Mark P. Hardwick, Individually and D/B/A Mark P. Hardwick Oil and Gas Properties and Mark P. Hardwick, LLC v. Smith Energy Company, on Its Own Behalf and on Behalf of Smith Energy Resource Oil, Ltd., a Texas Limited Partnership, and on Behalf of Smith Energy Partners I, Ltd., a Texas Limited Partnership

ACCEPTED 07-15-00083-CV SEVENTH COURT OF APPEALS AMARILLO, TEXAS 9/9/2015 5:05:30 PM Vivian Long, Clerk No. 07-15-00083-CV IN THE SEVENTH COURT OF APPEALS FILED IN 7th COURT OF APPEALS AMARILLO, TEXAS AMARILLO, TEXAS 9/9/2015 5:05:30 PM MARK P. HARDWICK, INDIVIDUALLY AND D/B/A VIVIAN LONG CLERK MARK P. HARDWICK OIL AND GAS PROPERTIES AND MARK P. HARDWICK, LLC, Appellants, v. SMITH ENERGY COMPANY, ON ITS OWN BEHALF AND ON BEHALF OF SMITH ENERGY RESOURCE OIL, LTD., A TEXAS LIMITED PARTNERSHIP, AND ON BEHALF OF SMITH ENERGY PARTNERS I, LTD., A TEXAS LIMITED PARTNERSHIP, Appellees. On Appeal from the 121st District Court, Terry County, Texas Trial Court Cause No. 19,490; The Honorable Rick Morris, Presiding BRIEF OF APPELLANTS BECK REDDEN LLP David M. Gunn State Bar No. 08621600 dgunn@beckredden.com Chad Flores State Bar No. 24059759 cflores@beckredden.com Erin H. Huber State Bar No. 24046118 ehuber@beckredden.com 1221 McKinney, Suite 4500 Houston, TX 77010-2010 (713) 951-3700 (713) 951-3720 (Fax) COUNSEL FOR APPELLANTS Oral Argument Requested  IDENTITY OF PARTIES AND COUNSEL Appellants: Mark P. Hardwick, Individually and d/b/a Mark P. Hardwick Oil and Gas Properties, and Mark P. Hardwick, LLC Counsel for Appellants: David M. Gunn State Bar No. 08621600 dgunn@beckredden.com Chad Flores State Bar No. 24059759 cflores@beckredden.com Erin H. Huber State Bar No. 24046118 ehuber@beckredden.com BECK REDDEN LLP 1221 McKinney, Suite 4500 Houston, TX 77010 (713) 951-3700 (713) 951-3720 (Fax) 1890.001/55701 Appellees: Smith Energy Company, on Its Own Behalf and on Behalf of Smith Energy Resource Oil, Ltd., a Texas Limited Partnership, and on Behalf of Smith Energy Partners I, Ltd., a Texas Limited Partnership Counsel for Appellees: Rusty Hardin State Bar No. 08972800 rustyhardin@rustyhardin.com Ryan K. Higgins State Bar No. 24007362 rhiggins@rustyhardin.com Jeremy Monthy State Bar No. 24073240 jmonthy@rustyhardin.com Lara Hollingsworth State Bar 00796790 lhollingsworth@rustyhardin.com Carolyn P. Courville State Bar No. 24007042 ccourville@rustyhardin.com RUSTY HARDIN & ASSOCIATES, LLP 1401 McKinney Street, Suite 2250 Houston, Texas 77010 (713) 652-9000 (713) 652-9800 (Fax) Trial Court: Hon. Rick Morris Judge, 121st District 1890.001/55701 ii  TABLE OF CONTENTS Page IDENTITY OF PARTIES AND COUNSEL .......................................................................... i TABLE OF CONTENTS ................................................................................................ iii INDEX OF AUTHORITIES............................................................................................ vii STATEMENT OF THE CASE .........................................................................................xv STATEMENT REGARDING ORAL ARGUMENT ........................................................... xvi ISSUES PRESENTED ................................................................................................. xvii INTRODUCTION ............................................................................................................1 STATEMENT OF FACTS.................................................................................................2 STANDARD OF REVIEW..............................................................................................11 SUMMARY OF THE ARGUMENT ..................................................................................12 ARGUMENT ...............................................................................................................13 I. THE CONTRACT AND THEFT THEORIES SHOULD BE REVERSED. ..........13 A. The Fusselman contract recovery should be reversed. .............13 1. The Fusselman part of the contract recovery should be reversed and rendered, because Hardwick did not breach any of the Fusselman contracts, let alone all of them. .......................................14 2. The Fusselman part of the contract recovery should be reversed and rendered, because no overcharge damages resulted from any breach. .............17 3. Alternatively, the Fusselman contract recovery should be reversed and remanded because of charge error. ....................................................................18 1890.001/55701 iii  B. The Bad Billy contract recovery should be reversed. ...............22 1. The contract (PX-85) is not ambiguous..........................22 2. The statute of frauds applies to the Bad Billy claim................................................................................23 C. There is no theft, and even if there were, the statute of limitations would still bar almost all of the theft recovery. ......26 1. The statute of limitations bars recovery. ........................27 2. Breach of a contract should not be theft. ........................29 II. THE