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Exhibit 10
FARMOUT AGREEMENT
I. PARTIES
Inland Production Company
000 00xx Xxxxxx, Xxxxx 000
Xxxxxx, Xxxxxxxx 00000
fax #: (000) 000-0000
and
Inland Resources Inc.
000 00xx Xxxxxx, Xxxxx 000
Xxxxxx, Xxxxxxxx 00000
fax #: (000) 000-0000
Herein collectively "Farmor"
Xxxxx Management LLC
000 0xx Xxxxxx, 00xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
fax #: (000) 000-0000
Herein "Farmee"
and
Inland Production Company
000 00xx Xxxxxx, Xxxxx 000
Xxxxxx, Xxxxxxxx 00000
fax #: (000) 000-0000
Herein "Operator"
II. CONTRACT AREA AND EARNED DRILLSITES
The Farmor agrees to farmout, and Farmee agrees to farmin, a number of
drilling and injection well locations within the area of land described on
Exhibit A attached hereto and made a part hereof and which is referred to herein
as the "Contract Area."
Each well drilled pursuant to this Farmout Agreement shall be located
within a mutually approved 40-acre drillsite spacing unit within the Contract
Area.
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Farmor will submit to Farmee a proposed drillsite and unit for approval, along
with a description of the objective zone, its depth, and the estimated dry hole
and completed cost in the form of an AFE, and if not rejected by Farmee within
fifteen (15) days after submission, the drillsite and unit shall be deemed
approved as submitted. At such time as a well has been drilled on a 40-acre
drillsite spacing unit to the objective depth stated in Farmor's notice, and
whether abandoned as a dry hole or completed as a well capable of producing oil
and/or gas and associated hydrocarbons in paying quantities or as an injection
well, such 40-acre drillsite spacing unit will be thereafter referred to herein
as an "Earned Drillsite."
III. FARMOUT OPERATIONS
Upon its execution hereof, Farmee shall be deemed to have agreed to
provide one hundred percent (100%) of the funds needed by Farmor to drill,
complete (or abandon) and equip through tanks any well spudded on an Earned
Drillsite from June 1 through September 30, 1998, and seventy percent (70%) of
the funds needed by Farmor to drill, complete (or abandon) and equip through
tanks any well spudded on an Earned Drillsite from October 1 through December
31, 1998, pursuant to the drilling program set forth in this Farmout Agreement,
all as proportionately reduced to Farmor's undivided interest in the Earned
Drillsite. The funds provided by Farmee shall be used by Operator to pay all of
Farmee's costs associated with drilling, completing, and equipping xxxxx within
drillsite spacing units, whether such xxxxx are completed as dry holes, xxxxx
capable of producing hydrocarbons in paying quantities, or as injection xxxxx
that benefit lands within the Contract Area.
The drilling program contemplated by this Farmout Agreement shall begin
effective as of June 1, 1998, and will run through December 31, 1998, and
contemplates the drilling of all xxxxx to be drilled by Farmor in the Contract
Area during such period, consisting of approximately 56 xxxxx and aggregating
total expenditures of approximately $20,000,000.00 by Farmee (including
"management fees" payable to Operator). All operations on xxxxx commenced during
this period for the account of Farmee shall be carried out in a good and
workmanlike manner.
Operator shall invoice Farmee on a monthly basis in the approximate sum
to be borne by Farmee on behalf of Farmor during the upcoming month pursuant to
this drilling program. The bills, except for the first xxxx for the month of
June 1998, shall be delivered to Farmee before the beginning of the month for
which the expenditures relate. The xxxxxxxx shall require pre-payment for
expenses estimated to be incurred during that month, and any funds not expended
from a prior month's billing and payment shall be credited in the next ensuing
month's invoice. Each month's xxxxxxxx shall be conducted likewise, with all
prior month's surplus rolling forward to the next ensuing billing. Each month's
billing shall be paid by Farmee to Farmor by wire transfer within five (5)
business days of Farmee's receipt of such billing.
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For each well drilled pursuant to this Farmout Agreement, Farmee will
pay to Operator a one-time "management fee" in the amount of $30,000.00. It is
understood and acknowledged that Farmee does not have land, geological,
engineering and oil and gas accounting staff currently on hand, and thus, Farmee
desires these services to be provided by Operator for Farmee's benefit.
