[PETROGEN LOGO APPEARS HERE] PETROGEN
April 15, 2005
Xx. Xxxxx Xxxxxx
Bazmo Exploration, LLC
0000 Xx. Xxxxx Xxxxx, Xxxxx 000
Xxxxxxx, XX 00000
Fax: 000.000.0000
RE: PARTICIPATION AGREEMENT - XXXXX XXXXX FIELD
XXXXXXX COUNTY, TEXAS
Dear Xx. Xxxxxx:
This letter follows our recent discussions concerning the participation
by Bazmo Exploration, LLC ("Bazmo)" with Petrogen Corp. ("PETROGEN") in
development and production of Petrogen's interest in certain leases ("LEASES")
within the Xxxxx Xxxxx Field of Xxxxxxx County, Texas, and shall evidence our
agreement in that regard. The Leases are described on the list attached to this
letter and marked Exhibit "A." The area covered by the Leases ("LEASE AREA") is
shown on a plat attached to Exhibit "A."
When signed by Bazmo, this letter will be a binding agreement
("AGREEMENT") between Bazmo and Petrogen setting out the terms and conditions
under which Bazmo will participate with Petrogen in development and production
of the Leases.
The terms and conditions of the Agreement are:
1. ASSIGNMENT. Within five (5) days of Bazmo's signing of this Agreement,
Petrogen will offer an assignment ("ASSIGNMENT") of the Leases to
Bazmo. The Assignment will be offered unsigned by Petrogen to allow
Bazmo to undertake its due diligence, as provided in Section 5 below.
2. WORKING INTEREST. The Assignment will be of a twenty-five percent of
eight-eighths (25% of 8/8) working interest in the Leases, if the
Leases cover one-hundred percent (100%) of the minerals within the
Lease Area. If the Leases do not cover one-hundred (100%) of the
minerals within the Lease Area, then Petrogen shall assign and convey
to Bazmo so much of its interest in the Leases as will deliver to
Bazmo an interest in the Lease Area (a working interest) equal to
twenty-five percent of eight-eighths (25% of 8/8), subject to the
terms and provisions of this Agreement.
3. NET REVENUE INTEREST. In the Assignment, the Leases will burdened by
royalties equal to twenty-two and one-half percent (22.5%), such that
Bazmo will own a net revenue interest equal to twenty-five percent of
seventy-seven and one-half percent (25% of 77.5%) .
4. CASH PAYMENT. In exchange for delivery of the signed Assignment by
Petrogen, Bazmo will pay Petrogen $42,680 ("CASH CONSIDERATION"). The
fully executed and acknowledged Assignment shall be delivered to Bazmo
contemporaneously with Bazmo's payment of the Cash Consideration to
Petrogen.
5. DUE DILIGENCE. The Assignment will be without warranty of title except
by, through and under Petrogen. For a period of ten (10) business days
following delivery of Petrogen's unexecuted Assignment to Bazmo, Bazmo
may conduct due diligence, including, without limitation, title due
diligence. During the due diligence period, Bazmo shall have the right
to review all of Petrogen's contract, lease, title, and correspondence
files and Petrogen's well files relating to the Leases. Should Bazmo
be unsatisfied with the outcome of its due diligence, it may reject
Petrogen's offer of the Assignment, declining to pay the Cash
Consideration. If Bazmo rejects the Assignment and declines to pay the
Cash Consideration, then the parties will have no further obligations
to each other. If the Assignment is executed and delivered to Bazmo
and Bazmo has paid Petrogen the Cash Consideration, Bazmo shall be
entitled to copy any or all of the contract, lease, title,
correspondence and well files of Petrogen that relate to the Leases.
6. INITIAL WELL. Following Petrogen's signing and delivery of the
Assignment and Bazmo's payment of the Cash Consideration, Petrogen and
Bazmo will agree upon a location on the Leases and a spud date for the
drilling of a well ("INITIAL WELL") to test the Miocene formation.
Such agreement shall be memorialized in a detailed Authority for
Expenditure ("AFE"). Bazmo will pay thirty-three and one-third percent
of eight-eighths (33.33% of 8/8) of the costs for the Initial Well
until it is either plugged and abandoned as a dry hole or completed
and producing into the tanks or a sales pipeline at or above the
Miocene formation. To the extent that costs for the Initial Well
exceed one-hundred ten percent (110%) of the AFE'd costs, Bazmo will
pay only twenty-five percent (25%) of the costs that exceed
one-hundred ten percent (110%) of the costs incurred in drilling and
completing the Initial Well. After the Initial Well, Bazmo will pay
its twenty-five percent of eight-eighths (25% of 8/8) share of all
operations on the Leases.
