DUNE ENERGY, INC.
0000 Xxxx Xxx Xxxxxxxxx, Xxxxx 000
Xxxxxxx, Xxxxx 00000
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
June 1, 2006
Chesapeake Exploraton Limited Partnership
0000 X. Xxxxxxx Xxx.
Xxxxxxxx Xxxx, Xxxxxxxx 00000
Attention: Xx. Xxxx X. Xxxxxx
Land Manager-Gulf Coast
Re: Welder Ranch, Victoria County, Texas
Gentlemen:
When accepted by you in the manner provided hereinafter, this letter shall
constitute a contract and agreement ("Agreement") between Vaquero Partners LLC
("Vaquero Partners"), JVR Petroleum Inc. ("JVR"), and First Australian
Resources, Inc. ("First Australian") (collectively, "Farmors"), and Chesapeake
Exploraton Limited Partnership ("Chesapeake"), concerning those certain oil,
gas, and mineral leases described more particularly in Section I of Exhibit I
attached hereto and made a part hereof for all purposes (the "Leases"), covering
the lands and depths also described more particularly in Section II of Exhibit
I.
All of the Farmors own interests in the Leases, insofar only as the Leases
cover the lands identified in Exhibit I as the "Area I". Neither JVR, or First
Australian own any interests in the Leases, insofar only as the Leases cover
lands identified in Exhibit I as the "Area II". For purposes hereof, the Leases,
insofar only as the Leases and the leasehold estates created thereby cover and
include the Area I Acreage, will be referred to herein as "Area I"; and the
Leases, insofar only as the Leases and the leasehold estates created thereby
cover and include the Area II Acreage, will be referred to herein as "Area II".
Chesapeake has expressed a desire to acquire an interest in the Leases and
to drill two (2) xxxxx in search of oil or gas on the Leases, and this letter
will evidence the agreement between Farmors and Chesapeake with respect thereto.
For and in consideration of the covenants, obligations, and undertakings
set forth herein, Farmors and Chesapeake (each a "Party", and, collectively, the
"Parties") hereby agree as follows:
1.
ASSIGNMENTS OF INTEREST; CASH CONSIDERATION
1.1 Assignments of Interest. Concurrently with the execution of this
Agreement, (a) Farmors have assigned to Chesapeake an undivided seventy-five
percent (75%) of the rights, titles, and interests of Farmors in and to Area I;
and (b) Vaquero Partners has assigned to Chesapeake an undivided seventy-five
percent (75%) interest in and to Area II. Both conveyances have been made by
recordable instrument of conveyance substantially in the form attached hereto as
Exhibit II (collectively, the "Lease Assignments"). Farmors and Chesapeake
understand that not all owners of the leasehold estate in Area I elected to join
with Farmors in the execution of this Agreement, with the result that the
aggregate undivided interest of Farmors in Area I immediately prior to the
execution of this Agreement was an undivided eighty percent (80%). Farmors have
retained, and the relevant Lease Assignment does not purport to convey to
Chesapeake, an undivided twenty-five percent (25%) of the rights, titles, and
interests of Farmors in and to Area I. Similarly, Vaquero Partners has retained,
and the relevant Lease Assignment does not purport to convey to Chesapeake, an
undivided twenty-five percent (25%) interest in and to Area II. As the result of
the Lease Assignments, Area I shall be owned (including, without limitation, the
interests of those interest owners who are not parties to this Agreement) in the
percentages set forth inExhibit I under "Area I", and Area II shall be owned in
the percentages set forth in Exhibit I under "Area II". As to each Farmor and
Chesapeake, such percentage shall be referred to as such Party's "Ownership
Percentage".
1.2 Reservations. Farmors expressly except and reserve from the interests
conveyed in the Lease Assignments, severally according to their respective
ownership interests and not jointly, all of their respective rights, titles, and
interests in and to all of the existing oil and gas xxxxx located on the Leases,
which xxxxx are described more particularly in Exhibit I as the "Excluded
Xxxxx", together with (a) a quantity of acreage surrounding each such well as
defined on Exhibit "I", (b) all oil, gas, and other hydrocarbons produced,
saved, and marketed from such xxxxx, as limited in Exhibit "I" (c) all personal
property, equipment, and fixtures located on the Leases or used in connection
therewith, and (c) all appurtenances thereto (collectively, the "Excluded
Xxxxx").