Operator's management services shall include all land, geological, engineering
and accounting services required to initiate, complete and account for the
operations contemplated hereby through completion and abandonment of the well if
it is a dry hole. The management fee will be payable when a well reaches its
total objective depth, and will be in lieu of, and not in addition to, the XXXXX
drilling rate charges customarily allowed an operator pursuant to a joint
operating agreement with respect to drilling (but not operating) periods.
Any funds previously advanced by Farmee which have not been spent by
Operator as of January 1, 1999 shall be promptly returned to Farmee unless there
are drilling, completion, or equipping activities which are still ongoing as of
January 1, 1999, on xxxxx the drilling of which was commenced prior thereto. In
such event, these activities will be wound up in the ordinary course of
business, and Farmor shall be entitled to its "management fee" with respect to
all such xxxxx, and any excess funds remaining thereafter shall be promptly
returned to Farmee, together with a final reconciliation.
IV. RIGHTS EARNED
A. ASSIGNMENTS
Prior to the commencement of drilling any well that will potentially
result in an Earned Drillsite, Farmor will assign to Farmee one hundred percent
(100%) of its interest in xxxxx drilled or commenced prior to October 1, 1998,
and seventy percent (70%) of its interest in xxxxx commenced after September 30,
1998 [and Farmor may retain the other thirty percent (30%)], of Farmor's
interest in the drillsite spacing unit from the surface of the earth to the base
of the Green River formation, free of any overriding royalty interest in favor
of Farmor; subject to the release of such Earned Drillsite from the liens held
thereon by Farmor's "Senior Lenders" (as herein defined). Assignments will be
made without warranty of title, either express or implied, except by, through,
and under Farmor, but not otherwise. If for any reason, this well is either not
drilled, or does not result in Farmee obtaining an Earned Drillsite, then Farmee
agrees to reassign its entire interest in this affected acreage to Farmor free
and clear of, and warranting title against, all liens or other encumbrances
created by, through or under Farmee. "Senior Lenders" shall mean (i) the Agent
and Banks (as defined therein) under that certain Credit Agreement dated as of
September 23, 1997 between Farmor and ING (U.S.) Capital Corporation (as amended
prior to the date hereof); and (ii) the "Noteholder," "Agent" and "Collateral
Agent" (as defined therein) under that certain Credit Agreement between Farmor,
Trust Company of the West and TCW Asset Management Company dated as of
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September 23, 1997 (as amended prior to the date hereof). The Senior Lenders
will release such Earned Drillsites from their liens, such release to be
evidenced by individual releases, individual subordinations, blanket releases or
blanket subordinations of their liens for the Earned Drillsites, at their
discretion.
B. AFTER PAYOUT REVERSION
At such time as Farmee has reached Payout, as hereinafter deferred,
Farmee shall reconvey all of its interest in all Earned Drillsites and affected
leases as received from Farmor, back to Farmor free and clear, and warranting
title against all liens or other encumbrances created by, through or under
Farmee. "Payout" as used herein shall mean that point in time when Farmee has
recovered from production attributable to its net working interest in all Earned
Drillsites and affected leases one hundred percent (100%) of Farmee's cost of
dealing, testing, completing, equipping, and producing and operating the xxxxx
located on such Earned Drillsites and affected leases during the Payout period.
Such costs shall also include Operator's management fees and applicable
severance and production taxes, plus an additional sum equal to an annual
eighteen percent (18%) rate of return on all the sums spent by Farmee and
attributable to this Farmout Agreement during the Payout period. The rate of
return and status of Payout shall be calculated monthly, Payout shall be
effective the first day of the month following occurrence of Payout. Payments
shall be made in amounts equal to one hundred percent (100%) or seventy percent
(70%), as applicable, of the net proceeds received from sales of hydrocarbons
from the xxxxx drilled under the drilling program, less all costs of production
and sales, including Operator's management fees. Payments will be made within
forty-five (45) days after the end of each month based on the proceeds received
for such month (the "Production Month"). Payments will be made, at Farmor's
option, either (i) in cash, provided such payments in cash do not result in a
default or event of default under either Credit Agreement with the Senior
Lenders, or (ii) in shares of common stock of Inland Resources, Inc. priced at a
ten percent (10%) discount of the average of the bid side of the closing price
for each trading day during the Production Month for which the payment is made.
