PARTICIPATION AGREEMENT (Acom A6 Prospect, Chambers County, Texas)
(Acom
X0 Xxxxxxxx, Xxxxxxxx Xxxxxx, Xxxxx)
This
Participation Agreement ("Agreement") is made and entered into effective as
of
the 14th day of June, 2005 ("Effective Date"), by and between Xxxx-XxXxx Oil
& Gas Onshore LP, d/b/a KMOG Onshore LP (hereinafter "Xxxx-XxXxx") and Ignis
Petroleum Corporation, (hereinafter "Participant"). Xxxx-XxXxx and Participant
are sometimes hereinafter referred to, individually, as a "Party" and,
collectively, as the "Parties".
WHEREAS,
Xxxx-XxXxx owns or has the right to acquire certain interests in and to the
oil
and gas leases identified on Exhibit "A", which is attached hereto and made
a
part hereof (the "Leases");
WHEREAS,
Participant has expressed a desire to participate with Xxxx-XxXxx in the
drilling of a test well in search of oil or gas on the Leases or portions
thereof and in the further development of the Leases, if warranted;
and
WHEREAS,
subject
to the terms and conditions hereinafter contained, and, subject to Participant
fulfilling certain requirements set out in this Agreement, KMG agrees to assign
unto Participant an undivided 25% of Xxxx-XxXxx'x leasehold interest in and
to
the Leases, subject to the reservation by Xxxx-XxXxx of the overriding royalty
interest provided for below.
NOW,
THEREFORE,
for and
in consideration of the mutual covenants and promises herein contained, the
Parties hereby agree as follows:
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1.
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TEST
WELL.
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On
or
before August 14, 2005 ("Commencement Date"), KMG will commence or cause to
be
commenced operations for the drilling of a test well ("Test Well") in search
of
oil and/or gas at a location of Xxxx-XxXxx'x choice on the Leases. The Test
Well
will be drilled with due diligence and in a good and workmanlike manner to
a
depth sufficient to test the Tex Miss formation as seen in the
Induction/Density-Neutron log for the Xxxxx XxxXxxxxx No. 9 Well between the
depths of 10,568 and 10,612 (TVD) located in Section 93, X-000, Xxxxxxxx Xxxxxx,
Xxxxx, or to a depth of 11,500' (TVD) beneath the surface of the earth,
whichever is the lesser depth (the "Objective Depth"), unless "Impenetrable
Conditions", as that term is hereinafter defined, are encountered prior to
reaching the Objective Depth. The term "Impenetrable Conditions" as used in
this
Agreement shall mean formations, conditions (such as heaving shale) or
mechanical problems that would render further drilling operations by a prudent
operator uneconomical or impracticable. To the extent not in conflict with
the
terms of this Agreement, the Parties agree to be bound by, and all operations
on
the Test Well shall be governed by, the terms and provisions of the Operating
Agreement attached hereto and made a part hereof as Exhibit "B" ("JOA"). Upon
reaching the Objective Depth, Xxxx-XxXxx shall cause such logs and tests to
be
made as it deems prudent under the circumstances.
During
the drilling of the Test Well, Participant's representatives shall be allowed
access to the xxxxxxx floor of the Test Well at their sole risk and expense,
provided they are and remain in compliance with Xxxx-XxXxx'x environmental,
health and safety standards. Prior to running any logging device, coring,
conducting any formation test(s), or conducting any other similar type test(s),
Xxxx-XxXxx will first give Participant notice in sufficient time to allow its
representatives to be present to witness the event. Xxxx-XxXxx will furnish
Participant all data relative to the drilling well(s) in accordance with
Participant's well requirement information. Any notice required hereunder to
be
given to Participant shall be sent to the address, telephone, email, or fax
numbers, as the case may be, set forth in Section 7 below.
If
Impenetrable Conditions are encountered prior to reaching the Objective Depth,
Xxxx-XxXxx shall have the option of attempting to complete the well as a
commercial producer of oil and/or gas at a lesser depth if it appears that
a
completion attempt is warranted, or, if in Xxxx-XxXxx'x opinion a completion
attempt at a lesser depth is not warranted, then, subject to the provisions
of
the immediately following sentence, Xxxx-XxXxx may plug and abandon the Test
Well, the costs of which shall be borne 65% by Xxxx-XxXxx and 35% by
Participant. Participant shall have twenty-four (24) hours after notice from
Xxxx-XxXxx stating that it has determined the Test Well should be plugged and
abandoned in which to elect to take over the Test Well and become solely
responsible for any and all costs and expenses associated with any future
operations on the well, including plugging and abandoning the well. Failure
of
Participant to respond within such period of time shall be deemed a response
by
Participant to elect to plug and abandon the well.
