EXHIBIT 10.4
ACQUISITION AND EXPLORATION AGREEMENT
This Acquisition and Exploration Agreement (the "Agreement"), effective as
of July 1, 1997 (the "Effective Date"), by and between Xxxxxxxx Energy, Inc., a
Delaware corporation ("CEI"), and Xxxxxxx Petroleum LLC, a Montana limited
liability company ("BPL"). CEI and BPL are sometimes herein referred to
individually as a "Party" and collectively as the "Parties".
RECITALS
1. By separate agreement, effective the Effective Date, BPL has sold to
CEI certain developed and undeveloped oil and gas properties located within the
AMI (as hereinafter defined) pursuant to that certain Purchase and Sale
Agreement between BPL and CEI dated July 2, 1997 (the "Acquisition Agreement");
2. CEI and BPL wish to enter into this Agreement to set forth their
understanding concerning their conduct of oil and gas activities within the AMI
during the term of this Agreement.
NOW, THEREFORE, the Parties agree as follows:
I.
DEFINITIONS
In addition to the terms defined elsewhere herein, the following
definitions shall apply to this Agreement:
"ACQUISITION COSTS" shall mean all costs associated with the acquisition of
Prospects in the AMI, including, without limitation, costs of brokerage services
and actual out of pocket expenses.
"AMI" shall mean the area of mutual interest established pursuant to
Article VI hereof constituting the States of Colorado, Kansas, Montana, North
Dakota, Nebraska, Nevada, South Dakota, Utah and Wyoming and the counties of San
Xxxx and Rio Arriba in New Mexico and Xxx County, Oklahoma; provided, however,
that the lands described on Exhibit "A" attached hereto shall be excluded from
the AMI.
"BPL G&A" shall include all general and administrative, legal, accounting,
geological, land, engineering, travel, cost-of-office occupancy, telephone and
postage, employee compensation and other incidental expenses necessary to the
conduct of the oil and gas business of BPL; provided, however, that BPL G&A will
be reduced by (1) costs of services of engineering and geological consultants
when such services relate and are charged to a specific oil and gas property and
(2) overhead reimbursements to BPL under the Operating Agreements or Third Party
Operating Agreements (as defined in Article V).
Page #1
"CASING POINT" means the time when a well has been drilled to the objective
depth stated in the initial notice, appropriate tests have been made, and the
operator notifies the drilling parties of its recommendation with respect to the
running and setting of a production string of casing and completing the well.
"OPERATING AGREEMENT" shall mean the form of Operating Agreement attached
hereto as Exhibit "B".
"G&A BUDGET" shall mean each of the budgets established annually pursuant
to Article IV hereof to provide for BPL G&A, as such budgets may be amended from
time to time pursuant to this Agreement.
"PROSPECT" shall mean either a producing oil and gas property or properties
or a geographical area whose subsurface contains the potential of commercial
hydrocarbon accumulation based upon geological and/or geophysical evaluation
which has been designated as provided in this Agreement and shall include all
oil and gas estates of whatever nature acquired within such Prospect. As
additional information is developed, the area of the Prospect may be enlarged,
subdivided or reduced, subject to agreement of the Parties hereto and any other
party in such Prospect.
II.
OBLIGATIONS OF THE PARTIES
In addition to their obligations as specified in the Operating Agreement,
the parties shall be obligated as follows:
2.1 BPL OBLIGATIONS. BPL shall, throughout the term of this Agreement,
utilize its best efforts to generate and present to CEI opportunities for
acquisitions of undeveloped and producing oil and gas properties within the AMI,
as well as evaluate and make recommendations for activities to be conducted on
the properties subject to the Acquisition Agreement. BPL shall limit its
activities to the AMI.
2.2 CEI OBLIGATIONS. CEI shall, throughout the term of this Agreement,
present to BPL for its review any opportunities presented to it for acquisition
of undeveloped or producing properties within the AMI and will assist and
cooperate with BPL in the performance of BPL's obligations herein.
Page #2
III.
TERM
3.1 TERM. This Agreement shall commence as of the Effective Date and,
except as specifically provided otherwise in Section 3.4, shall expire on June
30, 2002, unless sooner terminated pursuant to the provisions of this Agreement
or by agreement of the Parties.
