AGREEMENT REGARDING THE
DRILLING OF COALBED METHANE XXXXX
This Agreement Regarding the Drilling of Coalbed Methane Xxxxx
("Agreement") is effective the 1st day of October, 1998 ("Effective Date") and
is by and between CBM Drilling LLC, a Wyoming limited liability company ("CBM")
whose address is X.X. Xxx 000, Xxxxxxxxxx, XX 00000 and Pennaco Energy, Inc
("Pennaco") whose address is 0000 00xx Xxxxxx, Xxxxx 000, Xxxxxx, Xxxxxxxx
00000.
RECITALS
A. Pennaco owns and operates certain undeveloped oil and gas interests
located in the Powder River Basin in Montana and Wyoming and is interested in
developing those interests by drilling coalbed methane xxxxx into the Fort Union
Formation.
B. CBM has the equipment and expertise to drill coalbed methane xxxxx to
Pennaco's. specifications (with such CBM drilled xxxxx being the "Xxxxx").
C. To facilitate CBM's drilling of such Xxxxx for Pennaco, Pennaco has
heretofore paid CBM $250,000 as a prepayment for such drilling and agrees to pay
CBM an additional prepayment of $110,000 upon the execution of this Agreement
(collectively, the "Prepayment" as more fully described in Section 1 below).
D. To further facilitate the drilling of such Xxxxx for Pennaco, Pennaco
has agreed to loan CBM $90,000 (the "Loan"), to be secured with a first and
prior security interest in all of CBM's personal property and equipment pursuant
to a "Security Agreement."
E. To memorialize their agreement with respect to the drilling of the
Xxxxx, the Prepayment, the Loan and Security Agreement, the parties wish to
enter into this Agreement.
AGREEMENT
NOW THERETOFORE, for and in consideration of the foregoing, $100 and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree as follows:
1. PREPAYMENT FOR DRILLING. Prior to the execution of this Agreement,
Pennaco has paid CBM the sum of $250,000 as a prepayment for the drilling of
certain of the Xxxxx. Contemporaneously with the execution of this Agreement,
Pennaco shall pay CBM the additional sum of $110,000 as a prepayment for the
drilling of Xxxxx as hereinafter provided. The $250,000 prepayment and the
$110,000 prepayment are herein collectively referred to as the "Prepayment." The
Prepayment will be credited to every third Well drilled by CBM, i.e. for every
three Xxxxx CBM drills, CBM agrees to invoice Pennaco for two of such Xxxxx upon
the completion of each Well and apply a portion of the Prepayment to pay the
invoice for the third Well. Pennaco agrees to pay the CBM invoices within then
(10) days of receipt. Upon expiration or termination of this Agreement, any
unused portion of the Prepayment shall be refunded, without interest, to Pennaco
within five (5) days after such termination. Such refund obligation shall be
secured by the Security Agreement hereinafter described.
2. DRILLING OF THE XXXXX.
a. CBM will not be obligated to use more than three (3) rigs to
drill the Xxxxx unless Pennaco, with CBM's consent, elects to make an additional
$90,000 prepayment for each additional rig which Pennaco requests CBM to provide
for the drilling of the Xxxxx. Such $90,000
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prepayment will enable CBM to purchase a rig and such rig shall automatically
become subject to the Security Agreement hereinafter described.
b. It is the intent of the parties that as of the termination of
this Agreement (except for breach), CBM shall have been offered the right to
drill 75% of the coalbed methane xxxxx drilled on leases operated by Pennaco in
Xxxxxxxx, Xxxxxxxx and Xxxxxxx Counties, Wyoming, and in Big Horn, Rosebud and
Powder River Counties, Montana. This right shall terminate upon the earlier of
(i) when CBM has been offered 1,000 xxxxx under the terms of this Agreement to
drill on acreage operated by Pennaco or (ii) upon termination of this Agreement
as hereinafter provided. However, it is recognized that at any particular time
during the term of this Agreement, CBM may be drilling more or less than 75% of
the xxxxx then being drilled. In the event Pennaco offers a well to CBM for
drilling while CBM is using fewer than 3 rigs on Pennaco xxxxx (or the maximum
number of rigs that CBM is required to provide pursuant to subparagraph 2.a.
