[PETROGEN LOGO APPEARS HERE] PETROGEN
April 15, 2005
Xx. Xxxxxx X. Xxxx
Nortex Corporation
0000 Xxxxxxxxx, Xxxxx 0000
Xxxxxxx, XX 00000
Fax: 000.000.0000
RE: PARTICIPATION AGREEMENT - XXXXX XXXXX FIELD
XXXXXXX COUNTY, TEXAS
Dear Xx. Xxxx
This letter follows our recent discussions concerning the participation
by Nortex Corporation (96% of the Nortex interest), Astra Exploration Company,
Inc. (2% of the Nortex interest) and X. X. Xxxxxxxx Petroleum Interests (2% of
the Nortex interest), collectively referred to herein as "Nortex," with Petrogen
Corp. ("PETROGEN") in development and production of Petrogen's interest in
certain leases ("LEASES") within the Xxxxx Xxxxx Field of Xxxxxxx County, Texas,
and shall evidence our agreement in that regard. The Leases are described on the
list attached to this letter and marked Exhibit "A." The area covered by the
Leases ("LEASE AREA") is shown on a plat attached to Exhibit "A."
When signed by Nortex, this letter will be a binding agreement
("AGREEMENT") between Nortex and Petrogen setting out the terms and conditions
under which Nortex will participate with Petrogen in development and production
of the Leases.
The terms and conditions of the Agreement are:
1. ASSIGNMENT. Within five (5) days of Nortex's signing of this
Agreement, Petrogen will offer an assignment ("ASSIGNMENT") of the
Leases to Nortex. The Assignment will be offered unsigned by Petrogen
to allow Nortex to undertake its due diligence, as provided in Section
5 below.
2. WORKING INTEREST. The Assignment will be of a thirty-seven and
one-half percent of eight-eighths (37.5% of 8/8) working interest in
the Leases, if the Leases cover one-hundred percent (100%) of the
minerals within the Lease Area If the Leases do not cover one-hundred
(100%) of the minerals within the Lease Area , then Petrogen shall
assign and convey to Nortex so much of its interest in the Leases as
will deliver to Nortex a determinable fee interest in the minerals in
the Lease Area (a working interest therein) equal to thirty-seven and
one-half percent of eight-eighths (37.5% of 8/8) of the minerals,
subject to the terms and provisions of this Agreement.
3. NET REVENUE INTEREST. In the Assignment, the Leases will burdened by
royalties equal to twenty-two and one-half percent (22.5%), such that
Nortex will own a net revenue interest in all of the oil and gas
produced from the Lease Area equal to thirty-seven and one-half
percent of seventy-seven percent (37.5% of 77.5%) of all of the oil
and gas produced from such lands.
4. CASH PAYMENT. In exchange for delivery of the signed Assignment by
Petrogen, Nortex will pay Petrogen $66,112.25 ("CASH CONSIDERATION").
The fully executed and acknowledged Assignment shall be delivered to
Nortex contemporaneously with Nortex's payment of the Cash
Consideration to Petrogen.
5. DUE DILIGENCE. The Assignment will be without warranty of title except
by, through and under Petrogen. For a period of ten (10) business days
following delivery of Petrogen's unexecuted Assignment to Nortex,
Nortex may conduct due diligence, including, without limitation, title
due diligence. During the due diligence period, Nortex shall have the
right to review all of Petrogen's contract, lease, title, and
correspondence files and Petrogen's well files relating to the Leases.
Should Nortex be unsatisfied with the outcome of its due diligence, it
may reject Petrogen's offer of the Assignment, declining to pay the
Cash Consideration. If Nortex rejects the Assignment and declines to
pay the Cash Consideration, then the parties will have no further
obligations to each other. If the Assignment is executed and delivered
to Nortex and Nortex has paid Petrogen the Cash Consideration, Nortex
shall be entitled to copy any or all of the contract, lease, title,
correspondence and well files of Petrogen that relate to the Leases.
6. INITIAL WELL. Following Petrogen's signing and delivery of the
Assignment and Nortex's payment of the Cash Consideration, Petrogen
and Nortex will agree upon a location on the Leases and a spud date
for the drilling of a well ("INITIAL WELL") to test the Miocene
formation. Such agreement shall be memorialized in a detailed
Authority for Expenditure ("AFE"). Nortex will pay fifty percent of
eight-eighths (50% of 8/8) of the costs for the Initial Well until it
is either plugged and abandoned as a dry hole or completed and
producing into the tanks or a sales pipeline at or above the Miocene
formation. To the extent that costs for the Initial Well exceed
one-hundred ten percent (110%) of the AFE'd costs, Nortex will pay
only thirty-seven and one-half percent (37.5%) of the costs that
exceed one-hundred ten percent (110%) of the costs incurred in
drilling and completing the Initial Well. After the Initial Well,
Nortex will pay its thirty-seven and one-half percent of eight-eighths
(37.5% of 8/8) share of all operations on the Leases.
