Energy Contracting & Negotiation-6

CHAPTER 6 Gas Sales Contracts

Before focusing on the key-provisions of gas sales agreements, the basic economic principles of the gas industry will be discussed. Structure of the Gas Market In contrast to other energy related commodities which are subject of a single world market, the gas industry is divided into three regional gas markets. A world gas market is not likely to develop because of distance related, extraordinary transportation costs. These depend on the nature of gas as a generally network bound commodity Therefore, the successful development of infant gas markets demands a long, firm and fixed supply chain connecting the wellhead and processing plant of the producers, the transmission networks of the pipeline operators, the distribution networks of the Local Distribution Companies [LDC] and the final consumers. Fixation is a result of the expensive physical links within the chain. As the whole network is easily affected by disruptions - either downstream in terms of supply or upstream in terms of cashflows - firm and long-term relationships are likely to occur. The infrastructure is also responsible for large capital investments which even exceed the high expenditure of the oil industry by four to ten times for a number of reasons: Primarily, gas pipelines depend on the economies of scale. Secondly, they have to be larger than comparable oil pipelines Thirdly, expensive storage facilities are required. Financing these investments involve banks which will intensively look for securities. In order to cope with the risks of exploration, marketing, price and with the infrastructure expenditure, investors seek long term relationships with reliable sellers. The latter themselves were keen to agreeing on long-term agreements as either the duration of the contract was a means of competition instead of the regulated prices or they were backed up by large legal or factual monopolies on domestic markets rather focusing on the security than the costs of supply This situation changes if the industry is deregulated as even imperfect competition is superior to regulation of a monopoly Categories of Gas Sales Agreements Traditional gas sales agreements fall into four different categories. Firstly, one can distinguish depletion contracts which dedicate the whole capacity of small or medium fields to a specific vendee and supply contracts which are not related to the output of a specific field. These are suitable for vendors owning large fields or groups of fields. Thirdly, seller's option contracts allow the vendor to nominate the delivered amount and are chosen if the gas is a by-product of associated oil resources whereas buyer's option contracts grant the vendee the right to decide about the quantity within the agreed amounts. Notwithstanding this differences, gas sales agreements share numerous key-terms.

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Non Price Determined Provisions of Traditional Gas Sales Agreements Apart from the basic agreement of sale and purchase, the non price determined provisions of gas sales agreements focus on the quantities, take-or-pay and the duration.

Contract Quantities The contractual quantity which the buyer may nominate in advance is laid down by a series of terms. The daily contract quantity [DCQ] represents the daily average of the annual contract quantity [ACQ]. Due to seasonal fluctuations in demand the term of delivery capacity is introduced which denotes the maximum daily amount which the vendor is obliged to deliver. The latter term exceeds the DCQ. In order to avoid uneconomic small scale deliveries the terms of minimum nomination and zero nomination are introduced. The term excess gas describes nominated volumes beyond the daily capacity which are not subject of a stringent seller's obligation.

TOP -Take-or-pay The basic idea of TOP provisions is that the buyer is obliged to pay the contract quantity of gas even if he fails to take delivery in order to guarantee a cash flow for the seller One could argue that the legal rationale of TOP is an alternative obligation of the buyer so that he should be always free to choose between delivery or sole payment. The distinction between primary/secondary obligations and alternative obligations depends on the intention of the parties As the pure buyer's payment without taking delivery is generally not regarded as to have any commercial value reasonable vendees, it is more persuasive to argue, that this obligation is a secondary obligation in the terms of liquidated damages. These contractually defined damages favour the seller to a larger extent as he is normally obliged to reduce the claim by the amount which is saved due to the non fulfilment of the delivery of the commodity or due to the revenue earned by alternative sales. Furthermore, the legal feasibility of TOP was challenged by the argument that it should be regarded as punitive damages which are not sustained by common law In order to weaken this argument various additional terms have been introduced in order to make the clause more flexible. First of all, the TOP obligation only refers to a specific percentage of the ACQ Secondly, the buyer may make up gas volumes not taken but already paid in one year in order to get free volumes in the following years after having taken delivery of the ACQ. Thirdly, the buyer may have a carry forward right which allows him to use past gas deliveries exceeding the ACQ as a means to reduce his TOP obligations of following years Take-or-pay [TOP] obligations as an essential part of the non price-determined terms of common gas sales agreements by questioning both the legal and the economic logic underlying these terms. It analyses to what extent these provisions facilitate the development of infant gas markets but takes also mature ones into account. Consequently, it asks whether the merits of long-term TOP contracts will outweigh their risks if the economical or regulatory framework of gas markets changes towards deregulation. This approach is justifiable by the difficulties that occurred in the North American gas markets of the 1980s but also

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by the risks which European marketers face as a result of the recent liberalisation of the European gas markets. After a having given a brief account of the gas industry structure, the categories and key-provisions of gas sales agreements are described.