3.2 TERMINATION BY CEI. CEI shall have the right to terminate this
Agreement upon 90 days prior written notice of termination delivered to BPL, at
any time after July 1, 1998, if BPL is not performing its obligations under this
Agreement in a reasonable and prudent manner in accordance with industry-
accepted standards. If BPL disagrees with such notice, the matter will be
submitted to arbitration pursuant to Article VIII hereof. The sole issue to be
determined by the arbitrators is whether BPL is not performing its obligations
hereunder in a reasonable and prudent manner in accordance with industry-
accepted standards. This Agreement shall remain in effect while the
arbitrators' decision is pending. In addition, if any of Xxxxxxx X. Xxxxxxx,
Xxxx Xxxxxxx or Xxx Xxxxx shall cease to be an officer or full-time employee of
BPL, CEI, at its option, may terminate this Agreement.
3.3 OPERATIONS FOLLOWING TERMINATION FOR CAUSE. Upon termination of this
Agreement, the obligations of the Parties under this Agreement shall cease, but
the provisions of the respective Operating Agreements or Third Party Operating
Agreements covering the properties acquired by the Parties pursuant to this
Agreement or subject to the Acquisition Agreement shall continue to apply to the
operation of such properties; provided, however, that CEI shall have the right
to submit to arbitration pursuant to Article XIII hereof, following the
termination of this Agreement, the issue of whether BPL is performing its
responsibilities as operator of any of the properties acquired pursuant to this
Agreement or properties subject to the Acquisition Agreement in a reasonable and
prudent manner in accordance with industry-accepted standards. If the
arbitrators determine that BPL is not performing its responsibilities as to any
such property in a reasonable and prudent manner in accordance with industry-
accepted standards, BPL shall resign as operator of such property within 30 days
after such determination and shall support CEI being designated as operator
thereof.
3.4 OPERATIONS FOLLOWING END OF TERM. Notwithstanding anything contained
herein or in the Operating Agreement to the contrary, at any time after June 30,
2002, CEI shall have the right to become the operator of any or all Exploratory
Xxxxx drilled by the Parties pursuant to the terms of this Agreement, together
with all associated acreage and all development xxxxx related to any such
Exploratory Xxxxx. As used herein the term "Exploratory Xxxxx" shall mean xxxxx
drilled to find and produce oil or gas in an unproved area to find a new
reservoir and designated as such in the original Authority For Expenditure
submitted in connection therewith. If CEI exercises such right, BPL shall
resign as operator of such properties and shall support CEI as the operator
thereof.
Page #3
IV.
PAYMENT OF BPL G&A
4.1. SHARING OF BPL G&A. All BPL G&A shall be borne 60% by CEI and 40% by
BPL; provided, however, that CEI shall not be required to pay its share of BPL
G&A that exceeds the G&A Budget. CEI shall pay its portion of BPL G&A to BPL at
the address specified in Section 9.3 hereof, by the last day of the month
following the month for which such BPL G&A is allocated pursuant to the Budget.
BPL shall pay the BPL G&A as such costs are incurred.
4.2 FIRST YEAR BUDGET. CEI and BPL have agreed that the G&A Budget for
the first year of this Agreement (i.e., July 1, 1997 to June 30, 1998) shall be
the Budget attached hereto as Exhibit "C" (the "First Year G&A Budget").
4.3 SUBSEQUENT YEARS' BUDGETS. The Parties shall establish G&A Budgets
annually during the term of this Agreement covering the next 12 months period
commencing July 1st. On or before May 1st in each year, commencing, May 1,
1998, BPL shall submit to CEI a proposed G&A Budget for approval by the Parties
by June 1st. If CEI does not approve the G&A Budget by such date, the matter
will be submitted to arbitration pursuant to Article VIII hereof. The issue to
be determined by the arbitrators is whether the G&A Budget submitted by BPL is
consistent with the First Year G&A Budget. Such consistency shall be determined
by accessing reasonable industry criteria (including, but not be limited to, G&A
cost per barrel of oil equivalent produced, number of operated and non-operated
xxxxx managed, number of xxxxx anticipated to be drilled, anticipated level of
acquisition activity, etc.) and comparing such criteria as per the First Year
G&A Budget to the G&A Budget submitted by BPL for approval. If the panel of
arbitrators determines that using such criteria, the proposed G&A Budget is not
consistent with the First Year G&A Budget, then the panel will determine what
the G&A Budget should be by applying such criteria. While the arbitrators
decision is pending, the current G&A Budget shall remain in effect and the
Parties shall pay BPL's costs on such basis. If the arbitrators issue their
decision after July 1st, such decision shall be applied retroactively to July
1st. Each G&A Budget shall be in writing and shall be attached to this
Agreement as an Exhibit.
