FEDERAL UNITIZATION UNIT AGREEMENTS AND UNIT OPERATING AGREEMENTS. Tom Marranzino

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1 FEDERAL UNITIZATION UNIT AGREEMENTS AND UNIT OPERATING AGREEMENTS Tom Marranzino

2 DISCUSSION OUTLINE 1. BASIC INFORMATION 2. UNIT AGREEMENT 1. CONVENTIONAL 2. HORIZONTAL 3. UNIT OPERATING AGREEMENT

3 UNIT AGREEMENT Rule of Capture The legal rule stating that there is no liability for producing oil and gas that was originally in place under the land of another, so long as the producing well does not trespass (13 Tex. L. Rev. 391, 393 (1935). Rule of capture made it imperative that a mineral owner drill his land as quickly as possible to prevent drainage from another. Implied covenant in oil and gas leases to prevent drainage. The logical consequence of the rule was tremendous increase in drilling, waste and destruction of the reservoir.

4 SPACING Spacing Regulations were developed: To prevent waste, states promulgated regulations to allocate an area to a well that promoted the most efficient drainage of a reservoir. Regulations vary by state but usually address both oil and gas reservoirs. In the Jeffersonian system, spacing is allocated with rectangular units i.e. 40 acres, 80 acres, 160 acres, 320 acres and 640 acres.

5 POOLING Pooling is the bringing together of small tracts sufficient for the granting of a well permit under applicable state regulations. Example of pooling two leases under a 320 acre spacing unit.

6 UNITIZATION Unitization is a term used to describe the joint operation of all or some portion of a producing reservoir. Usually applied to situations where there are multiple spacing units and/or multiple sections. Agreement to govern the relationship of the parties and the planned development of a reservoir under a joint operating agreement. Usually an A.A.P.L Model Form.

7 FEDERAL UNITIZATION FEDERAL EXPLORATORY UNITS DEVELOPMENT UNITS SECONDARY RECOVERY UNITS

8 FEDERAL UNITIZATION Created under the Mineral Leasing Act of February 25, 1920, 41 Stat. 437, as amended and described in the Code of Federal Regulations for the purpose of conserving natural resources. The area to be unitized contains more than 10% of federal minerals. Enables the exploration of a large area where common geological and reservoir characteristics exist. Minimizes surface disturbance and less degradation of the environment with fewer wells, roads and infrastructure.

9 BENEFITS Enables an operator to locate wells in the most desirable locations to maximize efficient reservoir recovery and minimize waste. Ability to operate the area as a single lease. Sharing in the costs and risks of exploration and production. Relieves federal chargeability limitations. A single entity may not own more than 246,080 acres within a state.

10 FEE AND STATE LEASE EXTENSIONS Extends Leases State and Fee Leases are automatically extended by Section 17(d) of the Unit Agreement for so long as they remain committed to the agreement: Each lease, sublease or contract relating to the exploration, drilling, development, or operation for oil or gas of lands other than those of the United States committed to this agreement which, by its terms might expire prior to the termination of this agreement, is hereby extended beyond any such term so provided therein so that it shall be continued in full force and effect for and during the term of this agreement.

11 FEDERAL LEASE EXTENSIONS Federal Leases may be extended in only one of two ways pursuant to Section 17(e): (1) Any Federal lease committed hereto shall continue in force beyond the term so provided therein or by law as to the land committed so long as such lease remains subject hereto, provided that production of unitized substances in quantities sufficient to meet the Productivity Requirement, as defined hereinabove in Section 10, is established under this unit agreement prior to the expiration date of the term of such lease, or (2) in the event actual drilling operations are commenced on unitized land, in accordance with provisions of this agreement, prior to the end of the primary term of such lease and are being diligently prosecuted at that time, such lease shall be extended for two years, and so long thereafter as unitized substances are produced in paying quantities in accordance with the provisions of the Mineral Leasing Act, as amended.

12 PRODUCTION IN PAYING QUANTITIES Establishing production of unitized substances in paying quantities prior to the expiration date of the term of a lease. The Federal regulations provide that a Federal oil and gas lease may be extended by commitment to a Federally approved unit if a well is completed on a committed tract that is capable of producing unitized substances in paying quantities (quantities sufficient to repay the costs of drilling, completing, and producing operations with a reasonable profit) prior to the expiration date of the lease. Production in such quantities on any committed tract within the unit boundaries is considered to be on, or for the benefit of, each committed lease..

13 YATES DECISION The Interior Board of Lard Appeals in Yates Petroleum Corp. (IBLA Decision 67 IBLA 246 (1982) concluded that a well capable of production in paying quantities on a lease basis (quantities sufficient to repay the costs of day to day producing operations) which is completed on a committed tract within a unit agreement will extend the term of all expiring Federal leases committed to the unit agreement for the life of the agreement or for as long as the well is capable of production in paying quantities, whichever occurs first. If the leases are held by production by a Yates Decision, the terms and obligations of the unit agreement still apply. A well determined not to be capable of producing in unit paying quantities as defined by the terms of the agreement, but is capable of producing in paying quantities on a lease basis only, will require that the next unit well be drilled within six months of the completion date of the well or the unit terminates automatically.

14 ACTUAL DRILLING OPERATIONS Commencing actual drilling operations on any tract within the unit area prior to the expiration date of the term of a lease and diligently pursuing such operations over the expiration date will obtain a 2 year extension. Must be commenced during the primary term. Unit Agreement must be approved effective prior to the expiration date of the primary term. Operations must be conducted with diligence. Need not be continuous but must be conducted in good faith, according to regulations and within ordinary oil field practice.

15 FEDERAL EXPLORATORY UNIT AGREEMENT A combination of two agreements: Unit Agreement Unit Operating Agreement Unit Agreement An agreement between the Bureau of Land Management (BLM) and the proponent (Operator) of the Unit. Unit Operating Agreement An agreement between the Operator and other working interest owners within the unit boundary.

