EXHIBIT 10.1
EXHIBIT B
DRILLING PROGRAM AGREEMENT
among
XXXXXXXXX OIL COMPANY
XXXXXXXXX DEVELOPMENT CORPORATION
and
XXXXXXXXX ENERGY PARTNERS ____-A , L.P.
Dated as of
, 200__
TABLE OF CONTENTS
PAGE
Section 1. Certain Defined Terms and References.............................................................. 2
Section 2. Acquisition of Interests in Prospects............................................................. 5
Section 3. Allocation of Costs............................................................................... 7
Section 4. Allocation of Revenues............................................................................ 7
Section 5. Ownership of Production........................................................................... 8
Section 6. Management of Program............................................................................. 9
Section 7. Removal of the Program Manager.................................................................... 11
Section 8. Reimbursement of the Program Manager.............................................................. 11
Section 9. Tax Partnership................................................................................... 11
Section 10. Sales of Interests by MD.......................................................................... 11
Section 11. Assignment........................................................................................ 12
Section 12. Term and Amendment of Agreement................................................................... 12
Section 13. Insurance......................................................................................... 12
Section 14. Partnership Agreement............................................................................. 13
Section 15. Entire Agreement.................................................................................. 13
Section 16. Headings.......................................................................................... 13
Section 17. Governing Law..................................................................................... 13
Section 18. Attachments....................................................................................... 13
Section 19. Counterparts...................................................................................... 13
Attachment A Tax Partnership Provisions - Incorporated by
reference to the Tax Partnership Provisions filed as
Exhibit 10.3 to the Registration Statement on Form
X-0, Xxxxxxxxxxxx Xx. 000-
Xxxxxxxxxx X Form of Operating Agreement - Incorporated by
reference to the form of Operating Agreement filed as
Exhibit 10.4 to the Registration Statement on Form
S-1, Registration No. 333-
DRILLING PROGRAM AGREEMENT
THIS DRILLING PROGRAM AGREEMENT (this "Agreement"), dated as of
________, 200__ is made by and among Xxxxxxxxx Oil Company, a Delaware
corporation ("MOC"), Xxxxxxxxx Development Corporation, a Delaware corporation
("MD"), and Xxxxxxxxx Energy Partners -A, L.P., a Delaware Limited Partnership
("Partnership") of which MD is the managing general partner.
WHEREAS, MD and the Partnership desire to participate in a drilling
program (the "Program"), whereunder MD and the Partnership will (a) jointly
acquire interests in certain Prospects and (b) participate in the development of
such Prospects, on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto do hereby agree as follows:
Section 1. Certain Defined Terms and References.
(a) Certain Defined Terms. When used in this Agreement, the
following terms shall have the respective meanings assigned to them in this
subsection (a) or in the sections, subsections, or other subdivisions referred
to below:
"Administrative Costs" shall mean customary and routine
expenses incurred by MD or its Affiliates for the conduct of the
administration of a Partnership or a Program, including, legal,
finance, accounting, secretarial, travel, office rent, telephone, data
processing, and other items of a similar nature.
"Affiliate" shall mean, with respect to another person,
(a) any person directly or indirectly owning, controlling
or holding with power to vote 10% or more of the
outstanding voting securities of or equity interests
in such other person,
(b) any person 10% or more of whose outstanding voting
securities or equity interests are directly or
indirectly owned, controlled, or held with power to
vote by such other person,
(c) any person directly or indirectly controlling,
controlled by, or under common control with such
other person,
(d) any officer, director, or partner of such other
person, and
(e) any company for which any such officer, director, or
partner acts in any such capacity. For purposes of
this Agreement, unless otherwise indicated, an
affiliate of MD shall include Affiliated Programs.
"Affiliated Program" shall mean a drilling, producing
property, income, royalty, or other program (whether in the form of a
partnership, joint venture, or otherwise), including the Partnership,
for or of which the Managing Partner or an Affiliate thereof serves as
manager or managing partner or acts in a similar capacity.
"Agreement" shall mean this Drilling Program Agreement, as
amended from time to time.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Due Diligence Fees" shall mean fees to be paid to the
soliciting dealers, which may be in an amount of up to .5% of the sales
price of interests sold to persons other than
- officers, directors or employees of MD or its
Affiliates,
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- officers, directors, employees, or registered
representatives of a soliciting dealer, or
- an Affiliate of MD.
"Gas Marketing Fee" shall mean a fee equal to three cents per
MCF that is payable to the Program Manager in consideration for gas
marketing services to be rendered by the Program Manager in connection
with the marketing of the Program's natural gas.
"Lease" shall mean an oil and gas lease or an oil, gas and
mineral lease, a Working Interest, an interest (including certain
non-consent interest) arising under a pooling order or operating
agreement, an interest acquired under a farmout, operating rights under
governmental tracts, a mineral interest, royalty, or other interest in
and to oil, gas, and related hydrocarbons (or a contractual right to
acquire or earn such an interest), or an undivided interest therein or
portion thereof (including those covering only certain Horizons or
depths), together with all easements, permits, licenses, servitudes,
and rights-of-way situated upon or used or held for future use in
connection with the exploration, development, or operation of such
interest.