4.4 MODIFICATIONS TO THE G&A BUDGET. If BPL or CEI reasonably believes
that, as the result of the occurrence of a material event (e.g., a significant
acquisition, divestiture, exploration successes, properties rejected by CEI and
pursued by BPL involving an expected expenditure of $1,000,000 or more, etc.)
costs covered by the current G&A Budget have increased or decreased by a
material amount, BPL or CEI may propose and submit to the other Party a proposed
revised G&A Budget for such year. If CEI and BPL agree with such revised G&A
Budget, it shall be adopted as the current year's G&A Budget and shall be
applied retroactively to the date the costs increased or decreased. If the
Parties cannot agree to such revised G&A Budget, the matter will be submitted to
arbitration pursuant to Article VIII hereof. The sole issue to be determined by
the arbitrators is whether the revised G&A Budget accurately reflects an
increase or decrease in BPL's costs covered by the G&A Budget directly related
to the material event. While the arbitrators' decision is pending, the current
G&A Budget shall remain in effect and the Parties
Page #4
shall pay BPL's costs on such basis. If the arbitrators decision approves the
revised G&A Budget, such Budget shall be applied retroactively to the date the
costs increased or decreased.
V.
OPERATING AGREEMENT
5.1 OPERATING AGREEMENT. The Operating Agreement shall apply to all oil
and gas properties acquired jointly by the Parties pursuant to this Agreement
and to properties subject to the Acquisition Agreement to the extent such
properties are not subject to a Third Party Operating Agreement (as hereinafter
defined). Upon the execution of this Agreement, the Parties shall execute the
Operating Agreement with the Contract Area provided for therein being the
properties subject to the Acquisition Agreement to the extent such properties
are not subject to a Third Party Operating Agreement. Upon the joint
acquisition of properties within a Prospect pursuant to this Agreement, the
Parties shall execute a separate Operating Agreement in the form of Exhibit "B"
hereto covering each such Prospect.
5.2 THIRD PARTY OPERATING AGREEMENTS. The Parties acknowledge that some
of the oil and gas properties acquired pursuant to this Agreement will have
existing operating agreements, or may require a different operating agreement
because of the presence of third party interest owners (in each case, a "Third
Party Operating Agreement"). In such event, the Parties shall attempt to
conform such Third Party Operating Agreement to the Operating Agreement to the
greatest extent possible. When a Third Party Operating Agreement is utilized,
it shall supersede the provisions of the Operating Agreement only with respect
to the properties covered by such Third Party Operating Agreement.
5.3 OPERATOR. BPL shall be Operator of all of the properties acquired
pursuant to this Agreement and of all of the properties subject to the
Acquisition Agreement, unless there is a third party operator of such properties
under a Third Party Operating Agreement. CEI shall always vote in favor of BPL
becoming operator of any such properties or retaining such operatorship. If,
however, CEI reasonably believes that BPL is not operating a property acquired
pursuant to this Agreement in a reasonable and prudent manner, it may so notify
BPL and request that BPL resign as operator of such properties and assign such
operatorship to CEI or support CEI for operatorship if there are third party
interest owners in such properties. If BPL disagrees with CEI's notice and
refuses to resign, the matter shall be referred to arbitration pursuant to
Article VIII hereof. The sole issue for the arbitrators to determine shall be
whether BPL is operating the properties at issue in a reasonable and prudent
manner. While the arbitrators' decision is pending, BPL shall continue to
operate the properties.
Page #5
VI.
AREA OF MUTUAL INTEREST
6.1. AMI PROPERTIES. The Parties hereby create the AMI. Either Party may
recommend to the other Party the acquisition, exploration or development of a
Prospect within the AMI.
6.2 AUCTIONS. If the proposed acquisition is to be made pursuant to a
multi-party bid or a public sale, the Parties shall consult at least 10 business
days prior to the bid deadline and attempt to agree upon the price to be bid.
BPL shall be responsible for making such bids. If the Parties do not agree, the
Party wishing to submit the highest bid may pursue the bid independently.