16 FEDERAL EXPLORATORY JOA S Divided Type Leases and mineral interests committed to the unit share in costs and production based upon ownership within a drilling block or participating area. Generally selected when the extent and uniformity of a prospect are unknown. Undivided Type Leases and mineral interests committed to the unit share in costs and production based upon ownership and royalty burden within the unit boundary.

17 CONVENTIONAL UNIT CRITERIA Size Unit Requirement Conventional Unit Up to 25, 000 acres or larger depending on well commitment Term Covered Formations Continuing Drilling Obligation Productivity Requirement Participating Area Expansion Five years Usually all depths (BLM will consider horizontal segregation) Drill every 6 months from completion until producing Paying well determination Each well must receive a paying well determination

18 APPROVAL PROCESS Preliminary Conference Proponent meets with appropriate Resource Management Group of the Bureau of Land Management and presents the geologic and engineering pictures which support the proposed unit outline. In the conference, agreement is reached regarding Unit Name Unit Outline General location, formation and depth of the initial test well

19 Area and Depth Application Preparation of a formal written application for designation as provided in 43 CFR The application includes: Initial Drilling Obligation with the location of initial well or wells. Unitized land and substances, including a description of the depth and formations. (i.e. All oil and gas, including coalbed gas, from the surface of the earth to the stratigraphic equivalent of the base of the Mesaverde formation, which occurs at log depth of 4,943 feet as found on that certain Induction/Gamma Ray well log on the AR Fee I well, located in SE¼ of Section 5, T-18-N, R-90-W, Carbon County, Wyoming, are unitized under the terms of this agreement and herein are called "unitized substances. Additional obligations and unique provisions.

20 Exhibit A - shows the proposed unit boundary, amount and percentage of Federal, State, and Patented lands and total unit area. - identifies boundaries of individual tracts within the unit. Exhibit B - a schedule of ownership of all oil and gas interests in lands within the unit area as presently known. Exhibit C - a schedule showing Federal and State lease numbers and expiration.

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24 Preliminary Approval Letter from the Resource Management Group of the Bureau of Land Management designating the outlined area as a logical unit area. Confirms proponent s application for depth and formation of test well. Special provisions and requirements.

25 Final Approval Proponent submits to BLM a Unit Agreement, in the exact form approved in the Designation Letter, including Unit Area, objective formation and drilling depth. Unit Agreement must be properly executed by the Unit Operator, working interest owners who joined and all consenting royalty owners. 43 CFR states that the owners of any right, title or interest in the oil and gas deposits to be unitized are regarded as proper properties and as such must be invited to join the Agreement. Proponent must receive a minimum of 85% approval from working interest owners within the unit area on an acreage basis. That is the acreage within each tract with 100% commitment by the respective Working Interest Owners counts toward the total of 85%. Regulations provide that the agreement not be approved unless the parties signatory to the agreement hold sufficient interest in the unit area to provide reasonable effective control of operations.

26 Proponent receives a letter stamp dated from BLM indicating that the Unit Agreement was approved and is designated with a Unit Number (i.e. WYW166725X). The effective date of the unit is the date of the letter. CELEBRATE!!

27 Tract Commitment TRACT COMMITMENT BLM recognizes four categories of commitment of a particular tract to a unit: 1. Fully committed, means that all interest owners (record title, all operating rights and working interest owners, and all royalty owners, overriding royalty owners and production payment owners) are committed to the Unit. 2. Effectively committed, means all interest owners, except owners of overrides or production payments, are committed to the unit. 3. Partially committed, means, with respect to a fee tract, that the lessee and all working interest owners have committed their interest but the royalty interest is not committed. With respect to a state or federal tract, partially committed means that the lessee of record is not committed but the working interest owner is committed. 4. Not committed, means that less than 100% of the working interest owners have committed their working interest to the unit.

28 Fully committed and effectively committed tracts receive all of the benefits of unitization. Partially committed, tracts are treated differently. No segregation upon unit approval No off lease drilling extension (although within the unit area, must drill on the lease to receive a drilling extension). No off lease production status (must HBP on a leasehold basis).

29 CONVENTIONAL UNIT AGREEMENT Section 1 Enabling Act and Regulations Section 2 Unit Describes the number of acres with unit Identifies Exhibit A and Exhibit B and provides for revisions whenever changes occur in the area or individual tracts. Provides for the expansion or contraction of the unit area by the operator. Provides for contraction of the unit All legal subdivisions of lands, no parts of which are in or entitled to be in a participating area on or before the fifth anniversary of the effective date of the first initial participating area established under this unit agreement, shall be eliminated automatically from this agreement, effective as of said tenth anniversary, and such lands shall no longer be a part of the unit area and shall no longer be subject to this agreement. Possible 2 year extension may be granted.

30 Section 3 Unitized Land And Unitized Substances Provision provides for a definition of the depths and formations to be included within the unit. If not all depths, be certain to use language similar to All oil and gas in any and all formations of the Unitized Land from the surface of the earth down to and including the stratigraphic equivalent of the base of the formation which occurs at a log depth of feet as found on that certain Gamma Ray/Induction/Density well log on the well, located in (¼¼) of Section, T- -N, R- -W, County, (State), are unitized under the terms of this Unit Agreement and herein are called "Unitized Substances".

31 Section 4 Unit Operator Section 5 Resignation Or Removal Of Unit Operator Section 6 - Successor Unit Operator Section 7 - Accounting Provisions And Unit Operating Agreement If the Unit Operator is not the sole owner within the unit area, then any agreements entered into by the working interest owners shall be referred to as the Unit Operating Agreement. Unit agreement must provide for the respective proportionate and allocated share of the benefits accruing from unitization. Unit Agreement is the controlling document.

32 Section 8 Rights And Obligations Of Unit Operator. Section 9 Drilling to Discovery Commencement of the test well within six months following the effective date of the Agreement and drilled to the objective depth or until unitized substances are discovered. Diligent and continuous drilling of the initial obligation well. Drilling of additional test wells, with not more than six months being permitted to elapse between wells, until a discovery of unitized substances in paying quantities is made. Will grant reasonable extensions of time, if warranted.