Contract Length The traditional duration of gas sales agreements concentrates on the period which is required to amortise the producer's original capital investment Therefore, the parties usually chose 10 to 20 years U.S. Legislation even demanded a minimum duration of 15 years Price Determined Provisions The terminology how to define the price determined provisions of gas sales agreement is not consistent. However, it seems to be most appropriate to define fixed prices either as constant prices for the whole duration or as prices bound to escalating formulas depending on constant factors Contrarily, market based prices should be understood as prices linked to escalator-formulas which depend on the development of unforeseeable market based indexes and commodity prices These formulae can be used more flexibly if several commodities are combined or separate formulas are compared in order to choose the lower price [Top-stop] or the higher price [bottom-stop] Rationale of Long-term TOP Obligations in the Early Stages of Market Development There is nearly unanimous consent that long-term gas sales TOP agreements play a crucial role concerning the development of gas markets TOP obligations became a standard clause in the 1950s This development is justified by various arguments: The terms successfully cope with the seller's demand risk for the lifetime of the project Thereby, it also reduces the effect of cross-fuel competition. As gas is a highly substitutable commodity this finding has outstanding relevance. By eliminating demand risk these clauses provide secure long-term cash flows, too. These cash flows can be used to calculate the process of the amortisation of the equipment precisely in a very early stage. Furthermore, long-term contractually fixed cash flows are a useful means of project finance as banks want to secure their loans. Additionally, the buyer backed by transmission, distribution and supply monopolies - is regarded as an extremely reliable debtor. Although a long-term contract may be initially expensive because of 12- to 18-months of legal negotiations it generally minimises expenditure as frequent re-negotiations are avoided. Another economic argument for long-term legal relations is based on the fact that the supply chain provides for a highly mutual dedication of the physical linked investments This argument is backed by the fact that most gas resources are located far away from the retail markets. Contrarily, the traditional buyer takes advantage of these provisions by concentrating on the reliability of long-term supply rather than by looking for the cheapest means of supply. This approach is economically justifiable as long he is bound to supply his consumers on the basis of a regulated, cost oriented tariff so that he is able to recover his additional expenditure. Additionally, the so categorised buyer is able to predict

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the demand of his supply area sufficiently accurate in order to adjust the TOP obligation properly in the long run This would be nearly impossible in competitive environments. A second opinion points out that this traditional doctrine of long-term TOP obligations is no longer true, if a new field is developed which shall supply a mature liberal gas market It may be developed on the basis of a mixture of short term agreements as it is not feasible that the competing marketers return to longterm obligations only to serve the interests of one capital investor. It remains an interesting question whether this idea could be extended to the thesis that even new gas fields in infant gas markets could be developed relying on a mixture of short term contracts. The answer shall be positive if the initial market framework is liberal provided that there is a third party access [TPA] to the new networks for a large numbers of buyers and sellers as one can argue that there is an economical analogy between the former idea and the latter thesis. Stages of Market Development Four different stages of domestic gas market development may be classified by the criteria of percentage share of large consumers, cross-fuel competition, interdependence between producers and network operators and, lastly, the relevance of long-term TOP contracts. Infant gas markets focus on the depletion of few fields, large percentage shares of industrial consumers, a large impact of cross-fuel competition, a high interdependence of few producers and one or few domestic network operators, which are bound by long-term TOP contracts including high TOP percentages - in order to amortise their initial investments for field development and transportation. Sweden represents this stage. The second stage (childhood) is characterised by the fact that large numbers of small consumers begin to outweigh the importance of large consumers and Spain, Finland and Turkey fall into this category. The third/fourth stages of adolescence and maturity are described that gas balancing becomes more important and large interruptible users are supplied in order to avoid storage Additionally, networks interconnectors are introduced. In the middle of the 1990s, Austria, Belgium, France, Germany and the Netherlands are in this stage. Elements of the maturity are amendments of the legal framework in order to liberalise the market by unbundling of the vertically integrated utilities and allowing TPA to the networks, emerging of spot and future markets and declining relevance of TOP contracts. The U.K. represents this stage since the beginning of beach trades in the 1990s. The key element of transition between the third and fourth stage is that the concept of the natural monopoly is no longer applied for the whole supply chain. If it is reduced to the network operation the general domestic competition law is applicable Short-term Contracts Firstly, short-term gas sales agreements among producers and consumers, producers and shippers with a duration of up to 3 years and flexible spot market based pricing will be a valuable tool.

