DRILLING PROGRAM AGREEMENT
This
Drilling Program Agreement (“Agreement”) is made and entered into as of December
21, 2005, by and between Xxxxxxx & Xxxxxxx Exploration, L.L.C., a limited
liability company (“Xxxxxxx”), and 0743608 B.C. Ltd. (“Investor”).
RECITAL:
Xxxxxxx
is the owner or will become the owner of the oil, gas and mineral leases
covering those prospects described in Exhibit “A” attached and will drill on
each prospect a well (“Program Well”) to a depth sufficient to test the Frio
Sands identified as prospectively productive of oil and/or gas (the “Drilling
Program”).
Investor
wishes to purchase a ten percent (10%) gross working and revenue interest in
the
Drilling Program.
ARTICLE
I
DRILLING
PROGRAM
A.
The
Drilling Program shall be conducted as Xxxxxxx in its capacity as Operator
and
shall consist of the drilling, logging, testing and the completing and equipping
for production (or if applicable, the plugging and abandonment) of ten (10)
xxxxx upon the subject prospects (the “Program Xxxxx”), with such xxxxx being
located at sites selected by Xxxxxxx and being drilled to a subsurface depth
equal to such depth as is necessary to penetrate prospectively productive sands
of the Frio Formation (“Contract Depth”).
The
total
operational and overhead costs for one hundred percent (100%) interest in the
10-Well Drilling Program is U.S. $3,500,000.00 or less.
Xxxxxxx
shall use all reasonable efforts to cause the initial Drilling Program Well
to
be spudded on or before April 1, 2006, and to thereafter conduct the Drilling
Program on a sequential basis in such a manner so that the Drilling Program
shall be completed within nine (9) months of the date on which the initial
Program Well was spudded. The parties acknowledge delays in drilling may be
occasioned by lack of rig availability, weather conditions and, where
applicable, flood waters of the Mississippi River. When any such condition
exists, the completion date of the Drilling Program may be extended by such
period of time as equals the period access to a location or locations was
impractical or unduly burdensome.
Xxxxxxx
shall cause each horizon encountered by each Program Well that is potentially
capable of producing hydrocarbons in commercial quantities to undergo the
following logging and testing program:
(i)
a
dual induction sonic electrical log or its equivalent; and,
(ii)
side
wall core testing of all potentially productive formations.
Xxxxxxx
shall provide Investor with reasonable notice of the conducting of each such
logging and testing program in such manner and time as to allow Investor
sufficient opportunity to have a representative present during such logging
and
testing.
Based
upon the results of the logging and testing, Xxxxxxx shall decide whether or
not
a completion attempt should be conducted as to any one or more of the tested
horizons. In the event that Xxxxxxx should decide against any completion attempt
as to a particular Program Well, then such Program Well shall be immediately
plugged and abandoned. In the event that Xxxxxxx should decide to conduct one
or
more completion attempts as to a particular Program Well, then such completion
attempt shall be conducted by Xxxxxxx.
B.
Prior
to the spudding of each Program Well, Xxxxxxx shall:
(i)
hold
defensible title to the oil, gas and mineral leasehold estate covering the
Prospect;
(ii)
obtain and deliver to Investor a drill site title opinion, which shall be
addressed to Xxxxxxx, covering the applicable well site acreage and indicating
that the title to interests to be acquired by Investor hereunder is of a nature
that is customarily relied upon by a reasonable person engaged in activities
similar to those contemplated by the Drilling Program;
(iii)
obtain from the applicable governmental authority all necessary licenses and
permits;
(iv)
use
its reasonable efforts to (1) obtain leases covering any mineral estate
underlying the applicable well site acreage that is not otherwise subject to
a
lease held by Xxxxxxx; provided that such leases, without the prior consent
of
Investor, shall not provide for more than twenty-five percent (25%) of
eight-eighths (8/8) royalty and overriding royalty interest; (2) enter into
a
drilling contract with a drilling contractor regularly engaged in such business
on such terms as Xxxxxxx deems to be in the best interest of the Drilling
Program.
ARTICLE
II
1.
Within
forty-eight (48) hours after the execution of this Agreement by Investor,
Investor shall cause to be wired to the Truly, Xxxxx & Xxxxxx Trust Account
(the “Escrow Agent”) at the Natchez Main Office of AmSouth Bank the sum of
$110,000.00 (U.S. Dollars) to cover costs and expenses of Xxxxxxx in managing
the Drilling Program, costs previously incurred in obtaining and processing
seismic information and Xxxxxxx’x ongoing office overhead expenses. The said
$110,000.00 shall be paid to Xxxxxxx by the Escrow Agent only after receipt
from
Xxxxxxx certifying the owner or owners of the remaining fifty percent (50%)
interest of the Drilling Program, who are unrelated third parties to the
Investor, had paid their fifty percent (50%) share, or $550,000.00, of the
costs
and expenses in managing the Drilling Program, costs previously incurred in
obtaining and processing seismic information and Xxxxxxx’x ongoing office
overhead expenses. Failure of Xxxxxxx to receive from the other unrelated third
party owners of fifty percent (50%) of the Drilling Program their contribution
to cover said costs and expenses within
forty-eight
(48) hours of Investor’s payment to the Escrow Agent shall give rise to Investor
the right to demand from the Escrow Agent a return of the full escrow
payment.
