under applicable law from the date of such
payment by Grantee to the date repaid; and/or
(iv) apply to a court of equity for the specific performance or
observance of any such covenant or condition and in aid of the
execution of any power herein granted and for the appointment of
a receiver of the Subject Interests and the Oil produced
therefrom.
Grantee's exercise of the remedies provided in subclauses (i) through (iii)
above shall be made in accordance with any and all obligations, duties or
responsibilities of Grantor under any agreement then in effect and covering or
affecting the Subject Interests, including, without limitation, the obligations
and duties of Grantor under any of the Leases. Grantee shall promptly advise
Grantor in writing of any actions it may take according to this Section 11.
Following any default by Grantor in the performance or payment of the
obligations outstanding hereunder and under the Purchase Agreement, and the
passage of 45 days of the giving by Grantee to Grantor of notice of such default
without same having been cured by Grantor, any purchaser of Oil from or
attributable to the Subject Interests is authorized and directed to make payment
to Grantee out of the Oil attributable to Grantor's interest in the Subject
Interests for any amount which Grantee shall certify to such purchaser that it
has paid and which Grantor is obligated to pay hereunder. Any insurer is
authorized and directed to make payment to Grantee of proceeds of insurance
described in Section 6(a) for any amount which Grantee shall certify to such
insurer that it has expended in redrilling, rebuilding, reconstructing,
repairing, restoring or replacing damaged or lost property which Grantor has
failed or refused to do promptly pursuant to Section 6(b). Grantor hereby
designates Grantee as its agent and attorney in fact to execute any instruments
which may be necessary or appropriate, including, without limitation,
designations of operator, to enable Grantee to exercise its rights under this
Section 11. This designation and appointment shall be irrevocable as long as
the Production Payment remains in effect.
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12. FORCE MAJEURE. In the event of either party being rendered unable,
wholly or in part, by Force Majeure to carry out its obligations under this
Agreement other than to make payments due hereunder, it is agreed that on such
party's giving notice and full particulars of such Force Majeure in writing or
by telecopy to the other party as soon as possible after the occurrence of the
cause relied on, then the obligations of the party giving such notice, so far as
they are affected by such Force Majeure, shall be suspended during the
continuance of any inability so caused but for no longer period, and such cause
shall as far as possible be remedied with all reasonable dispatch.
13. NOTICES. All notices, requests, demands, instructions and other
communications required or permitted to be given hereunder shall be in writing
and shall be delivered personally, mailed by certified mail, postage prepaid and
return receipt requested or sent by telecopier, as follows:
Grantor: MERCURY EXPLORATION COMPANY
0000 Xxxxxxxxxxxx Xxx.
Xxxx Xxxxx, XX 00000
Attention: Xxxx Xxxxxx
Telecopy: (000) 000-0000
Grantee: MCNIC OIL & GAS
000 X. Xxxxxxxxx Xxxxxx
Xxxxx 0000
Xxxxxxx, XX 00000
Attention: Xxxx Xxxxxxxx
Telecopy: (000) 000-0000
or to such other place within the United States of America as either party may
designate as to itself by written notice to the other. All notices given by
personal delivery or mail shall be effective on the date of actual receipt at
the appropriate address. Notice given by telecopier shall be effective upon
actual receipt if received during the recipient's normal business hours or at
the beginning of the next business day after receipt if received after the
recipient's normal business hours.
14. INDEMNITY. It is understood and agreed that, except as set forth in
Section 1.07 of the Conveyance, under this Agreement, the Conveyance or Purchase
and Sale Agreement Grantee does not assume or shall Grantee ever be liable or
responsible in any way for the payment of any costs, expenses or liabilities
incurred in connection with developing, exploring, drilling, equipping, testing,
operating, producing, maintaining or abandoning the Subject Interests or any
Well or facility thereon or storing, handling, treating or transporting to the
relevant Delivery Point production therefrom. Grantor shall fully defend,
protect, indemnify and hold Grantee, its officers, employees, representatives
and agents harmless from and against any and all claims, demands, suits and
causes of action of every kind and character, including reasonable attorneys'
fees and entity, or by Grantor, Grantor's employees, agents, contractors and
subcontractors and their employees, agents, on account of personal injury, death
or property damage (including, without limitation, claims for pollution and
environmental damage), any civil
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or criminal fines or penalties and any causes of action alleging statutory
liability, relating to, arising out of, or in any way incidental to the
Subject Interests, the Xxxxx and facilities thereon or used in connection
therewith and in which Grantor owns an interest, the operation thereof and
the production therefrom. This indemnity shall apply, without limitation, to
any liability imposed upon any party indemnified hereunder as a result of any
statute, rule, regulation or theory of strict liability, but excluding the
gross negligence, bad faith, willful misconduct and violations of law by
Grantee.