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Spot Markets Liberalising and granting third party access meet the key-criterion of spot market development: a large number of liquid buyers and sellers in order to create sufficient market volume The other criteria are deregulated prices, transparency by published bids so that a market occurs for gas contracts concerning physical deliveries of one week or a few months in advance These markets will evolve from unregulated OTC trades via semi-regulated NBP-trades to stock exchanges including standard contracts and involving financial intermediaries which reduces party risks and negotiations Markets for Derivatives On the basis of an established gas spot market, markets for derivatives will evolve This establishes the trading of OTC-Forward contracts of futures options and swaps which are usually settled by cash. By carefully hedging and positiontaking, the marketers can reduce financial, demand and price risks similar to long-term TOP obligations without causing in-competitive, inflexible and distorted gas markets.

GAS SALES AGREEMENT This Gas Sales Agreement (this “Contract”) is made and entered into effective for all purposes as of _______________ (the “Effective Date”), by and between __________________________, a _________________corporation ("Buyer"), and the BOARD FOR LEASE OF UNIVERSITY LANDS ("Seller"). A. Seller is authorized by the Texas Education Code to execute sales contracts necessary for the disposition of royalty taken in kind. B. Seller takes its royalty gas in kind from those certain University leases located in Ward County, Texas, described in Exhibit “A” (the “Leases”). C. Buyer desires to purchase from Seller, and Seller wishes to sell to Buyer, the royalty gas Seller takes in kind from the Leases (the “Royalty Gas”). NOW THEREFORE, for and in consideration of the premises and the payment of amounts due hereunder, Seller agrees to sell to Buyer and Buyer agrees to purchase the Royalty Gas on the following terms and conditions: 1. POINTS OF DELIVERY AND TITLE. The Points of Delivery for the Royalty Gas shall be at the Koch Waha Header as specially described in Exhibit “B”. As between Buyer and Seller, Seller or its lessee shall be responsible for any damage or injury caused thereby until the same shall have been delivered to Buyer at the Points of Delivery. Seller represents and, to the extent authorized under the laws and Constitution of the State of Texas, warrants that Seller holds a valid royalty interest and title to the gas produced from such interest, free of claims, in the properties subject to this Contract; is authorized to take Seller’s gas royalty from such properties in kind; and has taken all actions necessary to cause Seller’s gas royalty from such properties to be delivered in kind. Title to, risk of loss from any cause, and liability with respect to the gas royalty production tendered for delivery to Buyer shall pass to Buyer at the point of delivery. Seller

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shall not be responsible for transportation or any other costs that may be incurred beyond the delivery point with respect to the gas sold under this Agreement. 2. PRICE. Subject to all applicable provisions of this Contract, Buyer shall pay to Seller for each MMBtu of Royalty Gas delivered hereunder a price based on the index price published in the __________________ effective for the month in which the gas is delivered. The index price shall be effective immediately upon publication. The price shall be equal to one hundred percent (100%) of the index price referenced above, ________________________ per MMBtu. 3. TERM. The term of this Contract shall commence on the Effective Date and continue for a period of ______________ (the “initial term”) and from month-tomonth thereafter, unless and until terminated as provided herein. Either party may terminate this Contract on or after the expiration of the initial term by giving the other party thirty (30) days' advance written notice. 4. QUALITY. All Royalty Gas delivered by Seller to Buyer hereunder shall be merchantable gas of pipeline quality.