1.3 Consideration. Concurrently with the execution of this Agreement by
Farmors and Chesapeake, Chesapeake has paid to Vaquero Partners, on behalf of
all Farmors, as consideration for the execution and delivery of the Lease
Assignments pursuant to Section 1.1, the aggregate sum of Two Million and no/100
Dollars ($2,000,000.00) in cash (the "Cash Consideration"). Vaquero Partners is
responsible for the distribution of the Cash Consideration among the remaining
Farmors, and Chesapeake shall have no responsibility for, or any liability in
connection with, such further distribution of the Cash Consideration by Vaquero
Partners.
1.4 Lease Assignments. The terms and provisions of the Lease Assignments
are incorporated into this Agreement by this reference for all purposes. In the
event of a conflict between the provisions of the Lease Assignments and the
provisions of this Agreement, the provisions of the Lease Assignments shall
govern and control.
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2.
ACCESS TO INFORMATION
2.1 Title Information. Each Farmor represents, warrants, and covenants,
severally according to its respective interest in the Leases and not jointly,
that the Leases identified as "Lease 1" and "Lease 2" in Section I of Exhibit I
have been amended or extended, or that Lease I and Lease 2 will otherwise be
maintained, in each case so that neither of such Leases will expire if a well is
drilled on each of such Leases prior to November 1, 2006. Except as provided in
the immediately preceding sentence of this Section 1.2, and notwithstanding any
other provision of this Agreement [or the Lease Assignments], Farmors make no,
and expressly disclaim any, representation or warranty, either expressed or
implied, concerning their title to the Leases, except as to acts by, through or
under Farmors. Within ten (10) days after the Effective Date, Farmors shall
furnish to Chesapeake copies of the Leases and all title data and information
(including, without limitation, land and title records, plats, surveys,
abstracts of title, runsheets, title opinions, and title curative) relating to
the Leases in the possession of Farmors as of the Effective Date. Thereafter,
Farmors shall cooperate with Chesapeake in obtaining additional title curative
as Chesapeake may reasonably request, but all additional abstracts of title,
title opinions, title curative, and other title materials obtained by Chesapeake
in connection with the Leases shall be at the sole cost, risk, liability, and
expense of Chesapeake. Farmors warrant that they have the authority to execute
this agreement and assignments, and that the leases are free of liens and
encumbrances except as to the lessor's royalty.
2.2 Scientific Information. Within ten (10) days after the Effective Date,
Vaquero Partners, on behalf of Farmors, shall furnish to Chesapeake copies of
all maps, logs, geological, geophysical (including, without limitation,
conventional and 3-D seismic data), reserve engineering, production, and other
scientific, technical, and/or operational information, tests, surveys, reports,
and data that relate to the Leases (including, without limitation, the Excluded
Xxxxx) and the disclosure of which is not prohibited by confidentiality,
licensing, or other contractual arrangements in effect on the Effective Date.
2.3 Disclaimer. CHESAPEAKE RECOGNIZES AND AGREES THAT ALL MATERIALS,
DOCUMENTS, AND OTHER INFORMATION MADE AVAILABLE TO IT AT ANY TIME IN CONNECTION
WITH THIS AGREEMENT ARE MADE AVAILABLE TO IT WITHOUT REPRESENTATION OR WARRANTY
OF ANY KIND (WHICH EACH FARMOR EXPRESSLY DISCLAIMS), WHETHER EXPRESSED, IMPLIED,
OR STATUTORY, AS TO THE ACCURACY AND COMPLETENESS OF SUCH MATERIALS, DOCUMENTS,
AND OTHER INFORMATION. CHESAPEAKE EXPRESSLY AGREES THAT ANY RELIANCE UPON OR
CONCLUSIONS DRAWN THEREFROM SHALL BE AT CHESAPEAKE'S RISK TO THE MAXIMUM EXTENT
PERMITTED BY LAW AND SHALL NOT GIVE RISE TO ANY LIABILITY OF OR AGAINST ANY
FARMOR.
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3.
OBLIGATION XXXXX
3.1 Drilling Obligation. Subject to the terms of this Agreement, on or
before November 1, 2006, Chesapeake shall commence, or to cause to be commenced,
for the account of itself and Farmors, the actual drilling of two (2) xxxxx in
search of oil or gas at legal locations of Chesapeake's choice, one of such
xxxxx to be located on the lands covered by Lease 1 and the other of such xxxxx
to be located on the lands covered by Lease 2 (each an "Obligation Well", and,
collectively, the "Obligation Xxxxx"). Chesapeake shall have a no obligation
hereunder to drill either Obligation Well at a location within Area I.