"Lease Acquisition Cost" shall mean, when used to describe the
costs of any Lease, the sum of (a) all monetary consideration paid or
given for such Lease to a non-Affiliate of the Managing Partner,
including but not limited to lease bonuses and advance rentals paid to
a non-Affiliate of the Managing Partner, (b) all costs of lease
acquisition and title examination including but not limited to curing
or defending title, title insurance or examination costs, brokerage
commissions, the fees and wages of landmen and lease brokers and their
expenses, filing fees, recording costs, transfer taxes, and like
charges paid in connection with the acquisition of such Lease, (c) all
delay rentals and other similar payments and ad valorem taxes paid by
the seller with respect to such Lease, (d) such portion as may be
allocated to such Lease in accordance with generally accepted
accounting principles and industry standards of all reasonable,
necessary, and actual costs and expenses of MD or its Affiliates for
geological, geophysical, seismic, land, engineering, drafting,
accounting, legal, and other like services together with related
administrative and general overhead costs involved in lease acquisition
and Prospect evaluation including such costs and expenses which could
otherwise be classified hereunder as Administrative Costs, (e) such
portion as may be allocated to such Lease in accordance with generally
accepted accounting principles and industry standards of all costs and
expenses incurred in the acquisition of farmouts, subleases, pooling
orders, or other oil and gas interests, (f) interest and points
actually incurred on funds borrowed to pay any of the costs and
expenses described in clauses (a) through (e) above calculated from the
date of their incurrence until the date of their reimbursement by the
Drilling Program at the time a Lease is acquired by the Drilling
Program, and (g) with respect to Leases held on the date hereof by or
acquired thereafter by MD or an Affiliate thereof, an interest in which
is transferred to the Participants pursuant to this Agreement, the
costs of such transfer; provided that the expenses described in clauses
(c), (d), (e), and (f) shall have been incurred by MOC or its
Affiliates not more than 36 months prior to the acquisition by the
Drilling Program of such Lease; and provided further, that such time
limitation shall not be applicable to Leases having a primary term of
five or more years. Lease Acquisition Costs of a Lease shall not
include any costs or expenses otherwise allocable herein to such Lease
and which represent costs or expenses incurred in connection with the
past drilling of xxxxx which are not producers of sufficient quantities
of oil or natural gas to make commercially reasonable their continued
operation.
"Managing Partner" shall mean Xxxxxxxxx Development
Corporation, a Delaware corporation, and any person who becomes a
substituted managing partner of a Partnership, in accordance with the
terms of the Partnership Agreement.
"Operating Agreement" shall mean a Model Form Operating
Agreement based upon the American Association of Petroleum Landmen Form
610-1989 and, among the other attached exhibits thereto, an accounting
procedure for joint operations issued by the Council of Petroleum
Accountants Societies of North America, each of which containing
modifications that are customary and usual for the geographic area in
which the Partnership intends to conduct operations.
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"Operating Costs" shall mean all expenditures made and costs
incurred in producing and marketing oil and gas from completed xxxxx,
including, in addition to labor, fuel, repairs, hauling, materials,
supplies, utility charges, and other costs incident to or therefrom, ad
valorem and severance taxes, insurance and casualty loss expense, and
compensation to well operators or others for services rendered in
conducting such operations.
"Participants" shall mean MD and the Partnership, and
"Participant" shall mean MD or the Partnership, individually.
"Partners" shall mean the partners of the Partnership.
"Partnership" shall have the meaning assigned to such term in
the preamble to this Agreement.
"Partnership Agreement" shall mean the Agreement of
Partnership dated ____________, 200__ creating the Partnership and
designating MD as the Managing Partner of the Partnership.
A "person" shall mean any natural person, partnership,
corporation, association, trust, or other legal entity.
"Program" shall have the meaning assigned to such term in the
preamble to this Agreement.
"Program Manager" shall mean MOC and any person who becomes
the manager of the business and affairs of the Program in accordance
with Section 7 of this Program Agreement.
"Program Well" shall mean any well in which the Participants
have an interest pursuant hereto.
"Prospect" shall mean an area covering lands which, in the
opinion of the Program Manager, contains subsurface structural or
stratigraphic conditions making it susceptible to the accumulation of
oil or gas in commercially productive quantities at one or more zones
or horizons. The area, which may be different for different Horizons,
shall be designated by the Program Manager in writing prior to the date
on which a well is spudded (i.e. boring is commenced) thereon and shall
be enlarged or contracted from time to time on the basis of
subsequently acquired information to define the anticipated limits of
the associated oil and gas reserves and to include all acreage
encompassed therein. A "Prospect" with respect to a particular Horizon
may be limited to the minimum area permitted by state law or local
practice, whichever is applicable, to protect against drainage from
adjacent xxxxx if the well to be drilled by the Partnership is to a
Horizon containing Proved Reserves.
"Prospectus" shall mean the Prospectus dated ________, 200__,
as amended or supplemented from time to time, describing the offer and
sale of interests in the Partnership.
"Reporting and Legal Expenses" shall mean all third party
accounting fees, costs, and expenses associated with obtaining audits
of books and records, third party engineering fees, costs, and expenses
associated with annual reserve reports, and third party attorney's fees
and other legal fees, costs, and expenses associated with matters that
are attributable to the Drilling Program's or the Partnership's
business.