5. PRESSURE. All Royalty Gas delivered by Seller to Buyer hereunder shall be at a pressure sufficient to overcome the operating pressure in Buyer's or its designee's pipeline system. 6. DEDICATION. For the term of this Contract, Seller dedicates to the performance of this Contract any and all royalty interest taken in-kind by Seller in all recoverable gas reserves attributable to or produced from the Leases. 7. REPRESENTATIONS. Except as to the quality of the Royalty Gas delivered to Buyer, the sale of the Royalty Gas is made, and Buyer accepts the Royalty Gas “AS IS” and SELLER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, WITH REGARD TO THE MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE WITH RESPECT TO THE GAS. 8. PAYMENTS. Buyer shall timely pay to the Board of Regents of The University of Texas System, c/o University Lands Accounting Office (“UT”), any and all amounts due under this Contract. Buyer shall pay to UT on or before the last day of each calendar month or fifteen (15) days after Seller provides the preliminary allocation statement to Buyer pursuant to Paragraph 9, whichever is later, amounts payable for Royalty Gas delivered by Seller to Buyer pursuant to this Contract during the preceding month. Together with each such payment, Buyer shall provide to UT a statement showing the total quantity of Royalty Gas in MMBtu's delivered to Buyer at the Points of Delivery and any other information or documentation deemed necessary and requested by UT to verify the accuracy of payment amounts or for other accounting purposes. If the term of this Contract is more than three (3) months, Buyer shall pay amounts due hereunder to UT by electronic funds transfer. If the term of this Contract is three (3) months or less, Buyer may make payments to UT by any method accepted by the Texas State Treasury and in accordance with applicable law.

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9. ALLOCATION STATEMENTS. Seller will make reasonable efforts to provide to Buyer on or before the twenty-fifth (25th) day of each calendar month a preliminary allocation statement setting forth the quantities of Royalty Gas attributable to each well from which Buyer purchases gas hereunder. Buyer shall be entitled to rely upon the accuracy of such preliminary allocation statement for the purpose of making payment pursuant to Paragraph 8. Buyer and Seller will promptly notify each other of any adjustments to a preliminary or other allocation statement and in any event no later than thirty (30) days after the need for the adjustment was discovered. If an adjusted allocation statement indicates an amount due to Buyer or Seller, such amount shall be taken by Buyer as a credit against amounts owed to Seller in the next payment period. If the adjusted allocation statement indicates an amount due to Seller from Buyer, Buyer shall add such amount to the amount due on the next payment due date that is at least fifteen (15) days after Buyer’s receipt of the adjusted allocation statement. Payment for any adjustments not accounted for on or before the last date a payment is due pursuant to Paragraph 8 shall be made no later than sixty (60) days after receipt of the adjusted allocation statement by the party from whom an amount is due. Payment may be made or a credit applied in any manner acceptable to the party to whom the amount is payable.

10. AUDIT. Seller shall have the right to reasonable access to any and all metering devices, records, and any other information relevant to any sale or delivery made pursuant to this Contract for purposes of auditing the same to verify the quantity and quality of Royalty Gas delivered to Buyer. 11. TAXES. Seller is currently exempt from the payment of all production, severance and other taxes. Seller is responsible for the payment of any such taxes lawfully levied against Seller with respect to the Royalty Gas purchased by Buyer under this Contract. Seller’s tax I.D. No. is 1-74-6000203-7 . 12. DEFAULT AND REMEDIES. The following shall be deemed to be an Event of Default: a. Buyer ceases to continue the business of purchasing gas, is insolvent, or files for protection under any bankruptcy law; b. If Buyer is a partnership, Buyer is dissolved; c. Failure of Buyer to maintain financial assurance as required by UT as of the effective date of this Agreement; d. If Buyer is required to maintain a letter of credit, if a circumstance exists that allows UT to draw on the letter of credit; e. Failure of Buyer to pay any amount due hereunder within five (5) business days after it is due; or f. Failure of Buyer to perform any other obligation under this Agreement within fifteen (15) business days after notice from Seller specifying such failure.

