VAQUERO PARTNERS, LLC 2 Tiki Circle Galveston, Texas 77554
VAQUERO
PARTNERS, LLC
0 Xxxx Xxxxxx
Xxxxxxxxx, Xxxxx 00000
April 7, 2004
Itera
International Energy Corporation
0000 Xxxx Xxxxxxx, Xxxxx 000
Xxxxxxxxxxxx, Xxxxxxx 00000
| RE: |
Participation Letter Agreement |
Gentlemen:
Our company is
a party to that certain Oil and Gas Lease and Option Agreement dated effective as of
August 21, 2003, as amended, by and among the undersigned as lessee and Xxxxxxxx
Xxxxxxx Xxxxxx, individually and as co-independent executrix under the Will of
Xxxxxx Xxxxxx Xxxxxxx, Deceased, and Xxxxx Xxxxxxx, individually and as
co-independent executor under the will of Xxxxx Xxxxxx Xxxxxxx, deceased, Xxxxx Xxxxxx
Ford and Xxxxx Xxxxxx Xxxxxxxx, a widow, as lessors, with respect to certain
property hereafter referred to as the “Welder Lease Prospect.” Such lease,
known hereafter as the “Welder Lease” is attached hereto as Exhibit “A.”
This letter
shall evidence your commitment to participate in the drilling of an initial test well
(the “Initial Well”) on the Welder Lease Prospect located in Victoria County,
Texas, as follows:
| 1. | Upon
signature by you below and after the satisfaction of all conditions precedent
set forth in paragraph 9 below (the “Commencement Date”), you agree to pay
over to Vaquero Partners, LLC (“Vaquero”) the sum of $1,000,000.00 in U.S.
Dollars (the “Commitment Funds”) for your right to participate in the
drilling of said Initial Well as further described and set forth herein. As stated
in paragraph 8 hereof, the Commitment Funds shall be deemed a credit applicable to
the purchase price of $12 Million dollars payable by you for the purchase of 78% of
the common stock, on a fully diluted as converted basis, of Dune Energy, Inc. upon
consummation of such transaction. |
| 2. | The
Commitment Funds will be allocated as follows: |
1
| (a) | $150,000.00
as a prospect fee to be applied towards geological and geophysical costs associated
with said prospect; and |
| (b) | $850,000.00
(less $185,000.00 already paid by you to Vaquero Oil and Gas, Inc. on our behalf),
to be applied towards the actual drilling and completion costs (including costs for
establishing production facilities, well tie-ins and pipeline hookups, etc.) for
said Initial Well. Expenditures from this amount shall be made substantially in
accordance with the Authorization For Expenditures attached hereto. The $185,000.00
which you already paid shall be applied by Vaquero Oil and Gas, Inc. at our direction
to that certain Drilling Bid Prospect and Daywork Drilling Contract – US between
Vaquero Oil and Gas, Inc. and Greywolf Drilling Company LP, a copy of which contract
is attached hereto as Exhibit “B.” |
| (c) | No
fee shall be payable to any consultant, finder, investment banker or broker,
including the Altitude Group LLC from, on or with respect to, the Commitment Funds,
except, however, a fee shall be payable to Altitude Group LLC at the closing of the
purchase of stock as provided in paragraph 1 hereof based upon the $12,000,000.00
purchase price for such stock of which the Commitment Funds is a part. |
| (d) | $730,000.00
of the Commitment funds (less the $185,000.00 already paid) shall be paid to the
undersigned upon the Commencement Date. Monthly reports shall be provided by us to
you explaining and accounting for the expenditure of these funds. The $270,000.00
balance of the Commitment Funds shall be paid by you to the undersigned when both of
us have agreed to expend such funds; except, however, upon certification by us to
you that we or Vaquero Oil and Gas, Inc. need to order pipe and related materials
associated with completion of the drilling operation, you will advance up to
$75,000.00 for such purposes. If, at any time, the operator of the drilling
operation decides, subject to the provisions of the JOA described hereinbelow, not to
proceed with the drilling operation because it is impractical or for other purposes,
then we will sell or cause the sale of the equipment and other materials associated
with completion of the drilling operation and return to you the proceeds from such
sale and refund the balance of any other unexpended funds advanced by you to us. |
| 3. | Your
participation in said Initial Well and all subsequent operations with respect to said
Initial Well are initially related to the Upper Xxxxxx xxxxx (as defined in paragraph
4 below), and the acreage and depths allocated to said Initial Well under the terms
of the Welder Lease, and will be governed by the provisions of a Joint Operating
Agreement (“JOA”) with Vaquero Oil and Gas, Inc. to be signed by you in the
form attached hereto as Exhibit “C”. In the event drilling in the
Upper Xxxxxx xxxxx is not productive, you will have the right, at your option,
to test and complete the Initial Well in a shallower zone or to drill and complete
the Initial Well in a deeper zone without the payment of an additional prospect fee. |
2
| 4. | On
or before May 21, 2004, operations shall be commenced to drill an initial test well
(the “Initial Well”) at a location on the Welder Lease as more particularly
identified on the plat attached hereto as Exhibit “D” to a subsurface depth
of 9,000 feet sufficient to test the Upper Xxxxxx sands as found in the Suemaur
Exploration & Production Company Welder Heirs No. 3 Well, Victoria County, Texas, API
No. 00-000-00000, the top of the Upper Xxxxxx being found at a log depth of 8,570 feet.
