EXPLORATION AND DEVELOPMENT AGREEMENT HACKBERRY CREEK PROJECT AREA HESS CORPORATION AND ZAZA ENERGY, LLC March 26, 2010
Exhibit 10.15
EXPLORATION AND DEVELOPMENT AGREEMENT
HACKBERRY CREEK PROJECT AREA
HACKBERRY CREEK PROJECT AREA
XXXX CORPORATION
AND
ZAZA ENERGY, LLC
March 26,
2010
Table of Contents
| Page | ||||
I. Recitals |
2 | |||
II. Definitions |
2 | |||
III. Operations and Costs |
5 | |||
IV. Collaboration in the Hackberry Creek Project Area |
7 | |||
V. Area of Mutual Interest |
9 | |||
VI. Xxxxx |
10 | |||
VII. Operating Agreement |
10 | |||
VIII. Exploration and Development Tax Rider |
10 | |||
IX. Miscellaneous |
11 | |||
X. REPRESENTATION, WARRANTIES AND COVENANTS OF HESS |
13 | |||
XI.
REPRESENTATIONS, WARRANTIES, AND COVENANTS OF ZAZA |
13 | |||
i
This Exploration and Development Agreement is entered into this 26th day of
March, 2010 (the “Effective Date”) between XXXX Corporation, a Delaware corporation “HESS”, with
offices at One Xxxxx Center, 000 Xxxxxx Xxxxxx, Xxxxxxx, XX 00000 and ZaZa Energy, LLC, a Texas
limited liability company, hereinafter “ZAZA”, with offices at 000 Xxxxxxx Xxxxxx, Xxxxx 0000,
Xxxxxx Xxxxxxx, XX 00000. HESS and ZAZA will sometimes hereinafter be referred to individually as
a “Party” and collectively as the “Parties”.
I. Recitals
1.1. The Parties have identified certain geographic areas located in Lavaca and Colorado
Counties for conducting exploration and production operations thereon, hereinafter the “Hackberry
Creek Project Area”.
1.2. The Parties have agreed upon the relative contributions, responsibilities, rights and
duties in connection with the Hackberry Creek Project, all in accordance with the terms and
conditions hereinafter contained.
II. Definitions
The following terms when used in this Agreement will have the following meanings:
2.1.
“Acquisition Costs” means, for costs incurred in the acquisition of leases over and above
the Hackberry Creek Leases, one hundred percent (100%) of the cost of (i) one thousand five hundred
dollars ($1500) per net mineral acre; or (ii) if the sum of the actual lease bonus cost plus third
party brokerage is greater than one thousand five hundred dollars ($1500) per net mineral acre then
the cost to Hess shall be the sum of the actual lease bonus and brokerage costs plus two hundred
dollars ($200) per net mineral acre.
2.2. “Agreement” means this agreement and all exhibits attached hereto.
2.3. “Carry Free of Costs” means a Working Interest ownership that is free and clear of
Exploration and Development Costs up to the Well Cap.
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2.4. “Exploration and Development Costs” of the Xxxxx means all actual third party direct
costs and expenses incurred or paid with respect to the Xxxxx, including but not limited to (a)
location costs, costs of drilling, re-entering (excluding any Xxxxx that have been previously
produced under this Agreement), logging, testing, completing, fracing and equipping such Well(s)
for production including flow-lines, tanks, flow meters and other equipment located on the drilling
unit, (b) that portion of drilling rate overhead charges allocated to such Well(s) under the
applicable JOA, and (c) costs of plugging and abandoning and surface restoration for any such well
completed as a dryhole, explicitly excluding Operating Costs
2.5. “Hackberry Creek Leases” mean leases totaling 13,500 Net Mineral Acres on the Hackberry
Creek Project Area delivered by ZAZA to HESS pursuant to the terms of the PSA.
2.6. “Hackberry Creek Project Area” means the area outline in bold on Exhibit “A” and part of
the Hackberry Creek Purchase and Sales Agreement, attached thereto as Exhibit “A”.
2.7. “Hackberry Creek Purchase and Sale Agreement” or “PSA” means that certain agreement
between HESS and ZAZA dated March 26, 2010.
2.8. “Existing Burdens” means (i) any royalty, overriding royalty, production payment, and
other similar burdens on production which burden the Subject Leases at the time of acquisition by
either Party, and (ii) the Reserved Interest.
2.9. “Exploration Program” means the operations to be conducted by the Parties in the area
using 2-D, and or 3-D seismic, and other exploration technologies to explore for subsurface
geological formations and anomalies indicative of the existence of oil, gas and other hydrocarbons,
along with all necessary processing, review and analysis of such data, including without limitation
acquisition of new geophysical data or the reprocessing of existing available geophysical data
covering some or all of the Hackberry Creek Project Area or across other areas if the data will
contribute to the evaluation of the trend and the subsequent leasing of prospective areas.
2.10. “XXXX Corporation” or “HESS” has the meaning ascribed in the preamble to this Agreement,
with a mailing address of 500 Dallas, Xxxxxxx, Xxxxx 00000.
2.11. “JOA” or “Operating Agreement” means the operating agreement referred to in Article VII
herein.
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2.12 “Net Mineral Acres” means shall be computed separately for each Lease and shall mean, for
each such Lease, the product of the number of gross acres in the lands covered by such Lease,
multiplied by (a) the undivided interest in the oil and gas or other mineral interest covered by
such Lease in such lands, multiplied by (b) the undivided working interest (expressed as a decimal)
in such Lease acquired by or for the benefit of the Parties insofar as it covers such lands
(provided that if items (a) and/or (b) vary as to different areas covered by the Lease, a separate
calculation shall be done for each such area).
2.13 “Operating Costs” of a Well means all costs incurred in producing such Well and disposing
of such production including, but not limited to:
(i) labor and other services necessary for the maintenance and operation of
such Well;
(ii) materials, equipment, supplies, transportation, repairs, and replacements
used in the maintenance and operation of such Well, including replacements for all
parts of machinery, equipment, tanks, or other equipment to replace and/or repair
original Well and/or lease equipment;
(iii) reworking or re-equipping such Well;
(iv) gathering, treating, processing, transporting, and marketing of production
from such Well, explicitly including all gathering lines and pipelines (explicitly
excluding flow-lines); and ad valorem, severance, gathering, windfall profits, or
other applicable taxes; and
(v) that portion of cost and expenses allocated to such Well in accordance
with the usual and customary accounting practices and a XXXXX Accounting Procedure
(including, but not limited to, overhead costs of the operator as set out in the
JOA) which, pursuant to such accounting practices, are determined to be Operating
Costs.
2.15 “Reserved Interest” means on Leases included in Exhibit A(i) of the PSA, an overriding
royalty interest in and to each Lease reserved by ZAZA’s predecessor in interest pursuant to the
Purchase and Sale Agreement by and between Blackstone Oil & Gas, LLC, et al. as Sellers and ZAZA as
Buyer, being an overriding royalty interest equal to the positive difference between (a) 25% of
8/8* and (b) the lessor’s royalty burden; and as to any Additional Interest acquired by either
Party pursuant to Article IV, an overriding royalty interest equal to the positive difference
between (a) twenty-five percent (25%) of 8/8ths and (b) the lessor’s royalty burden, determined on
a lease by lease basis; in no event, however, to ever be less than three percent (3%) of 8/8ths
such that the Parties will acquire a maximum of seventy-five percent (75%) net revenue interest,
but no less than a seventy-two percent (72%) net revenue interest in the additional Leases acquired
in accordance with Section 3.2.
2.16 “Seismic Data” means, with respect to each separate and distinct seismic operation on the
Hackberry Creek Project Area, the final gained and ungained migrated three
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dimensional survey (or two dimensional) stack data obtained in connection with the
Exploration Program.
