2nd AMENDED AND RESTATED AGREEMENT OF BUSINESS PRINCIPLES
2nd AMENDED AND RESTATED AGREEMENT OF BUSINESS PRINCIPLES
THIS AGREEMENT made effective as of the 1st day of September, 2003 between Enterra and XXX and effective as of the 1st day of August, 2004 among Enterra, XXX and JMG.
AMONG:
ENTERRA ENERGY TRUST, a trust
having an office in Calgary, Alberta (“Enterra”)
OF THE FIRST PART
- and -
XXX OIL INC., a corporation having an
office in Calgary, Alberta (“XXX”)
OF THE SECOND PART
- and -
JMG EXPLORATION, INC. a corporation
having an office in Calgary, Alberta (“JMG”)
OF THE THIRD PART
WHEREAS:
A.
Enterra was formed as a royalty trust by the reorganization of Enterra Energy Corp. on November 25, 2003;
B.
XXX was incorporated by principals of Enterra under the laws of the Province of Alberta on September 3, 2003 for the purpose of being an oil and gas development company; under a joint business plan pursuant to which XXX would be the operator and developer of Enterra’s assets with some development;
C.
JMG was incorporated by principals of Enterra and XXX under the laws of the State of Nevada on July 16, 2004 for the purpose of being an exploration company, under a joint business plan pursuant to which JMG would be the operator and explorer of Enterra’s assets with no development;
D.
the parties desire to enter into this Agreement to provide for their rights and obligations to each other;
NOW THEREFORE for consideration of $10.00 and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:
1.
Principles of Joint Business Plan
The general principles of the Joint Business Plan of Enterra, XXX and JMG reflect the circumstance that Enterra is a royalty trust whose primary purpose is providing an income stream to its unitholders, XXX is an oil and gas development company and JMG is an oil and gas exploration company. Accordingly the parties have agreed on the following principles (the “Principles”):
(a)
Operatorship: (i) Enterra hereby appoints XXX the operator or contract operator of all assets in which Enterra is now the operator and which have development, including the contract operator of assets in which XXX has no working interests, and agrees to appoint XXX the operator or contract operator of any and all future assets which have development acquired by Enterra in which Enterra has the right to be or appoint the operator.
(ii) Enterra hereby agrees to appoint JMG the operator or contract operator of any and all future assets which have no current development acquired by Enterra in which Enterra has the right to be or appoint the operator.
(b)
Enterra Acquisitions and Farmouts: (i) Enterra hereby agrees that working interests in any assets with production it acquires in the future which require additional drilling (“Enterra’s Acquired Interests”) will be offered to be farmed out to XXX on the basis that XXX will pay 100% of all costs allocable to Enterra’s Acquired Interests (including any required tie-ins and facility costs related to such additional drilling) to earn 70% of Enterra’s Acquired Interests in the producing zones of the spacing units of all new xxxxx drilled and Enterra retains a carried interest of 30% of Enterra’s Acquired Interests.
(ii) Enterra hereby agrees that Enterra’s Acquired Interests in any assets without production it acquires in the future will be offered to be farmed out to JMG on the basis that JMG will pay 100% of all costs allocable to Enterra’s Acquired Interests (including any required tie-ins and facility costs) to earn 70% of Enterra’s Acquired Interests in the producing zones of the spacing units of all new xxxxx drilled and Enterra retains a carried interest of 30% of Enterra’s Acquired Interests.
(c)
XXX Dispositions: In the event that XXX desires to sell any assets, other than assets earned under farmouts from Enterra and JMG pursuant to subclause 1(e), (either before or after receipt of a third party offer) it shall first offer such assets to Enterra.
(i)
In the event that XXX has received a bona fide third party offer for such assets, it shall offer such assets to Enterra on the same terms and conditions as such third party offer (or a cash equivalent purchase price if the offer is not for cash), and Enterra shall have 30 days from receipt of such notice to exercise its right of first refusal and close the purchase of the assets on the same terms and conditions as set out in the notice of the offer; following which XXX shall be free for 60 days to sell such assets to such third party on terms no less favorable to XXX that those set out in the offer.