All operations for the drilling of said Initial Well shall be governed by said JOA. |
| 5. | It
is understood that $850,000.00 of the Commitment Funds will be applied towards the
payment of 100% (100% Working Interest) of the costs associated with the drilling and
completion of said Initial Well, including all costs associated with connecting the
well to a pipeline for sales if necessary, all as more particularly set forth in the
Authorization For Expenditure (“AFE”) to be signed by you and is attached
hereto as Exhibit “E”. In the event of a dry hole, the AFE shall include all
costs necessary for the proper plugging and abandonment of the well. It is
hereby understood, that such AFE is an estimate of costs only, and that actual
costs may be more than the costs as set forth on the AFE. Accordingly, in the event
100% of the costs as set forth under the AFE exceed $850,000.00, you will be
responsible for paying 100% of that portion of the costs exceeding $850,000.00. |
| 6. | Upon
commencement of sales of oil and/or gas from the Initial Well, your Working Interest
share of all subsequent costs associated with the operation of the Initial Well,
including the drilling and operation of any subsequent xxxxx which may be drilled as a
replacement well for the Initial Well to the Upper Xxxxxx xxxxx on the acreage
allocated to the Initial Well drilled hereunder, shall be 75%. Your
proportionate share of the revenues (“Net Revenue Interest”) obtained
from sales of production attributable to said 75% Working Interest in the Initial
Well shall bear its proportionate share of the existing leasehold royalty burden of
30%. In summary, upon commencement of sales, your interest in said Initial Well shall
be as follows: Working Interest = 75% (75% x 100%), and Net Revenue Interest = 52.5%
(75% x 70%). Our interest in the Initial Well shall be as follows: Working Interest
equals 25% (25% x 100%), and Net Revenue Interest equals 17.5% (25% x 70%). |
| 7. | By
signing in the space provided below, you acknowledge that you have been provided
with all of the information you have requested about the Welder Lease Prospect and
the Initial Well, and that you have elected to and hereby agree to participate on the
terms set forth herein. |
3
| 8. | Simultaneously
upon the closing of a transaction in which you acquire 78% of the outstanding
common stock of Dune Energy, Inc., you shall assign your Working Interest in the
Initial Well to Dune Energy, Inc. for consideration equal to the Commitment Funds,
and you shall receive such number of shares of Dune Energy Inc.’s common stock,
equal to $1,000,000 divided by the per share price paid by you at the closing.
Furthermore, upon the assignment of such Working Interest to Dune Energy, Inc., as
assignee of such Working Interest, there shall be an adjustment in the Working
Interest such that Dune Energy Inc.’s interest therein shall be 85% and the
interest of Vaquero Oil and Gas, Inc. shall be 15%, notwithstanding the
provisions of paragraph 6 hereinabove. This provision shall be in accordance with
the Amended and Restated Operating Agreement of Vaquero Partners, LLC as revised by
Letter Agreement dated March 31, 2004. |
| 9. | As
a condition precedent to consummating the transaction described in this
Participation Letter Agreement and as a condition to paying the Commitment funds
(other than the $185,000.00 previously paid), Vaquero Partners, LLC shall receive
from the lessors under the Welder Lease and deliver to Itera International Energy
Corporation a letter in the form of the letter attached hereto as Exhibit “F” or
as such letter may be modified in a manner acceptable to Itera International Energy
Corporation in its sole discretion. |
| 10. | Upon
execution of an amendment to the Welder Lease by the Lessors whereby the Lessors grant
additional acreage to Lessees thereunder for drilling the Initial Well, Itera
International Energy Corporation shall pay $16,000.00 and Dune Energy, Inc. shall
pay $9,000.00 to the Lessors. Such amount shall be wired to Vaquero Partners, LLC
who, in turn, will wire such funds to Lessors. |
By agreeing
to the terms as outlined above, you agree to submit to Vaquero Partners, LLC
the Commitment Funds, the signed JOA, and the signed AFE.
| VAQUERO PARTNERS, LLC | ||
| By: | /s/ Xxxx Xxxxxx | |
| |
||
| Authorized Representative | ||
4
ACCEPTED
AND AGREED TO
THIS 7th DAY OF APRIL, 2004
ITERA
INTERNATIONAL ENERGY
CORPORATION
| By: | /s/ Xxxxxx X. Xxxxxxx | |
| |
||
| Xxxxxx X. Xxxxxxx Vice President – Chief Operating Officer |
JOINDER
Dune
Energy, Inc. hereby joins in this Participation Letter Agreement and consents to and
agrees to be bound by the terms hereof. Dune Energy, Inc. hereby unconditionally
guarantees the obligations of Vaquero Partners, LLC under this Participation Letter
Agreement and shall cause Vaquero Partners, LLC to perform its obligations hereunder.
| DUNE ENERGY, INC. | ||
| By: | /s/ Xxxx Xxxxxx | |
| |
||
| Xxxx Xxxxxx, Chairman | ||
5