TORT THEORIES SHOULD BE REVERSED. ......................................30 A. There is no breach of fiduciary duty. ........................................30 1. There is no joint venture, as the parties carefully disclaimed any joint venture in writing. .........................31 2. There is no agency, because the parties disclaimed it. .....................................................................................33 3. The contracts have legal effect. ......................................34 B. There is no fraud. ......................................................................37 1. The fraudulent inducement aspect of the claim fails because it lacks legally and factually sufficient evidence. .........................................................38 2. The rest of the fraud claim is flawed. .............................40 III. THE ADDITIONAL REMEDIES—$5 MILLION IN FORFEITURE, $3.5 MILLION IN FEES, $750,000 IN INTEREST ON THE FORFEITURE, AND PARTIAL RESCISSION—ARE IMPROPER. .......................................42 A. The $5 million forfeiture award is improper. ...........................42 1. There is no underlying tort to support forfeiture. ...........42 1890.001/55701 iv  2. Even if forfeiture were available—so that Hardwick had to “return” his “compensation”—the working interests never came from Smith and were not compensation. ...........................................................43 3. The forfeiture award rests on inaccurate factual findings. ..........................................................................44 4. The forfeiture amount is too large. .................................45 5. The forfeiture cannot be saved as restitution and rescission for fraud. ........................................................46 B. The attorney’s fees should be reduced or eliminated. ..............48 1. A reversal of the underlying damages will require either a rendition or remand on attorney’s fees. .............48 2. Smith failed to segregate fees between recoverable and non-recoverable claims. ...........................................49 3. There is no evidence that the hours worked by Smith’s lawyers were necessary. ....................................53 C. The judgment wrongly stacks remedies: Smith cannot have both the $5 million in disgorgement and the $3.5 million in fees............................................................................56 D. The rescission remedy is improper. ..........................................58 E. Interest on forfeiture. ................................................................58 IV. LLC Should Recover Fees Because It Prevailed on the Theft Claim. ..................................................................................................59 A. The Theft Liability Act alters the American Rule by making fees mandatory for a person who “prevails.”...............59 B. Under this Court’s reasoning in Dean Foods, the prevailing party on Smith’s theft claim against LLC is not Smith, but LLC. ..................................................................59 C. LLC should recover fees. ..........................................................61 1890.001/55701 v PRAYER FOR RELIEF ..................................................................................................63 CERTIFICATE OF SERVICE ..........................................................................................65 CERTIFICATE OF COMPLIANCE ..................................................................................66 APPENDIX Jury Verdict (2 CR 2948-92) .................................................................. TAB A Judgment (2 CR 3600-11) ...................................................................... TAB B North Mound Lake Participation Agreement (DX 1346) ...................... TAB C North Mound Lake Operating Agreement (DX 1347) ........................... TAB D North Mound Lake letter (DX 1345) (incorrectly dated as January 17, 2008 instead of July) ............................................................TAB E Big Bump Participation Agreement & Operating Agreement (DX 1354) ............................................................................. TAB F On Point GEA (DX 1351) ...................................................................... TAB G Muy Caliente GEA (DX 1356) ............................................................... TAB H Amended North On Point Extension & O’Donnell GEA (DX 1350) ................................................................................................. TAB I Bad Billy Agreement (Amended) (PX 85) .............................................. TAB J 1890.001/55701 vi  INDEX OF AUTHORITIES CASES Page(s) A.G. Edwards & Sons Inc. v. Beyer, 235 S.W.3d 704 (Tex. 2007) .............................................................................. 52 Air Routing Int’l Corp. (Canada) v. Britannia Airways, Ltd., 150 S.W.3d 682 (Tex. App.—Houston [14th Dist.] 2004, no pet.) ................................................................................... 