Further, at any time after February 1, 2000, Farmor shall have the right to make
one lump sum cash payment in an amount necessary to achieve Payout, thereby
causing all xxxxx to revert to Farmor, provided such payment does not result in
a default or event of default under either Credit Agreement with the Senior
Lenders.
V. ACCESS OF INFORMATION
Farmee and its representatives will have free access at its own risk to
the Contract Area and drillsite spacing, and will have the right to inspect and
make copies of all information and records pertaining to the operations
conducted hereunder. Additionally, as and when requested by Farmee, Operator
will furnish by telephone, telecopier or mail, as the case may be: daily
drilling reports, copies of all electrical
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survey logs and other logs which may be taken during the course of drilling or
testing; and copies of results of all tests run.
VI. DELAY RENTALS AND SHUT-IN WELL PAYMENTS
During the term of this Farmout Agreement, Operator will make a bona
fide effort to pay the annual delay rentals that may come due on any lease
affecting the Contract Area, but Operator will not be liable for any loss
resulting from a "good faith" failure to pay said rentals, or for improper
payment through clerical oversight. If a rental is due and paid by Operator
regarding any lease affecting one or more Earned Drillsites, Farmee shall
reimburse Operator for its allocable share of such rental in accordance with
Farmee's working interest in said lease.
In the event any well is completed on an Earned Drillsite as a gas
well, as determined by state or federal regulatory authorities, and if the well
is shut-in for any reason allowed by the affected oil and gas lease(s), Operator
will make such shut-in royalty payments as are necessary under the terms of the
affected oil and gas lease(s) necessary to keep such lease(s) in force and
effect, and Farmee shall reimburse Operator for such payments in accordance with
the working interest then owned by Farmee in the affected Earned Drillsite.
VII. OPERATING AGREEMENT
Each well drilled in accordance with this Farmout Agreement shall be
drilled pursuant to a joint operating agreement. If no agreement exists as to an
intended drillsite spacing unit, then the parties will execute, and operations
will be conducted in accordance with, the AAPL 1989 Model Form Operating
Agreement attached hereto and made a part hereof as Exhibit B. In the event a
joint operating agreement already exists as to an intended drillsite spacing
unit, then Farmee will be subject to the terms and conditions thereof and, if
appropriate, will become a party thereto. Should Farmee fail or refuse to become
a party thereto within thirty (30) days after the agreement has been delivered
to Farmee for signature, Farmee hereby appoints Operator as its agent and
attorney-in-fact to execute such agreement on its behalf, providing the terms
and conditions thereof do not differ substantially from those set forth in the
model agreement at Exhibit B.
If there exists any conflict between the provisions of this Farmout
Agreement and those of any existing or future joint operating agreement, then as
between Farmor, Farmee, and Operator, the provisions of this Farmout Agreement
shall control.
VIII. INDEMNIFICATION
Operator will indemnify and hold Farmee harmless from and against any
and all claims of any nature whatsoever, including personal injury and death,
and
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including reasonable attorney's fees and costs, and whether such claims are
based on negligence or otherwise, in connection with Operator's Operations on
the Contract Area. Operator shall obtain and at all times maintain insurance
coverage consistent with the insurance exhibit to the Model Form Operating
Agreement attached hereto as Exhibit B, and Farmee shall be listed as an
additional insured.
Farmor and Operator shall keep Earned Drillsites free and clear of
liens and encumbrances of every kind or character. Farmee shall keep Earned
Drillsites free and clear of liens and encumbrances of every kind or character.