2.17 “Subject Leases” means the Oil, Gas and Mineral Leases, or individually “Lease”,
covering portions of the Hackberry Creek Project Area acquired or to be acquired in connection with
exploration efforts to be conducted pursuant to this Agreement.
2.18 “Well” means any well or xxxxx drilled on the Subject Leases, or lands pooled therewith
and completed either as a producer or plugged and abandoned as a dry hole.
2.19 “Well Cap” means the number of xxxxx HESS is obligated to carry ZAZA in the Hackberry
Creek Project Area and shall be the number of xxxxx derived by dividing the Net Mineral Acres
retained in the Hackberry Creek Project Area (explicitly excluding any acreage that expires) by 640
gross mineral acres by way of example: if the Hackberry Creek Project
Area acreage totals 19, 200
Net Mineral Acres and is divided by 640 acres, then the Well Cap would be 30 carried xxxxx in the
Hackberry Creek Project Area. The Well Cap shall be reduced in proportion to acreage expiring
during the AMI Term (as that term is defined herein below). During development of the Hackberry
Creek Project Area, if a portion of the net acreage is condemned and deemed non-productive by HESS
the Well Cap shall be proportionately adjusted downward to reflect the condemned net acreage. HESS
shall then, upon the written request of ZAZA, re-assign or otherwise convey its Working Interest in
such condemned acreage to ZAZA. Notwithstanding the foregoing, prior to making a written request
for such condemned acreage, ZAZA shall not be obligated to accept the condemned acreage.
2.20 “Working Interest” means the cost-bearing leasehold estate and working interest in and to
the Subject Leases held by the Parties, subject to applicable participation elections.
2.21 “ZaZa Energy, LLC (“ZAZA”)” has the meaning ascribed in the preamble to this Agreement,
with a mailing address of 000 Xxxxxxx Xx., Xxxxx 0000, Xxxxxx Xxxxxxx, Xxxxx 00000.
III. Operations and Costs
3.1. Program Operator. ZAZA, as Operator, will conduct the Exploration and Development
Program across the Hackberry Creek Project Area. ZAZA and HESS acknowledge that HESS, at its sole
discretion, shall have the right to take over all operations including, but not limited to, all
drilling and production operations, at any time on or after two years from the spud date of the
first well drilled on the Hackberry Creek Project Area upon not less than thirty (30) days prior
written notice to ZAZA. ZAZA and HESS acknowledge that ZAZA, at its sole discretion, shall have the
right to turn over all operations including, but not limited to, all drilling and production
operations, at any time on or after two years from the spud date of the first well drilled on the
Hackberry Creek Project Area upon not less than thirty (30) days prior written notice to HESS.
3.2. Leasing. ZAZA shall, in good faith, use its best efforts to (a) obtain oil and gas
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leases within the Hackberry Creek Project Areas identified and mutually approved by the
Parties on leasing terms acceptable to HESS and substantially comparable to the current competitor
leasing terms found in the Hackberry Creek Project Area. HESS shall advise ZAZA of maximum
approved royalty and bonus terms in excess of such competitor leasing terms that it is willing to
offer for leases in the Hackberry Creek Project Area and ZAZA shall not offer in excess of such
maximum approved royalty and bonus. HESS and ZAZA shall periodically meet (at least once every
month) to review leasing efforts and to discuss, identify and solicit approval for the joint
acquisition in the Hackberry Creek Project Area and to discuss other matters pertinent to lease
acquisition. If HESS and ZAZA agree in writing on the acquisition of certain Leases (to be
identified by either land descriptions, a plat with an area outlined, or by landowner), then such
Leases shall be jointly acquired by ZAZA on behalf of the Parties. HESS is under no obligation to
accept any oil and gas lease acquired by ZAZA which does not conform to the above procedures.
Subject to the foregoing provisions of this Section 3.2, in the event the Parties cannot agree on
the joint acquisition of certain additional leases, or if either HESS or ZAZA separately acquire
additional leases within the Hackberry Creek Project Area without such periodic meeting and
subsequent agreement, then such leases shall be subject to the provisions of Section 5.1.
ZAZA shall retain consultants and brokers, both full time and part time, reasonably necessary
to assist ZAZA and HESS in the ongoing operations and development of the Hackberry Creek Project
Area. HESS shall have the right to approve any multi-year consulting terms. The associated fees
and expenses of all consultants and brokers related to the ongoing operations of the Exploration
and Development Program will be billed to HESS at cost (with supporting documentation) and HESS
shall reimburse ZAZA within thirty (30) days of HESS’ receipt of an invoice for such charges from
ZAZA. All such consultants and brokers shall be the contractors of ZAZA unless otherwise agreed to
in writing by HESS and the consultants and brokers in accordance with the provisions of this
Section 3.2. ZAZA shall assign to HESS, on a lease by lease basis, an undivided 90% of the working
interest acquired in each Lease and a proportionate share of the net revenue interest, reduced by a
proportionate 90% share, if applicable, of the Reserved Interest. The Reserved Interest is to be
reserved in favor of ZAZA and/or their assigns in all leasehold acquired pursuant to this
Agreement.
3.3. Leasing Costs. HESS shall provide ZAZA a lease fund, in accordance with this Agreement
and a mutually agreed upon funding agreement, reasonably necessary to facilitate Lease purchases
within the Hackberry Creek Project Area in accordance with Section 3.2. HESS shall deposit into
the lease fund only those amounts necessary for the acquisition of oil and gas leases that HESS
has previously agreed in writing to acquire. ZAZA shall use its reasonable efforts to acquire oil
and gas leases within the Hackberry Creek Project Area in accordance with the provisions of
Section 3.2. Of those oil and gas leases acquired pursuant to Section 3.2, HESS shall acquire
ninety percent (90%) working interest in the Subject Leases and shall pay one hundred percent
(100%) cost share of all Acquisition Costs. ZAZA shall retain an undivided ten percent (10%)
working interest in each Lease for its own account (proportionately reduced). ZAZA shall identify
areas available for lease within the Hackberry Creek Project Area and if for any reason ZAZA
offers to HESS and HESS declines to participate, ZAZA shall be free to pursue said
acreage for its own account outside of this Agreement for terms identical to or less favorable
than those presented to HESS. HESS shall
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have ten (10) business days to approve or decline an area for lease, unless otherwise agreed to
by the Parties where time is determined, in the reasonable opinion of the Parties, to be of the
essence.
3.4. Proportionate Reduction. To the extent that a Lease subject to this Agreement covers
less than the full interest in oil, gas and other minerals in the lands purported to be covered
under such Lease or if ZAZA’s interest in such Lease is less than the full leasehold interest,
then the Working Interest conveyed therein to HESS and the Reserved Interest shall be reduced in
proportion to the interest actually covered by such Lease.
4.1 Operating Teams. It is the intention of the Parties to collaborate in the
exploration and development of the Hackberry Creek Project Area through joint teams comprised of
employees, consultants or representatives of each Party. In this regard, the Parties shall form the
working groups described below (collectively the Operating Teams) to provide overall supervision,
direction and coordination of the lease acquisition, exploration, drilling, development and
production operations under this Agreement. The Operating Teams shall be composed of a minimum of
five (5) separate joint teams: (i) the Exploration Team, (ii) Engineering Team, (iii) the Land
Team, (iv) the Commercial Team and (v) the Management Team. Each of the team may subdivide into
separate sub-teams as the individual teams deem appropriate. Unless otherwise provided, each Team
shall consist of at least one (1) and no more than five (5) representatives from each Party. The
head of each team (“Team Lead”) shall initially be a ZAZA employee except for the Commercial Team
and the Management Team which HESS shall chair. HESS shall, however, have the option after the
initial well on the Hackberry Creek Project Area is drilled to total depth to place a HESS employee
as the Team Lead on any of the Operating Teams. The work of each Party’s team members shall be
performed independently at office locations provided by the Party designating such members.