The
liability of the Escrow Agent shall be limited to the receipt, holding and
disbursing of the escrowed funds as set out above.
2.
Upon
the payments for which provision is made in Paragraph 1 above, Investor shall
caused to be wired to Xxxxxxx the sum of $240,000.00 (U.S. Dollars), which
payment shall be made on or before January 20, 2006. This payment is conditioned
upon Investor and Xxxxxxx entering into a mutually acceptable Joint Operating
Agreement containing provisions customarily found in such Operating Agreements
covering Frio xxxxx in Southwest Mississippi. Failure to agree upon a Joint
Operating Agreement by January 20, 2006, shall permit either party to terminate
this Drillling Program Agreement, at which time any funds paid by Investor
shall
be returned to Investor and neither party shall have any further obligation
to
the other.
The
remaining $240,000.00 shall be deposited in a separate Xxxxxxx bank account
appropriately identified as the Investor Drilling Fund. As costs are incurred
in
drilling, completing, operating and constructing pipelines, Xxxxxxx may withdraw
from the fund Investor’s proportionate costs of such expenses. Nothing in this
Agreement shall be construed as requiring Investor to contribute more than
his
initial contribution of $350,000.00. Upon the completion of the Drilling
Program, any remaining funds in the Investor Drilling Fund shall be refunded
to
Investor.
Xxxxxxx
shall deliver to Investor on a monthly basis an accounting using generally
accepted accounting practices, which accounting shall reflect all withdrawals
from the Investor Drilling Fund and the amount remaining in it.
ARTICLE
III
Upon
the
establishment of production from each Program Well, Xxxxxxx shall receive
payment for all oil and/or gas sold attributable to the interest covered by
this
Agreement. The proceeds from such sales shall be paid to Investor after making
the following deductions:
(a)
The
payment of all operating expenses assessed the subject interests as required
by
the Operating Agreement.
(b)
After
making the payments required by (a) above, the payment to Xxxxxxx of fifteen
percent (15%) of such remaining amount.
Payments
to Investor shall be made by bank wire within fifteen (15) days after receipt
of
all sales of production proceeds by Xxxxxxx.
The
parties do no anticipate the execution and recording of an assignment or other
conveyance to Investor reflecting his interest in the Program Xxxxx. However,
upon request from
Investor,
Xxxxxxx shall deliver to Investor an instrument in recordable form recognizing
Investor’s ownership in the Program Xxxxx.
ARTICLE
IV
X.
Xxxxxxx shall keep, or caused to be kept, accurate, complete and proper books,
records and accounts of all activities conducted pursuant to this Agreement
and
Operating Agreement. Such books, records and accounts shall be prepared on
an
income tax basis and shall be kept at the principal office of Xxxxxxx, or such
other office as Xxxxxxx may designate for such purpose. In addition to the
reports required by the Operating Agreement, Xxxxxxx shall, from time to time
(not less frequently than monthly), submit to Investor such reports and
supporting information as may be necessary to keep Investor informed with
respect to all activities conducted pursuant to this Agreement and the Operating
Agreement. Investor and his agents and representatives shall have, upon giving
Xxxxxxx reasonable notice and during normal working hours, complete access
for
such inspection and copying, as Investor deems necessary, to the books and
records maintained by Xxxxxxx that relate to the activities conducted pursuant
to this Agreement and Operating Agreement.
B.
In
addition to the books, records, accounts and reports contemplated by Clause
A
above, Xxxxxxx shall provide, at no additional cost to Investor, such accounting
services and support to Investor as may be necessary for Investor to prepare
all
tax forms, returns and reports required by applicable federal and state laws,
rules and regulations.
Investor,
upon notice to Xxxxxxx, shall have the right, at Investor’s sole cost and
expenses, to have an audit conducted by a firm of independent certified
accountants or other accountants designated by Investor, of the books and
records maintained by Xxxxxxx that relate to the activities conducted under
the
terms of this Agreement and the Operating Agreement.
ARTICLE
V
A.
Any
notice required or permitted to be given under the terms of this Agreement
shall
be deemed as given if directed to Xxxxxxx at the following address:
Xxxxxxx
& Xxxxxxx Exploration, L.L.C.
XxXxxxx’x
Gallery
X.X.
Xxx
00000
Xxxxxxx,
XX 00000
Attention:
Xxxx Xxxxxx Xxxxxxx
Fax:
(000) 000-0000.
Notices
to Investor shall be deemed given if addressed:
0743608
B.C. Ltd.