(ii)
In the event that XXX desires to sell assets for which it has not received a bona fide offer from a third party, it shall offer such assets for sale to Enterra , on an area by area, play of project basis: (A) for each area, play or project that has production, at a price equal to the estimated present value as determined by an independent engineering report prepared by a mutually agreeable engineering firm utilizing such firm’s current fluctuating pricing deck and discounted by the Current Percentage
Discount Rate; and (B) for each area, play or project has not been developed, at a cost equal to the estimated value of the undeveloped land as determined by an independent valuation prepared by a mutually agreeable valuation firm, plus any actual expenses by XXX other than land acquisition costs, such as seismic data, etc.; and Enterra shall have 30 days from determination of the purchase price to close such purchase. If Enterra does not close the purchase withing 30 days from determination of the purchase price, JED shall be free for 6 months to sell such assets to another party at any price negotiated in good faith with such other party that is not less than the price at which Enterra could have acquired such assets, without triggering Enterra’s right of first refusal set out in subclause 1(c)(i). For purposes of this Agreement, the term “Current Percentage Discount Rate” means the discount rate in the independent engineering report which is closest to the 10 year bond rate established from time to time by the government of the United States of America for government savings bonds plus five percent (5%) provided that the Current Percentage Discount Rate shall be a minimum of 10%.
And in the event that XXX desires to sell any assets earned under farmouts from Enterra and/or JMG pursuant to subclause 1(e), (either before or after receipt of a third party offer) it shall first offer such assets to Enterra and/or JMG at a price determined pursuant to either subclause (i) or (ii) above, as applicable to the circumstances. If XXX has earned such assets under farmouts from both Enterra and JMG, the offer to sell shall be proportional to the interest earned from each.
(d)
JMG Dispositions: In the event that JMG desires to sell any assets (either before or after receipt of a third party offer) it shall first offer such assets to Enterra.
(i)
In the event that JMG has received a bona fide third party offer for such assets, it shall offer such assets to Enterra on the same terms and conditions as such third party offer (or a cash equivalent purchase price if the offer is not for cash), and Enterra shall have 30 days from receipt of such notice to exercise its right of first refusal and close the purchase of the assets on the same terms and conditions as set out in the notice of the offer; following which JMG shall be free for 60 days to sell such assets to such third party on terms no less favorable to JMG that those set out in the offer.
(ii)
In the event that JMG desires to sell assets for which it has not received a bona fide offer from a third party, it shall offer such assets for sale to Enterra , on an area by area, play of project basis: (A) for each area, play or project that has production, at a price equal to the estimated present value as determined by an independent engineering report prepared by a mutually agreeable engineering firm utilizing such firm’s current fluctuating pricing deck and discounted by the Current Percentage Discount Rate; and (B) for each area, play or project has not been developed, at a cost equal to the estimated value of the undeveloped land as determined by an independent valuation prepared by a mutually agreeable valuation firm, plus any actual expenses by JMG other than land acquisition costs, such as seismic data, etc.; and Enterra shall have
30 days from determination of the purchase price to close such purchase. If Enterra does not close the purchase withing 30 days from determination of the purchase price, JMG shall be free for 6 months to sell such assets to another party at any price negotiated in good faith with such other party that is not less than the price at which Enterra could have acquired such assets, without triggering Enterra’s right of first refusal set out in subclause 1(c)(i). For purposes of this Agreement, the term “Current Percentage Discount Rate” means the discount rate in the independent engineering report which is closest to the 10 year bond rate established from time to time by the government of the United States of America for government savings bonds plus five percent (5%) provided that the Current Percentage Discount Rate shall be a minimum of 10%.
(e)
Enterra and JMG Farmouts: Enterra and JMG hereby agree that when assets acquired by JMG have been sufficiently drilled to establish the existence of commercially viable hydrocarbons, on an area by area, play or project basis, JMG’s working interests, and Enterra’s working interests acquired from JMG pursuant to subclause 1(d), if any, will be offered to be farmed out to XXX on the basis that XXX will pay 100% of all costs allocable to both farmors’ working interests (including any required tie-ins and facility costs) to earn 70% of such interests in the producing zones of the spacing units of all new xxxxx drilled and Enterra and JGM each retain a carried interest of 30% of their respective working interests.
(f)
Enterra Technical Services Agreement: Enterra and XXX hereby agree to enter into a Technical Services Agreement effective September 1, 2003 for XXX to provide as a consultant to Enterra all personnel (including officers) required by Enterra in addition to its current employees and officers now or in the future during the term of this Agreement. While Enterra holds a lease on the current office space located on the 26th and 27th floors of 000 - 0xx Xxxxxx XX, Xxxxxxx, Xxxxxxx, and on any business machines or equipment, Enterra shall provide to XXX use of such office space, business machines and equipment, and XXX shall provide to Enterra all required office space, business machines and office systems not currently leased by Enterra. The Technical Services Agreement shall provide that XXX and its employees, officers, directors and consultants may be considered consultants to Enterra for the purpose of eligibility for Enterra’s compensation plans.