33 Upon completion of the initial well, failure to drill additional wells until discovery shall cause the agreement to terminate automatically. Failure to drill the initial well will cause the agreement to be declared invalid ab initio (from the beginning). Larger units will require additional obligation wells. In general, one well for each additional 10,000 to 15,000 acres.

34 Section 10 Plan of Further Development and Operation. Must provide a Plan of Further Development and Operation within six months after completion of a well capable of producing unitized substances in paying quantities and annually by March 1 of each year thereafter. Specify the number and location of any wells to be drilled. Proposed order and time frame within which they are to be drilled. Provide a summary of operations and production from previous year. Once the Unit is capable of producing no further wells can be drilled except those identified in the plan of development, wells to prevent drainage and wells identified by the AO.

35 Section 11 Participation after Discovery Provision provides for the establishment of a Participating Area ( PA ) which includes all lands then regarded as reasonably proved to be productive of unitized substances in paying quantities (quantities sufficient to repay the costs of drilling, completing, and producing operations with a reasonable profit) effective as of the date of the completion. A separate PA is formed for each separate pool or deposit. PA s are revised to include additional lands which are then regarded to be productive or which are necessary for unit operations. Operator submits a schedule of lands to be included which includes federal, state and fee lands.

36 In the state of Colorado, most of the federal units are units that are capable of producing natural gas. Unit wells typically produce from reservoirs that are lenticular and noncontiguous in nature. Recoverable reserves vary significantly from well to well. Without significant testing, it is difficult to determine true reservoir parameters. One can simulate a decline by assuming a drainage area and using material balance equations. However, using an assumed drainage area invalidates reserve calculations for the purpose of establishing a PA for the PA will be equivalent to the assumed drainage area. With little or no reliable geologic correlations and testing data for these isolated gas wells, this office has opted to use the circle-tangent method to determine the boundaries of a PA. The circle-tangent method does not honor reservoir characteristics for establishing the boundaries of a PA. The size of a PA is strictly determined by the depth of the producing formation. Based on the depth of the gas well, a circle size is determined: Well Depth (Feet) Circle Size (Acres ) 2,000-2, ,500-3, ,500-4, ,500-5, , Colorado

37 circle is drawn around the well, then all 40 acre tracts cut 50 percent or more by the circle are included in the PA. If two wells capable of producing from the same formation are located a distance less than four times the radius of the respective circles for each well, than a revision is required. A revision is accomplished by drawing tangents between the two circles surrounding the subject wells and including all tracts cut 50 percent or more by the circles and the tangents in the PA. The circle-tangent method is strictly an administrative procedure. The benefits of an administrative procedure is that all working interest owners know the boundary of a PA prior to a well being drilled. Drilling blocks can be established which are equivalent to the boundary of the PA. The circle-tangent method has resulted in no protests or appeals concerning the boundaries of a PA in the state of Colorado. The controversy around this method is that the circle-tangent method does not adequately reflect that area reasonably proven productive of unitized substances in paying quantities. Many people are of the opinion that actual reservoir data should be utilized in determining the size of the PA. In the state of Colorado, industry has accepted the circle-tangent method as standard practice for establishing PA boundaries. However, should an operator want to use geologic parameters to establish the boundaries of a PA, we will consider their proposal. If their data appears reasonable and logical, we will approve the PA as submitted. We have utilized geologic parameter s to establish the boundaries of a PA for our carbon dioxide units. Due to the control of the reservoir, a geologic type PA was appropriate. Another area we are considering to use geologic parameters is horizontal wellbores.

38 Participating Area Preparation Circle-Tangent Method Spot well on unit map. Determine spacing in the absence of unitization. Draw a circle using the radius below encompassing the number of acres that would be included in a rectangular spacing unit. Area = π x (radius) 2 40 acre spacing = 745 feet 80 acre spacing = 1,053 feet 160 acre spacing = 1,489 feet 320 acre spacing = 2,106 feet 640 acre spacing = 2,979 feet

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43 Montana It is always preferable to use actual reservoir data to determine the size of a PA. However, for some gas wells, it may not be possible to obtain adequate reservoir data without extensive testing of the well. This may involve flaring of gas if the well is not connected to a pipeline. Flaring of gas is a waste of resources. In such cases, our policy is to use state well spacing rules. In Montana, statewide spacing for wildcat gas wells is 640 acres. The 640 acre PA should be configured to place the well near its center, rather than merely establishing a single, full section as the PA. If reservoir data are available, the unit operator should use such data to determine the size of the PA. For an oil well, the operator should submit a PA application within 6 to 8 months after completion of the well. This should be sufficient time for the well's production to stabilize and for the operator to prepare a decline curve and determine the recoverable reserves. Since PAs are based on subdivisions of the public land surveys, our policy is to include all 40 acre legal subdivisions cut 50 percent or more by the outer boundary of the well's calculated drainage configuration. Less than 40 acre legal subdivisions may be used on a case-by-case basis. Effective January 1, 2012 the policy was amended for horizontal wells to include every 10 acre tract cut by any portion of the calculated drainage radius of the designated paying wells used to establish or revise a participating area.

44 New Mexico According to 43 CFR , paragraph 11, a PA represents "...the area known or reasonably proved to be productive of unitized substances in paying quantities or which are necessary for unit operations..." In New Mexico, our interpretation of this definition requires the use of geologic parameters to determine PAs. After a well has been determined to be commercial, the unit operator submits an application for a PA that is based on reservoir geology. The application is reviewed for administrative compliance and for a reasonable and logical geologic interpretation. If there is a discrepancy between the operator' s interpretation and our interpretation of the reservoir geology, we inform the operator of our recommendation as to what we believe the PA should be. The operator can then agree with this recommendation or submit additional information to support his interpretation. Extensive geologic data are available in New Mexico for use in determining the PA. Existing unit wells and wells located outside the unit boundary are used to determine reservoir parameters. In addition to this, area or regional characteristics can be determined from drainage determination cases, Known Geologic Structure reports, NGPA data, and other units.