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If an Event of Default occurs, Seller may, at Seller’s option, immediately terminate this Agreement by giving written notice of such termination to Buyer. The parties acknowledge that UT may insure payment of amounts payable to UT hereunder. If such insurance is required by UT as of the effective date of this Agreement and should such insurance be canceled for any reason relating to the performance or insurability of Buyer, UT may demand that Buyer provide additional financial assurance to UT for the remainder of the term of this Agreement. Buyer agrees to immediately provide a letter of credit in favor of UT in a form and with a bank acceptable to UT upon receipt of notice from UT of such cancellation of insurance. Such letter of credit shall be in an amount deemed satisfactory by UT, but in no event less than the amount paid (or payable) hereunder for the immediately preceding 2-month period. If Buyer fails to provide the letter of credit within ten (10) business days, this Agreement shall terminate at the option of UT. Seller hereby authorizes UT or its authorized agent to terminate this Agreement under the above-specified conditions. 13. INDEMNITY. Except monetary damages for injury, death, or property damage directly and proximately caused solely by the negligence of Seller, Buyer hereby agrees to indemnify Seller and UT and hold Seller and UT harmless from and against any and all claims, liabilities, demands, causes of action, and any related expenses, including without limitation attorneys’ fees, of any type and nature, specifically including but not limited to claims of strict liability, arising out of or pertaining to this Contract after delivery of the Royalty Gas, or a portion thereof, to Buyer. 14. NOTICE. Any notice, request, demand, or statement provided for in this Contract shall be given or made in writing and shall be deemed delivered when deposited in the United States mail and addressed as follows: BUYER: __________________________________ __________________________________ __________________________________ Attn: _______________________ Phone: _______________________ Fax: _______________________ SELLER AND UT: University Lands Accounting Office P. O. Box 579 Austin, Texas 78767-0579 Attn: Tenzy Rambo Bradley Phone: (512) 499-4751 Fax: (512) 494-3528 or at such address as Seller or Buyer shall from time to time designate by letter properly addressed. 15. MISCELLANEOUS. A. Applicable Law. This Contract shall be governed by and construed under the laws of the State of Texas. Venue for any cause of action hereunder shall be in Travis County, Texas.

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B. Standards of Practice. Buyer shall conduct its business hereunder in a manner consistent with the highest applicable standard of industry practice. C. Severability. In case any one or more of the provisions contained in this Contract shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, and this Contract shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. D. Entire Agreement. This Contract constitutes the sole and entire agreement between the parties and cannot be amended except by written instrument signed by both parties. E. Authority to Enter into this Contract. If Buyer is a corporation, partnership, or other entity, each individual executing this Contract on behalf of Buyer represents that he has full power and authority to enter into this Contract. F. Captions. The captions used herein are for convenience only and do not limit or amplify the provisions hereof. G. Gender. Words of any gender used in this Contract shall be held and construed to include any other gender and words in the singular number shall be held to include the plural, unless the context otherwise requires. H. Actions of Seller. Whenever an action is required to be taken hereunder by Seller, an action taken by an authorized employee of UT shall be sufficient. I. Assignment. Buyer shall not assign any or all of its rights under this Contract without the prior written consent of Seller. J. Force Majeure. Any failure of either party hereto to perform any of the obligations hereunder other than to make payments due shall be excused if such failure is due to fires, strikes, floods, lack of water, winds, lightning, or accidents beyond the control of the party failing to perform. Executed by the parties hereto to be effective for all purposes on the date written above. SELLER: BOARD FOR LEASE OF UNIVERSITY LANDS By: ________________________________ David Dewhurst, Chairman BUYER: ___________________________________ [TYPED OFFICIAL COMPANY NAME] By: ________________________________ [authorized representative signature] Typed Name: _______________________ Title: ______________________________ EXHIBIT A Description of Leases Operated by Exxon Corporation