"Sales Commissions" shall mean the sales commissions to be
paid to the Soliciting Dealers, which may be in an amount of up to 8%
of the sales price of interests sold to persons other than:
- officers, directors or employees of MD or its
Affiliates,
- officers, directors, employees, or registered
representatives of a soliciting dealer, or
- an Affiliate of MD.
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"Soliciting Dealers" shall mean those persons who are
authorized to act as registered representatives by the National
Association of Securities Dealers, Inc. and have contracted with MD to
offer and sell interests in a Partnership.
"Working Interest" shall mean an interest in an oil and gas
lease which is subject to some portion of the costs of development,
operation, or maintenance.
(b) Other Defined Terms. The following terms shall have the
respective meanings assigned to them in the Prospectus:
"Intangible Drilling Costs"
"Organization and Offering Expenses"
"Proved Reserves"
"Tangible Costs"
(c) References. All references in this Agreement to sections,
subsections, and other subdivisions refer to corresponding sections,
subsections, and other subdivisions of this Agreement unless expressly provided
otherwise. The words "this Agreement," "this instrument," "herein," "hereof,"
"hereby," "hereunder" and words of similar import refer to this Agreement as a
whole and not to any particular subdivision unless expressly so limited. Words
in the singular form shall be construed to include the plural and vice versa,
unless the context otherwise requires.
Section 2. Acquisition of Interests in Prospects.
(a) Prospects Subject to this Agreement. Subject to the terms and
conditions hereof, the Participants shall acquire undivided interests in Leases
within Prospects selected by the Program Manager in its sole discretion from
time to time. At the time any Lease within a Prospect is acquired, the Program
Manager shall designate the area comprising the Prospect in the manner provided
in the definition of such term (if the Prospect has not been previously so
designated). Prospects may be limited to certain stated depths and may include
areas in which Leases may or may not have been acquired. The Program Manager
shall maintain records showing the Prospects (and depths if limited by depth) so
designated. In the case of certain Prospects, the designation of Prospects may
conform generally to the geographic limits of individual Leases. In some cases,
where known reservoirs cover large geographic areas and subsequent drilling does
not depend directly on results obtained by the Program Xxxxx, Prospects may be
directly adjacent or in close proximity to other Prospects. Leases on lands
which are contiguous or in the vicinity of each other may constitute more than
one Prospect, and a zone or horizon under an area may constitute a Prospect
separate and apart from another zone or horizon which lies in whole or in part
under the same area. With respect to any Prospect that is not limited to a
particular zone or horizon and which is in any large continuous known
stratigraphic trend or formation which could be defined as a continuous
reservoir, the Program Manager may reduce the areal extent included in such
Prospect to that area which covers the spacing unit or proration unit prescribed
by the appropriate regulatory authority on such Prospect or permitted by local
practice, whichever is applicable, and such additional area, if any, as the
Program Manager determines reasonable. A Prospect which is limited to a
particular zone or horizon may be limited to that area which covers the spacing
unit or proration unit prescribed by the appropriate regulatory authority on
such Prospect or permitted by local practice, whichever is applicable, to
protect against drainage from adjacent xxxxx if the well to be drilled by the
Program is to a horizon containing Proved Reserves. The area of a Prospect may
be enlarged or contracted from time to time by the Program Manager in the
reasonable exercise of its judgment. The Program Manager and its Affiliates
shall have no obligation to assign to any of the Participants any Lease held as
of the date hereof by the Program Manager or any such Affiliate or any Lease
acquired by the Program Manager or any such Affiliate after the date hereof.
The amount of the undivided interest in Leases to be assigned to the
Participants by the Program Manager shall be determined solely by the Program
Manager and the Managing Partner of the Partnership, taking into account the
nature of the risks associated with the drilling of xxxxx on such Leases, the
estimated costs of such drilling, the amount of funds available from the
Partnership for such drilling and such other factors as the Program Manager and
the Managing Partner shall in good faith determine. The Program shall have no
right to acquire the entire interest in any such Lease, and the Program Manager
and Affiliates thereof shall have the right to acquire or retain a portion of
such interest in their own name, for their own account, or for the account of
others. Any such
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interest so acquired or retained by the Program Manager or such Affiliate shall
be held independently and not as a part of the Program and shall not be subject
to the terms and provisions of this Agreement.
The undivided interests in all Leases acquired by the Program shall be
acquired and held by the Program Manager for the benefit of the Participants
hereto as follows: the Partnership 60% and MD 40%. Following commencement of
production from a Program Well, the Program Manager shall assign and convey to
the Partnership and MD the above-described undivided interests in the Leases
proportionally reduced as to the interest acquired by the Program insofar as
such Leases pertain to the spacing or proration unit prescribed by regulatory
authority for such productive Program Well.
(b) Sales of Leases to the Program. Any sale, transfer, or
conveyance of a Lease to the Program by the Managing Partner or any Affiliate
thereof, including an Affiliated Program, shall be subject to the restrictions
contained in Section 5.10(h) of the Partnership Agreement.
