October 1, 1998
Fan Energy Inc.
0000 Xxxxxxxx, Xxxxx000
Xxxxxx, Xxxxxxxx 00000
Re: Participation Agreement
XXXXXXXXXX XXXXXX XXXXXXXX
X00X, R102-103W, 6th P.M.
Sweetwater County, Wyoming
Gentlemen:
This Agreement will constitute our understanding regarding Fan Energy Inc.,
hereinafter referred to as "FEI", purchase of an interest in Xxxxxxx Resources,
LLC, hereinafter referred to as "Xxxxxxx", Horsethief Canyon Prospect,
Sweetwater County, Wyoming.
1. Xxxxxxx will assign 20% of its right, title and interest in and to all
of its leasehold, being approximately 3525 net acres as depicted on
Exhibit "A" attached hereto. In addition, Xxxxxxx will assign 20% of
its right, title and interest in and to all leasehold and/or minerals
which are acquired within the prospect outline as shown on said
Exhibit "A" (map). Further, Xxxxxxx agrees to assign 20% interest in
and to all acreage trades, farmins, seismic options, etc. which are
secured for the Horsethief Prospect. All leasehold, minerals and
acreage trades are hereinafter referred to as the "interests".
2. FEI agrees to pay $28,000 to Xxxxxxx for acreage and geological cost
associated with Horsethief Canyon Prospect, upon execution of this
letter agreement.
3. In delivering the interests, Xxxxxxx will deliver to FEI an 80% NRI on
acreage which is currently owned, on this date, by Xxxxxxx as well as
any open UPRC acreage where a lease is earned pursuant to shooting 3D
seismic. Xxxxxxx will deliver an 80% NRI on all other interests
assigned to FEI within the prospect. In the event an earned interest
is less than 80% NRI Xxxxxxx will deliver said interest as is without
reserving additional overriding royalty interests.
Fan Energy Inc.
October 1, 1998
Page Two
4. Xxxxxxx has acquired 3D seismic data over the Horsethief Canyon
Prospect as shown on Exhibit B. FEI agrees to pay 24% of all costs
involved in acquiring, processing, and interpreting the 3D seismic
data over the Horsethief Canyon Prospect. Notwithstanding said
payment, the ownership of such data will be FEI 20% and Xxxxxxx 80%.
The estimated gross cost to acquire, process and interpret the 3D
seismic data in the Horsethief Canyon prospect is estimated to be
$500,000. FEI's cost to date for seismic is shown on Exhibit E and is
due upon execution of this Agreement.
5. An area of mutual interest is hereby established, effective for
acquisitions after this date, consisting of the Horsethief Canyon
Prospect lands as shown on Exhibit "A". The AMI will remain in effect
for the term of any oil and gas leases which become subject to this
agreement, whether by acquisition, extension or renewal and shall
thereafter terminate unless production is established on any portion
of said land through this agreement, and shall then continue so long
as there is production. Any acquisition to the AMI, shall be reported
within ten (10) days in writing describing the acquired interest and
cost of same, FEI will have twenty (20) days from receipt of such
notice in which to elect to participate in the interest by payment of
its proportionate share of the actual cost of the interest plus 10%.
Failure to participate in an acquisition to the AMI shall remove that
interest from the terms of this agreement.
6. FEI agrees to pay 24% of all costs to casing point on the initial well
drilled on the Horsethief Canyon Prospect, as reflected in the AFE
attached hereto and made a part of this Agreement. The initial well
will be spudded on or before November 1, 1998.
7. A Federal Exploratory Unit has been formed as shown on Exhibit F. FEI
agrees to ratify and adopt the Horsethief Canyon Unit Agreement and
Unit Operating Agreement. The Horsethief Canyon Unit Operating
Agreement will control all operations of the parties while it is in
effect. In the event any lands subject to this agreement are
contracted out of the Horsethief Canyon Unit, or if the Horsethief
Canyon Unit is terminated, then such lands will be automatically
subject to the AAPL 610-1989 JOA attached hereto as Exhibit D.
Fan Energy Inc.
October 1, !998
Page Three
8. FEI will have a continuing right of first refusal to participate, on
similar terms to Horsethief Canyon Prospect, in Xxxxxxx'x four other
prospects in this area as shown on Exhibit "C" attached hereto and any
other prospects or re-entries that Xxxxxxx may develop in the subject
area. These prospects are identified as Northeast Xxxxxxxx, Southwest
Xxxxxxxx, Deadman Wash and Shiprock. FEI will have fifteen (15) days
from the presentation and review of each prospect in which to elect to
participate in the aforementioned prospects.
9. Simultaneous with the execution of this agreement Xxxxxxx and FEI will
enter into the AAPL Model Form 610-1989 Operating Agreement attached
hereto as Exhibit "D" which designates Xxxxxxx Oil LLC as Operator.
Said Operating Agreement will contain a provision which allows
Xxxxxxx, as operator, to charge a reasonable fee for G&A related to
the time required to administer this project on a mutually acceptable
basis.
If the terms as outlined above are satisfactory, please so indicate by
signing below in the space provided and return one copy of this agreement to my
attention. Thank you for your time and consideration of this matter. Should you
have any questions, please advise.
Sincerely,
XXXXXXX RESOURCES, LLC
/s/ Xxxxxx X. Xxxxxxx Xx.
Xxxxxx X. Xxxxxxx Xx.
GHF:jh
enclosures
AGREED TO AND ACCEPTED THIS
1ST DAY OF OCTOBER, 1998.
FAN ENERGY INC.
By /s/ Xxxx Xxxxx
----------------------------------
Xxxx Xxxxx, Director