Chesapeake shall cause such drilling operations to be prosecuted with diligence
and in a workmanlike manner consistent with the practices of a reasonably
prudent operator until each Obligation Well shall have been drilled to a
vertical depth sufficient to test adequately and conclusively the stratigraphic
equivalent of the Middle Xxxxxx formation as encountered in the geographic area
where the lands covered by the Leases are located; provided, however, that in no
event will either Obligation Well be drilled to a depth less than 12,000 feet
subsurface (the "Objective Depth").
3.2 Allocation of Costs. Chesapeake agrees to bear one hundred percent
(100%) of the total cost, risk, liability, and expense incurred in connection
with the drilling of each Obligation Well to its Objective Depth and all
logging, coring, and testing of such Obligation Well provided or permitted under
this Agreement prior to "Casing Point". For purposes of this Agreement, "Casing
Point" is hereby defined as that point in time when each Obligation Well has
been drilled to its Objective Depth and all such logging, coring, and testing of
such Obligation Well prior to a decision concerning a completion attempt therein
has been completed, and a decision to complete or plug and abandon must be made.
Chesapeake shall pay promptly when due all undisputed charges for labor,
materials, and services that it incurs in connection with drilling the
Obligation Xxxxx to Casing Point (and shall cause all of its subcontractors to
pay promptly when due all similar charges incurred by them) and shall not permit
any undisputed liens to be filed (or, if filed, shall take prompt action to have
the same removed) by any person against any Lease, well location, well,
equipment, or appurtenances related thereto.
3.3 Operations in Obligation Xxxxx. During the course of drilling each
Obligation Well to Casing Point, Chesapeake shall take, or cause to be taken,
the following actions with respect to each Obligation Well:
(a) Chesapeake shall cause a survey of the location of each Obligation
Well to be made, cause such location to be staked, and secure drilling permits
for each Obligation Well. As soon as is practicable after the execution of this
Agreement, Chesapeake shall furnish to Farmors a survey plat showing the staked
location of each Obligation Well.
(b) Chesapeake shall prepare, or cause to be prepared, each Obligation
Well location and the access thereto, and shall settle or pay surface damages,
if any, occasioned by these operations.
(c) Chesapeake shall furnish, or cause to be furnished, an appropriate
drilling rig, equipment, labor, mud and chemicals, surface casing, protection
casing if necessary, cement, water, and fuel; shall move the drilling rig on and
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off location; and shall perform such other services as may be required to drill
each Obligation Well to its Objective Depth.
(d) Chesapeake shall furnish such on-site geological and engineering
supervision as it deems necessary or appropriate.
(e) Chesapeake shall, on a daily basis, maintain an estimate of the total
expenses incurred to date for the drilling of each Obligation Well and shall
include such information, along with the daily progress of the drilling of each
Obligation Well, in the daily drilling reports to Farmors provided for in
Section 3.3(g)(i).
(f) During the drilling of each Obligation Well, Chesapeake shall conduct
such coring and testing as would a reasonably prudent operator. Upon reaching
the Objective Depth in each Obligation Well, Chesapeake shall run, from the base
of the surface casing of such Obligation Well to its Objective Depth, such
electrical induction logs, neutron density logs, or other logs as Chesapeake may
determine to be necessary to test properly the Objective Depth for the presence
of oil or gas.
(g) Farmors and Chesapeake agree that Farmors and their representatives
shall, at all times, have access at their own cost and risk to the xxxxxxx floor
of each Obligation Well to witness all operations thereon and to inspect the
logs and other records kept with respect to each Obligation Well. Chesapeake
shall provide Farmors with at least forty-eight (48) hours written notice
concerning the anticipated time that any logging, coring, testing, completion,
or plugging operations will take place on each Obligation Well to allow Farmors
or their respective representatives sufficient time to be present at the
wellsite to witness the same. Further, upon the request of Farmors, Chesapeake
shall furnish to Farmors copies of each of the following:
(i) daily drilling reports (including the cost summary referred to
in Section 3.3(e), sent by email or facsimile daily;
(ii) drillstem tests, analyses, and other tests, if run, made
during drilling, sent by facsimile immediately when available;
(iii) mud logs and related reports, if run, sent by facsimile daily;
(iv) sidewall or conventional core analyses or evaluation results,
if run, sent by facsimile when available;
(v) electrical induction logs and surveys, neutron density logs,
and/or other open logs run, together with evaluation results;
sent as provided below;
(vi) production tests, fluid analyses, pressure tests, and other
well tests, sent by facsimile when available;
(vii) completion reports, sent by facsimile when available;
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(viii) one (1) copy of all digital data (magnetic tapes, floppy
disks, CD ROMS, and the like), if any, prepared with respect
to any of the preceding items (i) through (vii) of this
Section 3.3(g); and
(ix) all permits received from and reports made to any state or
federal agency.