(g)
JMG Technical Services Agreement: JMG and XXX hereby agree to enter into a Technical Services Agreement effective August 1, 2004 for XXX to provide as a consultant to JMG all personnel (including officers) required by JMG in addition to its current employees now or in the future during the term of this Agreement, and XXX shall further provide to JMG all required office space, business machines and office systems. The JMG Technical Services Agreement shall provide that XXX and its employees, officers, directors and consultants may be considered consultants to JMG for the purpose of eligibility for JMG’s compensation plans.
(h)
Transactions with Other Parties: Nothing in this Agreement or the Principles is intended to create exclusivity among the parties for transactions and any party is
free to transact with other entities in any way that does not infringe on the rights of the other parties hereunder.
2.
Documentation
(a)
Documents: Subject to subclause (b) the parties will enter into specific joint operating agreements, farmouts, conveyances and such other documents as may be necessary or desirable to give effect to the Principles; provided that prior to the preparation and execution of any such document the parties shall be deemed to be acting under the Principles and Operating Procedures set out herein.
(b)
Operating Procedures: When the parties hold 100% of the working interests, the Operating Procedure for such assets shall be the CAPL 1990 Operating Procedure, including the 1996 PASC Accounting Procedure, with the option elections as set out on Schedule A attached hereto (regardless of the location of the assets); and when the parties hold less than 100% of the working interests the Operating Procedure for such assets shall be the operating procedures in effect for such assets pursuant to the documents of title under which the parties acquired the assets.
3.
Variations
The parties acknowledge and agree that the Principles and the Operating Procedures herein defined may not be appropriate for each individual circumstance, and accordingly the parties may, on an individual circumstance basis, agree to amend, waive or otherwise vary any Principle or term and condition of the Operating Procedure; provided however that such variations must be in writing and agreed to by all parties.
4.
Binding Agreement
Notwithstanding that this Agreement is expressed as Principles, it is the intention of the parties that the Principles and the terms and conditions of this Agreement be binding upon the parties hereto, subject only to such amendments, waivers and variations as may be made from time to time in individual circumstances under clause 3.
5.
Term
This Agreement shall commence effective September 1, 2003 with respect to Enterra and XXX, and effective August 1, 2004 as it relates to JMG, and the term shall be indefinite until terminated in accordance with clause 6.
6.
Termination
This Agreement shall be terminated:
(a)
on the mutual agreement of the parties hereto; or
(b)
at the option of any party upon the Change of Control of one of the parties. For purposes of this Agreement, “Change of Control” means (i) the acquisition of 75% or more of a party’s voting securities by one person or a group of persons
acting jointly and in concert with each other; (ii) the amalgamation, merger or business combination of one of the parties with one or more other entities such that a majority of the voting securities of the resulting entity are not held by the party’s own former security holders; (iii) the appointment of a receiver or receiver-manager for the benefit of a party’s creditors, whether voluntary or involuntary; or (iv) proceedings under any applicable bankruptcy or insolvency legislation by a party.
7.
Conflicts of Interest
The Board of Directors of each of Enterra, XXX and JMG has considered the potential conflict issues of the joint aspects of the respective business plans and this Agreement, and have determined that this Agreement and the efficiencies and mutual benefits arising hereunder are in the best of interests of each of Enterra, XXX and JMG; and that potential conflicts are mitigated and minimized by the different business purposes and investor profiles of each party. This Agreement has been unanimously approved by the directors of each of Enterra, XXX and JMG who are not directors of either of the other parties, and the parties agree that the Technical Services Agreements contemplated by subclauses 1(f) and 1(g), variations of this Agreement pursuant to clause 3 and amendments to this Agreement pursuant to clause 9 shall also be approved by the directors of each party who are not directors of either of the other parties, but documentation of arrangements under subclauses 1(a), 1(b), 1(c), 1(d) and 1(e) shall be in the ordinary course of business and such contracts shall not require further approval by either any Board of Directors, unless management believes that any such contract has materially different circumstances that need to be approved by the Board of Directors of the parties to such contract.
8.
Representations and Warranties
Each of Enterra, XXX and JMG represents and warrants to the others that:
(a)
it has the requisite capacity and authority, including the approval of its directors who are not also directors of the other party, to enter into this Agreement and carry out its obligations hereunder; and
(b)
the execution and delivery of this Agreement is not prohibited or restricted by such party’s constating documents or any other agreement to which it is a party or by which it is bound.