However, from time to time either Party’s team members may be seconded at the other Party’s offices
in order to maximize team efficiencies. The Operating Teams are teams specific to this Agreement
and shall be independent from any study team (in connection with the undertaking of a feasibility
study) and/or any project team that may be established pursuant to the terms of the Operating
Agreement.
4.2 Exploration Team. The Exploration Team will be responsible for conducting the Exploration
Program for the evaluation of the Hackberry Creek Project Area to identify the most desirable
drillable areas and to identify areas in the Hackberry Creek Project Area for future lease
acquisitions and exploration by the Parties. The Parties agree to disclose to each other their
technical data and interpretations of the Participation Area (unless such data and interpretation
are subject to third party confidential data restrictions). In any event, all such data or
interpretations disclosed shall be subject to the confidentiality provisions of the Operating
Agreement. The Exploration Team shall provide recommendations for the placement of drilling units
and the location of xxxxx on any such drilling units and well evaluation procedures.
4.3 Engineering Team. The Engineering Team shall include at least one (1) member from HESS’
Environmental, Health and Safety unit and shall be responsible for well design, completion and
fracturing and stimulation procedures, scheduling of drilling operations,
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compliance with federal, state and local environmental, safety and operational regulations, and
the production of hydrocarbon resources throughout the term of this Agreement. The Engineering
Team and the Exploration Team shall work together to efficiently accomplish the responsibilities
of each Team.
4.4 Land Team. The Land Team shall include one (1) member from HESS’ Legal Department and
shall be responsible for construction and implementation of all contracts and other instruments
necessary for the conduct of business under this Agreement. The Team shall also coordinate the
approval of leases, lease negotiations and acquisitions, facilitate funding for lease acquisitions
and payment of acquisition costs. The Team shall conduct joint venture negotiations with third
parties, procurement of drillsite title opinions and preparation of unit declarations and other
matters relating to overall supervision of business matters, other than commercial, in the
Hackberry Creek Project Area.
4.5 Commercial Team. The Commercial Team shall consist of at least one (1) but not more than
three (3) representatives from each Party and will be responsible for the planning and
implementation of transportation and marketing strategies for field production. The Commercial Team
shall identify, evaluate and attempt to agree upon the most commercially advantageous form of field
gathering system, and the assessment of any third party gathering proposals (including the review
of pertinent contracts in connection with any such proposals). The Commercial Team is expected to
develop effective and cost-efficient strategies and plans for the construction and/or installation
of production facilities intended to service numerous xxxxx across the Hackberry Creek Project
Area.
4.6 Management Team. The Management Committee will be composed of a Vice President level
manager from HESS and a Managing Partner from ZAZA. The Management Team shall have the
responsibility for ensuring that (a) the Teams are properly formed, maintained and functioning in a
manner consistent with this Agreement; (b) effective coordination and cooperation of efforts exists
within the Operating Teams and the management of each of the Parties; and (c) that a forum exists
for prompt reconciliation of competing alternative views of a Party’s members of the respective
Teams. In particular, the Management Team shall (1) review, assess and approve reports and
recommendations from the respective Teams; (2) attempt to reconcile the views and proposals
supported by one Party’s Team members with the other Party’s members where practicable.
Additionally, the Management Team shall serve as a forum to resolve differences of opinion among
Team members as to matters such as appropriate AFE costs, geophysical data acquisition and
reprocessing, well locations, drilling schedules, completion procedures or health, safety and
environmental matters. The Management Team shall perform its purpose in good faith and use its
reasonable best efforts to arrive at unanimous solutions as expeditiously as possible. Failing to
reach a consensus view, the decision of HESS shall prevail.
On a regularly scheduled basis, but no less than once a month, the respective Teams will
prepare a report to the Management Team of its recommendations on: (1) The approval of any
potential lease acquisitions and funding; (2) a subsurface review updated to reflect new well
results in the area; and (3) a tentative drilling schedule of xxxxx for the coming six (6) months.
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5.1 AMI Procedures. The Parties established an Area of Mutual Interest pursuant to the PSA
(“AMI”). The AMI shall remain in effect until all Leases in the AMI terminate or April 1, 2020,
whichever is first to occur (“AMI Term”). During the AMI Term, if any Party hereto (the “Acquiring
Party”) acquires any oil and gas leasehold interest, unleased mineral interest, or the right to
earn any such interest, directly or indirectly (whether through xxxxxx in a joint operating
agreement, participation agreement or otherwise) (through any individual or entity associated or
affiliated with such Party) (through any individual or entity associated or affiliated with such
Party), the Acquiring Party shall, within fifteen (15) business days following such acquisition,
notify the other Party to this AMI provision, or a counterpart thereof (the “Offeree”) of such
acquisition. To the extent a lease covers acreage inside and outside the AMI, the portion situated
outside the AMI shall also be offered to the Acquiring Party. If the Offeree elects to purchase
its proportionate share of the lease, the AMI shall be amended to include the acreage outside the
AMI. The notice from the Acquiring Party to the Offeree shall include a copy of all instruments of
acquisition and any other pertinent available data, and an itemized statement of the actual costs
and expenses incurred by the Acquiring Party in acquiring such interest, excluding, however, costs
and expenses of its own personnel. The Offeree shall have ten (10) business days after the receipt
of such notice within which to notify the Acquiring Party of its election to acquire its
proportionate interest in the interest acquired by the Acquiring Party. The proportionate
interests will be based upon the Party’s respective Working Interests, the Reserved Interest and
the Carried Free of Costs rights of ZAZA. If the Acquiring Party has not received actual notice of
the election of an Offeree to acquire its proportionate interest within the ten (10) business day
period, it shall be conclusively presumed that the Offeree has rejected the offer. If the Offeree
notifies the Acquiring Party within the aforesaid time period of its election to acquire its
proportionate interest in the interest acquired, the Acquiring Party shall promptly invoice the
Offeree for its proportionate part of the actual third party costs incurred in the acquisition,
along with a written agreement whereby the Offeree assumes its proportionate share of all terms,
conditions, provisions, obligations and liabilities assumed by the Acquiring Party in connection
with such acquisition.
Notwithstanding any of the foregoing, however, if a well is being drilled within the AMI at
the time of acquisition, the result of which, is reasonably expected to impact the value of the
interest so acquired, the Acquiring Party shall so advise the Offeree, and the election to acquire
a proportionate interest in the acquired interest must be made within forty-eight (48) hours after
receipt of such notice. Failure of the Offeree to timely respond in either case to the Acquiring
Party shall be conclusively deemed an election by such Party not to acquire its proportionate
interest in the acquired interest. In the event that a Party to this AMI provision, or a
counterpart thereof, should elect not to acquire its proportionate interest in such acquisition,
or should fail to timely exercise its option, then such Offeree will be deemed to have forfeited
all rights to acquire any right, title and interest in and to
acquired interest.
If the Offeree elects to acquire its proportionate interest and assumes its obligations, as
hereinabove set forth, the Acquiring Party shall, after such Offeree has paid the invoice amount
and executed and delivered the written agreement provided for above, execute and deliver a written
assignment in recordable form covering the Offeree’s proportionate share in the acquired interest,
and an attributable net working interest (net of the ZAZA Reserved Interest in each
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Lease) which assignment shall be made without any warranty of title, express or implied, except to
claims of all persons claiming or to claim the same or any part thereof by, through or under the
Acquiring Party, but not otherwise. Such assignment shall also be made subject to the terms of
this Agreement.