IX. TERM
This Farmout Agreement shall remain in full force and effect until
Payout his occurred and all xxxxx have reverted to Farmor, but Farmee's
obligation to fund the drilling and completion of operations contemplated hereby
shall cease at the close of business on December 31, 1998, except as to xxxxx on
which drilling commenced prior thereto, and unless otherwise extended or
previously terminated in accordance with the terms hereof. Farmee will have the
right to suspend or cease the drilling operations in the event of receipt by
Farmor of any notice of default issued by Farmor's lenders. In the event Farmee
shall elect (for the reasons provided in the preceding sentence) at any time to
curtail or terminate further drilling operations, then Farmee shall so notify
Farmor in writing, and thereafter the operations shall be wound down in a
businesslike manner.
X. BONDING
The costs of any bonds that Farmee is required to obtain shall be borne
solely by Farmee, but allocated as additional drilling costs. To the extent
possible, Farmee will be joined on either Farmor's or Operator's bonds that are
now in existence.
XI. REASSIGNMENT
If, during the time that Farmee owns an interest in an Earned
Drillsite, Farmee elects to surrender, let expire, abandon, or releases all or
any part of its rights in an Earned Drillsite, Farmee will notify Farmor not
less than sixty (60) days in advance of such surrender, expiry, abandonment, or
release. At Farmor's request, Farmee will then immediately reassign its rights
in such affected Earned Drillsite to Farmor free and clear of, and warranting
title against, any liens or other encumbrances by, through or under Farmee, and,
upon receipt of that reassignment, Farmor will pay Farmee the reasonable salvage
value of any material or equipment received.
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XII. FARMEE'S OPTION FOR ADDITIONAL FARMOUTS
Farmee will have the option, exercisable not later than sixty (60) days
before the end of 1998 and 1999, respectively, to enter into like-kind Farmout
Agreements with Farmor for the years 1999 and 2000, respectively, unless (a) a
"change of control" (as hereinafter defined) of Inland Resources Inc. has
occurred or (b) Farmee shall have failed to exercise timely its option with
respect to year 1999, in which event any unexercised option will immediately and
automatically expire. For purposes of this Farmout Agreement, a "change of
control" shall mean Farmee and its affiliates shall cease to beneficially own at
least a majority of the outstanding shares of voting capital stock of Inland
Resources Inc.
XIII. GENERAL
A. NOTICE
Any notice required under the terms of this Farmout Agreement will be
given to Farmor, Farmee, and/or Operator at the addresses and fax numbers listed
above.
B. INUREMENT
This Farmout Agreement is binding upon the successors and assigns of
the parties. Farmee may assign this Farmout Agreement to affiliates without
Farmor's consent, but upon prior written notice to Farmor, but any such
assignment by Farmee shall not release it from its liabilities, duties and
obligations hereunder. This Farmout Agreement may not otherwise be assigned by
Farmee or Farmor without the prior written consent of the other party, which
consent will not be unreasonably withheld.
C. ENTIRE AGREEMENT
This Farmout Agreement constitutes the entire agreement by and between
the parties, and may not be modified except by a written instrument signed by
all parties hereto.
D. GOVERNING LAW
This Farmout Agreement shall be governed by the laws of the state of
Colorado, except that any real property issue shall be governed by the laws of
the state where such property is located. Venue for any action involving this
Farmout Agreement shall exclusively lie in the District Court for the City and
County of Xxxxxx, Xxxxxxxx.
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This Farmout Agreement is dated the date of acknowledgment for each of
the undersigned, effective June 1, 1998, at Denver, Colorado.
FARMOR:
INLAND PRODUCTION COMPANY
ATTEST:
/s/ Xxxxxxx Xxxxxxx By: /s/ Xxxx X. Xxxxxx
------------------- ----------------------
Secretary Xxxx X. Xxxxxx, President
INLAND RESOURCES INC.
ATTEST:
/s/ Xxxxxxx Xxxxxxx By: /s/ Xxxx X. Xxxxxx
------------------- ----------------------
Secretary Xxxx X. Xxxxxx, President
FARMEE:
XXXXX MANAGEMENT LLC
By: /s/ Xxxxx X. Xxxxxxxxx
--------------------------
Xxxxx X. Xxxxxxxxx,
Senior Vice President
OPERATOR:
INLAND PRODUCTION COMPANY
ATTEST:
/s/ Xxxxxxx Xxxxxxx By: /s/ Xxxx X. Xxxxxx
------------------- ----------------------
Secretary Xxxx X. Xxxxxx, President