9.
Amendments
Any amendments to this Agreement shall be in writing and executed by each party hereto.
10.
Assignment
This Agreement and the rights and obligations of the parties hereunder is personal to such parties and neither party may assign its interest in this Agreement or any portion thereof without the prior written consent of the other parties, which consent may be arbitrarily withheld.
11.
Arbitration
The parties may mutually agree with respect to disputes hereunder to submit to either binding or non-binding arbitration in such jurisdiction and pursuant to such terms and conditions as the parties may agree.
12.
Jurisdiction
This Agreement shall be governed by and construed in accordance with the laws of the Province of Alberta and, subject to clause 11, the parties irrevocably attorn to the jurisdiction of the courts of the Province of Alberta with respect to disputes arising hereunder.
13.
Severability
In the event any portion of this Agreement is declared by a court of competent jurisdiction to be invalid, illegal or unenforceable in a non-appealable order, such portion shall be deemed severed from this Agreement and the remaining parts hereof shall remain in full force and effect, as fully as though such portion had never been a part of this Agreement.
14.
Enurement
This Agreement shall enure to the benefit of and be binding upon the parties hereto, their respective successors at law and permitted assigns.
IN WITNESS WHEREOF the parties have executed and delivered this Agreement the 12th day of May, 2005, effective as of the dates first written above.
ENTERRA ENERGY TRUST
by its Administrator,
ENTERRA ENERGY CORP.
Per:
signed “Reg Xxxxxxxx”
Per:
signed “Xxxx Xxxxxx”
XXX OIL INC.
Per:
signed “Xxx Xxxxxxxx”
Per:
signed “Xxxxx Xxxxxxx”
ATTEST:
By:
signed “H.S. (Xxxxxx) Xxxxxxx”
signed “Xxx Xxxxxxxx”
Title:
Xxxxxx X. Xxxxxxx, President
Xxxxxx X. Xxxxxxxx, Chairman
SCHEDULE "A"
Attached to and forming part of the Agreement of Business Principles dated September 1, 2003 between Enterra Energy Trust and XXX Oil Inc. and Amended and Restated effective August 1, 2004 among Enterra Energy Trust, XXX Oil Inc. and JMG Exploration, Inc.
1990 CAPL OPERATING PROCEDURE
ARTICLE | CLAUSE | ELECTION |
III VI IX X XXII XXIV | 311 - Insurance 604 - Marketing Fee 903 - Party Participation 1004 - Operator for Independent Operations 1007 - Penalty for Independent Well 1010 - Title Preserving Well Addresses For Notices 2401 - Right to Assign, Sell, Dispose 2404 - Recognition Upon Assignment | _A__ _A__ If Alt. B then (a) in the case of Petroleum, ______% or $_______ m3 (b) in the case of natural gas, ______% or $______/103m3 (c) in the case of natural gas liquids and substances other than petroleum and natural gas (but not including sulphur), ______% or $______/m3; and (d) in the case of sulphur, ______% or $______/t. _A_ Notwithstanding anything to the contrary contained in this Operating Procedure, if the Operator is a participating Party, it shall carry out the operation for the account of the participating Party, provided, if the Operator is not a participating Party, the participating Parties shall, as and among themselves and accordance with the provisions of Clause 206, mutatis mutandis, appoint an Operator for the operation. If the operation is commenced prior to the time the Operator becomes a participating Party (and it is specifically understood that nothing in this Clause shall restrict or prohibit the proposing Party from actually commencing operations as provided in Clause 1003) the Operator, upon becoming a participating Party, shall have the right to take over and carry out the operation for the participating Parties. 300%_- Development 500%_ - Exploratory 365___ days Enterra Entergy Trust Suite 2600, 000 - 0xx Xxxxxx XX Xxxxxxx, Xxxxxxx X0X 0X0 XXX Oil Inc. Xxxxx 0000, 000 - 0xx Xxxxxx XX Xxxxxxx, Xxxxxxx X0X 0X0 Xxxxx 0000, 000 - 0xx Xxxxxx XX Xxxxxxx, Xxxxxxx X0X 0X0 See clause 1(c) of the Agreement. Replaced and amended by the 1993 CAPL Assignment Procedure |
RATES, ELECTIONS AND MODIFICATIONS TO THE 1996 PETROLEUM ACCOUNTANTS SOCIETY OF CANADA (PASC) ACCOUNTING PROCEDURE AND EXPLANATORY TEXT
101.