5.2 Existing AMI Areas. The Parties acknowledge that they may have existing areas of mutual
interest within the Hackberry Creek Project Area with third parties. The Parties agree these areas
are exempt from this Agreement. A list of such areas is attached hereto as Exhibit “C”.
5.3 Excluded from the Hackberry Creek Project Area. Share acquisitions and mergers by
either Party are explicitly excluded from this Agreement.
6.1 Xxxxx. Drilling, completion, reworking and production operations on all xxxxx drilled on
the Hackberry Creek Project Area will be conducted in accordance with the JOA. As to each well
drilled up to the Well Cap, ZAZA will retain a 10% carried Working Interest on a Carry Free of
Costs basis proportionately reduced to HESS’ Working Interest in any such well(s). Once the Well
Cap is reached, ZAZA shall have the right to participate for a cost bearing 10% Working Interest
on subsequent Xxxxx within the Hackberry Creek Project Area pursuant to the terms of the
applicable JOA.
7.1 Concurrent with the execution of this Agreement, the Parties agree to be bound by the
terms of a JOA substantially in the form of the JOA attached as “Exhibit B”, with appropriate
revisions for the date of the agreement, the description of the Leases covered, and the interest
of the Parties naming ZAZA as “Operator”, covering operations conducted with respect to the
Hackberry Creek Project Area and jointly owned Leases acquired pursuant to the PSA and this
Agreement. In the event of a conflict between the terms and provisions of this Agreement and the
JOA, the terms of this Agreement shall control.
VIII. Exploration and Development Agreement Tax Rider
8.1 Tax Partnership. The Parties intend and expect that the transactions contemplated by this
Agreement and the PSA will be treated, for purposes of federal income taxation and for purposes of
certain state income tax laws that incorporate or follow federal income tax principles, as
resulting in (a) the creation of a partnership (the “Tax Partnership”) in which HESS and ZaZa are
treated as partners, with the Tax Partnership being treated for Tax purposes as holding the Subject
Leases and engaging in all activities of the Parties with respect to the Subject Leases and any
other assets that may subsequently be acquired by the Parties jointly pursuant to this Agreement;
and (b) the realization by the Tax Partnership of all items of income or gain and the incurrence by
the Tax Partnership, of all items of costs or expenses attributable to the ownership, operation or
disposition of such assets and other assets that may subsequently be acquired by the Parties
jointly, notwithstanding that such items are realized, paid or incurred by the Parties
individually, all as set forth in the Tax Partnership Agreement
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attached as Exhibit “D” .
With respect to any of the Subject Leases purchased by HESS pursuant to this Agreement (but
not those purchased pursuant to the PSA)as to which HESS will be considered to own a ninety percent
(90%) working interest (and regardless of how title is taken), the Parties specifically intend that
(a) HESS shall be treated as having purchased such leases or other property for the Tax Partnership
for an amount equal to all costs paid by HESS with respect to such property (including, but not
limited to, Acquisition Costs as defined in this Agreement); (b) the Tax Partnership will be
considered to have paid any amounts payable to ZaZa pursuant to Sec. 3.2 of this Agreement as
amounts described in Sec. 707(a) of the Internal Revenue Code of 1986, (“Code”) for services
rendered; and (c) the Reserved Interest shall also be considered amounts payable to ZaZa by the Tax
Partnership as amounts described in Sec. 707(a) of the Code for services rendered.
9.1 Relationship of the Parties. It is not the purpose nor intention of this Agreement to
create, and this Agreement shall never be construed as creating, a joint venture, mining
partnership, or other relationship by and between the Parties whereby any Party shall be held
liable for the acts, either of omission or commission, of any other Party hereto. The rights and
liabilities of the Parties hereunder shall be several and not joint or collective.
9.2 Confidentiality. The Parties shall keep this transaction and the information obtained from
the Exploration Program strictly confidential and agree that no Party shall disclose in whole or in
part, any such information to any third party without the other Party’s prior written consent. It
is agreed that the Parties may disclose the information to the following persons only to the extent
necessary to evaluate the participation in acquiring leases and drilling a well or xxxxx thereon:
(a) the Parties’ (and their affiliates’ and nominees’) employees, officers and directors who need
to examine the information for purposes of evaluation; (b) any professional consultant retained for
the purpose of evaluating the information; (c) their respective working interest owners or
potential participants in the Hackberry Creek Project Area or non-consent acreage; or (d) any
lender financing the Parties’ participation in the potential acquisition or drilling, including any
professional consultant retained by the lender for purposes of evaluating the information. In any
event, the disclosing Party shall be responsible for ensuring that any party to whom the
information is disclosed shall keep the information confidential in accordance with this provision.
9.3 Exhibits. The exhibits attached hereto are hereby incorporated herein and made a part
hereof for all purposes.
9.4 Binding Effect. This Agreement will be binding upon the Parties hereto, their successors
and assigns. The AMI provision hereof constitutes a covenant running with the land.
9.5 Complete Agreement. Excluding the PSA, this Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect to the
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subject matter hereof and contains all of the covenants and agreements between the parties with
respect to said matter. Time is of the essence in this Agreement.
9.6 Amendment. No change, modification, or alteration of this Agreement shall be binding upon
any Party unless made in writing and executed by all Parties.
9.7 Construction. This Agreement shall be construed in accordance with and governed in all
respects by the laws of the State of Texas. This Agreement shall be deemed to have been executed in
Houston, Texas, and all payments hereunder shall be deemed payable in Xxxxxx County, Texas.
9.8 Notices. Any and all notices, requests, consents, responses to notices, or other
communications permitted or required to be given under the terms of this Agreement shall be in
writing, properly addressed to the other Party as shown below, and delivered by mail (postage
paid), by hand delivery or by facsimile transmission. Notices sent by email are ineffective.
Notices or responses are effective when received by the receiving Party during that Party’s regular
business hours. Notices and responses shall be deemed received (a) if given by facsimile
transmission, when transmitted if transmitted on a business day and during normal business hours of
the recipient, and otherwise on the next business day following transmission, (b) if given by
certified mail, return receipt requested, postage prepaid, three (3) business days after being
deposited in the United States mails and (c) if given by Federal Express service or other means,
when received or personally delivered. All communications shall be sent to the respective Party at
the address set forth below or at such other address as such Party may designate by ten (10) days
advance written notice to the other Party hereto:
| Addresses for Notices: | ||||
| If to HESS: | Xxxx Corporation | |||
| One Xxxxx Center | ||||
| 000 Xxxxxx Xx. | ||||
| Xxxxxxx, XX 00000 | ||||
| Attention: X.X. Xxxxxxxxxxx | ||||
| Facsimile: (000) 000-0000 | ||||
| If to ZAZA: | ZAZA ENERGY, LLC | |||
| Attn: Xxxx Xxxxxx | ||||
| 0000 XxXxxxxx Xx., Xxx. 0000 | ||||
| Xxxxxxx, XX 00000 | ||||
| Fax: (000) 000-0000 |
9.9 Arbitration. All disputes, controversies, or claims that may arise among the
parties relating to this Agreement will be submitted to, and determined by, binding arbitration.