above if Pennaco has made additional prepayments) and CBM is unable to drill
such well within the drilling schedule for such well or elects not to drill such
well, such well shall count toward the 1,000 well maximum. Only those xxxxx
offered to and undrilled by CBM while CBM has fewer than 3 rigs (or the maximum
number of rigs that CBM is required to provide pursuant to subparagraph 2. a.
above) will be included in the 1,000 well maximum. CBM also will have the right
to sub-contract with one or more third-party drillers (the "Driller(s)") to meet
its drilling obligations under this Agreement. Pennaco will have the right to
accept or reject any Driller proposed for use by CBM under this Agreement. Such
Drillers must agree in writing with Pennaco to look solely to CBM for payment
and to waive any rights to file liens against the Xxxxx drilled under this
Agreement. Notwithstanding
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the foregoing, nothing in this Agreement is intended to obligate Pennaco to
drill any minimum number of xxxxx during the term hereof.
b. In the event of a slow-down in or cessation of drilling
activities on Pennaco-operated xxxxx, Pennaco shall release third-party drilling
rigs first so that CBM is the last to be released.
x. Xxxxx shall be drilled by CBM or third-party Drillers pursuant to
the Drilling Contract (including Exhibit A thereto) attached hereto as EXHIBIT
1. Upon Pennaco's payment to CBM for work performed by third-party Drillers
under the Drilling Contract, CBM shall indemnify and hold Pennaco harmless from
any claims for payments by such Drillers. In the event of any claims for
payment by such Drillers, Pennaco shall have the right, but not the obligation,
in addition to all of its other remedies at law or in equity, to suspend
payments hereunder to CBM until such claims have been resolved.
e. All xxxxx shall be drilled in a good and workmanlike manner to
industry standards and to the specifications provided by Pennaco at any time and
from time to time. The Parties shall work diligently together in order to
attempt to resolve operational problems and performance problems as they arise.
f. Pennaco shall enter into a separate agreement with Powder River
Cementers giving Powder River the same rights as to the cementing of xxxxx as
CBM has for drilling hereunder', provided, however, that the rates for such
cementing work must be competitive; provided, however, that such agreement shall
not require any prepayments or obligation to loan.
g. To facilitate the timely drilling of the Xxxxx, Pennaco agrees to
forward to CBM reasonable advance notice of Pennaco's proposed drilling
schedule. The parties agree to work
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together in good faith to schedule and meet such schedule for the drilling of
the Xxxxx, as the same may be amended at any time and from time to time by
Pennaco.
h. Pennaco, at its cost and expense, agrees to obtain and comply
with all permits necessary to drill the Xxxxx. Pennaco will be responsible for
the negotiating of and payment of surface owner agreements and will provide
copies of same to CBM.
3 . LOAN/PROMISSORY NOTE. As soon as a Note and Security Agreement have
been mutually agreed to by Pennaco and CBM, Pennaco agrees to lend CBM $90,000
to be evidenced by a Term Promissory Note (the "Note") which shall heave a term
of 3 years and shall provide that the principal and interest, accrued on a
semi-annual basis at the rate of ten percent (10%) per annum for the first two
years and thirteen percent (13%) per annum for the third year, shall be paid at
maturity. There shall be no prepayment penalty.
4. ADDITIONAL LOANS. Similarly, Pennaco agrees, if requested by CBM on
or before June 30, 1999, to loan CBM, promptly after such request, an additional
$150,000.00, in $75,000.00 increments, for a three year term from the date of
each loan, with principal and accrued interest, accrued on a semi-annual basis
at the rate of 2.25% over the Prime Rate of Chase Manhattan Bank on the date of
each loan for the first two years and 5.25% over such Prime Rate on the date of
each loan for the third year, to be paid on the maturity date or earlier with no
prepayment penalty. Such additional loans shall be evidenced by Secured
Promissory Notes in the same form as the Note negotiated in connection with
paragraph 4 above and shall be secured by the Security Agreement.