Rates and Elections
The following clauses of the Accounting Procedure are modified to include the indicated election, alternate, option or value:
105.
Operating Fund: 10% %
110.
Approvals: Clause 2 ; from 2 ; fifty-one percent ( 51 %)
112.
Expenditure Limitations:
(a) excess of twenty-five thousand dollars ($ 25,000.00 )
(c) excess of twenty-five thousand dollars ($ 25,000.00 )
202.
Employee Benefits:
(b) exceed twenty-two percent ( 22 %)
213.
Camp and Housing:
(b) shall ________/shall not ✘
216.
Warehouse Handling:
five percent ( 5 %)
221.
Allocations Options:
CLAUSE | OPTIONS FOR CHARGING JOINT ACCOUNT | |||
FIXED $/MONTH | ||||
SUBJECT to 302 (e) | Not subject to 302 (e) | Percentage of Direct Cost | Other (Specify) (Well/m3) | |
000 | X/X | X/X | X/X | X/X |
207(c) | X/X | X/X | X/X | X/X |
000 | X/X | X/X | N/A | N/A |
213(a) | X/X | X/X | X/X | X/X |
000 | X/X | X/X | X/X | X/X |
000.
Overhead Rates:
(a) Exploration Project __________ percent (_______%)
OR
(1) Five percent ( 5 %); Fifty thousand dollars ($ 50,000.00)
(2) Three percent ( 3 %); One hundred thousand dollars ($100,000.00)
(3) One percent ( 1 %)
(b) Drilling of a well __________ percent (_______%)
OR
(1) Three percent ( 3 %); Fifty thousand dollars ($ 50,000.00)
(2) Two percent ( 2 %); One hundred thousand dollars ($100,000.00)
(3) One percent ( 1 %)
(c) Initial Construction __________ percent (_______%)
OR
(1) Five percent ( 5 %); Fifty thousand dollars ($ 50,000.00)
(2) Three percent ( 3 %); One hundred thousand dollars ($100,000.00)
(3) One percent ( 1 %)
(d) Construction Project __________ percent (_______%)
OR
(1) Five percent ( 5 %); Fifty thousand dollars ($ 50,000.00)
(2) Three percent ( 3 %); One hundred thousand dollars ($100,000.00)
(3) One percent ( 1 %)
(e) Operation and Maintenance:
(1) _________ percent (_______%) of cost; and/or
(2) Three hundred fifty dollars ($ 350.00)
(3) _________ dollars ($______________)
Subclause 302(e)(2) and 302(e)(3) hereof shall __________/shall not ✘
406.
Dispositions: Twenty-five thousand dollars($ 25,000.00)
102. Modifications to the PASC Accounting Procedure
The Accounting Procedure is modified as follows:
The clauses contained in the Accounting Procedure are deleted and replaced as follows:
Clause 201(a)(6) - Salaries and wages of the Operator's employees engaged in Production Engineering who are either temporarily or permanently assigned to and directly employed off-site in direct support of Joint Operations.
Clause 207(d) - Maintaining and operating an On-Site Warehouse that is part of the Joint Property. When additional operations or activities are served by the On-Site Warehouse, the cost of maintaining and operating the On-Site Warehouse shall be allocated among all operations and activities served, on an equitable basis or as otherwise agreed to by the Owners pursuant to Clause 216 of this Accounting Procedure.
Clause 406 - The Operator shall make timely disposition of idle and/or surplus Material, either through sale to the Non-Operators or sale to other parties. The Operator may purchase, but shall be under no obligation to purchase, the interest of the Non-Operator's surplus Material. All sales of Material, regardless of Condition, the proceeds from disposition of which is greater than twenty-five thousand dollars ($ 25,000.00) shall be subject to approval by the Owners. All other disposals of Material shall be at the discretion of the Operator, excepting sale to the Operator or its Affiliates. Exceptions shall be priced pursuant to Clause 402 of this Accounting Procedure unless prior approval by the Owners is obtained.
Clause 501(b) The Operator shall conduct an inventory of stock maintained in a Warehouse which is part of Joint Operations on an annual basis or as otherwise approved by the Owners.
103. Warranty as to Modifications
Except as otherwise provided for in Clause 101 and 102 hereof, the Accounting Procedure published by the Petroleum Accountants Society of Canada, 1996 (copyright) is hereby incorporated in its entirety in the Agreement and the Parties so warrant that said Accounting Procedure has been amended only to the extent set forth herein.