The arbitration will be conducted before a single arbitrator pursuant to the Commercial Arbitration
Rules then in effect of the American Arbitration Association but without using the offices or
auspices of the AAA. Exclusive venue for the arbitration will be in Xxxxxx County, Texas. The
arbitrator will apply the laws of the State of Texas (without regard to conflict of
12
law rules) to the dispute, controversy, or claim. Evidentiary questions will be governed by the
Texas Rules of Evidence. The arbitrator’s award will be in writing and shall set forth findings
and conclusions upon which the arbitrator based the award. The prevailing Party in the arbitration
will be entitled to recover its reasonable attorneys’ fees, costs, and expenses incurred in
connection with the arbitration, as determined by the arbitrator. Any award pursuant to the
arbitration will be final and binding upon the Parties and judgment on the award may be entered in
any federal or state court sitting or located in Xxxxxx County, Texas, or in any other court
having jurisdiction. The provisions of this Section will survive the termination of this
Agreement. Notwithstanding the foregoing, this Section will not prevent any Party from seeking
injunctive relief from a court of competent jurisdiction under appropriate circumstances,
provided, however, such action will not constitute a waiver of the provisions of this Section.
9.10
Counterparts. This Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which together shall constitute one instrument.
9.11 Public Announcements. The Parties agree to consult with each other prior to issuing any
press release or making any public statement with respect to this Agreement and, except for any
press release or public announcements, the making of which are required by law or any listing
agreement with any notional securities exchange, shall not issue any such press release or make any
such public statement prior to such consultation and the consent of the other Party.
HESS hereby represents, warrants, and covenants to ZAZA as follows:
10.1 Organization, Good Standing and Qualification. HESS is duly organized, validly existing
and in good standing under the laws of the State of Delaware and is qualified to do business and in
good standing in the State of Texas. HESS has all requisite corporate power and authority to
execute and deliver this Agreement, and to carry out the provisions
of this Agreement.
10.2 Requisite Power and Authority. HESS has all necessary power and authority under all
applicable provisions of law to execute and deliver this Agreement and to carry out its provisions.
All action on HESS’ part required for the lawful execution and delivery of this Agreement has been
or will be taken prior to the closing. Upon its execution and delivery, this Agreement will be a
valid and binding obligation of HESS enforceable in accordance with its terms, except (a) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors’ rights and (b) general principles of equity that
restrict the availability of equitable remedies.
ZAZA hereby represents, warrants, and covenants to HESS as follows:
13
11.1 Organization, Good Standing and Qualification. ZAZA is duly organized, validly existing
and in good standing under the laws of the State of Texas and is qualified to do business and in
good standing in the State of Texas. ZAZA has all requisite company power and authority to
execute and deliver this Agreement, and to carry out the provisions of this
Agreement.
11.2 Requisite Power and Authority. ZAZA has all necessary power and authority under all
applicable provisions of law to execute and deliver this Agreement and to carry out its
provisions. All action on ZAZA’s part required for the lawful execution and delivery of this
Agreement has been or will be taken prior to the closing. Upon its execution and delivery, this
Agreement will be a valid and binding obligation of ZAZA, enforceable in accordance with its
terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights and (b) general
principles of equity that restrict the availability of equitable remedies. ZAZA represents that
it has obtained all necessary consents and/or approvals of all of its partners to enter into this
Agreement and to perform its obligations set forth hereunder.
11.3 No Conflict. The execution, delivery and performance by ZAZA of this Agreement and the
consummation of the transactions contemplated hereby do not and will not: (i) violate or conflict
with any provision of the charter documents or bylaws of ZAZA; (ii) violate any provision or
requirement of any domestic or foreign, national, state, or local law, statute, judgment, order,
writ, injunction, decree, award, rule, or regulation of any governmental entity applicable to
ZAZA; (iii) violate, result in a breach of, constitute (with due notice or lapse of time or both)
a default or cause any obligation, penalty, premium or right of termination to arise or accrue
under any contract; (iv) result in the creation or imposition of any lien, charge or encumbrance of any kind whatsoever upon any of the properties or assets of
ZAZA; and (v) result in the cancellation, modification, revocation or suspension of any
license, permit, certificate, franchise, authorization or approval issued or granted by any
governmental entity.
11.4 Consents. No consents or notices are required to be obtained or given by or on behalf
of ZAZA before consummation of the transactions contemplated by this Agreement in compliance with
all applicable laws, rules, regulations, orders or governmental or other agency directives, or
the provisions of any document binding upon ZAZA.
11.5 Books and Records. ZAZA has maintained its books, records and files accurately and in
accordance with generally accepted industry standards and all books, records and files are in
ZAZA’s possession and the accounting records have been maintained in accordance with generally
accepted accounting principles consistently applied.
11.6 Legal Proceedings. There is no suit, action, claim, investigation by any person or
entity or by any administrative agency or governmental body, and no legal administrative or
arbitration proceeding pending or, to ZAZA’s best knowledge, threatened against ZAZA which has
materially adversely affected or may so affect the performance of ZAZA.
14
11.7 No Third Party Beneficiaries. No third party has any rights under this Agreement or may
enforce any provision in this Agreement.
11.8 Conflicts of Interest. Except as otherwise expressly provided in this Agreement, no
director, employee, or agent of any Party shall give to or receive from any director, employee or
agent of any other Party, or any affiliate of any other Party, any commission, fee, rebate, gift,
or entertainment of significant cost or value in connection with this Agreement. In addition, no
director, employee, or agent of any Party shall enter into any business arrangement with any
director, employee, or agent of any other Party, or any affiliate of any other Party, who is not
acting as a representative of such other Party or its affiliate, without prior written notification
thereof to the other Party.
11.9 Assignment of This Agreement. Neither Party may assign or transfer in whole or part its
rights and obligations under this Agreement without the prior written consent of the other Party,
which consent shall not be unreasonably withheld, conditioned or delayed. Any purported assignment
or transfer in breach of this obligation is void as between HESS and ZAZA. However, either Party
may assign any of its rights and obligations under this Agreement to an Affiliate or subsidiary
without the consent of the other Party.
11.10 Limitation of Liability and No Responsibility for Extraordinary Damages. The
Parties acknowledge their sole obligation and liability to each other in connection with the
subject matter hereof shall be governed by the terms of this Agreement and the Operating Agreement.
Each Party mutually waives and releases to the fullest extent permitted by applicable law, all
claims for Consequential Loss, punitive or exemplary damages arising out of this Agreement, whether
such claims are made in connection with an indemnity, a breach of any obligation under this
Agreement, or otherwise. For the purposes of this Agreement, the phrase “Consequential
Loss” shall mean any of the following regardless of cause, whether arising under common law,
equity or contract, by virtue of any fiduciary duty, in tort or delict (including negligence) as a
consequence of breach of any duty (statutory or otherwise) or under any other legal doctrine or
principle whatsoever, irrespective of whether recoverable in law or equity.
(A) Loss of production, failure or inability to produce, process, take delivery of,
transport or deliver or delay in producing, processing, taking delivery of,
transporting or delivering hydrocarbons.
(B) Any failure, loss or damage or expense directly or indirectly consequent upon
any of the foregoing, including any loss or damage incurred or liquidated or
pre-estimated damages or penalties of any kind whatsoever borne or payable, under
any contract [for the sale, exchange, transportation, processing, storage or other
disposal of hydrocarbons].
(C) Any loss associated with business interruption including the cost of overheads
incurred during business interruption or deferment of revenue or income, loss of or
failure to obtain any contract or other business opportunity or loss of profit.
(D) Any loss, damage, cost and expense arising out of any action, claim,
15
suit, demand or judgment resulting from or arising out of any of the
foregoing.
(E) Loss of bargain, contract, expectation or opportunity in each case whether
direct or indirect.