If
Impenetrable Conditions are encountered in the Test Well prior to reaching
the
Objective Depth and:
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i)
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both
Parties elect to complete the well at a depth that is less than the
Objective Depth, then Participant shall have earned a 25.00% leasehold
interest in and to the well bore of the Test Well, limited in depth
to one
hundred feet (100') below the deepest producing perforations in the
well,
and subject to the reservation of the overriding royalty interest
described in Section 5 below; or
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ii)
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Xxxx-XxXxx
elects not to participate in the completion attempt for the well
and
Participant does elect to attempt to complete the well, then Participant
shall have earned a 100% interest in and to the well bore only of
the Test
Well, subject to the depth limitation set forth immediately above
and the
reservation of the overriding royalty interest described in Section
5
below; or
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iii)
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Participant
elects not to participate in the completion attempt for the well
and
Xxxx-XxXxx elects to attempt to complete the well, then Participant
shall
not have earned an interest in the well bore of the Test Well and,
if both
Parties elect to drill a substitute well as provided in Section 3
below,
any assignment earned by Participant in the drilling of the substitute
well shall be less and except the well bore of the Test Well completed
at
such lesser depth.
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The
non-consent provisions of Article VI.B.2 of the JOA shall not apply in the
case
of a well that is proposed to be completed at a depth that is less than the
Objective Depth as a result of encountering Impenetrable
Conditions.
Any
interest earned by Participant under the provisions of this Section l. shall
be
assigned to it by Xxxx-XxXxx within thirty (30) days after the date on which
the
completion rig for the well has been released.
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2.
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CASING
POINT ELECTION FOR TEST
WELL.
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When
the
Test Well has reached the Objective Depth and all tests have been completed,
and
the results thereof furnished to Participant, Xxxx-XxXxx shall give notice
to
Participant, and Participant shall have twenty-four (24) hours from receipt
of
such notice hick to elect whether or not it desires to participate in the
setting of casing and the completion attempt of the Test Well. Failure of
Participant to respond within such twenty-four (24) hour period shall be deemed
a response to not participate in the completion attempt. If both Parties elect
to set casing and attempt completion of the Test Well, then all further
operations on the Test Well shall be conducted under the terms of the
JOA.
If
a
Party elects not to participate in the completion attempt of the Test Well
at
the Objective Depth ("Non-Consenting Party"), then the non-consent provisions
of
Article VI.B.2. of the JOA shall apply to the Non-Consenting Party's interest
in
the Test Well.
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3.
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SUBSTITUTE
TEST WELL.
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In
the
event Impenetrable Conditions which render further drilling impracticable are
met prior to reaching the Objective Depth in the Test Well, then, subject to
the
provisions of Section 1 above, for a period of ninety (90) days after making
the
election, either Party shall have the right to drill a substitute Test Well
to
the Objective Depth on the Leases or on lands pooled therewith. The substitute
Test Well shall be drilled under the same terms as the Test Well and the
substitute Test Well shall be deemed to be the Test Well for all purposes under
this Agreement. If both Parties elect to drill the substitute Test Well, then
such well shall be drilled by Xxxx-XxXxx. If neither Party elects to drill
the
substitute Test Well or if only Xxxx-XxXxx elects to drill the substitute Test
Well, then this Agreement shall terminate. If Participant is the only Party
electing to drill the substitute Test Well, then it shall have the right to
do
so and if it is drilled to the Objective Depth, Participant shall earn an
assignment of 100% of Xxxx-XxXxx'x right, title and interest in and to the
Lease(s) and the well shall not be subject to the provisions of the JOA),
subject to the reservation of the overriding royalty interest described in
Section 5 below. In such event, the Leases and the well shall no longer be
subject to the provisions of the JOA.
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4.
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EXPENSES
FOR DRILLING THE TEST
WELL.