Material sections of any logs run in each Obligation Well shall be sent by email
or facsimile, with two (2) field prints and one(1) copy of the LAS file being
delivered by overnight courier immediately upon availability. For purposes of
this Section 3.3, references to Farmors shall mean all Farmors if the relevant
Obligation Well is located in Area I, and only Vaquero Partners if the relevant
Obligation Well is located in Area II.
3.4 Substitute Obligation Xxxxx.
(a) If Chesapeake is unable to reach the Objective Depth of either
Obligation Well, or having reached the Objective Depth, is unable to complete
either Obligation Well because of subsurface conditions or formations, including
without limitation heaving shale, domal formations, or excessively high pressure
water sands or cavities, that would render further drilling operations by a
prudent operator impracticable, or because of mechanical conditions in either
Obligation Well beyond Chesapeake's control, Chesapeake shall plug and abandon
the relevant Obligation Well, at its sole cost, and restore the drillsite
premises thereof in accordance with the terms of the applicable Lease(s) and all
applicable laws, rules, regulations and order of any governmental authority
having jurisdiction.
(b) Within forty-five (45) days after the date that plugging operations on
the relevant Obligation Well are completed as provided in Section 3.4(a), but in
no event later than November 1, 2006, Chesapeake shall commence, or cause to be
commenced, the actual drilling of a substitute well in search of oil or gas (the
"Substitute Obligation Well") at a legal location selected by Chesapeake on the
lands covered by the Lease on which the relevant Obligation Well was located and
to cause such drilling operations to be prosecuted with due diligence until the
Substitute Obligation Well shall have been drilled to the Objective Depth.
Chesapeake agrees to bear one hundred percent (100%) of the total cost, risk,
liability, and expense incurred in connection with the drilling of the
Substitute Obligation Well to Casing Point. Each Substitute Obligation Well
shall be drilled under the same terms and conditions as the Obligation Xxxxx. If
a Substitute Obligation Well is commenced in a timely manner and drilled to
Objective Depth, such Substitute Obligation Well shall take the place of the
relevant Obligation Well for purposes of this Agreement, and as used herein, the
term "Obligation Well" shall include the Substitute Obligation Well drilled in
lieu thereof.
3.5 Completion Attempt in Obligation Xxxxx.
(a) When each Obligation Well has been drilled to Casing Point, Chesapeake
shall provide to the Farmors that are parties in interest in such Obligation
Well written notice of such fact, together with its recommendation concerning
whether such Obligation Well should be completed as a well capable of producing
oil and gas in paying quantities. The decision whether to attempt to complete
the relevant Obligation Well as a well capable of producing oil or gas in
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commercial quantities shall be governed by the terms of Articles VII.D.1 and
VI.B.2 of the Operating Agreement referred to hereinafter, and all operations in
connection with any such completion attempt shall be governed by the terms of
the Operating Agreement, except to the extent that they conflict with the terms
hereof.