45 Most of the reservoirs in this area are stratigraphic or combination structural/stratigraphic reservoirs. Therefore, an isopach map or a combination structure/isopach map of the reservoir is used to determine the limits of the PA. The minimum acceptable area is the spacing unit of the well. Any spacing unit cut 50 percent or greater by the determining boundary is included in the PA. In New Mexico, geologic criteria are used to determine reservoir parameters. These parameters define that area to be included in a PA. This method assures the PA adequately reflects that area reasonably proved to be productive of unitized substances in paying quantities.

46 Wyoming In Wyoming, any reasonable application for a PA, or revision, thereof, will be accepted for review by the AO. The methods used to generate or revise the PA could include circle-tangent or geologic and/or engineering inference. In general, stratigraphic-type prospects are amenable to the circle-tangent method while structural-type prospects are more suitable to geologic and engineering inference. The important thing to remember is that the amount of data available for the determination is the limiting factor. Generally, an initial PA is based upon a circle of reasonable size; as more and more information is collected during field development, revisions to the PA tend to be based more on geologic and engineering data. In Wyoming, state spacing is vacated within a unit area and does not impact the PA size.

47 Wyoming Horizontal Wells If the initial unit obligation well is determined to be a unit paying well (i.e., the well will pay out its drilling and completion costs), then an initial participating area (PA) will be formed. The participating area for the horizontal well will be established by constructing 40-acre circles around the end of the lateral and around the entry point of the lateral into the participating area formation and by constructing tangents between them. All 10-acre subdivisions cut by the circles/tangents will be included in the participating area.

48 FEDERAL FEE STATE 10 acre subdivisions cut by the circles/tangents FEE FEE STATE FEDERAL 40 acre circles FEDERAL

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50 Section 12 Allocation of Production Allocation of production under the Unit Agreement only establishes a basis for settlement of the royalty, overriding royalty, and production payment obligations of the working interest owners. All unitized substances produced from a participating area established under this agreement shall be deemed to be produced equally on an acreage basis from the several tracts of unitized land, and unleased Federal land, if any, included in the participating area established for such production. Each tract of Unitized land within a Participating Area is credited with such percentage of production as the number of acres of that tract bears to the total number of Unitized acres within the participating area.

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52 EXHIBIT "B" MESAVERDE (CBM) PARTICIPATING AREA A THIRD REVISION, EFFECTIVE AS OF SEPTEMBER 1, 2006 DOTY MOUNTAIN (CBM) UNIT AREA CARBON COUNTY, WYOMING TRACT TRACT SERIAL DESCRIPTION PARTICIPATING TRACT PERCENT OF NO. COMMITMENT NUMBER ACRES TOTAL PARTICIPATION STATUS 1 EC WYW T17N-R91W, 6th PM % Sec. 14: S½ Sec. 22: NESE Sec. 26: N½NE, NENW FC WYW T17N-R91W, 6th PM % Sec. 14: N½ Sec. 27: NENE EC WYW T17N-R91W, 6th PM % Sec. 28: NENE EC WYW T17N-R91W, 6th PM % Sec. 22: N/2NE, SENE FC WYW T17N-R91W, 6th PM % Sec. 22: W½, SWNE, W½SE, SESE NC WYW T17N-R91W, 6th PM Sec. 12: SWSW % 13 EC WYW T17N-R91W, 6th PM % Sec. 26: NWNW EC STATE T17N-R91W, 6th PM % Sec. 16: E½SE EC FEE T17N-R91W, 6th PM % Sec. 24: Lots 4, 5, 12, FC FEE T17N-R91W, 6th PM % Sec. 11: S½S½ Sec. 13: W½W½ Sec. 15: S½, S½N½, NENE Sec. 21: E½E½ Sec. 23: All Sec. 27: NW, W½NE %

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54 TRACT COMMITMENT Tract Commitment BLM recognizes four categories of commitment of a particular tract to a unit: 1. Fully committed, means that all interest owners (record title, all operating rights and working interest owners, and all royalty owners, overriding royalty owners and production payment owners) are committed to the Unit. 2. Effectively committed, means all interest owners, except owners of overrides or production payments, are committed to the unit. 3. Partially committed, means, with respect to a fee tract, that the lessee and all working interest owners have committed their interest but the royalty interest is not committed. With respect to a state or federal tract, partially committed means that the lessee of record is not committed but the working interest owner is committed. 4. Not committed, means that less than 100% of the working interest owners have committed their working interest to the unit.

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57 Section 13 Development Or Operation Of Nonparticipating Land Or Formations Provides that a non-operator may propose and drill a well on unitized land outside an existing PA. If production is obtained in paying quantities, the well is turned over to the Operator; if not, nonoperator may continue to operate on a lease basis. Section 14 Royalty Settlement Royalty owners who have the right to take in kind, may take their share of unitized substances. Royalty due to the United States is paid in accordance with current regulations.

58 Section 15 Rental Settlement Provides that rentals or minimum royalties must be paid on all leases committed to the Unit. With respect to any lease on non-federal land containing provisions which would terminate such lease unless drilling operations are commenced upon the land covered thereby within the time therein specified or rentals are paid for the privilege of deferring such drilling operations, the rentals required thereby shall, notwithstanding any other provision of this agreement, be deemed to accrue and become payable during the term thereof as extended by this agreement and until the required drilling operations are commenced upon the land covered thereby or until some portion of such land is included within a participating area.

59 Section 16 Conservation Provides that operations must be conducted for the most economical and efficient recovery of oil or gas without waste. Section 17 Drainage Provides that Operator must take measures to prevent drainage of unitized substances from unitized land by wells on land not subject to this agreement. Further, provides that for unleased Federal lands, the value of 12½ percent of the production that would be allocated to such Federal lands under Section 12 of this agreement, if such lands were leased, committed, and entitled to participation, shall be payable as compensatory royalties to the Federal Government.