15. SUCCESSORS AND ASSIGNS. All the covenants and agreements of Grantor
and Grantee herein contained shall be deemed to be covenants running with the
land and shall be binding upon the successors and assigns of Grantor's interest
in the Subject Interests and Grantee's interest in the Production Payment and
shall inure to the benefit of Grantor, Grantee, and their respective successors
and permitted assigns. The foregoing notwithstanding, nothing herein is
intended to modify or shall have the effect of modifying the restrictions set
forth in the Conveyance regarding mortgage, assignment, transfer or pooling of
Grantor's interest in the Subject Interests; and the preceding sentence shall
not be deemed to permit any assignment or other transfer of the interest of
Grantor in any of the Subject Interests that is not specifically permitted by
the provisions of the Conveyance. Nothing contained in this Agreement, Purchase
and Sale Agreement or in the Conveyance shall in any way limit or restrict the
right of Grantee, or Grantee's successors and assigns, to sell, convey, assign
or mortgage the Production Payment in whole or in part. If Grantee, or
Grantee's successors and assigns, at any time shall execute a mortgage, pledge
or deed of trust covering all or any part of the Production Payment as security
for any obligation, the mortgage, the pledge or the trustee therein named or the
holder of the obligation secured thereby shall be entitled, to the extent such
mortgage, pledge or deed of trust so provides and upon the occurrence or
existence of the event or condition therein stated, if so conditioned, to
exercise all of the rights, remedies, powers and privileges herein conferred
upon Grantee, and to give or withhold all consents herein required or permitted
to be obtained from Grantee.
16. COST OF LITIGATION. In the event of a breach of this Agreement, or if
a dispute arising hereunder is not resolved by mutual agreement, and either
party should xxx the other party to enforce its rights hereunder or for breach
hereof, the party prevailing in such litigation shall be entitled to recover its
costs and reasonable attorneys' fees in addition to any other remedy or recovery
to which it may be entitled.
17. ENTIRE AGREEMENT: AMENDMENTS: WAIVER. This Agreement, the Purchase
Agreement and the Conveyance constitute the entire agreement between the parties
hereto; provided, that in the event there is a discrepancy between the terms of
the foregoing agreements concerning matters addressed herein, the terms of this
Agreement shall control. This Agreement may not be amended, and no rights
hereunder may be waived, except by a written document signed by the duly
authorized representatives of the parties. No waiver of any of the provisions
of this Agreement shall be deemed to be or shall constitute a waiver of any
other provisions hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
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18. HEADINGS. The headings of the sections of this Agreement are for
guidance and convenience of reference only and shall not limit or otherwise
affect any of the terms or provisions of this Agreement.
19. COUNTERPART EXECUTION. This Agreement may be executed by Grantor and
Grantee in any number of counterparts, each of which shall be deemed an original
instrument, but all of which shall constitute but one and the same Agreement.
20. PARTIAL INVALIDITY. Except as otherwise expressly stated herein, in
the event any provision contained in this Agreement shall for any reason be held
invalid, illegal or unenforceable by a court or regulatory agency of competent
jurisdiction by reason of a statutory change or enactment, such invalidity,
illegality or unenforceability shall not affect the remaining provisions of this
agreement.
21. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN, EXCEPT TO THE EXTENT THE LAWS
OF ANY OTHER STATE ARE MANDATORILY APPLICABLE.
THIS AGREEMENT IS EXECUTED as of the date first above written, but made
effective for all purposes as of the 1st day of October, 1996.
MERCURY EXPLORATION COMPANY
MCNIC OIL & GAS
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