(b) Subject to the right of the Farmors that are parties in interest in an
Obligation Well to elect not to participate in a completion attempt therein as
provided in Article VII.D.1 of the Operating Agreement, each Farmor, if the
relevant Obligation Well is located in Area I, or Chesapeake and Vaquero
Partners, if such Obligation Well is located in Area II, agree to bear their
respective Ownership Percentages of the cost, risk, liability, and expense
incurred in connection with any completion attempt in such Obligation Well,
including, without limitation, all expenses incurred in equipping such
Obligation Well for production. For purposes of this Agreement, all costs and
expenses of labor, services, materials, and equipment used and incurred in a
completion attempt in an Obligation Well that are not included in the cost of
drilling the Obligation Well to Casing Point shall be deemed to be costs of
completion and equipping for production, including, without limitation, (i)
costs of casing and associated equipment, (ii) cement and cementing service,
(iii) tubing, (iv) packers, (v) Christmas tree, (vi) perforation, (vii)
formation treatment and stimulation, (viii) rig time, (ix) engineering
supervision, (x) surface handling facilities, and (xi) administrative overhead
as provided in Exhibit "C" to the Operating Agreement. Notwithstanding any other
provision of this Agreement or the Operating Agreement, if a Farmor that is a
party in interest in an Obligation Well elects not to participate in a
completion attempt therein pursuant to Articles VII.D.1 and VI.B.2 of the
Operating Agreement, only the costs and expenses incurred in completing such
Obligation Well and equipping the same for production shall be taken into
account in determining the non-consent penalty to which such Farmor is subject
under the terms of clause (b) of Article VI.B.2 of the Operating Agreement. At
its option, Chesapeake has the preferential right to assume all non-consent
interests.
(c) If Chesapeake drills an Obligation Well to its Objective Depth, but
all parties in interest in such Obligation Well elect not to attempt to complete
such Obligation Well as a well capable of producing oil and gas, Chesapeake, at
its sole cost, risk, liability, and expense, shall plug and abandon the relevant
Obligation Well and shall restore the drillsite premises pursuant to the
requirements of the Leases and applicable laws, rules, regulations, and orders
of any governmental authority having jurisdiction.
3.6 Subcontractors. Chesapeake may, at its option, subcontract the
performance of all or any part of its responsibilities and obligations
hereunder; provided, however, that (a) Chesapeake, and not Farmors, shall be
responsible for all payments or other obligations due to any such subcontractor,
and (b) no such subcontract shall have the effect of relieving Chesapeake of its
contractual responsibilities and obligations hereunder.
3.7 Insurance. During all operations for oil and gas conducted by
Chesapeake on the Leases pursuant to this Agreement, Chesapeake shall comply
with any and all applicable laws, rules, regulations, and orders of any
governmental authority having jurisdiction over such operations, and with all of
the terms, covenants, and conditions, either expressed or implied, set forth in
the Leases, this Agreement, and the Operating Agreement. In addition, during all
such operations, Chesapeake shall carry the insurance specified in the Operating
Agreement, which shall be effective from the date of execution of this Agreement
and shall cover Farmors, Chesapeake, and all other parties in interest as
insured parties. Prior to the commencement of the first Obligation Well,
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Chesapeake shall furnish to Farmors Certificates of Insurance from the insurance
carrier selected by Chesapeake, evidencing the existence of the insurance
coverage called for in the Operating Agreement. Chesapeake shall have no
obligation to carry insurance coverage for the joint account of Farmors and
Chesapeake hereunder in addition to the coverage specified in the Operating
Agreement.
3.8 Failure to Timely Commence Obligation Xxxxx.
(a) If Chesapeake fails to commence the actual drilling of the Obligation
Xxxxx (or any Substitute Obligation Well drilled in lieu thereof) in a timely
manner as provided in Section 3.1 (or Section 3.4(a), if applicable), Chesapeake
shall, within ten (10) days after its receipt of the written request of Farmors,
reassign (a) to Farmors all of the rights, titles, and interests in and to Area
I acquired by Chesapeake from Farmors pursuant to the relevant Lease Assignment,
in the proportions in which such interests were owned by Farmors immediately
prior to the execution of such Lease Assignment, and (b) to Vaquero Partners all
of the rights, titles, and interests in and to Area II acquired by Chesapeake
from Vaquero Partners pursuant to the relevant Lease Assignment; provided,
however, that if Chesapeake is in default of its obligations under Section 3.1
or Section 3.4(a), as applicable, with respect to only one (1) Obligation Well,
Chesapeake's obligation to reassign under this Section 3.8 shall be limited to
the Lease(s) on which the Obligation Well not drilled in a timely manner as
provided herein was to have been located.
(b) Such reconveyances shall be by recordable instrument of conveyance
substantially in the form attached hereto as Exhibit II-, except any interests
in the Leases reassigned by Chesapeake to Farmors pursuant to this Section 3.8
shall be free and clear of all liens, security interests, and encumbrances
created by or resulting from the act or omission of Chesapeake and all
royalties, overriding royalties, production payments, and other burdens upon,
measured by, or payable out of production from the Leases except for those
burdens in existence on the Effective Date. In such event, Farmors shall be
entitled to retain the Cash Consideration as liquidated damages for Chesapeake's
failure to perform such obligation. No reassignment shall relieve either Party
from liability for the payment of any costs and expenses incurred in accordance
herewith for which such Party is responsible under the terms hereof.