0000
Xxxxxxxx Xxxxx
Xxxxxxx,
XX, Xxxxxx
X0X 0X0
Phone:
(000) 000-0000
Fax:
(000) 000-0000.
B.
This
Agreement constitutes the entire understanding between the parties with respect
to the subject matter hereof, and supersedes all other understandings and
negotiations with respect thereto. This Agreement may amended only in a writing
signed by both parties hereto. Any provision of this Agreement may be waived
only in writing signed by the party to be charged with such waiver. No course
of
dealing between the parties shall be effective to amend or waive any provision
of this Agreement.
C.
Investor recognizes that Xxxxxxx is otherwise engaged in activities relating
to
the exploration for, and production of, oil and gas and in that regard, Xxxxxxx
currently holds and may hereafter acquire interests in acreage and prospects
other than the Subject Prospects and well site acreage, and that Xxxxxxx shall
have no restrictions hereunder in regard to such other interests.
D.
It is
not the purpose or intention of the parties hereto create any partnership,
joint
venture or association. Neither party shall, by reason of this Agreement, have
the right to bind the other party to any contract, except to the extent
expressly provided for in the Operating Agreement.
E.
If any
term or other provision of this Agreement is invalid, illegal or incapable
of
being enforced under applicable law, all other conditions and provisions of
this
Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated herein are not
affected in any manner adverse to any party. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced,
then
this Agreement may be reformed to the extent necessary so as to effect the
original intent of the parties as closely as possible in order that the
transactions contemplated herein are consummated as originally contemplated
to
the fullest extent possible.
F.
This
Agreement shall be binding upon and inure solely to the benefit of each party
hereto and their successors and assigns, and nothing in this Agreement, express
or implied, is intended to confer upon any other person any rights or remedies
of any nature whatsoever under or by reason of this Agreement.
G.
This
Agreement shall be governed by the laws of the State of
Mississippi.
H.
This
Agreement may be executed in two or more counterparts, each of which shall
be
deemed an original, but all of which together shall constitute one and the
same
instrument.
I.
All
obligations of either party to this Agreement to the other party hereto shall
be
suspended so long as the performance of such obligation is prevented or hindered
in whole or in part by reason of fire, earthquake, action of the elements,
strikes, riots, lockouts, civil
commotions,
acts of the country’s enemy, inability to obtain the necessary material for the
performance of such obligations on the open market, or for any other cause
except financial, whether similar or dissimilar to those specifically enumerated
herein, which shall be beyond the reasonable control of the party claiming
such
suspension. Upon the happening of any such cause, the party claiming suspension
shall immediately notify the other party, specifying in reasonable detail the
reason for non-performance and the party giving such notice shall thereafter
use
all reasonable efforts to eliminate such cause, but it shall not thereby be
or
become obligated to settle any strikes or lockouts.
In
witness whereof, each of the parties hereto has caused this Agreement to be
executed and delivered as of the date hereof.
XXXXXXX
& XXXXXXX EXPLORATION, L.L.C.
BY: /s/
Xxxxxxx X. Xxxxxxx, III
XXXXXXX
X. XXXXXXX, III,
PRESIDENT
0743608
B.C. LTD.
BY: /s/
Xxxxx Xxxxx
XXXXX
XXXXX,
PRESIDENT
Exhibit
“A”
Palmetto
Point Prospects
Palmetto Point
|
Acres
|
Sec.Twp.Rge.
|
Time
|
1. PP F |
142
|
42-2-4
|
.616
|
2. PP
F-7
(offset shale 10ft. show of gas)
|
105
|
5-2-5
|
.655
|
3. PP F-12 |
142
|
41-2-4
|
.835
|
4. PP F-25 |
38
|
18-2-5
|
.687
|
5. PP F-29/28
(offset multiple oil & gas shows)
|
77
|
15-2-5
|
.903
|
6. PP F-39/2 |
68
|
6-2-5
|
.83
|
7. PP F-40/12 |
100
|
7-2-5
|
.915
|
8. PP F-42
(Pritchartt oil offset)
|
97
|
12-2-5
|
.83
|
9. PP F-115 |
49
|
9-2-4
|
.764
|
10. PP F-117
(offset 5’ gas between shale)
|
171
|
23&24-2-4
|
.783
|
11. PP F-118
(offset
possible gas show- will test #119 also)
|
145
|
6&7-2-5
|
.779
|
12. PP F-121
(offset 2 shows)
|
57
|
7-2-5
|
.784
|
13. PP F-122
(no show in well offset)
|
82
|
6-2-5
|
.936
|
It
is
agreed that notwithstanding anything in this Agreement or this Exhibit “I” to
the contrary, Investor’s interest in the above Prospects is limited to those ten
(10) xxxxx selected by Xxxxxxx for this Drilling Program. Investor has no
interest through this Agreement in those xxxxx in this Exhibit “I” not selected
by Xxxxxxx as a Program Well.
![](https://www.sec.gov/Archives/edgar/data/1166847/000125529406000108/graphic.jpg)