(F) Any indirect or consequential loss under applicable law whether or not
foreseeable at the date of execution of this Agreement.
| XXXX CORPORATION | ZAZA ENERGY L.L.C. | |||||||||
By:
|
/s/ Xxxxxxx X. Xxxxxxx III
|
By: | /s/ Xxxx X. Xxxxxx |
|||||||
| Name: Xxxxxxx X. Xxxxxxx III | Name: Xxxx X. Xxxxxx | |||||||||
| Title: Sr. VP Global Expl. | Title: Managing Partner | |||||||||
| Date: July 27, 2010 | Date: 7/27/2010 | |||||||||
16
Exhibit “A”
Plat of Hackberry Creek Project Area
17
Exhibit “D”
ATTACHED TO AND MADE A PART OF THAT CERTAIN
EXPLORATION AND DEVELOPMENT AGREEMENT ENTERED
INTO MARCH 26,2010 BETWEEN XXXX CORPORATION AND
ZAZA ENERGY, LLC.
EXPLORATION AND DEVELOPMENT AGREEMENT ENTERED
INTO MARCH 26,2010 BETWEEN XXXX CORPORATION AND
ZAZA ENERGY, LLC.
HESS & ZAZA
HACKBERRY CREEK PROJECT AREA
TAX PARTNERSHIP PROVISIONS
HACKBERRY CREEK PROJECT AREA
TAX PARTNERSHIP PROVISIONS
1. General Provisions
1.1 Designation of Documents.
This exhibit is referred to in, and is part of, that Agreement identified above and, if so
provided, a part of any agreement to which the Agreement is an exhibit. Such agreement(s)
(including all exhibits thereto, other than this exhibit) shall be hereinafter referred to as the
“Agreement;” and this exhibit is hereinafter referred to as the “Exhibit” or the “Tax Partnership
Provisions.” Except as may be otherwise provided in this Exhibit, terms defined and used in the
Agreement shall have the same meaning when used herein.
1.2 Relationship of the Parties.
The parties to the Agreement shall be hereinafter referred to as “Party” or “Parties.” The Parties
understand and agree that the arrangement and undertakings evidenced by the Agreement result in a
partnership for purposes of Federal income taxation and certain State income tax laws which
incorporate or follow Federal income tax principles as to tax partnerships. Such partnership for
tax purposes is hereinafter referred to as the “Partnership.” For every other purpose of the
Agreement the Parties understand and agree that their legal relationship to each other under
applicable State law with respect to all property subject to the Agreement is one of tenants in
common, or undivided interest owners, or lessee(s)-sublessee(s) and not a partnership; that the
liabilities of the Parties shall be several and not joint or collective; and that each Party shall
be responsible solely for its obligations.
1.3 Priority of Provisions of this Exhibit.
If there is a conflict or inconsistency, whether direct or indirect, actual or apparent, between
the terms and conditions of this Exhibit and the terms and conditions of the Agreement, or any
other exhibit or any part thereof, the terms and conditions of this Exhibit shall govern and
control.
1.4 Survivorship.
1.4.1 Any termination of the Agreement shall not affect the continuing application of the
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Xxxx XxXx Eagle Ford TPP
Tax Partnership Provisions for the termination and liquidation.
1.4.2 Any termination of the Agreement shall not affect the continuing application of the Tax
Partnership Provisions for the resolution of all matters regarding Federal and State income
reporting.
1.4.3 These Tax Partnership Provisions shall inure to the benefit of, and be binding upon, the
Parties hereto and their successors and assigns.
1.4.4 Term. The effective date of the Agreement shall be the effective date of these Tax
Partnership Provisions. The Partnership shall continue in full force and effect from, and after
such date, until termination and liquidation.
2. Tax Reporting Partner and Tax Matters Partner
2.1 Tax Reporting Partner.
The Operator (or the Party listed in Sec. 9.1) as the Tax Reporting Partner (“TRP”) is responsible
for compliance with all tax reporting obligations of the Partnership, see Sec. 3.1, below. In the
event of any change in the TRP, the Party serving as TRP at the beginning of a given taxable year
shall continue as TRP with respect to all matters concerning such year.
2.2 If Small Partnership Exception Not Applicable.
If the Partnership does not qualify for the “small partnership exception” from, or if the
Partnership elects (see infra Elections at Secs. 4.1 and 9.2) to be
subject to, §§6221 et seq.,
Subchapter C of Chapter 53 of Subtitle A (the “TEFRA rules”) of the Internal Revenue Code (the
“Code”) the TRP shall also be the Tax Matters Partner as defined in Code §6231(a) (the “TMP”) and
references to the TRP shall then include references to the TMP and vice versa.
2.2.1 Expenses. The TMP shall not be required to incur any expenses for the preparation for, or
pursuance of, administrative or judicial proceedings, unless the Parties agree on a method for
sharing such expenses.
2.2.2 Information Request by the TMP. The Parties shall furnish the TMP, within two weeks from the
receipt of the request, the information the TMP may reasonably request to comply with the
requirements on furnishing information to the Internal Revenue Service.
2.2.3 The TMP shall not agree to any extension of the statute of limitations for making assessments
on behalf of the Partnership without first obtaining the written consent of all Parties. The TMP
shall not bind any other Party to a settlement agreement in tax audits without obtaining the
written concurrence of any such Party.
2.2.4 Any other Party who enters in a settlement agreement with the Secretary of the
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Xxxx XxXx Hackberry Creek TPP
Treasury with respect to any partnership items, as defined in Code §6231(a)(3), shall
notify the other Parties of the terms within ninety (90) days from the date of such settlement.
2.2.5 Inconsistent Treatment of Partnership Items. If any Party intends to file a notice of
inconsistent treatment under Code §6222(b), such Party shall, prior to the filing of such notice,
notify the TMP of the (actual or potential) inconsistency of the Party’s intended treatment of a
partnership item with the treatment of that item by the Partnership. Within one week of receipt the
TMP shall remit copies of such notification to the other Parties. If an inconsistency notice is
filed solely because a Party has not received a Schedule K-1 in time for filing of its income tax
return, the TMP need not be notified.
2.2.6
Request for Administrative Adjustment. No Party shall file pursuant to Code §6227 a request
for an administrative adjustment of partnership items without first notifying all other Parties.
If all other Parties agree with the requested adjustment, the TMP shall file the request on behalf
of the Partnership. If unanimous consent is not obtained within thirty (30) days from such
notice, or within the period required to timely file the request, if shorter, any Party, including
the TMP, may file a request for administrative adjustment on its own behalf.
2.2.7 Judicial Proceedings. Any Party intending to file with respect to any partnership item, or
any other tax matter involving the Partnership, a petition under Code §§6226, 6228, or any other
provision, shall notify the other Parties prior to such filing of the nature of the contemplated
proceeding. In the case where the TMP is the Party intending to file such petition, such notice
shall be given within a reasonable time to allow the other Parties to participate in the choice of
the forum for such petition. If the Parties do not agree on the appropriate forum, then the forum
shall be chosen by majority vote. Each Party shall have a vote in accordance with its percentage
interest in the Partnership for the year under audit. If a majority cannot agree, the TMP shall
choose the forum. If a Party intends to seek review of any court decision rendered as a result of
such proceeding, the Party shall notify the other Parties prior to seeking such review.
3. Income Tax Compliance and Capital Accounts
3.1 Tax Returns.
The TRP shall prepare and file all required Federal and State partnership income tax returns. Not
less than thirty (30) days prior to the return due date (including extensions), the TRP shall
submit to each Party for review a copy of the return as proposed.
3.2 Fair Market Value Capital Accounts.
The TRP shall establish and maintain for each Party fair market value (“FMV”) capital accounts and
tax basis capital accounts. Upon request, the TRP shall submit to each Party along with a copy of
any proposed partnership income tax return an accounting of such Party’s FMV capital accounts as of
the end of the return period.