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OIL AND GAS LEASE This Agreement is made and entered into this_____ day of __________, 200__, by and between: ___________________________ , whose address is ____________________ , hereinafter called Lessor (whether one or more), and Vista Exploration Corporation, whose address is _________________________ ,hereinafter called Lessee. WITNESSETH, that the Lessor, for and in consideration of TEN DOLLARS ($10.00), cash in hand paid, the receipt and sufficiency of which are hereby acknowledged, and the covenants and agreements hereinafter contained, has granted, demised, leased and let, and by these presents does grant, demise, lease and let exclusively unto Lessee, the land hereinafter described, with the exclusive right for the purpose of exploring by geophysical and other methods, and operating for and producing therefrom oil, gas, and other hydrocarbons and all other minerals or substances, whether similar or dissimilar, including, but not limited to, coalbed methane, helium, nitrogen, carbon dioxide, condensate, distillate, casinghead gas, casinghead gasoline and all substances produced in association therewith from coal bearing formations or elsewhere, that may be produced from any well drilled under the terms of this lease, with rights-of-way and easements for laying pipe lines and servicing or drilling other wells in the vicinity of said lands, and erection of structures thereon to produce, save and take care of said products, including the right to inject salt water, production fluids, gases and other fluids into strata below those providing fresh water from wells located on the herein leased lands or on adjacent lands, all that certain tract of land, together with any reversionary, remainder and executor rights therein, situated in _______ County, State of KANSAS, described as follows: ____________________________________________ and containing ___ acres, more or less, together with all strips or parcels of land (not, however, to be construed to include parcels comprising a regular 40-acre legal subdivision or lot of approximately corresponding size) adjoining or contiguous to the above described land and owned or claimed by Lessor. 1. It is agreed that this lease shall remain in force for a term of FIVE (5) YEARS from the date of this lease and as long thereafter as oil or gas of whatsoever nature or kind is produced from said leased premises or on acreage pooled therewith, or drilling operations are continued as hereinafter provided. If, at the expiration of the primary term of this lease, oil or gas is not being produced on the leased premises or on acreage pooled therewith but Lessee is then engaged in drilling or re-working operations thereon, then this lease shall continue in force so long as operations are being continuously prosecuted on the leased premises or on acreage pooled therewith; and operations shall be considered to be continuously prosecuted if not more than One Hundred Twenty (120) days shall elapse between the completion or abandonment of one well and the beginning of operations for the drilling or a subsequent well. If, after discovery, of oil or gas on said land or on acreage pooled therewith, the production thereof should cease from any cause after the primary term, this lease shall not terminate if Lessee commences additional drilling or re-working operations within One Hundred 445

Twenty (120) days from date of cessation of production or from date of completion of dry hole. If oil or gas shall be discovered and produced as a result of such operations at or after the expiration of the primary term of this lease, this lease shall continue in force so long as oil or gas is produced from the leased premises or on acreage pooled therewith. 2. This is a PAID-UP LEASE. In consideration of the cash payment, Lessor agrees that Lessee shall not be obligated, except as otherwise provided herein, to commence or continue any operations or to make any rental payments during the primary term. Lessee may at any time or times during or after the primary term surrender this lease as to all or any portion of said land and as to any strata or stratum by delivering to Lessor or by filing for record a release or releases, and be relieved of all obligation thereafter accruing as to the acreage surrendered.

3. In consideration of the premises Lessee covenants and agrees: A. To deliver to the credit of Lessor, free of cost, in the pipe line to which Lessee may connect wells on said land, equal to one-eighth (1/8) part of all oil produced and saved from the leased premises. B. To pay Lessor one-eighth (1/8) of the net proceeds at the well from the proceeds received for gas sold from each well where gas only is found, or the market value at the well of such gas used off the premises. C. To pay Lessor one-eighth (1/8) of the market value at the well for gas produced from any oil well and used off the premises, or for the manufacture of casinghead gasoline or dry commercial gas. D. To pay Lessor one-eighth (1/8) of the proceeds received from the sale of any substance covered by this lease, other than oil and gas and the products thereof, which Lessee may elect to produce, save, and market from the leased premises. 4. Where gas from a well capable of producing gas is not sold or used, Lessee may pay or tender to Lessor, as a royalty payment, One Dollar per year per net royalty acre retained hereunder, such payment or tender to be made on or before the anniversary date of this lease next ensuing after the expiration of 90 days from the date such well is shut-in and thereafter on or before the anniversary date of this lease during the period such well is shut-in. If such payment or tender is made, it will be considered that gas is being produced within the meaning of this lease. 5. If Lessor owns a less interest in the above described land than the entire and undivided fee simple estate therein, then the royalties (including any shut-in gas royalty) herein provided for shall be paid to Lessor only in the proportion which Lessor's interest bears to the whole and undivided fee. 6. Lessee shall have the right to use, free of cost, gas, oil and water produced on said land for Lessee's operation thereon, except water from the wells of Lessor.