59 In re Bank One, N.A., 216 S.W.3d 825 (Tex. 2007) .............................................................................. 37 Bank One, Tex., N.A. v. Stewart, 967 S.W.2d 419 (Tex. App.—Houston [14th Dist.] 1998, pet. denied) ............................................................................ 39 Barker v. Eckman, 213 S.W.3d 306 (Tex. 2006) .............................................................................. 49 Bay Colony, Ltd. v. Trendmaker, Inc., 121 F.3d 998 (5th Cir. 1997) .............................................................................. 39 Bed, Bath & Beyond, Inc. v. Urista, 211 S.W.3d 753 (Tex. 2006) .............................................................................. 20 Bokor v. State, 114 S.W.3d 558 (Tex. App.— Fort Worth 2002, no pet.) ................................................................................... 29 Bowden v. Phillips Petroleum Co., 247 S.W.3d 690 (Tex. 2008) .............................................................................. 11 Boyce Iron Works, Inc. v. Sw. Bell Tel. Co., 747 S.W.2d 785 (Tex. 1988) ........................................................................56, 57 Bradford v. Vento, 48 S.W.3d 749 (Tex. 2001)................................................................................. 41 1890.001/55701 vii Brainard v. Trinity Universal Ins. Co., 216 S.W.3d 809 (Tex. 2006) .............................................................................. 58 Bryant v. Vaughn, 33 S.W.2d 729 (Tex. 1930)................................................................................. 48 Burns v. Bishop, 48 S.W.3d 459 (Tex. App.—Houston [14th Dist.] 2001, no pet.) ................................................................................... 28 Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999) ..................................................................11, 45, 54 Cadle Co. v. Henderson, 982 S.W.2d 543 (Tex. App.—San Antonio 1998, no pet.) ...................................................................................................... 28 City of Amarillo v. Glick, 991 S.W.2d 14 (Tex. App.—Amarillo 1997, pet. denied)................................................................................................ 60 City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005) .............................................................................. 11 City of Laredo v. Montano, 414 S.W.3d 731 (Tex. 2013) (per curiam) ......................................................... 54 Columbia Rio Grande Healthcare, L.P. v. Hawley, 284 S.W.3d 851 (Tex. 2009) .............................................................................. 21 Cooper v. Green Tree Servicing LLC, 2015 WL 799255 (N.D. Tex. Feb. 25, 2015) ..................................................... 27 Costley v. State Farm Fire & Cas. Co., 894 S.W.2d 380 (Tex. App.—Amarillo 1994, writ denied) ...................................................................................47, 48, 58 Crown Life Ins. Co. v. Casteel, 22 S.W.3d 378 (Tex. 2000)...........................................................................18, 20 1890.001/55701 viii Dean Foods Co. v. Anderson, 178 S.W.3d 449 (Tex. App.—Amarillo 2005, pet. denied)................................................................................................ 60 Dryzer v. Bundren, 2014 WL 1856849 (Tex. App.—Amarillo June 16, 2014, pet. denied) ................................................................................. 48 El Apple I, Ltd. v. Olivas, 370 S.W.3d 757 (Tex. 2012) .............................................................................. 53 Ensil Int’l Corp. v. Lear Siegler Servs., Inc., 2011 WL 2473067 (Tex. App.—San Antonio June 22, 2011, no pet.) ........................................................................................ 39 Fairfield Ins. Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653 (Tex. 2008) .............................................................................. 35 Figueroa v. Davis, 318 S.W.3d 53 (Tex. App.—Houston [1st Dist.] 2010, no pet.) ..................................................................................... 11 Foreca, S.A. v. GRD Dev. Co., Inc., 758 S.W.2d 744 (Tex. 1988) .............................................................................. 35 Gates v. Asher, 154 Tex. 538, 280 S.W.2d 247 (1955) ............................................................... 24 Goose Creek Consol. I.S.D. v. Jarrar’s Plumbing, Inc., 74 S.W.3d 486 (Tex. App.—Texarkana 2002, pet. denied)................................................................................................ 28 Grant Thornton LLP v. Suntrust Bank, 133 S.W.3d 342 (Tex. App.—Dallas 2004, pet. denied)................................................................................................ 41 Greer v. Greer, 144 Tex. 528, 191 S.W.2d 848 (1946) ............................................................... 24 1890.001/55701 ix Gregory v. Porter & Hedges, LLP, 398 S.W.3d 881 (Tex. App.—Houston [14th Dist.] 2013, pet. denied) ............................................................................ 