60 Section 18 - Leases And Contracts Conformed And Extended The terms, conditions, and provisions of all leases, subleases, and other contracts relating to exploration, drilling, development, or operation for oil or gas on lands committed to this agreement are hereby expressly modified and amended to the extent necessary to make the same conform to the provisions hereof but otherwise to remain in full force and effect. Provides for the One Lease Theory - operations performed upon any tract of unitized lands will deemed to be performed upon, and for the benefit of, each and every tract of unitized land, and no lease shall be deemed to expire by reason of failure to drill or produce wells situated on the land therein embraced.

61 Any fee lease which, by its terms might expire prior to the termination of this agreement, is hereby extended beyond any such term so provided therein so that it shall be continued in full force and effect for and during the term of this agreement. Any Federal lease committed to the Unit shall continue in force beyond the primary term, provided that production of unitized substances in paying quantities is established prior to the expiration date of the term of such lease; or, in the event actual drilling operations are commenced on unitized land in accordance with provisions of this agreement prior to the end of the primary term of such lease and are being diligently prosecuted at that time, such lease shall be extended for 2 years and so long thereafter as oil or gas is produced in paying quantities. Any Federal lease committed to the unit which embraces lands that are in part within and in part outside of the area covered by the unit shall be segregated into separate leases as to the lands committed and the lands not committed as of the effective date of unitization: provided, however, that any such lease as to the nonunitized portion shall continue in force and effect for the term thereof but for not less than two years from the date of such segregation and so long thereafter as oil or gas is produced in paying quantities.

62 Section 19 - Covenants Run With Land Section 20 Effective Date and Term Agreement becomes effective upon approval and shall automatically terminate 5 years from said effective date unless: 1. Extended by AO 2. Terminated prior to expiration because exploration revealed lands incapable of producing unitized substances in paying quantities. 3. Unitized substances in paying quantities have been discovered, in which event, the agreement shall remain in effect for such term and so long thereafter as unitized substances can be produced in quantities sufficient to pay for the cost of producing same from wells on unitized land within any participating area established hereunder. (Notice this is not a paying quantities definition). 4. Voluntarily terminated by 75% of the working interest owners after the initial drilling obligation has been met.

63 Section 21 - Rate Of Prospecting, Development, And Production The AO is hereby vested with authority to alter or modify from time to time, in his discretion, the rate of prospecting and development and the quantity and rate of production under the agreement when such alteration or modification is in the interest of attaining the conservation objectives stated in this agreement and is not in violation of any applicable Federal or State law.

64 Section 22 Appearances Unit Operator shall have the right to appear for, appeal and apply for relief on behalf of, any and all interests affected hereby before the Department of the Interior. Section 23 Notices Section 24 No Waiver of Certain Rights Section 25 Unavoidable Delay All obligations under this agreement requiring the Unit Operator to commence or continue drilling or to operate on, or produce unitized substances may be suspended for force majeure causes. Operator must be able to demonstrate that it was acting in a prudent manner.

65 Section 26 Nondiscrimination Section 27 Loss of Title In the event of a dispute as to title to any royalty, working interest, or other interests subject thereto, payment or delivery on account thereof may be withheld without liability for interest until the dispute is finally settled; provided that, as to Federal lands or leases, no payments of funds due the United States shall be withheld, but such funds shall be deposited as directed by the AO to be held as unearned money pending final settlement of the title dispute and then applied as earned or returned in accordance with such final settlement. Section 28- Nonjoinder and Subsequent Joinder Procedure for joining an interest to the unit after it has received final approval. After operations are commenced joinder by a working interest owner is subject to the approval provided for in the unit operating agreement. After final approval hereof, joinder by a nonworking interest owner must be consented to in writing by the working interest owner committed hereto and responsible for the payment of any benefits that may accrue hereunder on behalf of such non-working interest. A non-working interest may not be committed to this unit agreement unless the corresponding working interest is committed. Section 29- Counterparts Section 30: Special Surface Stipulations Nothing in the Unit Agreement modifies the Federal lease stipulations attached to the individual Federal oil and gas leases.

66 Additional Provisions Taxes The working interest owners shall pay for their account and the account of the royalty owners all valid taxes on the unitized substances produced, gathered, and sold from the land covered by the UA after its effective date. Surrender Any working interest owner has the right to surrender any lease as to all or part of the leased lands provided that each party who will or might acquire such working interest by such surrender or by forfeiture is bound by the terms of this agreement. If a surrender becomes vested in a fee owner, such owner may: (a) Accept the working interest rights subject to the agreement and the unit operating agreement; or (b) Lease the portion which is included in an established participating area; or (c) Provide for the independent operation the lands that is not then included within a participating area established hereunder.

67 UNIT OPERATING AGREEMENT The Unit Agreement provides the method of allocating production for the disbursement of royalties, overriding royalties and production payments. The Unit Agreement does not provide for an allocation of cost and expenses nor for sharing in production among working interest owners.

68 The Unit Operating Agreement is entered into by the working interest owners who have committed their interest to the unit agreement to govern the relationship among the parties, provide for an operator, sharing of expenses and allocation of production. Two forms of agreement: Form 1 Rocky Mountain Unit Operating Agreement - Oil and Gas (Undivided Interest) (May 1954) (RMOA-Form 1) An agreement in which the working interest owners agree to fix costs and share of production for the life of the unit. Interests do not fluctuate as participating areas expand or contract. Form 2 - Rocky Mountain Unit Operating Agreement - Oil and Gas (Divided Interest) (Feb.1994) (RMOA Form 2) An agreement in which the working interest owner s share in production and costs is determined by its interests in a participating area.

69 FORM 1 Undivided Type Agreement Participating Interest of a Party means the proportion (expressed as a percentage) that the acreage of its Committed Working Interest or Interests bears to the total acreage of all the Committed Working Interests of the Parties; for the purposes of this definition (a) the acreage of the Working Interest in a tract within the Unit Area shall be the acreage of such tract as set forth in Exhibit B to the Unit Agreement and (b) if the Working Interest in a tract is owned by two or more owners, the acreage of such tract shall be apportioned among them in proportion to their respective Working Interests therein.