(c) Acquisition Price. The price to be paid by the Participants
with respect to their acquisition of an interest in a Lease pursuant to this
Section 2 shall be an amount equal to the Participants' respective shares, as
set forth in Section 3(a) of either (i) the Lease Acquisition Costs with respect
to such Lease or (ii) as provided in Section 5.10(h) of the Partnership
Agreement, the fair market value of such Lease.
(d) Conveyance. With respect to the Leases within Prospects that
are acquired by the Participants hereunder, the interests in such Leases so
acquired shall cover all depths and horizons designated by the Program Manager
as comprising such Prospect and as contemplated in Section 2(a) such interests
shall be assigned, conveyed and transferred by the Program Manager or an
Affiliate thereof pursuant to a special warranty deed. Further, any such
assignment by the Program Manager or an Affiliate thereof shall be made with
full substitution and subrogation in and to all rights and actions of warranty
which the Program Manager or such Affiliate may have against all former owners.
(e) Assignments of Record. Following commencement of production
from a Program Well, as contemplated in Section 2(a) the Program Manager shall
cause record title to the Participants' respective interests in such Program
Well to be placed in the names of MD and the Partnership (or its designated
nominee), except (i) where record title is held in the name of a third party (as
in the case where pursuant to industry practice record title is held by a third
party, such as a pooled operating interest), in which event the Program Manager
shall place of record MD's and the Partnership's interests promptly following
the receipt by the Program Manager or an Affiliate thereof of an assignment from
such third party, (ii) in the case of a federal, state, or other Lease where an
approval to the transfer is required, in which event the Program Manager shall
take steps to obtain approval from appropriate authorities of the assignment of
MD's and the Partnership's interests in any such Lease as promptly as possible
following the time that such assignment is to be made hereunder (iii) in the
case where delays in the recording of assignments occur because of the practices
of the recording office or officers, (iv) in the case of Indian or other Leases
where the royalty interest or other term of any such Lease is required to be
renegotiated as a condition to the lessor's consent to the assignment of MD's
and the Partnership's interests, in which event MD's and the Partnership's
interests in such Lease shall be held in the name of the Program Manager as
nominee for MD and the Partnership so long as any such arrangement does not
jeopardize the validity or substance of such Lease or subject it to forfeiture
or other penalty, or (v) where the interests in the Lease to be assigned to MD
and the Partnership cannot be exactly determined because of pooling or
unitization laws, rules or regulations or agreements, the rights of third
parties under area of mutual interest or other agreements, or other similar
circumstances, in which event the Program Manager shall promptly proceed to
determine such interests and shall place them of record as promptly as possible.
(f) Title Examination. Prior to drilling a Program Well on a
Prospect, the Program Manager shall cause to be done or be satisfied that there
has been done such title examination and other title curative work as the
Program Manager, in its sole discretion, shall determine to be necessary or
appropriate in accordance with general industry standards.
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Section 3. Allocation of Costs. The costs of activities and operations
conducted pursuant to this Agreement shall be allocated to and paid by the
parties hereto as follows:
(a) Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees. All Organization and Offering Expenses attributable to the
Partnership shall be allocated to and paid to MD and MD shall receive a
contribution credit in respect of such Organization and Offering Expenses;
provided that such credit may not exceed an amount equal to 3.5% of the initial
subscriptions to the Partnership made by the Partners.
(b) Sales Commissions and Due Diligence Fees. All Sales
Commissions and Due Diligence Fees attributable to a Partner's subscription to
the Partnership shall be deducted from such subscription and borne by such
Partners.
(c) Lease Acquisition Costs. MD shall contribute or cause to be
contributed to the Program all Leases to be acquired by the Program and shall
receive a contribution credit in respect of the contributed Leases equal to the
acquisition costs of the contributed Leases (which shall be determined in
accordance with Section 2(c)) to the extent that such costs do not exceed 21.5%
of the subscriptions by Partners to the Partnership. To the extent that such
costs exceed 21.5% of the subscriptions by investor partners to the Partnership,
then such excess costs shall be allocated 30% to MD and 70% to the Partnership
and capital contributions of the Partners to the Partnership shall be used to
reimburse MD for 70% of such excess.
(d) Intangible Drilling Costs. All Intangible Drilling Costs shall
be allocated entirely to the Partnership.
(e) Tangible Costs. All Tangible Costs shall be allocated entirely
to the Partnership; provided, however, that to the extent, if any, that the
total costs allocated to MD pursuant to paragraphs (a) and (b) above are less
than an amount equal to 25% of the subscriptions by Partners to the Partnership
("Deficit Amount"), then MD shall be allocated an amount of Tangible Costs equal
to the Deficit Amount; provided, further, that in determining the amount of
total costs allocated to MD pursuant to paragraphs (a) and (c) above are less
than an amount equal to 25% of the subscriptions by Partners to the Partnership,
then MD will be allocated an amount of Tangible Costs equal to the deficit
amount.
(f) Operating Costs and Reporting and Legal Expenses. All
Operating Costs and Reporting and Legal Expenses incurred with respect to
Program Xxxxx shall be allocated 30% to MD and 70% to the Partnership.