7. ESCROWED COSTS. Thirty (30) days in advance of the mutually agreed
upon spud date for the Initial Well, Bazmo will pay into a mutually
acceptable independent escrow account one-half of its thirty-three and
one-third percent (33.33%) share of estimated costs, as shown in the
approved AFE. The remaining one-half of Bazmo's thirty-three and
one-third percent (33.33%) share of estimated costs will be paid into
the escrow account upon the spud date of the Initial Well. Funds
escrowed will only be escrowed under the terms of a mutually
acceptable escrow agreement.
8. OPTION TO PARTICIPATE IN FRIO TEST. Bazmo will have a one-time option
to participate for up to thirty-three and one-third percent (33.33%)
of the costs to Casing Point (and retain a proportionate working
interest as set forth below) in a well with Petrogen (including a
deepening of the Initial Well if it has been determined to be a dry
hole at or above the Miocene formation) on the Leases to test the Frio
formation at depths below 7,000 feet TVD. Should a Frio test well be
proposed on the Leases, Bazmo shall have thirty (30) days in which to
elect to participate in the Frio test well or opt out of the drilling
and forfeit its rights below 7,000 feet.
In proportion to the percentage of twenty-five percent (25%) for which
Bazmo may elect not to participate in the Frio test well, it will
reassign to Petrogen all of its rights in the Leases below 7,000 feet,
such assignment to be made within five (5) days of Bazmo's election.
In addition to Bazmo's interest in the Leases below 7,000 feet, this
re-assignment shall include a like percentage of any other interests
below 7,000 feet that Bazmo may have acquired in the AMI (as
subsequently defined) below 7,000 feet.
If Bazmo elects to participate in the Frio test, Bazmo will have the
election to bear up to thirty-three and one-third percent (33.33%) of
the cost to Casing Point in the test well (or any amount less than
that that Bazmo elects to bear) on a one-third (1/3) of cost for
one-fourth (1/4) interest basis, such that Bazmo would have a working
interest equal to seventy-five percent (75%) of the cost percentage to
Casing Point that is borne by Bazmo in the Frio test, as to depths
below 7,000 feet below the surface of the earth. Should the Frio test
well be undertaken as a deepening or "tail" to a well drilled
subsequent to the Initial Well, the promote (i.e., Bazmo bearing 1/3
of costs for a 1/4 interest) shall only begin after setting pipe to
protect the Miocene interval.
If Bazmo participates in the Frio test, Bazmo will bear costs after
Casing Point in the Frio test well and in other operations deeper than
7,000 feet below the surface of the earth equal to the working
interest percentage that Bazmo has retained, calculated in the manner
set forth above. "Casing Point" for purposes of this Agreement is
understood to be that point in time when the Frio test well has been
drilled to its objective depth, all logging and testing of the well
has been completed, and a decision must be made either to attempt a
completion of said well or to abandon said well as a dry hole.
9. OPERATING AGREEMENT. Within thirty (30) days of Bazmo's execution of
this letter, Petrogen and Bazmo will enter into a mutually acceptable
joint operating agreement ("JOA") on the AAPL Form 610-1989 Model
Form, which shall name Petrogen as operator and include provisions for
fixed rate administrative overhead for similar xxxxx in accordance
with the latest survey of such rates published by Ernst & Young, LLP.
In the event Bazmo elects not to participate in a Frio test for any
percentage, the Operating Agreement will be amended to only include
depths above 7,000 feet.
If Bazmo elects not to participate in the Frio test for any
percentage, if proposed, Bazmo agrees to maintain information that it
has received from Petrogen, with respect to that formation,
confidential and agrees that it will not compete with Petrogen in any
manner as to depths below 7,000 feet below the surface of the earth
during the term of this Agreement.
10. KNOWLEDGEABLE INVESTOR. Bazmo is an experienced and knowledgeable
investor and operator in the oil and gas business. In making its
decision to participate in the Leases, Bazmo has relied solely on its
own independent investigation, analysis and evaluation.