70 Beneficial Interest of a Party means the proportion (expressed as a percentage) that the net acreage of its Committed Working Interest or Interests bears to the total net acreage of all the Committed Working Interests of the Parties; for the purposes of the definition, the net acreage of the Committed Working Interests owned by a Party shall be calculated by multiplying the acreage of each tract in which it owns an interests, as shown in Exhibit B to the Unit Agreement, by the percentage of the oil and gas, including coalbed gas, which, if produced from such tract in the absence of the Unit Agreement and this agreement, would accrue to such Committed Working Interest after deducting Lease Burdens (whether payable in cash or in kind) shown on said Exhibit B as an encumbrance upon such Committed Working Interest, then adding all such interests together.

71 PARTICIPATING INTERESTS OF THE PARTIES - Drilling Title Opinion 4/21/2006 (Based on Committed Tracts within Unit Area) Committed Tract No. Adamson Borgerding Trust Double Eagle Redwine Anadarko PetroCorp Trigg Ventures Warren Total Committed Tract Acreage % of Unit: % % % % % % % % a b Total Acres: , , % of Unit: % % % % % % % % %

72 Commi tted Tract No. Committed Tract Acreage Tract Burden on All WI Tract Net Revenue (All WI) BENEFICIAL INTERESTS OF THE PARTIES - Initial (Based on Committed Tracts within Unit Area) Adamson Anadarko Borgerding Trust Double Eagle Redwine Total Committed Beneficial Acreage Tract WI Bene. Int. Tract WI Bene. Int. Tract WI Bene. Int. Tract WI Bene. Int. Tract WI Bene. Int. Tract WI Bene. Int. Tract WI Bene. Int. Tract WI Bene. Int. Acreage Acreage Acreage Acreage Acreage Acreage Acreage Acreage Acreage Acreage Acreage Acreage Acreage Acreage Acreage Acreage 1-A % % B % % C % % D % % A % % B % % C % % D % % E % % F % % G % % % % % % % % % % a % % b % % % % % % % % % % a % % b % % % % % % % % a % % b % % % % % % , % % % % % % % % % % % % % % % % , Committed WI Acreage PetroCorp Trigg Ventures Warren Beneficial Unit Acreage: Participating Acreage Percentage % % % % % % % % % % of Beneficial Unit Acreage: % % % % % % % % %

73 ARTICLE 2 APPORTIONMENT OF COSTS AND OWNERSHIP OF AVAILABLE PRODUCTION AND PROPERTY 2.1 Apportionment. Except as otherwise specified herein, (particular reference being made to Sections 9.3 Taxes, Effect of Option 2 Assignment, Rights and Obligations of Drilling Party Under Option 2, 16.7 Relinquishment of Interests by Non-Drilling Party, 16.8 Rights and Obligations of Drilling Party, 18.9 Relinquishment of Interest by Non-Drilling Parties, Rights and Obligations of Drilling Parties, and 25.3 Rights and Obligations of Non-Abandoning Party): A. All Costs incurred by Unit Operator in the conduct of operations pursuant to this agreement shall be borne by the Parties in proportion to their respective Participating Interests. B. All Available Production shall be owned by the Parties in proportion to their respective Beneficial Interests. C. All materials, equipment and other property, whether real or personal, acquired by Unit Operator, and the cost of which is chargeable as Costs pursuant to this agreement, shall be owned by the Parties in proportion to their respective Participating Interests.

74 ARTICLE 4 RENTALS AND LEASE BURDENS 4.3 Lease Burdens Payable by Unit Operator. Any and all payments (including minimum royalties) accruing to Lease Burdens shown in Exhibit B to the Unit Agreement on the effective date hereof, (including any such Lease Burdens not committed to the Unit Agreement) in respect of Unitized Substances, shall be made by Unit Operator for the account of the Parties. All such payments made by Unit Operator shall be charged to and borne by the Parties in proportion to their respective Beneficial Interests, except that all such payments made in respect of Unitized Substances produced from a well owned by less than all the Parties shall be charged to and borne by the Party or Parties owning such well in the proportions that such Parties share in the Available Production therefrom. Also, Unit Operator shall deliver Unitized Substances to owners of Lease Burdens who have the right and who elect to take the same in kind.

75 BENEFICIAL INTEREST Under a working interest unit with a Beneficial Interest Clause; each party has both a working interest and a beneficial interest in the unit area. They share all unit expenses in accordance with their working interests and participate in all net unit production in accordance with their beneficial interests. The beneficial interest for each party is determined on a revenue acreage basis. The adjustment from committed acreage to revenue acreage in each tract is made by deducting the total royalty and overriding royalty percentage from 100% and multiplying the remainder by the number of committed acres, the product being the revenue acres in such tract. A simple example on a 640-acre working interest unit with 40 acre spacing is as follows: Tract A Shell 12.5% RI 480 acres Tract B Phillips 12.5% RI 12.5% OR 160 acres Working Interest Phillips 25% Shell 75% Committed Total RI & Acres ORI Burdens Revenue Acres Beneficial interest Shell % 87.5% x 480 = /540 = 77.78% Phillips % 75% x 160 = /540 = 22.22% 540

76 The 87.5% revenue interest from Tract A remaining after deducting the 1/8 royalty would be divided in accordance with the beneficial interest of each party as follows: Shell Phillips % x 87.5% = % tract net revenue interest % x 87.5% = % tract net revenue interest The 75% revenue interest from Tract B remaining after deducting the 12.5% royalty and 12.5% OR burdens would be divided in accordance with the beneficial interest of each party as follows: Shell Phillips % x 75% = % tract net revenue interest % x 75% = % tract net revenue interest Without a Beneficial Interest Clause, Phillips would pay 25% of the costs of a well drilled on Tract B and receive 25% of the 87.5% (or %) revenue interest. Out of this % Phillips would be obligated to pay 100% of the 12.5% OR burden to the overriding royalty interest owner, leaving Phillips with a 9.375% revenue interest in this tract. In most cases it would be impossible for Phillips to justify joining in the drilling of a well on Tract B under these circumstances.