(g) Administrative Costs. All Administrative Costs incurred by the
Program Manager or any of its Affiliates in managing and conducting the business
and affairs of the Partnership or the Program, including expenses incurred in
providing or obtaining such professional, technical, administrative and other
services and advice as the Program Manager may deem necessary or desirable shall
be allocated 30% to MD and 70% to the Partnership and shall be reimbursed by the
Participants pursuant to Section 8.
(h) Other Costs. All other costs incurred shall be allocated 30%
to MD and 70% to the Partnership.
Section 4. Allocation of Revenues. Except as provided in Attachment A
attached hereto, all revenues attributable to the activities and operations
conducted pursuant to this Agreement shall be allocated to and received by the
parties hereto as follows:
(a) Revenues from Program Operations. Subject to subparagraph (b)
below, all revenues from Program operations, including without limitation, all
revenues directly or indirectly resulting from the investment of revenues from
Program operations, shall be allocated 30% to MD and 70% to the Partnership.
(b) Revenues from Disposition of Program Assets.
(i) Revenues resulting from the sale or other taxable
disposition of an oil and gas property (as such term is defined in
Section 614 of the Code) shall be allocated, (A) to the extent such
revenues constitute a recovery of the Program's simulated tax basis in
such property, to the parties in the same
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percentages as the simulated tax basis of the property sold was
allocated up to an amount equal to the Program's simulated tax basis in
such property at the time of such sale, and (B) thereafter, to the
parties in a manner which will cause the aggregate of all revenues
allocated to the parties from such sale or disposition and from all
prior sales (to the extent possible) to equal the amounts which would
have been allocated to the parties if all such revenues had been
allocated 30% to MD and 70% to the Partnership. For purposes of
computing the simulated tax basis of any such property, depletion
deductions shall be computed as provided in paragraph 4(c) of
Attachment A without regard to depletion deductions actually claimed by
the parties under paragraph 6(d) of Attachment A.
(ii) All revenues resulting from the rental, sale or other
disposition of any item of depreciable property shall be allocated (A)
to the extent such revenues constitute a recovery of the Program's
adjusted tax basis in such property, to the parties in the same
percentages as the adjusted tax basis of the property sold was
allocated up to an amount equal to the Program's adjusted tax basis in
such property at the time of such sale, and (B) thereafter, to the
parties in a manner which will cause the aggregate of all revenues
allocated to the parties from such rental, sale or other disposition
and from all prior rentals or sales (to the extent possible) to equal
the amounts which would have been allocated to the parties if all such
revenues had been allocated 30% to MD and 70% to the Partnership.
(iii) All revenues resulting from the disposition of any
other property shall be allocated 30% to MD and 70% to the Partnership.
(iv) All dry hole and bottom hole and similar
contributions shall not be considered to be revenues hereunder but
shall be applied to reduce the Intangible Drilling Costs of the
respective Program Xxxxx to which they relate.
Section 5. Ownership of Production.
Each Participant shall have the right to take in kind or separately
dispose of its proportionate share of all oil and gas produced from any Lease
subject to the Program pursuant to the terms of this Agreement. Any extra
expenditure incurred in the taking in kind or separate disposition by any party
hereto of its proportionate share of production shall be borne by such party.
Each party shall execute such division orders and contracts as may be necessary
for the sale of its interest in production from any such Lease. The proceeds
from the sale of all production produced, saved, and sold from any Prospect
herein shall be paid to MOC by all purchasing companies purchasing such
production, and by the execution of this Agreement, MOC and the Participants
covenant and agree to hold harmless all purchasing companies from any and all
liability by reason of paying any such proceeds to MOC. Further, the
Participants authorize and direct MOC to deduct from their proportionate share
of such proceeds from such sales all Operating Costs and other expenses and
costs of all types owed to MOC provided for under the terms of this Agreement
and remit the balance from the sale to the Participants. In the event any party
shall fail to make the arrangements necessary to take in kind or separately
dispose of its proportionate share of oil and gas produced from any such Lease,
the Program Manager shall have the right, but not the obligation, subject to the
revocation at will by the party owning such production, to purchase such oil and
gas or sell it to others at any time and from time to time for the account of
such party at a price competitive with the best price obtainable in the area for
such production. Any such purchase or sale by the Program Manager shall be
subject to the right of the owner of the production to exercise at any time its
right to take in kind, or separately dispose of, its share of all oil and gas
not previously delivered to a purchaser. Any purchase or sale by the Program
Manager of any other party's share of oil and gas shall be only for such
reasonable periods of time as are consistent with the minimum needs of the
industry under the particular circumstances.
Section 6. Management of Program.
(a) Program Affairs. The Participants hereby designate MOC as the
Program Manager who shall have the full and exclusive power and authority to
manage, control and administer the business and affairs of the Program and the
properties of the parties subject to this Agreement, except to the extent
otherwise set forth herein and in the Partnership Agreement.