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7. When requested by Lessor, Lessee shall bury Lessee's pipeline below plow depth. 8. No well shall be drilled closer than 200 feet from the house or barn now on said premises without written consent of Lessor. 9. Lessee shall pay for damages caused by Lessee's operations to growing crops on said land. 10. Lessee shall have the right at any time to remove all machinery and fixtures placed on said premises, including the right to draw and remove casing. 11. The rights of Lessor and Lessee hereunder may be assigned in whole or part. No change in ownership of Lessor's interest (by assignment or otherwise) shall be binding on Lessee until Lessee has been furnished with notice, consisting of certified copies of all recorded instruments or documents and other information necessary to establish a complete chain of record title from Lessor, and then only with respect to payments thereafter made. No other kind of notice, whether actual or constructive, shall be binding on Lessee. No present or future division of Lessor's ownership as to different portions or parcels of said land shall operate to enlarge the obligations or diminish the rights of Lessee, and all Lessee's operations may be conducted without regard to any such division. If all or any part of this lease is assigned, no leasehold owner shall be liable for any act or omission of any other leasehold owner. 12. Lessee at its option, is hereby given the right and power at any time and from time to time as a recurring right, either before or after production, as to all or any part of the land described herein and as to any one or more of the formations hereunder, to pool or unitize the leasehold estate and the mineral estate covered by this lease with other land, lease or leases in the immediate vicinity for the production of oil and gas, or separately for the production of either, when in Lessee's judgment it is necessary or advisable to do so, and irrespective of whether authority similar to this exists with respect to such other land, lease or leases. Likewise, units previously formed to include formations not producing oil or gas may be reformed to exclude such non-producing formations. The forming or reforming of any unit shall be accomplished by Lessee executing and filing a record of declaration of such unitization or reformation, which declaration shall describe the unit. Any unit may include land upon which a well has theretofore been completed or upon which operations for drilling have theretofore been commenced. Production, drilling or re-working operations or a well shut-in for want of a market anywhere on a unit which includes all or a part of this lease shall be treated as if it were production, drilling, or re-working operations or a well shut-in for want of a market under this lease. In lieu of the royalties elsewhere herein specified, including shut-in gas royalties, Lessor shall receive on production from the unit so pooled royalties only on the portion of such production allocated to this lease; such allocation shall be that proportion of the unit production that the total number of surface acres covered by this lease and included in the unit bears to the total number of surface acres in such unit. In addition to the foregoing, Lessee shall have the right to unitize, pool, or combine all or any part of the above described lands as to one or more of the formations

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there under with other lands in the same general area by entering into a cooperative or unit plan of development or operation approved by any governmental authority, and, from time to time, with like approval, modify, change or terminate any such plan or agreement; and, in such event, the terms, conditions and provisions of this lease shall be deemed modified to conform to the terms, conditions, and provisions of such approved cooperative or unit plan of development or operation; and, particularly, all drilling and development requirements of this lease, express or implied, shall be satisfied by compliance with the drilling and development requirements of such plan or agreement. This lease shall not terminate or expire during the life of such plan or agreement. In the event that said above described lands, or any part thereof, shall hereafter be operated under any such cooperative or unit plan of development or operation whereby the production therefrom is allocated to different portions of the land covered by said plan, then the production allocated to any particular tract of land shall, for the purpose of computing the royalties to be paid hereunder to Lessor, be regarded as having been produced from the particular tract of land to which it is allocated and not to any other tract of land; and the royalty payments to be made hereunder to Lessor shall be based upon production only as so allocated. Lessor shall formally express Lessor's consent to any cooperative or unit plan of development or operation adopted by Lessee and approved by any governmental agency by executing the same upon request of Lessee. 13. For purposes of promoting the development of shallow gas and associated hydrocarbons produced in conjunction therewith, Lessee is granted the power to pool and unitize all or portions of this lease into a development unit containing not more than 3,000 acres. This grant shall only be effective if Lessee drills or has drilled at least Two (2) wells within the pooled unit no later than one (1) year from declaration of pooling and in no event later than one (1) year after the expiration of the primary term hereof. This special pooling grant is only effective as to formations hereby defines as geologic formations located from the surface of the earth to one hundred feet (100') below the top of the Pre-Cambrian formation. The pooled unit must consist of all contiguous acreage with at least one common corner. To utilize this pooling grant, Lessee shall file with the Office of the Register of Deeds of the relevant county or counties a declaration of the exact description of the unit formed pursuant to this clause. Subject to fulfilling the above described drilling requirements, such declaration is all that is required to establish the pooled unit. If such gas well or wells as contemplated by this clause shall not be drilled on the premises herein leased it shall nevertheless be deemed to be upon the leased premises within the meaning of all covenants, expressed or implied, in this lease. Lessor shall receive on hydrocarbon production thus pooled the same proportion of the royalty stipulation herein reserved as the proportion that the Lessor's acreage placed in the unit bears to the total acreage so pooled in the particular declared unit, regardless of which wells the production actually comes from. After one such unit has been declared, Lessee may add other lands to such unit up to the limit of 3,000 acres. 14. All express or implied covenants of this lease shall be subject to all Federal and State laws, executive orders, rules or regulations; and this lease shall not be terminated, in whole or in part, nor Lessee held liable for damages, or for failure to comply therewith, if compliance is prevented by, or if such failure is the result of, any such law, order, rule or regulation.