77

78 FORM 2 Divided Type Agreement The Divided Type Unit Operating Agreement governs operations much the same as the more familiar A.A.P.L. Model Form 610 Operating Agreement. That is, it provides for the drilling of an initial well, subsequent operations, Operator s responsibilities and duties and the relationship of the parties. The agreement is different in that it provides for the above operations in concert with the Federal Exploratory Unit Agreement. It addresses the drilling of exploratory and development wells in regard to participating areas, the formation, expansion and contraction of participating areas, the sharing of costs and expenses relative to a proposed drilling block and the distribution of revenue within a participating area.

79 ARTICLE 1 DEFINITIONS 1.1 Definitions. The definitions contained or used in the Unit Agreement are adopted for all purposes of this Agreement. In addition, whenever used in this Agreement the terms "Agreement," "Unit," "Unit Agreement," and "Unit Area" shall have the meanings set forth above and the following terms shall have the following meanings: "Acreage Basis," when used to describe the basis of participation by the Parties within the Unit Area, a participating area, or other area designated pursuant to this Agreement in voting, consenting to operations, or sharing in Costs, or Production, means participation by each Party in the proportion that the acreage of its Committed Working Interests in the area bears to the total acreage of the Committed Working Interests of all Parties therein. For the purposes of this definition: (a) the acreage of the Committed Working Interest in a tract within the Unit Area shall be the acreage of the tract as set forth in Exhibit B to the Unit Agreement, (b) if there are two or more undivided Committed Working Interests in a tract, there shall be apportioned to each Committed Working Interest that portion of the acreage of the tract that the Committed Working Interest bears to the entire Committed Working Interest in the tract, and (c) when ownership is divided as to formation, strata, or horizon, any vote as to a particular formation, strata or horizon shall be determined by ownership within that particular formation, strata, or horizon.

80 ARTICLE 6 APPORTIONMENT OF COSTS AND OWNERSHIP AND DISPOSITION OF PRODUCTION AND PROPERTY 6.1 Apportionment and Ownership Within Participating Area. Except as otherwise provided in Articles 8, 9, 10, 11, 12, and 13: A. Costs. All Costs incurred in the development and operation of a participating area for or in connection with production of unitized substances from any pool or zone for which the participating area is established shall be borne by the Parties within the participating area on an Acreage Basis, determined as of the time the Costs are incurred. B. Production. All Production from a participating area shall be allocated on an Acreage Basis to the tracts of unitized land within the participating area. That portion of Production that is allocated to any tract shall be owned by the Party or Parties having Committed Working Interest or Interests therein in the same manner and subject to the same conditions as if actually produced from the tract through a well thereon and as if this Agreement and the Unit Agreement had not been executed. C. Property. All materials, equipment, and other property, whether real or personal, the cost of which is chargeable as Costs and which have been acquired in connection with the development or operation of a participating area, shall be owned by the Parties within the participating area on an Acreage Basis.

81 2 ARTICLE III. 3 INTERESTS OF PARTIES 4 A. Oil and Gas Interests: 5 If any party owns an Oil and Gas Interest in the Contract Area, that Interest shall be treated for all purposes of this 6 agreement and during the term hereof as if it were covered by the form of Oil and Gas Lease attached hereto as Exhibit "B," 7 and the owner thereof shall be deemed to own both royalty interest in such lease and the interest of the lessee thereunder. 8 B. Interests of Parties in Costs and Production: 9 Unless changed by other provisions, all costs and liabilities incurred in operations under this agreement shall be borne 11 and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by the parties as their 12 interests are set forth in Exhibit "A." In the same manner, the parties shall also own all production of Oil and Gas from the 13 Contract Area subject, however, to the payment of royalties and other burdens on production as described hereafter. 14 Regardless of which party has contributed any Oil and Gas Lease or Oil and Gas Interest on which royalty or other 15 burdens may be payable and except as otherwise expressly provided in this agreement, each party shall pay or deliver, or 16 cause to be paid or delivered, all burdens on its share of the production from the Contract Area up to, but not in excess 17 of and shall indemnify, defend and hold the other parties free from any liability therefor. 18 Except as otherwise expressly provided in this agreement, if any party has contributed hereto any Lease or Interest which is 19 burdened with any royalty, overriding royalty, production payment or other burden on production in excess of the amounts 20 stipulated above, such party so burdened shall assume and alone bear all such excess obligations and shall indemnify, defend 21 and hold the other parties hereto harmless from any and all claims attributable to such excess burden. However, so Jong as 22 the Drilling Unit for the productive Zone(s) is identical with the Contract Area, each party shall pay or deliver, or cause to 23 be paid or delivered, all burdens on production from the Contract Area due under the terms of the Oil and Gas Lease(s) 24 which such party has contributed to this agreement, and shaji indemnify, defend and hold the other parties free from any 25 liability therefor.

82 Definitions A few highlights Acreage Basis, when used to describe the basis of participation by the Parties within the Unit Area, a participating area, or other area designated pursuant to this Agreement in voting, consenting to operations, or sharing in Costs, or Production, means participation by each Party in the proportion that the acreage of its Committed Working Interests in the area bears to the total acreage of the Committed Working Interests of all Parties therein. Development Well means a well Drilled within a participating area and projected to the pool or zone for which the participating area was established. Exploratory Well means a well other than a Development Well Drilled after discovery of unitized substances in Paying Quantities in the Unit Area. Paying Quantities means the quantities of unitized substances defined as paying quantities in Section 9 of the Unit Agreement. Subsequent Test Well means a test well Drilled after the Drilling of the Initial Test Well and before discovery of unitized substances in Paying Quantities in the Unit Area.

83 Article 3 - Initial Test Well Location. Unit Operator must begin to Drill the Initial Test Well within the time required by Section 9 of the Unit Agreement, or any extension thereof, at the location specified in Exhibit 2. Costs of Drilling. Subject to the investment adjustment provisions of Article 13, the Costs of Drilling the Initial Test Well shall be shared by the Parties in the manner and in the proportions specified in Exhibit 2.