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(b) Well Operations. The Participants, hereby designate MOC, and
MOC agrees to act, as operator with respect to the drilling, testing, and any
attempted completion and equipping and operating (or plugging and abandoning, if
necessary) of any Program Well to be drilled or developed hereunder, except in
those instances in which (i) the Leases on which such Program Well is to be
drilled is already subject to an existing operating agreement under which a
third party (not MOC) has already been designated as operator, (ii) the
requisite number of third parties being joint working interest owners in such
Program Well decline to approve MOC as operator or (iii) a good faith
determination is made by MOC that it is not in the best interests of the
Participants and of MOC for it to act as operator. In conducting operations on a
Prospect, MOC may use its own personnel (including consultants retained by MOC),
properties and equipment and may subcontract with any other Affiliate of MOC to
perform such operations. The charge to MD and the Partnership for the use of
MOC's personnel (including consultants retained by MOC), properties and
equipment, the basis of pricing materials purchased by MD and the Partnership
from MOC or any Affiliate thereof and the basis of pricing materials purchased
by MOC or any Affiliate thereof from MD and the Partnership shall be as provided
in the Operating Agreement, subject to the terms of the Partnership Agreement.
(c) Operating Agreement. With respect to each Program Well for
which MOC is to serve as operator as contemplated in Section 6(b), all
operations relating to such Program Well, including without limitation, all
costs and expenditures of drilling, testing, completing, and equipping and
operating such Program Well shall be conducted pursuant to an Operating
Agreement between MOC as operator, and the Participants as non-operator. In the
event, at the time of acquisition of a Lease by the Participants, such Lease is
subject to another operating agreement or if MOC enters into an operating
agreement with third parties that are joint operating interest owners in such
Program Well, nevertheless, the Operating Agreement between MOC and the
Participants shall govern operations as between them, provided that MOC and the
Managing Partner shall have the right to amend the Operating Agreement between
MOC and the Participants covering certain of the Leases to conform to such other
operating agreement (provided, the Operating Agreement may not be amended as
provided above in any manner that the Managing Partner determines will adversely
affect the Partnership or the Partners in any material respect) and MOC shall
have the right to charge the Joint Account under the Operating Agreement between
MOC and the Participants a share attributable to the Participants' interest of
any costs or expenses incurred by MOC under such other operating agreement which
are not otherwise provided for herein or in the Operating Agreement between MOC
and the Participants. To the extent that the terms of this Agreement and the
terms of the Operating Agreement attached hereto conflict, this Agreement
governs and takes precedence over the Operating Agreement.
(d) Program Funds; Distributions. Funds held by the Program
Manager on behalf of the Program, subsequent to their allocation to the Program,
shall not be commingled with funds of any other entity. If the Program Manager
elects at any time to distribute funds derived from revenues from Program
operations or the disposition of Program assets to any of the Participants, the
Program Manager shall be obligated at the same time to make distributions of
funds from such sources to the other Participants. All such distributions shall
be made to the Participants in the same percentages as the Participants are
allocated revenues of the Program pursuant to Section 4. At no time shall the
Program or the Program Manager on behalf of the Program retain in its accounts
funds required to be distributed to the Participants pursuant to the preceding
sentence. At least quarterly, any cash funds of the Program which the Program
Manager reasonably determines are not needed for the payment of existing or
anticipated Program obligations and expenditures shall be distributed to the
Participants.
(e) Access to Records. Each Participant and the Partners thereof
shall have access during normal business hours to all books and records relating
to the business and operations of the Program as provided in the Operating
Agreement, provided that the Program Manager may refuse for a reasonable time to
grant any Participant or any Partner thereof access to such books and records as
the Program Manager (i) has agreed shall be kept confidential or (ii) has
determined in good faith should be kept confidential considering the interests
of the Program and the Participants.
(f) Liability and Indemnification of Program Manager.
(i) Neither the Program Manager nor its Affiliates shall
have any liability to the Participants for any loss suffered by a
Participant that arises out of any action or inaction performed or
omitted relating to its duties or obligations or services rendered or
to be rendered pursuant to this Agreement or the Operating Agreement,
if the Managing Partner in good faith has determined, as of the time of
the conduct or omission, that the Program Manager's or its Affiliate's
course of conduct or omission was in the best
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interest of the Participants, that the Program Manager or such
Affiliate was acting on behalf of or performing services for the
Participants, and that such conduct or omission did not constitute
negligence or misconduct. Termination of any action, suit or proceeding
will not create a presumption that the Managing Partner or its
Affiliate did not act in the best interest of the Partnership.
(ii) The Partnership shall indemnify the Program Manager
and its Affiliates against any losses, judgments, liabilities,
expenses, and settlements sustained or incurred by the Program Manager
or such Affiliates as a result of any threatened, pending or completed
claim, action, suit, or proceeding, whether civil, criminal,
administrative, arbitrative, or investigative, any appeal in such
claim, action, suit, or proceeding, and any inquiry or investigation
that could lead to such a claim, action, suit, or proceeding and which
in any such case relates or which otherwise arises from or is
attributable to (a) the fact that the Program Manager is serving in
such capacity or in the capacity as the operator under the Operating
Agreement or (b) any acts, omissions or operations performed or omitted
by the Program Manager or such Affiliate on behalf of the Program or
the Partnership or which otherwise relates to the activities and
business affairs of the Program or the Partnership; provided that the
Managing Partner has determined in good faith, as of the time of the
conduct or omission, that the conduct or omission was in the best
interest of the Partnership and that the conduct or omission did not
constitute negligence or misconduct. Any such indemnity will be
satisfied only out of the assets of the Partnership and in no event
will the Investor Partners be liable therefor.