6.3 AMI PROCEDURES. Either Party (the "Acquiring Party") which proposes
to conduct an operation not covered by an Operating Agreement or to acquire an
interest or right to participate in a Prospect located within the AMI after
execution of this Agreement shall offer in writing to the other Party (the "Non-
Acquiring Party") a right to participate in such operation or acquisition as
soon as possible, giving full details of the anticipated costs and terms of such
operation or acquisition and providing the Non-Acquiring Party with all
information in its possession concerning the Prospect. The Non-Acquiring Party
may elect to participate in such proposed operation or acquisition by (1)
delivering written notice of its election to participate within the lesser of 30
days after its receipt of the proposal or prior to the day the Acquiring Party
must commit to the proposed operation or acquisition and (2) paying the
Acquiring Party its share of the costs of the proposed operation or acquisition
prior to the time the Acquiring Party must pay for such operation or
acquisition. If the Non-Acquiring Party elects not to participate in the
proposed operation or acquisition or if the Non-Acquiring Party's fails to
respond within such time, the Non-Acquiring Party shall have relinquished its
right to acquire its share of such Prospect, and such Prospect shall no longer
be subject to the terms of this Agreement. If the Non-Acquiring Party delivers
notice of its election to participate but fails to timely pay its share of
costs, then the Non-Acquiring Party shall also be liable to the Acquiring Party
for any damages incurred by the Acquiring Party as a result of the Non-Acquiring
Party's failure to pay. Upon payment of a proportionate share of the out-of-
pocket costs incurred by the other Party to obtain the interest or the right to
participate in such interest, each Party shall have the right to participate in
any such Prospect such that the proportion of ownership in such Prospect shall
be CEI 60% and BPL 40%.
Either Party may propose operations, including exploration or development
operations, in the AMI. In the event the proposed operations are subject to the
terms of a Third Party Operating Agreement at the time the operations are
proposed, then the terms of the Third Party Operating Agreement shall control.
If the proposed operations are not subject to a Third Party Operating Agreement
but are still subject to the terms of this Agreement, then the terms of the
Operating Agreement shall control.
Page #6
6.4 ACQUISITION AND DRILLING COSTS. CEI will pay all of BPL's costs or
expenses (i) to acquire Prospects under this Agreement and/or (ii) to explore
and develop such Prospects and the properties subject to the Acquisition
Agreement to Casing Point on each well drilled on such Prospects or properties,
until CEI has expended an aggregate amount of $4,050,000 (the "Carried Amount"),
whether or not CEI participates in the Prospect. In the event CEI does not
participate in a Prospect the Carried Amount shall only apply to 40% of BPL's
interest in such Prospect. Following the expenditure of the Carried Amount, all
future costs in the Prospects jointly owned by the Parties will be borne 60% by
CEI and 40% by BPL.
VII.
CONFIDENTIALITY; ACCESS TO DATA
7.1 CONFIDENTIALITY. All information pertaining to properties acquired by
the Parties pursuant to this Agreement and to the properties subject to the
Acquisition Agreement shall be treated by the Parties as confidential unless and
until mutually agreed that the same may be released; provided, however, either
Party shall be entitled to disseminate information to the public to the extent
required by applicable laws or any listing or trading agreement concerning its
publicly traded securities or if such disclosure is consistent with the Party's
normal disclosure policies. If additional parties are permitted to acquire
interests within a property subject to this Agreement or the Acquisition
Agreement, such information may be released to such parties provided that they
agree to similar confidentiality restrictions.
7.2 ACCESS TO INFORMATION. Each Party shall have access to all data and
information acquired or developed hereunder (to extent such access is not
prohibited by third-party agreements) during normal business hours and without
disrupting the other Party's business activities. Each Party shall furnish the
other Party with copies of any such data and information that the other Party
may reasonably request, to the extent the furnishing of same will not violate
any third-party agreement.
VIII.
ARBITRATION
8.1 SELECTION OF ARBITRATORS. Any controversy between the Parties arising
under this Agreement and not resolved by agreement shall be determined by a
board of arbitration upon notice of submission given by either Party to the
other, which notice shall name a qualified, independent arbitrator. Within 10
days after the receipt of such notice, the other Party shall name a qualified,
independent arbitrator, or if it fails to do so, the Party giving notice shall
name the second arbitrator. The two arbitrators so appointed shall name the
third qualified, independent arbitrator within 30 days after the appointment of
the second arbitrator or, if they fail to do so, the arbitrator may be
appointed by the Senior Judge (in service) of the United States District Court
for the District of Colorado. Each Party shall pay the fees and expenses of the
arbitrator it names and shall share equally the fees and expenses of the third
arbitrator. Each Party shall pay its experts' fees and expenses.
Page #7
8.2 DETERMINATION. The arbitrators selected to act hereunder shall be
qualified by education and experience to pass on the particular question in
dispute. The arbitrators shall promptly hear and determine (after due notice of
hearing and giving the parties a reasonable opportunity to be heard) the
questions submitted, and shall render their decision within 60 days after
appointment of the third arbitrator. If within said period a decision is not
rendered by the board, or by a majority thereof, new arbitrators may be named
and shall act hereunder, at the election of either Party, in like manner as if
none had been previously named.