(c) For purposes of this Agreement, Chesapeake shall be deemed to be in
default of its obligation hereunder to commence the actual drilling of an
Obligation Well by the applicable deadline provided in Section 3.1 or Section
3.4(a), as applicable, if, on or before September 1, 2006, Chesapeake has not
either (i) entered into a drilling contract with a third party for a rig capable
of drilling the relevant Obligation Well to its Objective Depth which is
available to commence the actual drilling thereof prior to November 1, 2006, or
(ii) delivered to Farmors a binding written commitment, in form and substance
reasonably acceptable to Farmors, that identifies such a drilling rig owned by
Chesapeake and commits to utilize such drilling rig for the actual drilling of
the relevant Obligation Well beginning on a date prior to November 1, 2006.
4.
ADDITIONAL XXXXX; NEGATIVE DRILLING COVENANT
4.1 Additional Xxxxx. The Parties understand and agree that, under the
terms of Lease 1 and Lease 2, such Leases shall remain in effect as to all of
the lands and depths covered thereby so long as certain drilling obligations
contained in such Leases are performed in a timely manner as provided therein.
If Chesapeake performs its obligations under Section 3 hereof with respect to
the Obligation Xxxxx in a timely manner as provided therein, Chesapeake agrees
that, during the period of six (6) months beginning on November 1, 2006, and
ending on April 1, 2007, and each six (6) month period thereafter for as long as
is required under the terms of Leases 1 and 2 to maintain such Leases in effect
as to all of the lands and depths covered thereby, Chesapeake shall, subject to
and in accordance with the terms of the Operating Agreement, propose, or consent
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to the proposal by a Non-Operator with respect to, the drilling of at least one
(1) well in search of oil or gas on each of Lease 1 and Lease 2 (each an
"Additional Well"), and thereafter cause each Additional Well to be drilled on
the schedule, and otherwise in accordance with the requirements, set forth in
the relevant Lease for maintaining such Lease in effect as to all of the lands
and depths covered thereby. If Chesapeake fails to perform in a timely manner
under the terms of the relevant Lease any of its obligations under the
immediately preceding sentence of this Section 4.1 with respect to an Additional
Well, Chesapeake shall, within ten (10) days after its receipt of the written
request of Farmors, reassign (a) to Farmors all of the rights, titles, and
interests in and to Area I acquired by Chesapeake from Farmors pursuant to the
relevant Lease Assignment, in the proportions in which such interests were owned
by Farmors immediately prior to the execution of such Lease Assignment, and (b)
to Vaquero Partners all of the rights, titles, and interests in and to Area II
acquired by Chesapeake from Vaquero Partners pursuant to the relevant Lease
Assignment; LESS AND EXCEPT, in each case, Chesapeake's Ownership Percentage in
the Obligation Xxxxx and any Additional Xxxxx and other xxxxx drilled on the
Leases and in which Chesapeake is a party in interest, together with
Chesapeake's Ownership Percentage in and to (a) a quantity of acreage
surrounding each such well equal to the quantity of acreage allocable to such
well under the terms of Article V of Lease 1 or Article V of Lease 2, as
applicable, (b) all oil, gas, and other hydrocarbons produced, saved, and
marketed from such xxxxx, (c) all personal property, equipment, and fixtures
located on the Leases and used in connection with such xxxxx, and (d) all
appurtenances thereto. Such reconveyances shall be by recordable instrument of
conveyance substantially in the form attached hereto as Exhibit II. Any
interests in the Leases reassigned by Chesapeake to Farmors pursuant to this
Section 4.1 shall be free and clear of all liens, security interests, and
encumbrances created by or resulting from the act or omission of Chesapeake and
all royalties, overriding royalties, production payments, and other burdens
upon, measured by, or payable out of production from the Leases except for those
burdens in existence on the Effective Date.
4.2 Drilling of Xxxxx by Farmors. Farmors agree not to propose, under the
terms of the Operating Agreement, the drilling of any well in search of oil and
gas to be located in Area I or Area II until a period of 60 days prior to the
expiration of a lease, whereby drilling is required to maintain the lease, or a
portion thereof, in full force and effect.