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Xxxx XxXx Hackberry Creek TPP
3.3 Information Requests.
Each Party agrees to furnish to the TRP not later than sixty (60) days before the return due date
(including extensions) such information relating to the operations conducted under the Agreement
as may be required for the proper preparation of such returns. Similarly, each Party agrees to
furnish to the TRP, as requested and timely, any the information and data necessary for the
preparation and/or filing of other required reports and notifications, and for the computation of
the capital accounts. As provided in Code §6050K(c), a Party transferring its interest must notify
the TRP to allow compliance with Code §6050K(a) (see also Sec. 8.1).
3.4 Best Efforts.
The TRP and the other Party(ies) shall use its/their best efforts to comply with responsibilities
outlined in this Section, and with respect to the service as TMP as outlined Sec. 2.2, and in
doing so shall incur no liability to any other Party.
4. Tax and FMV Capital Account Elections
4.1 General Elections.
For both income tax return and capital account purposes, the Partnership shall elect:
a) to deduct when incurred intangible drilling and development costs (“IDC”);
b) to use the maximum allowable accelerated tax method and the shortest permissible tax life for
depreciation;
c) the accrual method of accounting;
d) to
report income on a calendar year basis;
and the Partnership shall also make any elections as specially noted in Sec. 9.2, below.
4.2 Depletion.
Solely for FMV capital account purposes, depletion shall be calculated by using simulated cost
depletion within the meaning of Treas. Reg.§1.704-1(b)(2)(iv)(k)(2), unless the use of simulated
percentage depletion is elected in Sec. 9.2, below. The simulated cost depletion allowance shall
be determined under the principles of Code §612 and be based on the FMV capital account basis of
each Lease. Solely for purposes of this calculation, remaining reserves shall be determined
consistently by the TRP.
4.3 Election Out Under Code §761(a).
4.3.1 The TRP shall notify all Parties of an intended election to be excluded from the application
of Subchapter K of Chapter 1 of the Code not later than sixty (60) days prior to the filing date or
the due date (including extensions) for the Federal partnership income tax return, whichever comes
earlier. Any Party that does not consent must provide the TRP with written objection within thirty
(30) days of such notice.
4.3.2 After an election-out, to avoid an unintended impairment of the election-out: The Parties
will avoid, without prior coordination, any operational changes which would terminate the
qualification for the election-out status; all Parties will monitor the
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Xxxx XxXx Hackberry Creek TPP
continuing qualification of the Partnership for the election-out status and will notify the
other Parties if, in their opinion, a change in operations will jeopardize the election-out; and,
all Parties will use, unless agreed to by them otherwise, the cumulative gas balancing method as
described in Treas. Reg.§1.761-2(d)(2).
4.4 Consent Requirements for Other Tax or FMV Capital Account Elections.
Unless stipulated differently in Sec. 9.3, any election, other than those referenced above, must
be approved by the affirmative vote of two (2) or more Parties owning a majority of the working
interest based upon post-Payout ownership.
5. Capital Contributions and FMV Capital Accounts
The provisions of this Sec. 5 and any other provisions of the Tax Partnership Provisions relating
to the maintenance of the capital accounts are intended to comply
with Treas. Reg. §1.704-1(b) and
shall be interpreted and applied in a manner consistent with such regulations.
5.1 Capital Contributions.
The respective capital contributions of each Party to the Partnership shall be (a) each Party’s
interest in the oil and gas lease(s), including all associated lease and well equipment, committed
to the Partnership, and (b) all amounts of money paid by each Party in connection with the
acquisition, exploration, development, and operation of the lease(s), and all other costs
characterized as contributions or expenses borne by such Party under the Agreement. The
contribution of the leases and any other properties committed to the Partnership shall be made by
each Party’s agreement to hold legal title to its interest in such leases or other property as
nominee of the Partnership.
5.2 FMV Capital Accounts.
The FMV capital accounts shall be increased and decreased as follows:
5.2.1 The FMV capital account of a Party shall be increased by:
(i) the amount of money and the FMV (as of the date of contribution) of any property
contributed by such Party to the Partnership (net of liabilities assumed by the Partnership
or to which the contributed property is subject);
(ii) that Party’s share of Partnership items of income or gain, allocated in accordance with
Sec. 6.0; and
(iii) that
Party’s share of any Code §705(a)(1)(B)item.
5.2.2 The FMV capital account of a Party shall be decreased by:
(i) the amount of money and the FMV of property distributed to a Party (net of liabilities
assumed by such Party or to which the property is subject);
(ii) that Party’s Sec. 6.1 allocated share of Partnership loss and deductions, or items
thereof; and,
(iii) that Party’s share of any Code §705(a)(2)(B) item.
5.2.3 “FMV” when it applies to property contributed by a Party to the Partnership shall
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Xxxx XxXx Hackberry Creek TPP
be assumed to equal the adjusted tax basis, as defined in Code §1011, of that property
unless the Parties agree otherwise as indicated in Sec. 9.2.
5.2.4 FMV Capital Account Revaluation.
As
provided in Treas, Reg. §1.704-1(b)(iv)(e), the capital accounts will be adjusted to reflect
the manner in which the unrealized income, gain, loss and deduction inherent in distributed
property (not previously reflected in the capital accounts) would be allocated among the Parties
if there were a taxable disposition of such property at its FMV as of the time of distribution.
Furthermore, if so agreed to in Sec. 9.2, under the rules of Treas.
Reg. § 1.704-1(b)(iv)(f), the
FMV capital accounts shall be revalued to reflect value changes of the Partnership property.
6. Partnership Allocations
6.1 FMV Capital Account Allocations.
Each item of income, gain, loss, or deduction shall be allocated to each Party as follows:
6.1.1 Actual or deemed income from the sale, exchange, distribution or other disposition of
production shall be allocated to the Party entitled to such production or the proceeds from the
sale of such production. The amount received from me sale of production and the amount of the FMV
of production taken in kind by the Parties are deemed to be identical; accordingly, such items may
be omitted from the adjustments made to the Parties’ FMV capital accounts.
6.1.2 Exploration cost, IDC, operating and maintenance cost shall be allocated to each Party in
accordance with its respective contribution, or obligation to contribute, to such cost.
6.1.3 Depreciation shall be allocated to each Party in accordance with its contribution, or
obligation to contribute, to the cost of the underlying asset.
6.1.4 Simulated depletion shall be allocated to each Party in accordance with its FMV capital
account adjusted basis in each oil and gas property of the Partnership.
6.1.5 Loss (or simulated loss) upon the sale, exchange, distribution, abandonment or other
disposition of depreciable or depletable property shall be allocated to the Parties in the ratio of
their respective FMV capital account adjusted bases in the depreciable or depletable property.
6.1.6 Gain (or simulated gain) upon the sale, exchange, distribution, or other disposition of
depreciable or depletable property shall be allocated to the Parties so that the FMV capital
account balances of the Parties will most closely reflect their respective percentage or fractional
interests under the Agreement.
6.1.7 Costs or expenses of any other kind shall be allocated to each Party in accordance
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Xxxx XxXx Hackberry Creek TPP
with its respective contribution, or obligation to contribute, to such costs or expense.
6.1.8 Any other income item shall be allocated to the Parties in accordance with the manner in
which such income is realized by each Party.
6.2 Tax Return and Tax Basis Capital Account Allocations.
6.2.1 Unless otherwise expressly provided in this Sec. 6.2, the allocations of the Partnership’s
items of income, gain, loss, or deduction for tax return and tax basis capital account purposes
shall follow the principles of the allocations under Sec. 6.1. However, the Partnership’s gain or
loss on the taxable disposition of a Partnership properly in excess of the gain or loss under Sec.
6.1, if any, is allocated to the contributing Party to the extent of such Party’s pre-contribution
gain or loss.
6.2.2 The Parties recognize that under Code §613A(c)(7)(D) the depletion allowance is to be
computed separately by each Party. For this purpose, each Party’s share of the adjusted tax basis
in each oil and gas property shall be equal to its contribution to the adjusted tax basis of such
property.