(iii) The Program Manager, acting on behalf of the Program,
may purchase and maintain insurance on behalf of the Program Manager
and its Affiliates against any liabilities asserted against or expenses
incurred by the Program Manager or its Affiliates in connection with
Program activities; provided, however, that the Participants (other
than MD) shall not incur the cost of that portion of such insurance, if
any, which insures the Program Manager or its Affiliates against any
liability with respect to which the Program Manager or its Affiliates
are denied indemnification under the provisions of this Agreement;
provided, however, that nothing contained herein shall preclude the
Program Manager from purchasing and paying for such types of insurance
including without limitation, extended coverage liability and casualty
and workers' compensation, as would be customary for any person owning
comparable assets and engaged in a similar business, or from naming the
Program Manager and its Affiliates as additional insured parties
thereunder, provided, that the naming of such additional insured
parties does not add to premiums payable by the Program.
(iv) The termination of any claim, action, suit, or
proceeding by judgment, order, settlement, conviction, or a plea of
nolo contendere or its equivalent does not alone establish that a
person seeking indemnification under this Section 6(f) is disqualified.
Any person who is determined to be not entitled to indemnification
under this Section 6(f) may petition a court of competent jurisdiction
for a determination that in view of all facts and circumstances that
such person is fairly and equitably entitled to indemnity and the
Partnership shall provide such indemnity as may be determined proper by
such court; provided, however, that the court has determined that such
person has met the standard set forth in Section 6(f)(ii) above.
(v) Legal fees and expenses and other costs incurred as a
result of a claim described in this Section 6(f) shall be paid by the
Partnership from time to time in advance of the final disposition of
such claim if: (a) the claim relates to the performance or
non-performance of duties or services by the Program Manager or its
Affiliates rendered on behalf of the Program and the Participants, (b)
the claim is initiated by a third party who is not an Investor Partner,
or the claim is initiated by an Investor Partner and a court of
competent jurisdiction specifically approves such advancement, and (c)
the Program Manager or its Affiliate undertakes to repay the advanced
funds to the Partnership in the event it is later determined that the
Program Manager or such Affiliate is not entitled to indemnification
under the provisions of this Section 6(f).
(vi) To the extent that the Program Manager or its
Affiliates are successful on the merits or otherwise in defense of any
claim, action, suit, or proceeding referred to in this Section 6(f) or
in defense of any claim, issue, or matter therein, the Partnership
shall indemnify the Program Manager or its Affiliates, against the
expenses, including attorneys' fees, actually incurred by the Program
Manager or such Affiliate in connection therewith.
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(vii) The indemnification provided by this Section 6(f)
shall continue as to the Program Manager and its Affiliates in the
event the Program Manager ceases to act in the capacity of manager of
the Program or as operator under the Operating Agreement with respect
to events occurring prior to the time such Program Manager or its
Affiliate ceased to act in such capacity and shall inure to the benefit
of the successors and assigns of the Program Manager and such
Affiliates.
Section 7. Removal of the Program Manager.
The Partnership shall have the right to remove MOC as Program Manager
and to elect and substitute a successor to act in the capacity as Program
Manager; provided, the Partnership shall not have the right to remove MOC as
Program Manager and to elect and substitute a successor to act in such capacity
during the term that MD or any of its Affiliates serve in the capacity of
Managing Partner.
Section 8. Reimbursement of the Program Manager.
As may be requested by the Program Manager from time to time, the
Program Manager shall be reimbursed by the Participants for their respective
share of all General and Administrative Expenses and other costs and expenses
incurred by the Program Manager or any of its Affiliates in managing and
conducting the business and affairs of the Program, including expenses incurred
in providing or obtaining such professional, technical, administrative, and
other services and advice as the Program Manager may deem necessary or
desirable. Reimbursements of General and Administrative Expenses made by the
Partnership as a Participant hereunder shall be made in accordance with Section
5.9 of the Partnership Agreement, including without limitation, the provisions
contained in Section 5.9 of the Partnership Agreement which limit the amount of
such reimbursement.
Section 9. Tax Partnership.
This Agreement and Attachment A attached hereto are not intended and
shall not be construed to create a joint venture, mining or other partnership
(general, limited, or otherwise) or association or to render the parties hereto
liable as partners. The parties expressly agree that no party hereto shall be
responsible for the obligations of the other parties, each party being severally
responsible only for its obligations arising hereunder and liable only for its
allocable share of the costs and expenses incurred hereunder. Each of the
Participants hereby agrees that this Agreement creates a partnership for federal
and state income tax purposes only, which tax partnership shall function and
exist as set forth in Attachment A attached hereto.
Section 10. Sales of Interests by MD.
Subject to paragraph 7 of Attachment A, MD shall have the right to sell
or otherwise dispose of the ownership interests in Leases held by it as part of
the Program and subject to this Agreement without obtaining the consent of the
Partnership. MOC, MD, and their Affiliates shall have the right to sell or
otherwise dispose of the ownership interests in Leases held by them for their
own account outside the Program and not subject to this Agreement on terms more
or less favorable to the party or parties acquiring such interests than those
terms contained in this Agreement with respect to the acquisition of interests
in such Leases by the Partnership, and the Partnership shall not have any claim
or right to any consideration or benefits derived therefrom.