5.
OPERATING AGREEMENT
5.1 Execution. Concurrently with the execution of this Agreement, Farmors
and Chesapeake have executed an Operating Agreement identical in form and
substance to the form of Operating Agreement attached hereto and made a part
hereof as Exhibit "III" (the "Operating Agreement") that names Chesapeake as
"Operator". The Operating Agreement establishes two (2) separate "Contract
Areas", the first consisting of Area I and as to which all of the Farmors (as
well as the other parties in interest identified in Exhibit I under Area I) are
named "Non-Operators", and the second consisting of Area II and as to which
Vaquero Partners is named "Non-Operator."
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5.2 Operations Covered. All operations in connection with the Obligation
Xxxxx shall be governed by the applicable terms of the Operating Agreement, to
the extent that such terms are not inconsistent with the terms of this
Agreement. All operations in connection with any subsequently drilled well
located on the Leases (including, without limitation, the Additional Xxxxx),
including the decision to drill or not to drill, shall be governed by the
applicable provisions of the Operating Agreement, to the extent that such terms
are not inconsistent with the terms of this Agreement. Operations on the
Contract Area consisting of Area I will be conducted in a manner completely
separate and distinct from operations on the Contract Area consisting of Area
II, as if such Contract Areas were covered by separate joint operating
agreements. Without limiting the preceding sentence of this Section 5.2, the
reciprocal liens granted by the parties in interest in Area I pursuant to
Article VII.B of the Operating Agreement, covering their respective interests in
Area I, shall secure only obligations incurred under this Agreement and the
Operating Agreement in connection with operations on Area I, and such liens
granted by the parties in interest in Area II, covering their respective
interests in Area II, shall secure only obligations incurred under this
Agreement and the Operating Agreement in connection with operations on Area II.
There shall be no cross-netting, set off, offset, or recoupment between revenues
and obligations attributable to Area I and revenues and obligations attributable
to Area II.
6.
RELATIONSHIP OF PARTIES -- TAXATION
6.1 No Joint Venture. It is not the purpose of this Agreement to create,
and this Agreement shall not be construed as creating, a joint venture,
partnership, or other relation whereby any Party shall be liable for the acts,
either of omission or commission, of any other Party. Furthermore, the
respective rights and obligations of the Parties hereto shall, in all respects,
be several and not joint, and shall be governed by the express provisions
hereof.
6.2 Tax Partnership. Notwithstanding any other provision of this Agreement
to the contrary, Farmors and Chesapeake agree that their relationship for
purposes of U.S. federal and state income taxation shall be governed by the
provisions of the "Agreement Concerning Election to be Taxed Pursuant to
Subchapter K (Tax Partnership)" attached as Exhibit G to the Operating
Agreement.
7.
NOTICES
All notices, consents, approvals, requests, demands, and other
communications required or permitted to be given hereunder or in connection with
the transactions contemplated hereby shall be in writing and shall be deemed to
have been duly given when received by (a) personal delivery, (b) bonded
messenger or overnight courier, (c) mail, either registered or certified U.S.
mail with return receipt requested, or (d) facsimile, to the indicated
individuals at the following addresses:
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If to Farmors:
Vacquero Partners LLC
0000 Xxxx Xxx Xxxxxxxxx, Xxxxx 000
Xxxxxxx, Xxxxx 00000
Attention: Dr. Xxxxx Xxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
With copies of information provided under Section 3.3(g) to:
Production: Xxxx Xxx
Telephone (cell): (000) 000-0000
Geological: Xxx Xxxxxx
Telephone (cell): (000) 000-0000
Land: Xxxxxxxxx Xxxxxxxx
Telephone (cell): (000) 000-0000
If to Chesapeake:
Chesapeake Exploraton Limited Partnership
0000 X. Xxxxxxx Xxx.
Xxxxxxxx Xxxx, XX 00000
Attention: Xx. Xxxx X. Xxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
All notices, in accordance with the provisions of this Article 7, shall be
deemed to have been given when received by the abovesaid addressee. Farmors and
Chesapeake may change the address to which such communications are to be
directed by giving written notice to the other Party in the manner provided in
this Article 7.
8.