5. SECURITY AGREEMENT. To secure any refund obligation under this
Agreement and CBM's obligations under the Note and any additional loans pursuant
to paragraph 4 above, CBM agrees to grant Pennaco a first and prior security
interest in all of CBM's personal property and
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equipment including, but not limited to, the personal property and equipment
described on EXHIBIT 2 (the "Collateral"). To grant the security interest to
Pennaco, CBM, as debtor, agrees to execute a Security Agreement and such other
documentation as reasonably deemed necessary in Pennaco's discretion to perfect
Pennaco's security interest in the Collateral, including without limitation,
local UCC filings in the appropriate counties and state central recording
offices.
6. INDEPENDENT CONTRACTOR STATUS. The parties intend that CBM provide
the services under this Agreement as an independent contractor. This Agreement
is not intended to create, and shall not create a joint venture, partnership or
any other type of business association.
7. TERM. This Agreement shall terminate upon the earlier of (i)
completion of the drilling of the last well by CBM which constitutes the 1,000th
well offered by Pennaco to CBM for drilling, or (ii) five years after the
Effective Date hereof. If the 1,000 well number has not been reached by
December 31, 2000, either Party may request renegotiation of the terms of the
Drilling Contract based on prevailing market conditions at the time. If the
parties are unable to agree on renegotiation of such terms within sixty (60)
days after a request for renegotiation is made, either Party may terminate this
Agreement on thirty (30) days notice to the other Party. Notwithstanding the
foregoing, this Agreement may be terminated earlier by Pennaco in the event of a
breach of this Agreement by CBM which is not cured within ten (10) days after
notice by Pennaco of such breach. Upon expiration of the term of this Agreement
(except for termination due to the breach of this Agreement by CBM), the Parties
shall meet to attempt to negotiate a new Agreement for services on other xxxxx
to be drilled by Pennaco.
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8. MISCELLANEOUS.
a. GOVERNING LAW. The parties agree that this Agreement is governed
by and shall be construed pursuant to the laws of the State of Colorado.
b. NOTICES. All notices and communications required or permitted
under this Agreement shall be in writing and addressed to the parties at the
addresses set forth above. Any communication or delivery hereunder shall be
deemed to have been duly made when received by the receiving party and may be
personally delivered, sent by certified mail, return receipt requested,
overnight courier or facsimile transmission. Any party may, by written notice
so delivered to the other parties, change the address or individual to which
delivery shall thereafter be made.
c. AMENDMENTS. This Agreement may not be amended except by an
instrument in writing signed by the party to be charged with such amendment and
delivered by such party to the party claiming the benefit of such amendment.
d. NO WAIVER. A waiver by either Party of any breach of this
Agreement shall not be deemed to be a waiver of any subsequent breach, whether
of the same type or otherwise.
e. ASSIGNMENT. This Agreement may not be assigned without the
express written consent of the other Party, which consent shall not be
unreasonably withheld. CBM hereby consents to the assignment of this Agreement
to CMS Oil and Gas Company ("CMS"), at the election of CMS, as to xxxxx to be
drilled by CMS on acreage operated by CMS in Xxxxxxxx, Xxxxxxxx and Xxxxxxx
Counties, Wyoming, and in Big Horn, Rosebud and Powder River Counties, Montana.
If CMS elects to accept such assignment it shall execute a ratification of this
Agreement and, thereafter, this Agreement shall apply in the same manner as if
CMS had been an original signatory hereto so that the xxxxx drilled by CBM for
CMS shall count toward the 1,000 well maximum and
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CBM shall drill for CMS on the same terms as for Pennaco; provided, however,
that the Prepayment shall be credited only against xxxxx drilled for Pennaco,
CMS shall not be obligated to make any prepayments, and CMS shall not be
obligated to make any of the loans.
f. HEADINGS. Headings used in 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.
g. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding among the parties, superseding all negotiations, prior discussion
and prior agreements.
h. BINDING EFFECT. This Agreement shall be binding upon, and shall
inure to the benefit of, the parties hereto, and their respective successors and
assigns.
Executed on the dates set forth below but effective as of the Effective
Date.
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Pennaco Energy, Inc.
By:
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Name:
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Title:
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Date:
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CBM Drilling, LLC
BY:
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its Manager
By:
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Name:
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Title:
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Date:
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