Section 11. Assignment.
Except as otherwise provided herein, no party hereto shall have the
right to assign its rights or obligations under this Agreement without the
express written consent of the other parties, except in the event of the
following assignments:
(a) A disposition by MD of all or any portion of its rights or
obligations hereunder to one or more Affiliates of MD;
(b) A disposition by MD or any Affiliate thereof of all or any
part of its rights or obligations hereunder to one or more persons that have as
a result of a merger, consolidation, corporate reorganization, or other
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transaction acquired all or substantially all of the assets of MD and have
assumed the obligations of MD hereunder; or
(c) A disposition by MD or any Affiliate thereof of all or any
portion of its rights or obligations hereunder after the cessation of
substantially all drilling activities of the Program.
Any assignment shall be subject to paragraph 7 of Attachment A.
Notwithstanding anything in this Agreement to the contrary, MD shall have the
right at any time to mortgage, pledge, or encumber the oil and gas properties
and interests of MD under or subject to this Agreement to secure any debts or
obligations of MD or its Affiliates (whether or not such debts or obligations
are related to the Program). If MD receives a bona fide offer from an unrelated
third party to purchase an interest in any Lease in which the Partnership has
interests pursuant to this Agreement, MD shall request the offeror to make a
similar offer available to the Partnership.
Section 12. Term and Amendment of Agreement.
(a) This Agreement shall terminate upon the occurrence of any of
the following: (i) the dissolution of the Partnership, or (ii) upon the election
of MD after the cessation of substantially all drilling activities of the
Program, provided, in the case of clause (ii), that MD shall have given at least
120 days' notice to the Investor Partners of the Partnership prior to such
termination. Upon the occurrence of any of the foregoing events, the provisions
of paragraph 9 of Attachment A shall be applicable and the Participants shall be
subject to the terms of the Operating Agreement or such other operating
agreements as may then be in effect.
(b) This Agreement and Attachment A may only be amended, modified
or changed by a writing duly executed by MD, and the Partnership; provided that,
to the extent required under the terms of the Partnership Agreement, the
Partnership shall execute or have executed on its behalf such a writing only if
the amendment, modification, or change shall have been approved or consented to
by a Majority in Interest of the Investor Partners thereof, to the extent
required by the Partnership Agreement, and, provided further, the consent of the
Partnership shall not be required if MD determines that the amendment,
modification, or change is necessary or advisable to ensure that the Program
Agreement conforms with any changes in or modifications to the Code or does not
adversely affect in a material manner the Investor Partners of the Partnership.
Section 13. Insurance.
The Program Manager or Affiliates thereof shall carry for the benefit
of the Participants insurance coverage in such amounts, with provisions for such
deductible amounts and for such purposes as are customarily carried by the
Program Manager or such Affiliates in its operations. To the extent practical,
all of the Participants shall be added as additional co-insureds under such
coverage. The Program Manager shall notify the Participants of any adverse
material change in the insurance coverage of the Program as soon as possible
after learning of such change. If possible, such notice shall be given 30 days
in advance of the change in insurance coverage. In the event that the insurance
coverage carried for the benefit of the Participants is materially reduced, the
Program, as soon as reasonably possible to do so, will halt all drilling
activity until such time as comparable replacement insurance coverage is
obtained.
Section 14. Partnership Agreement.
In the event of conflict between the provisions of this Agreement and
the provisions of the Partnership Agreement, the provisions of the Partnership
Agreement shall control unless otherwise expressly provided herein. This
Agreement is subject to the provisions of the Partnership Agreement in all
respects and all matters provided for herein shall also be governed by the
provisions of the Partnership Agreement.
Section 15. Entire Agreement.
This Agreement, together with Attachment A and Attachment B attached hereto,
constitutes the entire agreement among the parties hereto with respect to the
subject matter hereof, and supersedes all previous oral and written and all
contemporaneous oral negotiations, commitments, writings and understandings.
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Section 16. Headings.
The headings of the various sections, subsections, and other
subdivisions of this Agreement have been inserted for convenient reference only
and shall not be construed to enlarge, diminish, or otherwise change the express
provisions hereof.
Section 17. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas, except that any laws of such state regarding
choice or conflicts of law shall not be applied if the result would be the
application of a procedural or substantive law of another state or other
jurisdiction.
Section 18. Attachments.
Attachment A and Attachment B to this Agreement is attached hereto.
Such Attachments are incorporated herein by reference and made a part hereof for
all purposes, and references to this Agreement shall also include such
Attachments unless the context in which such references are used shall otherwise
require.
Section 19. Counterparts.
This Agreement may be executed in several counterparts, each of which
shall be deemed an original, and all of which together shall constitute one and
the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
XXXXXXXXX OIL COMPANY
By: ________________________________________
Title: _____________________________________
XXXXXXXXX DEVELOPMENT CORPORATION
By: ________________________________________
Title: _____________________________________
XXXXXXXXX ENERGY PARTNERS -A, L.P.
By: XXXXXXXXX DEVELOPMENT CORPORATION,
its Managing General Partner
By: ____________________________________
Title: _________________________________
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