11. SECURITIES REPRESENTATION. Bazmo is acquiring the Leases for its own
account and not with a view to, or for offer of resale in connection
with, a distribution thereof, within the meaning of the Securities Act
of 1933 and any other applicable laws pertaining to the distribution
of securities.
12. ASSIGNABILITY. This Agreement is binding upon the parties hereto,
their successors and assigns. Except for assignments to Affiliates,
Bazmo shall make no assignment of this Agreement without Petrogen's
prior written consent, which consent shall not be unreasonably
withheld.
13. AREA OF MUTUAL INTEREST. Petrogen and Bazmo hereby establish an Area
of Mutual interest within the area ("AMI") outlined on the map
attached hereto as Exhibit "B." During the term of this Agreement, if
either Petrogen or Bazmo acquire an interest in the rights to explore
for and produce oil and gas from the AMI (the term "interest" as used
herein shall include any interest whatsoever in the oil and gas,
including but not limited to royalties, overriding royalties, leases,
renewals of existing leases, farmins, etc.), the acquiring party shall
notify the non-acquiring party, giving complete information as to the
interest acquired, along with copies of the instrument or instruments
by which the interest was acquired, and the consideration to be given
or paid. For a period of thirty (30) days after receipt of notice of
acquisition, the non-acquiring party shall have the right to acquire
an interest in the interest acquired by the acquiring party, by
notifying the acquiring party of its desire to share in the
acquisition, and paying the acquiring party its proportionate share of
the consideration given or assuming its proportionate share of the
obligations assumed. Thereupon, the acquiring party shall immediately
execute and deliver the appropriate assignment to the non-acquiring
party, without covenants of warranty, except by, through or under the
acquiring party. If Petrogen is the non-acquiring party, it shall have
a right to acquire a seventy-five percent (75%) interest and if Bazmo
is the non-acquiring party it shall have the right to acquire a
twenty-five percent (25%) interest, such percentages subject to
adjustment for rights below 7,000 feet if Bazmo elects not to
participate in a Frio test well for twenty-five percent (25%). Thus,
for example, if Bazmo elects to participate in a Frio test well for
five percent (5%) its right to acquire a portion of Petrogen
acquisitions in the AMI below 7,000 feet shall be five percent (5%)
and Petrogen's right to acquire a portion of Bazmo acquisitions in the
AMI below 7,000 feet shall be ninety-five percent (95%). Should Bazmo
decline to participate for any percentage of a Frio test well, the AMI
would still apply, but Bazmo's right to acquire a portion of Petrogen
acquisitions in the AMI below 7,000 feet shall be zero (-0-) and
Petrogen's right to acquire a portion of Bazmo acquisitions in the AMI
below 7,000 feet shall be one-hundred percent (100%).
Notwithstanding its participation or non-participation in any Frio
test well, Bazmo agrees that it will continue to keep confidential all
information and data related to the Leases and the AMI.
14. LEASING UNLEASED MINERALS. Petrogen agrees that it will endeavor to
lease all unleased mineral interests in the AMI and the renewal of any
of the Leases that are likely to expire during the next ________
(____) months.
15. TERM. The term of this Agreement shall be for the longer of so long as
any of the Leases (including any extensions or renewals) remain in
force and effect or the JOA remains in force and effect according to
its terms.
If this Agreement meets with your approval, please sign the enclosed
duplicate in the space provided and return it to the attention of the
undersigned. Upon receipt of the signed Agreement, Petrogen will begin
preparation of the Assignment.
Unless this Agreement is returned to Petrogen signed by Bazmo before
5:00 PM on May __, 2004, it shall be deemed withdrawn and of no force and
effect.
Very truly yours,
PETROGEN CORP.
Xxxxx X. Xxxxxxxx
CEO
AGREED & ACCEPTED, THIS ___ DAY OF
_______ 2004
BAZMO EXPLORATION, LLC
______________________________________________
Name & title:_________________________________
Greenway Plaza, 0000 X.X. Xxxxxxx, Xxxxx 0000, Xxxxxxx, Xxxxx, 00000
Tel: 000-000-0000 / Fax: 000-000-0000 / Toll Free: 0-000-000-0000 /
Email: xxxx@xxxxxxxxxxxx.xxx
Website: xxx.xxxxxxxxxxxx.xxx