6.2.3 Under Code §613A(c)(7)(D) gain or loss on the disposition of an oil and gas property is to be
computed separately by each Party. According to Treas. Reg.
§1.704-1(b)(4)(v), the amount realized
is allocated as follows: (i) An amount that represents recovery of adjusted simulated depletion
basis is allocated (without being credited to the capital accounts) to the Parties in the same
proportion as the aggregate simulated depletion basis was allocated to such Parties under Sec. 5.2;
and (ii) any remaining realization is allocated in accordance with Sec. 6.1.6.
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6.2.4 Depreciation shall be allocated to each Party in accordance with its contribution to
the adjusted tax basis of the depreciable asset.
6.2.5 In accordance with Treas. Reg. §1.1245-l(e), depreciation recapture shall be allocated, to
the extent possible, among the Parties to reflect their prior sharing of the depreciation.
6.2.6 In accordance with the principles of Treas. Reg. §1.1254-5, any recapture of IDC is
determined and reported by each Party separately. Similarly any recapture of depletion shall be
computed separately by each Party, in accordance with its depletion allowance computed pursuant to
Sec. 6.2.2.
6.2.7 For Partnership properties with FMV capital account values different from their adjusted tax
bases the Parties intend that the allocations described in this Section 6.2 constitute a
“reasonable method” of allocating gain or loss under Treas.
Reg. §1.704-3(a)(1).
6.2.8 Take-in-kind.
If checked “Yes” in Sec. 9.2, below, each Party has the right to determine the market for its
proportionate share of production. All items of income, deductions, and credits arising from such
marketing of production shall be recognized by the Partnership and shall be allocated to the Party
whose production is so marketed.
7. Termination and Liquidating Distribution
7.1 Termination of the Partnership.
7.1.1 Upon termination, as provided in Code §708(b)(l)(A), the business shall be wound-up and
concluded, and the assets shall be distributed to the Parties as described below by the end of such
calendar year (or, if later, within ninety (90) days after the date of such termination). The
assets shall be valued and distributed to the Parties in the order provided in Secs. 7.1.2, 7.5,
and 7.7
7.1.2 Reversion. First, all cash representing unexpended contributions by any Party and any
property in which no interest has been earned by any other Party under the Agreement shall be
returned to the contributor.
7.2 Balancing of FMV Capital Accounts.
Second, the FMV capital accounts of the Parties shall be determined as described hereafter. The TRP
shall take the actions specified under this Sec. 7.2 in order to cause the ratios of the Parties’
FMV capital accounts to reflect, as closely as possible, their interests under the Agreement. The
ratio of a Party’s FMV capital account is represented by a fraction, the numerator of which is the
Parry’s FMV capital account balance and the denominator of which is the sum of all Parties’ FMV
capital account balances. This is hereafter referred to as the “balancing of the FMV capital
accounts” and, when
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Xxxx XxXx Hackberry Creek TPP
completed, the FMV capital accounts of the Parties shall be referred to as “balanced.”
7.3 Deemed Sale Gain/Loss Charge Back.
The FMV of all Partnership properties shall be determined and the gain or loss for each property,
which would have resulted if sold at such FMV, shall be allocated in accordance with Secs. 6.1.5
and 6.1.6.
7.4 Deficit Make-Up Obligation.
If hereafter a Party has a negative FMV capital account balance, that is a balance of less than
zero, in accordance with of Treas. Reg.
§1.704-1(b)(2)(ii)(b)(3) such Party is obligated to
contribute an amount of money to the Partnership sufficient to achieve a zero balance FMV capital
account (the “Deficit Make-Up Obligation”). Moreover, any Party may contribute an amount of cash
to the Partnership to facilitate the balancing of the FMV capital accounts. If after these
adjustments the FMV capital accounts are not balanced, Secs. 7.5 shall apply.
7.5 Distribution to balance capital accounts.
7.5.1 If all Parties agree, any cash or an undivided interest in certain selected properties shall
be distributed to one or more Parties as necessary for the purpose of balancing the FMV capital
accounts.
7.5.2 Distribution of undivided interests.
Unless Sec.7.5.1 applies, an undivided interest in each and every property shall be distributed to
one or more Parties in accordance with the ratios of their FMV capital accounts.
7.6 FMV determination.
If a property is to be valued for purposes of balancing the capital accounts and making a
distribution under this Sec. 7, the Parties must first attempt to agree on the FMV of the
property; failing such an agreement, the TRP shall cause a nationally recognized independent
engineering firm to prepare an appraisal of the FMV of such property.
7.7 Final Distribution.
After the FMV capital accounts of the Parties have been adjusted pursuant to Secs.7.2 to 7.5, all
remaining property and interests then held by the Partnership shall be distributed to the Parties
in accordance with their positive FMV capital account balances.
8. Transfers, Indemnification, and Correspondence
8.1 Transfer of Partnership Interests.
Transfers of Partnership interests shall be governed by the Agreement. A Party transferring its
interest, or any part thereof, shall notify the TRP in writing within two weeks after such
transfer.
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8.2 Correspondence.
All correspondence relating to the preparation and filing of the Partnership’s income tax returns
and capital accounts shall be sent to:
TRP
|
“Att to:” reference | ||||
Xxxx Corporation
|
Att: Xxxxxx Xxxx 000 Xxxxxx Xx. Xxx 0000 Xxxxxxx, Xxxxx 00000-0000 |
||||
Other Parties:
ZaZa Energy, LLC
|
Attn: Xxxx Xxxxxx 0000 XxXxxxxx Xx., Xxx. 0000 Xxxxxxx, XX 00000 |
||||
9. Elections and Changes to above Provisions
9.1 Operator not the TRP.
With respect to Sec. 2.1, (insert name of Party to be TRP instead of Operator, or indicate “N/A”)
Xxxx Corporation is designated as TRP.
9.2 Special Tax Elections
With respect to Sec. 4.1, the Parties agree (if not applicable insert “N/A” or strike):
| Yes | |||||
e) that the Partnership shall elect to account for dispositions of depreciable
assets under the general asset method to the extent permitted by Code §168(i)(4);
|
Yes | ||||
f) that the Partnership shall elect under Code §754 to adjust the basis of
Partnership property, with the adjustments provided in Code §734 for a distribution
of property and in Code §743 for a transfer of a partnership interest. In case of
distribution of property the TRP shall adjust all tax basis capital accounts. In the
case of a transfer of a partnership interest the acquiring party(ies) shall establish
and maintain its (their) tax basis capital account(s);
|
Yes | ||||
g) that the Partnership shall elect under Code §6231 to be subject to the TEFRA rules.
|
N/A | ||||
With
respect to Sec. 4.2, Depletion, the Parties agree that the Partnership shall use
simulated percentage depletion instead of simulated cost depletion.
|
N/A | ||||
With
respect to Sec. 5.2.4, under the rules of Treas. Reg. §
1.704-1(b)(iv)(f), the
Parties agree that the FMV capital accounts shall be revalued to reflect value
changes of the Partnership property upon the occurrence of the events specified in
(5)(i) through (iii) of said regulations.
|
N/A | ||||
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With respect to Sec. 6.2.8, the income attributable to
take-in-kind production will be reflected on the tax return.
|
N/A | ||||
With respect to Sec. 5.2.3 the FMV for the listed properties are determined as follows (xxxx as
“N/A” if not applicable)
Property Description
|
FMV | ||||
| N/A | |||||
9.3 Change of Majority for Other Tax Elections
Instead of the Sec. 4.4 majority for other tax elections, a majority shall be considered if
consisting of (specify or line out blanks) N/A
—END OF EXHIBIT “D”—
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