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Participant
shall bear and pay, in the percentages set forth below, its share of the costs
and expenses described below. Such payment shall be due and payable to
Xxxx-XxXxx on or before fifteen (15) days after receipt of an invoice or
invoices for such costs or any portion thereof. Xxxx-XxXxx shall have the right
to "cash call" Participant for Participant's estimated share of such costs
and
expenses and the provisions of Article XV. of the JOA shall apply in the event
of any cash calls and the failure of Participant to timely pay such cash
calls.
A.
35% of
the costs and expenses incurred in drilling the Test Well (and any substitute
well therefor) to casing point, or to a lesser depth if Impenetrable Conditions
are encountered in the well, and in plugging and abandoning the well if no
completion attempt is made. The term "casing point" shall mean that point in
time when the Test Well has been drilled to the Objective Depth, logged,
evaluated and Xxxx-XxXxx has notified Participant that a completion attempt
will
be made.
B.
Participant shall pay none of the costs and expenses, including brokerage fees
and leasehold bonus, incurred in connection with acquiring the Leases for the
Test Well.
C.
25% of
the costs and expenses incurred in completing the Test Well (and any substitute
well therefor) and in equipping the same for production.
D.
35% of
the costs for drilling title examination, curative work and brokers' fees for
the test well (and any substitute well therefore) and 25% of subsequent title
costs.
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5.
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INTEREST
EARNED BY DRILLING TO OBJECTIVE
DEPTH.
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At
such
time as the Test Well has reached the Objective Depth and Participant has
elected whether or not to participate in the completion of the well at the
Objective Depth or at a lesser depth if Xxxx-XxXxx has recommended to complete
the well at a depth shallower than the Objective Depth, Participant shall have
earned an undivided 25% of Xxxx-XxXxx'x leasehold interest in and to the Leases,
subject the provisions of the Leases, subject to any depth limitations described
below, and subject to the reservation of the overriding royalty interest
described below in this Section 5.
In
the
event Participant elects to participate in the completion of the Test Well
and
Xxxx-XxXxx does not participate in the completion of the well, then Participant
shall earn all depths in the Leases.
In
the
event Xxxx-XxXxx acquires leasehold interests in the N12 of Section 106 ("Acorn
Offset Acreage"), Participant shall be required to reimburse Xxxx-XxXxx for
25%
of the actual cost to acquire the Acorn Offset Aceage and be entitled to an
assignment of 25% of Xxxx-XxXxx'x right, title and interest in such leasehold,
free and clear of any burdens placed thereon by Xxxx-XxXxx save and except
those
burdens that were required to acquire such leasehold. The Acorn Offset Acreage
shall be subject to and governed by the attached JOA; provided, however, should
Participant elect not to participate in the drilling of a well proposed on
the
Acorn Offset Acreage or acreage pooled therewith, the provisions of Article
VIB
shall not apply and Participant shall be deemed to have forfeited it's interest
in the Acorn Offset Acreage and required to reassign the leasehold to Xxxx-XxXxx
free and clear of any burdens placed on such leasehold by
Participant.
Xxxx-XxXxx
shall assign to Participant the interest earned in the Leases, effective as
of
the date of this Agreement, and such assignment shall be made within thirty
(30)
days after the date on which the Objective Depth has been reached. The
assignment shall be subject to, among other things, the terms and provisions
of
this Agreement, the terms and provisions of the JOA, and all royalties,
overriding royalties, payments out of production, and similar leasehold burdens
affecting the Leases and existing as of the Effective Date of this Agreement,
and the overriding royalty interest described below. The drilling of additional
xxxxx on the Leases and the operation of the Test Well and any additional xxxxx
on the Leases or lands pooled therewith shall be governed by the terms and
provisions of the JOA.
Any
assignment of the Leases (or any portion thereof) to Participant provided for
in
this Agreement shall be subject to the reservation by Xxxx-XxXxx of a 5% of
818ths overriding royalty interest in the Leases, however, there will be no
reservation of an overriding royalty interest in the Acorn Offset Acreage.
The
overriding royalty interest shall be reduced in proportion to the leasehold
interest owned by Xxxx-XxXxx at the time of the assignment.
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6.
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MARKETING
OF PRODUCTION.
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The
Parties shall have the right to take their proportionate share of production
from the Leases in kind or separately market same, exclusive of production
which
may be used in development and producing operations and in preparing and
treating said production for marketing purposes.