84 EXHIBIT 2 Attached to and made a part of that certain Unit Operating Agreement for the SPYGLASS HILL (CBNG) UNIT AREA Carbon County, Wyoming Initial Well LOCATION AND DEPTH: DRILLING BLOCK: TIME: COSTS: TITLE EXAMINATION AREA: COST OF TITLE EXAMINATION:

85 Article 4 - Subsequent Test Wells Recall that the Unit Agreement provides that Unit Operator drill successive wells until a well capable of production in paying quantities is discovered without more than six months elapsing between the completion of one well and the commencement of the next. Article 5 - Establishment, Revision, And Consolidation Of Participating Areas Unit Operator initiates each proposal for a PA, if no objection, proposal is approved. Parties may object by submitting an objection to all Parties Once approval received, PA proposal sent to AO for approval.

86 Article 6 Apportionment of Costs and Ownership and Disposition Of Production and Property Apportionment and Ownership Within Participating Area All Costs incurred in the development and operation of a participating area shall be borne by the Parties within the participating area on an Acreage Basis, determined as of the time the Costs are incurred. All Production from a participating area shall be allocated on an Acreage Basis to the tracts of unitized land within the participating area. 6.2 Ownership and Costs Outside a Participating Area or Unit Area If a well Drilled within a Drilling Block established under the provisions of either Article 9 or Article 10 is completed as a producer but not in a formation included within a participating area, then the following provisions shall be applicable: The well, the production, materials and equipment, costs and all lease burdens shall be borne and paid by such Parties.

87 6.3 Cost Liability of Subsequently Created Interests 6.4 Taking in Kind 6.5 Failure to Take in Kind 6.6 Gas Marketing Arrangements 6.7 Surplus Materials and Equipment 6.8 Lease Burdens Option 1 - Each Party responsible or entitled to receive a share of production shall be responsible for payments. Option 2 - Unit Operator shall make all payments.

88 Article 8 Development Wells A well drilled within an existing Participating Area. This is a well in which the proposed formation is currently producing. A well can be located geographically within a PA but be an exploratory proposal. Proposal of a well Any party with a working interest in the PA may propose well. Approval of the Parties (which will be discussed under Article 14) is required prior to the Parties making a participation election. Parties have 30 days after receipt of a drilling proposal to elect to participate. Failure to respond means such party shall be deemed to have elected not to participate. If less than all parties elect to participate, then within 15 days after expiration of the 30 day period parties must elect to proceed with the drilling of the well. Operator must commence the test well within 90 days with a 30 day extension period for obtaining permits, surface rights, drilling equipment or completing title.

89 Attempted Completion After a Development Well has reached its projected depth and been tested, logged, and logs furnished to each Drilling Party, but before production pipe has been set, Unit Operator shall give notice to each Drilling Party entitled to participate in the Completion attempt. Parties have 24 hours (exclusive of weekends and legal holidays) within which to make election. Article 9 Exploratory Wells A Subsequent Test Well means a test well Drilled after the Drilling of the Initial Test Well and before discovery of unitized substances in Paying Quantities in the Unit Area. A well drilled other than a Development Well Drilled after discovery of unitized substances in Paying Quantities in the Unit Area is an Exploratory Well. In the absence of another agreement, both are drilled under the provisions of Article 9.

90 Any party may propose a well on lands in which it owns a Committed Working Interest by proposing a Drilling Block which the party believes will be proved productive by the drilling of the well. As a general rule, the Drilling Block should approximate the spacing that would be in effect absent the formation of the unit. Participation in the proposed well is on an Acreage Basis. This means the participation by each Party in the proportion that the acreage of its Committed Working Interest bears to the total acreage of the Committed Working Interests of all Parties in the Drilling Block. Notice provisions are similar to a Development Well for both drilling and completion. Parties may object to the proposed Drilling Block and lands excluded at the Direction of Parties.

91 Article 10 Required Wells A Required Well means a well required by a final order of the Authorized Officer to protect the unit from drainage. If the Parties approve the well it is drilled for the account of the Parties. If no Party elects to drill the first alternative that is available shall be followed: Payment of compensatory Royalties; or Contraction; or Termination. If none of these alternatives are available Unit Operator shall drill the required well for the account of the parties. Article 11- Deepening, Sidetracking, Plugging Back, and Abandonment Procedure similar to the A.A.P.L. Model Form JOA

92 Article 12- Rights And Obligations Of Drilling Party and Non-drilling Party Procedure similar to Article 6B of the A.A.P.L. Model Form JOA. Article provides a procedure for Relinquishment of Interest by Non-Drilling Party Rights and Obligations of Drilling Party Reversion of Relinquished Interest Effect of Reversion Accounting Due Non-Drilling Party Stand-By Rig Time Subsequently Created Interests

93 BREAK TIME Please be back in 10 min

94 INVESTMENT COST ADJUSTMENTS This is a little ditty about Jack and Diane two American kids growin up in the heartland. Jack and Diane each invested $50,000 to buy a piece of the American Dream for a rental property.

95 Several years later Jack and Diane decided to buy a second house but they didn t have enough money so they invited John Cougar to join with them in equal shares to purchase a $125,000 home. Their agreement provided that each would also purchase a share in the two homes and ownership would be proportionate to their investment.

96 LEASE W.I. OWNER GROSS LEASE TRACT TRACT MIN AC W.I. FACTOR W. I. 1 Jack Diane Jack Diane John Tract Acres (as is) Jack Diane John

97 The accounting for the transaction looks something like this: Credit Charge Total January 1, st Home Value: $ 100, January 1, 2008 Jack $ 50, Diane $ 50, $ 100, Second Home Value: $ 125, Jack $ 41, Diane $ 41, John $ 41, $ 125, Investment Cost Adjustment Value: $ 225, Jack $ 91, $ 93, $ (2,083.33) Diane $ 91, $ 93, $ (2,083.34) John $ 41, $ 37, $ 4,166.66

98 This was a little ditty about Jack and Diane, two American kids doing the best they can. Oh yeah, life goes on