GENERAL PROVISIONS
8.1 Assignment. The rights and obligations of Chesapeake hereunder shall
not be assignable in whole or in part without the prior written consent of
Farmors, which consent shall not be unreasonably withheld. Any such assignment
of interest shall expressly be made subject to all of the terms, covenants,
provisions, and conditions of the Leases, this Agreement and the Operating
Agreement and shall provide that the assignee identified therein agrees to
ratify this Agreement at Farmors' request. No such assignment shall be binding
upon any Farmor until thirty (30) days after Chesapeake shall have furnished to
Vaquero Partners a certified copy of the recorded instrument or instruments
evidencing the same. Subject to the preceding terms of this Section 8.1, this
Agreement shall be binding upon and inure to the benefit of the Parties and
their respective successors and assigns.
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8.2 Lease Maintenance. Farmors and the other parties in interest in the
Excluded Xxxxx shall be responsible for, and shall bear and pay, all shut-in
well payments, minimum royalties, and other lease maintenance payments that
become due and payable under the terms of the Leases after the Effective Date
and that are triggered by or otherwise attributable to the shut-in of, or
operations (or the deferral thereof) on or related to, the Excluded Xxxxx.
Chesapeake and Farmors shall bear and pay their respective Ownership Percentages
of all shut-in well payments, minimum royalties, and other lease maintenance
payments that become due and payable under the terms of the Leases after the
Effective Date and that are triggered by or otherwise attributable to the
shut-in of, or operations (or the deferral thereof) on or related to, the
Obligation, substitute or subsequent xxxxx located on Area X. Xxxxxxx Partners
and Chesapeake shall bear and pay their respective Ownership Percentages of all
shut-in well payments, minimum royalties, and other lease maintenance payments
that become due and payable under the terms of the Leases after the Effective
Date and that are triggered by or otherwise attributable to the shut-in of, or
operations (or the deferral thereof) on or related to, Obligation, substitute or
subsequent xxxxx located on Area II.
8.3 Further Assurances. The Parties agree to execute such additional
instruments, agreements, or documents as may be necessary to effectuate the
intentions of this Agreement.
8.4 Articles and Sections. Article, section, and exhibit numbers used in
this Agreement refer to articles, sections, and exhibits of this Agreement
unless otherwise specifically provided. The section headings contained herein
are inserted for convenience only and shall not control or affect the meaning or
construction of any provision hereof.
8.5 Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Texas, excluding any
conflicts of law, rule, or principle that might refer construction of such
provisions to the laws of another jurisdiction.
8.6 Entire Agreement. This Agreement and the Operating Agreement
constitute the entire agreement between the Parties and supersede any and all
other written or oral agreements or understandings between the Parties
concerning the subject matter hereof. In the event of a conflict between the
terms of this Agreement and those of the Operating Agreement, the terms of this
Agreement shall govern and control.
8.7 Amendment. No modification or amendment of the terms and provisions of
this Agreement shall be effective unless in writing and signed by the Party
against whom enforcement is sought.
8.8 Multiple Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall constitute an original hereof for all
purposes, and all of which, when taken together, shall constitute one and the
same instrument.
8.9 Effective Date. This Agreement shall be effective as of the date of
acceptance hereof by Chesapeake (the "Effective Date"), notwithstanding the date
set out on the first page hereof.
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If the foregoing reflects your understanding of our agreement in
connection with the subject matter hereof, please execute two (2) counterparts
of this Agreement in the space provided below and return one such executed
counterpart to Farmors at the address indicated in Section 7.1. The remaining
counterpart should be retained for your files.
Very truly yours,
VAQUERO PARTNERS LLC
By: /s/ Xxxxx Xxxxx
-----------------------------
Dr. Xxxxx Xxxxx
Manager
JVR PETROLEUM INC.
By: /s/ Xxxxx X. Xxxxx
-----------------------------
Name: Xxxxx X. Xxxxx
Title: President
FIRST AUSTRALIAN RESOURCES, INC.
By: /s/ Xxxxxxx Xxxxxx
-----------------------------
Name: Xxxxxxx Xxxxxx
Title: Corp. Secretary
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ACCEPTED AND AGREED TO THIS
21st DAY OF JULY, 2006.
CHESAPEAKE EXPLORATON LIMITED
PARTNERSHIP
By: /s/ Xxxxx X. Xxxx
-----------------------------
Xxxxx X. Xxxx
Senior Vice President - Land and Legal
Chesapeake Operating, Inc., General Partner
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