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7.
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NOTICES.
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All
notices and information to be given hereunder shall be in writing and shall
be
sent by United States certified mail, telegram, telex, facsimile, email,
overnight delivery service or telecopy, postage or charges prepaid and addressed
to the Party to whom such notice is given as follows:
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If
to Xxxx-XxXxx:
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Xxxx-XxXxx
Oil & Gas Onshore LP
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00000
Xxxxxxxxxx
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Xxxxxxx,
Xxxxx 00000
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Attention:
Xx. Xxxxx XxXxxxx
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Telephone:
2811673-6815
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Facsimile:
281/673-4815
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Email:
xxxxxxxx@xxx.xxx
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If
to Participant:
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Ignis
Petroleum Corporation
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000
Xxxxxxx Xxxxx
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0xx, Xxxxx
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Xxxxxx,
Xxxxx 00000
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Attention:
Mr. Xxxx Xxxxxx
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Telephone:
000-000-0000
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Facsimile:
214-000-0000
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Email:
xxx@xxxxxxxxxx.xxx
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8.
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FORCE
MAJEURE.
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A. In
the
event either Party is rendered unable, wholly or in part, by Force Majeure
(as
hereinafter defined) to carry out its obligations under this Agreement (except
for the payment of money when due), then the Party relying on such Force Majeure
(or its or their representative) shall give prompt written notice of the Force
Majeure with reasonably full particulars concerning it to the other Party.
The
obligations of the Party relying on the Force Majeure, insofar as it is affected
by the Force Majeure, shall be suspended during the continuance of the Force
Majeure and for a reasonable period thereafter not to exceed thirty (30)
days.
B. The
term
"Force Majeure" as herein employed, shall include acts of God or the public
enemy, wars, blockades, insurrections, riots, epidemics, landslides, fires,
floods, tornadoes, lightning, explosions, acts or requests, rules or orders
of
federal, state or municipal governments or of any federal, state or municipal
officer or agent purporting to act under duly constituted authority, strikes,
lockouts, interruptions of transportation, freight embargoes, unavailability
of
equipment or drilling rigs and any other cause, whether of the kind specifically
enumerated above or otherwise, which is not reasonably within the control of
the
Party claiming the Force Majeure.
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9.
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ASSIGNMENT
AND BINDING EFFECT.
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This
Agreement shall inure to the benefit of and be binding upon the Parties and
their successors and permitted assigns. Neither Party may assign its rights
and
obligations under this Agreement without the prior written consent of the other,
which consent will not be unreasonably withheld, delayed or conditioned. In
the
event of an assignment, the assignee shall agree to be bound by the terms and
provisions of this Agreement, including any JOA provided for hereunder. In
the
event of such assignment the assigning Party shall be relieved from all
obligations thereafter accruing, but not theretofore accrued, with respect
to
the interest assigned.
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10.
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ENTIRETY
OF AGREEMENT.
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This
Agreement and the Exhibits attached hereto constitute the entire agreement
between the Parties with respect to the subject matter hereof, and there are
no
representations or other agreements between the Parties except as expressly
set
forth herein and included within the Exhibits attached hereto.
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11.
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GOVERNING
LAW.
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IT
IS SPECIFICALLY STIPULATED AND AGREED TO BY THE PARTIES THAT THE VALIDITY OF
THIS AGREEMENT AND ANY OF ITS TERMS AND PROVISIONS, AS WELL AS THE RIGHTS AND
DUTIES OF THE PARTIES HEREUNDER, SHALL BE GOVERNED AND CONSTRUED BY THE LAWS
OF
THE STATE OF TEXAS (EXCLUDING ANY CONFLICT OF LAW RULES WHICH WOULD REFER TO
THE
LAWS OF ANOTHER JURISDICTION).
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12.
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RELATIONSHIP
OF PARTIES.
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This
Agreement is not intended to create a relationship of partnership or an
association for profit between or among the Parties. It is expressly agreed
that
the obligations and liabilities of the Parties are several and not joint.