42 Guenther v. Amer-Tex Const. Co., 534 S.W.2d 396 (Tex. Civ. App.—Austin 1976, no writ) ...................................................................................................... 25 Gulf States Utils. Co. v. Low, 79 S.W.3d 561 (Tex. 2002)................................................................................. 48 Gym-N-I Playgrounds, Inc. v. Snider, 220 S.W.3d 905 (Tex. 2007) .............................................................................. 35 Haase v. Glazner, 62 S.W.3d 795 (Tex. 2001)................................................................................. 34 Hann v. State, 771 S.W.2d 731 (Tex. App.—Fort Worth 1989, no pet.) ...................................................................................................... 29 In re Hardwick, 426 S.W.3d 151 (Tex. App.—Houston [1st Dist.] 2012, orig. proceeding) .................................................................xiv, 8 Harris County v. Smith, 96 S.W.3d 230 (Tex. 2002)...........................................................................20, 21 Heir of Barrow v. Champion Paper & Fibre Co., 327 S.W.2d 338 (Tex. Civ. App.— Beaumont 1959, writ ref’d n.r.e.) ....................................................................... 25 Hoffart v. Wiggins, 2010 WL 816915 (E.D. Tex. Jan. 30, 2010), adopted & rejected in part, 2010 WL 816863 (E.D. Tex. Mar. 3, 2010), rev’d in part on other grounds, 406 Fed. Appx. 834 (5th Cir. 2010) .................................................... 27 Houchins v. Scheltz, 590 S.W.2d 745 (Tex. Civ. App.—Houston [14th Dist.] 1979, no writ) .................................................................................. 28 1890.001/55701 x Howard v. Sony BMG Music Entm’t, 2007 WL 2537865 (S.D. Tex. Aug. 31, 2007), aff’d, 293 Fed. Appx. 350 (5th Cir. 2008) .......................................................... 27 IKON Office Solutions, Inc. v. Eifert, 125 S.W.3d 113 (Tex. App.—Houston [14th Dist.] 2003, pet. denied) ............................................................................ 39 Ingram v. Deere, 288 S.W.3d 886 (Tex. 2009) .............................................................................. 35 Ins. Co. of N. Am. v. Morris, 981 S.W.2d 667 (Tex. 1998) .............................................................................. 41 J&J Sports Prods., Inc. v. JWJ Mgmt., Inc., 324 S.W.3d 823 (Tex. App.—Fort Worth 2010, no pet.) ...................................................................................................... 27 Jacobs v. State, 230 S.W.3d 225 (Tex. App.—Houston [14th Dist.] 2006, no pet.) ................................................................................... 29 Jeanbaptiste v. Wells Fargo Bank, N.A., No. 14-10671, at *4 (5th Cir. Nov. 7, 2014) ...................................................... 27 Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507 (Tex. 1998) .............................................................................. 58 Larson v. Cook Consultants, Inc., 690 S.W.2d 567 (Tex. 1985) .............................................................................. 45 Long Trusts v. Griffin, 222 S.W.3d 412 (Tex. 2006) ........................................................................24, 26 Long v. Griffin, 442 S.W.3d 253 (Tex. 2014) (per curiam) ...................................................53, 54 Malik v. ConocoPhillips Co., 2014 WL 3420775 (E.D. Tex. June 23, 2014) ................................................... 27 Matney v. Odom, 147 Tex. 26, 210 S.W.2d 980 (1948) ................................................................. 24 1890.001/55701 xi MBM Fin. Corp. v. Woodlands Operating Co., L.P., 292 S.W.3d 660 (Tex. 2009) .............................................................................. 50 Morrow v. Shotwell, 477 S.W.2d 538 (Tex. 1972) .............................................................................. 24 In re Nalle Plastics Family Ltd. P’ship, 406 S.W.3d 168 (Tex. 2013) .............................................................................. 49 Nat’l Plan Adm’rs, Inc. v. Nat’l Health Ins. Co., 235 S.W.3d 695 (Tex. 2007) .............................................................................. 35 Nat’l Prop. Holdings, L.P. v. Westergren, 453 S.W.3d 419 (Tex. 2015) .............................................................................. 11 Osterberg v. Peca, 12 S.W.3d 31 (Tex. 2000)................................................................................... 45 Peltier Enters., Inc. v. Hilton, 51 S.W.3d 616 (Tex. App.—Tyler 2000, pet. denied)................................................................................................ 41 In re Prudential Ins. Co. of Am., 148 S.W.3d 124 (Tex. 2004) .............................................................................. 37 Quigley v. Bennett, 227 S.W.3d 51 (Tex. 2007)................................................................................. 23 Reyna v. First Nat’l Bank, 55 S.W.3d 58 (Tex. App.—Corpus Christi 2001, no pet.) ...................................................................................................... 