8.3 DECISION BINDING. The decision of the arbitrators, or the majority
thereof, made in writing shall be final and binding upon the Parties as to the
questions submitted, and the Parties will abide by and comply with such
decision. The prevailing Party shall be entitled to be paid by the other Party
for its reasonable attorneys' fees and expenses.
IX.
MISCELLANEOUS
9.1 DELIVERY OF INFORMATION TO CEI. BPL agrees that it shall make such
modifications to its internal systems and programs so that it may deliver to CEI
information concerning the properties operated by BPL in the fashion, and upon
the time schedule, reasonably required by CEI. All costs of converting and
maintaining existing BPL systems at the request of CEI shall be borne by CEI.
9.2 ASSIGNMENT. Neither Party may assign all or any part of its rights or
obligations under this Agreement without the prior written consent of the other
Party; provided, however, that BPL shall not have the right to withhold its
consent to any such assignment by CEI unless BPL reasonably believes that the
assignee of CEI does not have the financial capability to perform the
obligations of CEI hereunder. This Agreement shall be binding upon and enure to
the benefit of the parties hereto and their respective successors and their
respective assigns of rights hereunder. Any assignment of interests subject to
this Agreement, however, shall specifically refer to and be made subject to the
terms of this Agreement.
9.3 NOTICES AND RESPONSES. All notices, responses and other
communications required or permitted under this Agreement shall be in writing
and, unless otherwise specifically provided, shall be delivered personally, or
by mail, telecopier or facsimile or delivery service, to the address set forth
opposite the signature of the Parties to this Agreement, and shall be considered
delivered upon the date of receipt. Each Party may specify a change in its
address by giving notice to the other Party in the manner provided in this
Section 9.3, at least 10 days prior to the effective date of such change of
address.
9.4 RELATIONSHIP OF THE PARTIES. This Agreement is not intended to
create, and shall not be construed to create, a partnership, mining partnership,
joint venture or other relationship or association for profit between or among
CEI and BPL, except to the limited extent provided in
Page #8
the Operating Agreement. Each of CEI and BPL shall maintain title to, and
shall be free to mortgage or dispose of their respective oil and gas
properties within the AMI. Except as expressly provided in this Agreement,
each Party shall have the right to independently engage in, and to receive the
full benefits from, business opportunities and activities inside or outside
the AMI, whether or not competitive with activities pursuant to this
Agreement, without consulting the other Party.
9.5 CONFLICTS. In the event of a conflict between the terms and
conditions of an Operating Agreement and the terms and conditions of this
Agreement, the terms and conditions of this Agreement shall control.
9.6 ENTIRE AGREEMENT. This Agreement, the Acquisition Agreement and the
Operating Agreement constitute the entire agreement and understanding between
the Parties with respect to the subject matter hereof, and may not be changed or
amended in any way, except with the mutual consent of both Parties, expressed in
a written document executed by both Parties.
9.7 SEVERABILITY CHOICE OF LAW. In the event that any provision of this
Agreement shall be held to be invalid, illegal or unenforceable, the remaining
provisions shall be construed as if the invalid, illegal or unenforceable
portion or portions were deleted. The construction of this Agreement shall be
governed by the laws of the State of Texas.
9.8 SURVIVAL. Except by mutual agreement of the Parties, the provisions
of Sections 3.4 and 7.1 of this Agreement shall remain in effect as between the
Parties and their successors and assigns, for so long any properties acquired
under this Agreement remain subject to an Operating Agreement or Third Party
Operating Agreement, notwithstanding the termination of this Agreement.
9.9 EXECUTION. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each
Party and delivered to the other Party.
EXECUTED AS OF THE dates set forth opposite the respective signatures
below, effective, however, as of the Effective Date.
ADDRESSES COMPANY
000 Xxxx Xxxxxxxx XXXXXXXX ENERGY, INC.
Xxxxx 000
XX Xxx 00000
Xxxxxxx, XX 00000-0000
Fax: (000) 000-0000
Page #9
Dated: August 28, 1997 By: /s/ Xxxxxxxx X. Hair, Jr.
--------------------------
Xxxxxxxx X. Hair, Jr.
Vice President - Land
000 00xx Xxxxxx Xxxx XXXXXXX PETROLEUM LLC
X.X. Xxx 00000
Xxxxxxxx, Xxxxxxx 00000
Fax: (000) 000-0000
Dated: August 28, 1997 By: /s/ X.X. Xxxxx
--------------------------
X. X. Xxxxx
Attorney-in-Fact
Page #10