Nothing contained in this Agreement shall be construed to create or impose
a
partnership duty, obligation or liability on any of the Parties or an
association for profit between or among the Parties. Notwithstanding the
foregoing provisions, if, for federal income tax purposes, this Agreement and
the operations hereunder are regarded as a partnership, each of the Parties
elects, under the authority of Section 761(a) of the Internal Revenue Code
of
1986, as amended, and applicable issued regulations, to be excluded from the
application of all provisions of Subchapter K of Chapter 1 of the Internal
Revenue Code of 1986, as amended. Should there be any requirement that a Party
give further evidence of this election, such Party shall execute such documents
and furnish such other evidence as may be required by the Internal Revenue
Service or as may be necessary to evidence this election.
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13.
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TERM
OF AGREEMENT.
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This
Agreement shall remain in force and effect for a period commencing on the
Effective Date hereof and, subject to the provisions hereof which provide for
an
earlier termination, ending on the date on which the JOA terminates in
accordance with the provisions of Article XIII. of the JOA.
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14.
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SEVERABILITY.
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If
any
term, provision or condition of this Agreement is held invalid, unenforceable
or
contrary to applicable laws, it shall be reformed to the extent necessary to
conform, consistent with the intention of the Parties, to such laws, and if
such
provision cannot be so reformed, it shall be deemed deleted and the validity
of
the other terms, provisions and conditions shall not be affected.
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15.
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MISCELLANEOUS.
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A. The
titles and the section headings contained in this Agreement are inserted for
convenient reference only and shall not be construed as limiting or extending
the meaning of any provision of this Agreement.
B. This
Agreement and any documents to be executed pursuant hereto may be executed
in
multiple counterparts, each of which shall constitute an original and all of
which, when construed together, shall constitute but one and the same
instrument.
C. If
any
action at law or in equity is necessary to enforce or interpret any of the
rights or obligations under this Agreement, the prevailing Party shall be
entitled to reasonable attorney's fees, costs, and necessary disbursements
from
the non-prevailing Party in addition to any other relief to which the prevailing
Party may be entitled.
D. If
any
payment or reimbursement provided for under this Agreement (but not under the
provisions of the JOA) is to be made on the basis of a Party's costs, the other
Party shall have the right to audit the books and records relating to such
costs. Each Party shall maintain such books and records for a period of two
(2)
years from the date such costs were incurred and shall make such books and
records available to the other Party during the Party's normal business hours
during such two (2) year period; provided that no audit shall be conducted
more
than one time during any six (6) month period of time. The foregoing provisions
of this Section 16.D. are in addition to, and not in substitution for, the
audit
provisions under the JOA.
E. The
Parties hereby agree to do, execute or procure to be done and executed, any
and
all further necessary acts, deeds, documents and things within their power
to
give effect to this Agreement and its intent.
F. No
waiver
of any term, provision or condition of or rights under this Agreement shall
be
effective unless in writing and signed by an authorized representative of the
waiving Party. The failure of either Party to insist upon the strict performance
of any term, provision or condition of this Agreement shall not be construed
as
a waiver or relinquishment in the future of the same or any other term,
provision or condition.
G. If,
following the granting of relief under the Bankruptcy Code to either Party
as
debtor thereunder, this Agreement should be held to be an executory contract
within the meaning of 11 U.S.C. Section 365, then the other Party shall be
entitled to a determination by the debtor or any trustee for the debtor within
thirty (30) days from the date an order for relief is entered under the
Bankruptcy Code as to the rejection or assumption of this Agreement. In the
event of an assumption, the other Party shall be entitled to adequate assurances
as to future performance of the debtor's obligations hereunder and the
protection of the interest of the other Party.
H. In
the
event of a conflict between the terms and provisions of this Agreement and
the
terms and provisions of the JOA, then the terms and provisions of this Agreement
shall control and prevail.
If
the
foregoing sets forth your understanding of our agreement, please so indicate
by
signing in the space provided below and returning one (1) original of this
Agreement to the undersigned.
Sincerely
yours,
XXXX-XXXXX
OIL & GAS ONSHORE LP
d/b/a
KMOG Onshore LP
By: Xxxx-XxXxx
Oil & Gas Onshore LLC
Its
Managing General Partner
By:
/s/
Xxxxx XxXxxxx
Name:
Xxxxx XxXxxxx
Title:
Attoney-in-Fact
Ignis
Petroleum Corporation
By:
/s/
Xxxxxxx X. Xxxxxx
Name:
Xxxx Xxxxxx
Title:
President & CEO