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15. Lessor hereby warrants and agrees to defend the title to the lands herein described, and agrees that Lessee shall have the right at any time to redeem for Lessor, by payment, any mortgages, taxes or other liens on the above described lands, in the event of default of payment by Lessor and be subrogated to the rights of the holder thereof; and Lessor hereby agrees that any such payments made by Lessee for Lessor may be deducted from any amounts of money which may become due to Lessor under the terms of this lease. The undersigned Lessors, for themselves and their heirs, successors and assigns, hereby surrender and release all right of dower and homestead in the premises described herein, insofar as said right of dower and homestead may in any way affect the purposes for which this lease is made, as recited herein.

16. Should any one or more of the parties hereinabove named as Lessor fail to execute this Lease, it shall nevertheless be binding upon all such parties who do execute it as Lessor. The word "Lessor", as used in this lease, shall mean any one or more or all of the parties who execute this lease as Lessor. All the provisions of this lease shall be binding on the heirs, successors and assigns of Lessor and Lessee. 17. Lessee has the option to extend this lease for an additional term of THREE (3) YEARS from the expiration of the primary term of this lease, and as long thereafter as oil or gas, or either of them, is produced from said land by the Lessee, its successors and assigns, said renewal to be under the same terms and conditions as contained in this lease. Lessee, its successors or assigns, may exercise this option to renew if on or before the expiration date of the primary term of this lease, Lessee pays or tenders to Lessor or to Lessor's credit, the sum of TEN (10) DOLLARS per net mineral acre. 18. Bonuses may be paid by check or draft and may be remitted by mail. Mailing of bonuses on or before the bonus paying date shall be deemed a timely tender thereof and shall preclude termination of this lease.

IN WITNESS WHEREOF, this instrument is executed as of the date first above written.

________________________________ ________________________________ SS/Tax ID# _____________________ ________________________________

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SS/Tax

ID#

EXHIBIT "A" This Exhibit "A" is attached to and made a part thereof that certain Oil and Gas Lease dated this _____ day of _____________________, 200__. Notwithstanding anything to the contrary contained in the Oil and Gas Lease to which this Exhibit is attached and made a part of, the provisions of this Exhibit shall prevail whenever in conflict with the provisions of the Oil and Gas Lease. 1. Lessee and Lessor agree that any access roads, well sites, or pipelines to be constructed under the terms of this lease shall be located after consultation with and consent of Lessor, provided however, that Lessor shall not attempt to prohibit said construction or make unreasonable requests of Lessee. 2. Lessee agrees that as soon as is reasonably possible, following completion of its operations, Lessee shall restore its well site, as nearly as possible, to its original condition and land contour. 3. Lessee agrees to be a prudent operator and will keep all surface disturbances to the minimum area necessary to conduct its operations. 4. Lessee shall indemnify and hold Lessor harmless from any and all liability, liens, claims and environmental liability arising out of Lessee's operations under the terms of this lease. 5. This lease shall terminate on the first anniversary date, unless Lessee pays or tenders to Lessor, in the same manner provided for payment of shut-in loyalties, TEN DOLLARS ($10.00) per net mineral acre covered by this lease. If said payment is not made, Lessee agrees to record a Release of Lease within THIRTY (30) DAYS of said termination. 6. Lessee agrees to pay Lessor a one-time payment of FIVE HUNDRED DOLLARS ($500.00) per acre for all property which is damaged as a direct result of Lessee's operations under the terms of this lease.

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