7. ESCROWED COSTS. Thirty (30) days in advance of the mutually agreed
upon spud date for the Initial Well, Nortex will pay into a mutually
acceptable independent escrow account one-half of its fifty percent
(50%) share of estimated costs, as shown in the approved AFE. The
remaining one-half of Nortex's fifty percent (50%) share of estimated
costs will be paid into the escrow account upon the spud date of the
Initial Well. Funds escrowed will only be escrowed under the terms of
a mutually acceptable escrow agreement.
8. OPTION TO PARTICIPATE IN FRIO TEST. Nortex will have a one time option
to participate for up to fifty percent (50%) of the costs to Casing
Point (and retain a proportionate working interest as set forth below)
in a well with Petrogen (including a deepening of the Initial Well if
it has been determined to be a dry hole at or above the Miocene
formation) on the Leases to test the Frio formation at depths below
7,000 feet TVD Should a Frio test well be proposed on the Leases,
Nortex shall have thirty (30) days in which to elect to participate in
the Frio test well or opt out of the drilling and forfeit its rights
below 7,000 feet.
If Nortex elects to participate in the Frio test, Nortex will have the
election to bear up to fifty percent (50%) of the cost to Casing Point
in the test well (or any amount less than that that Nortex elects to
bear) on a one-third (1/3) of cost for one-fourth (1/4) interest
basis, such that Nortex would have a working interest (determinable
fee interest in the minerals carved out of the Leases) equal to
seventy-five percent (75%) of the cost percentage to Casing Point that
is borne by Nortex in the Frio test, as to depths below 7,000 feet
below the surface of the earth. For example, if Nortex elects to bear
the full fifty percent (50%) of the cost to Casing Point in the Frio
test well it will have a working interest in that well equal to
seventy-five percent (75%) of fifty percent (50%), or thirty-seven and
one-half percent (37.5%).
Should Nortex elect to participate in the Frio test well for less than
its full thirty-seven and one-half percent (37.5%) working interest,
it will re-assign to Petrogen a percentage of its rights in the Leases
below 7,000 feet, which percentage will be equal to a fraction where
the numerator is thirty-seven and one-half percent (37.5%) less the
working interest percentage that Nortex would own as a result of its
participation election (calculated in the manner stated above) and the
denominator is thirty-seven and one-half percent (37.5%). For example,
if Nortex elects to participate in a Frio test well for a three and
three-quarters percent (3.75%) working interest (meaning that it
elected to bear 5% of the costs), the fraction would be(37.5% less
3.75%)/37.5%=90%,, meaning that Nortex would re-assign ninety percent
(90%) of its thirty-seven and one-half percent (37.5%) working
interest in the Leases below 7,000 feet to Petrogen. If Nortex elects
not to participate in the Frio test well for any percentage, then the
fraction would be (37.5% less 0.0%)/37.5%=100%, meaning that Nortex
would re-assign one-hundred percent (100%) of its thirty-seven and
one-half percent (37.5%) working interest in the Leases below 7,000
feet. In addition to Nortex's interest in the Leases below 7,000 feet,
this re-assignment shall include a like percentage of any other
interests below 7,000 feet that Nortex may have acquired in the AMI
(as subsequently defined) below 7,000 feet. Any such re-assignment
shall be made within five (5) days of the time that the Frio test well
is spud; provided, however, if the Frio test well has not been spudded
within sixty (60) days following the date on which it was proposed,
the proposal shall be null and void and deemed as if it had never been
made, such that if Petrogen desires to initiate the drilling of a Frio
test at a later date, it must again propose that test to Nortex under
the terms and provisions of this agreement and as if the earlier
proposal had not been made.
8. OPERATING AGREEMENT. Within thirty (30) days of Nortex's execution of
this letter, Petrogen and Nortex will enter into a mutually acceptable
joint operating agreement ("JOA") on the AAPL Form 610-1989 Model
Form, which shall name Petrogen as operator and include provisions for
"Average" fixed rate administrative overhead for similar xxxxx in
accordance with the latest survey of such rates published by Ernst &
Young, LLP. In the event Nortex elects not to participate in a Frio
test for any percentage, the Operating Agreement will be amended to
only include depths above 7,000 feet.
If Nortex elects not to participate in the Frio test for any
percentage, if proposed, Nortex agrees to maintain information that it
has received from Petrogen, with respect to that formation,
confidential and agrees that it will not compete with Petrogen in any
manner as to depths below 7,000 feet below the surface of the earth
during the term of this Agreement.
9. KNOWLEDGEABLE INVESTOR. Nortex is an experienced and knowledgeable
investor and operator in the oil and gas business. In making its
decision to participate in the Leases, Nortex has relied solely on its
own independent investigation, analysis and evaluation.
10. SECURITIES REPRESENTATION. Nortex is acquiring the Leases for its own
account and not with a view to, or for offer of resale in connection
with, a distribution thereof, within the meaning of the Securities Act
of 1933 and any other applicable laws pertaining to the distribution
of securities.
11. ASSIGNABILITY. The rights and obligations under this Agreement shall
not be assignable or delegable without the consent of Petrogen or
Nortex.
12. AREA OF MUTUAL INTEREST. Petrogen and Nortex hereby establish an Area
of Mutual interest within the area ("AMI") outlined on the map
attached hereto as Exhibit "B." During the term of this Agreement, if
either Petrogen or Nortex acquire an interest in the rights to explore
for and produce oil and gas from the AMI (the term "interest" as used
herein shall include any interest whatsoever in the oil and gas,
including but not limited to royalties, overriding royalties, leases,
renewals of existing leases, farm-ins, etc.), the acquiring party
shall notify the non-acquiring party, giving complete information as
to the interest acquired, along with copies of the instrument or
instruments by which the interest was acquired, and the consideration
to be given or paid. For a period of thirty (30) days after receipt of
notice of acquisition, the non-acquiring party shall have the right to
acquire an interest in the interest acquired by the acquiring party,
by notifying the acquiring party of its desire to share in the
acquisition, and paying the acquiring party its proportionate share of
the consideration given or assuming its proportionate share of the
obligations assumed. Thereupon, the acquiring party shall immediately
execute and deliver the appropriate assignment to the non-acquiring
party, without covenants of warranty, except by, through or under the
acquiring party. If Petrogen is the non-acquiring party, it shall have
a right to acquire a sixty-two and one-half percent (62.5%) interest
and if Nortex is the non-acquiring party it shall have the right to
acquire a thirty-seven and one-half percent (37.5%) interest, such
percentages subject to adjustment for rights below 7,000 feet if
Nortex elects not to participate in a Frio test well for thirty-seven
and one-half percent (37.5%). Thus, for example, if Nortex elects to
participate in a Frio test well for five percent (5%) its right to
acquire a portion of Petrogen acquisitions in the AMI below 7,000 feet
shall be five percent (5%) and Petrogen's right to acquire a portion
of Nortex acquisitions in the AMI below 7,000 feet shall be
ninety-five percent (95%). Should Nortex decline to participate for
any percentage of a Frio test well, the AMI would still apply, but
Nortex's right to acquire a portion of Petrogen acquisitions in the
AMI below 7,000 feet shall be zero (-0-) and Petrogen's right to
acquire a portion of Nortex acquisitions in the AMI below 7,000 feet
shall be one-hundred percent (100%).
Notwithstanding its participation or non-participation in any Frio
test well, Nortex agrees that it will continue to keep confidential
all information and data related to the Leases and the AMI.
14. LEASING UNLEASED MINERALS. Petrogen agrees that it will endeavor to
lease all un-leased mineral interests in the AMI and the renewal of
any of the Leases that are likely to expire during the next ________
(____) months.
15. TERM. The term of this Agreement shall be for the longer of so long as
any of the Leases (including any extensions or renewals) remain in
force and effect or the JOA remains in force and effect according to
its terms.
If this Agreement meets with your approval, please sign the enclosed
duplicate in the space provided and return it to the attention of the
undersigned. Upon receipt of the signed Agreement, Petrogen will begin
preparation of the Assignment.
Unless this Agreement is returned to Petrogen signed by Nortex before
5:00 PM on May __, 2004, it shall be deemed withdrawn and of no force and
effect.
Very truly yours,
PETROGEN CORP.
Xxxxx X. Xxxxxxxx
CEO
AGREED & ACCEPTED, THIS ___ DAY OF
_______ 2004
NORTEX CORPORATION
________________________________________
Xxxxxx X. Xxxx, Executive Vice-President
ASTRA EXPLORATION COMPANY, INC.
________________________________________
Xxxxxx X. Xxxx, President
X. X. XXXXXXXX PETROLEUM INTERESTS
________________________________________
X. X. Xxxxxxxx, Owner
Greenway Plaza, 0000 X.X. Xxxxxxx, Xxxxx 0000, Xxxxxxx, Xxxxx, 00000
Tel: 000-000-0000 / Fax: 000-000-0000 / Toll Free: 0-000-000-0000 /
Email: xxxx@xxxxxxxxxxxx.xxx
Website: xxx.xxxxxxxxxxxx.xxx