39 Robbins v. Capozzi, 100 S.W.3d 18 (Tex. App.—Tyler 2002, no pet.) ...................................................................................................... 18 Rogers v. Ricane Enters., Inc., 772 S.W.2d 76 (Tex. 1989)................................................................................. 43 Roper v. State, 917 S.W.2d 128 (Tex. App.—Fort Worth 1996, pet. ref’d)................................................................................................... 29 1890.001/55701 xii Sabine Inv. Co. of Tex., Inc. v. Stratton, 549 S.W.2d 247 (Tex. Civ. App.— Beaumont 1977, no writ) .................................................................................... 25 Saden v. Smith, 415 S.W.3d 450 (Tex. App.—Houston [1st Dist.] 2013, pet. denied)............................................................................... 57 Scott v. Ingle Bros. Pac., Inc., 489 S.W.2d 554 (Tex. 1972) .............................................................................. 35 Sullivan v. Abraham, 2014 WL 5140289 (Tex. App.—Amarillo Oct. 13, 2014, pet. filed) ..................................................................................... 55 Sw. Bell Tel. Co. v. Marketing on Hold Inc., 308 S.W.3d 909 (Tex. 2010) .............................................................................. 28 T.O. Stanley Boot Co., Inc. v. Bank of El Paso, 847 S.W.2d 218 (Tex. 1992) ........................................................................22, 39 Thota v. Young, 366 S.W.3d 678 (Tex. 2012) .............................................................................. 11 Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299 (Tex. 2006) ......................................................49, 50, 51, 53, 57 Travel Music of San Antonio, Inc. v. Douglas, 04-00-757-CV, 2002 WL 1058527 (Tex. App.— San Antonio May 29, 2002, pet. denied) .............................................................. 1 U.S. Enters., Inc. v. Dauley, 535 S.W.2d 623 (Tex. 1976) .............................................................................. 25 Varner v. Cardenas, 218 S.W.3d 68 (Tex. 2007)................................................................................. 50 Wilson v. Fisher, 144 Tex. 53, 188 S.W.2d 150 (1945) ................................................................. 24 1890.001/55701 xiii STATUTES TEX. BUS. ORGS. CODE § 152.002(a) ........................................................................................................ 33 § 152.052(b)(4) ................................................................................................... 32 TEX. CIV. PRAC. & REM. CODE § 16.068............................................................................................................... 27 §§ 38.001(8), 134.005(b) ..............................................................................49, 53 § 134.003 ............................................................................................................. 27 § 134.005(b) ........................................................................................................ 59 RULES TEX. R. CIV. P. 277 ................................................................................................... 20 OTHER AUTHORITIES Calvert, “No Evidence” & “Insufficient Evidence” Points of Error, 38 TEX. L. REV. 361 (1960)...................................................... 36 RESTATEMENT (THIRD) OF RESTITUTION & UNJUST ENRICHMENT, Introductory Note (2011) ................................................ 47 1890.001/55701 xiv  STATEMENT OF THE CASE Nature of the case This dispute arises out of several oil and gas projects. The projects made millions of dollars, but a dispute arose about the contractual obligations between the parties. The five participants consist of four West Texans and an investor from Houston. The West Texans are (1) an engineer, (2) a geologist, (3) a geophysicist, and (4) a landman. The Houstonian is Lester Smith, who invested in the projects through his company, Smith Energy. This suit is between Smith and the landman (Hardwick). Trial court Hon. Rick Morris, senior judge from 146th Jud. Dist. Ct. of Bell Cty., sitting in 121st Jud. Dist. Ct. of Terry Cty. Course of proceedings Smith sued the landman in Harris County. After a venue mandamus, the case was transferred to West Texas. In re Hardwick, 426 S.W.3d 151 (Tex. App.—Houston [1st Dist.] 2012, orig. proceeding). A jury trial took place in Terry County. Trial court disposition A jury awarded Smith actual damages of $104,000. The court increased Smith’s recovery by adding the following awards:  $5,004,231 in disgorgement  about $3,500,000 in attorney’s fees  about $750,000 in interest on the disgorgement  Partial rescission of the multi-party contracts, i.e., “as to” Smith and Hardwick. See Tab A (verdict); Tab B (judgment). 1890.001/55701 xv  STATEMENT REGARDING ORAL ARGUMENT Oral argument is appropriate for several reasons:  The legal issues are numerous.  The monetary stakes are substantial.  The reporter’s record is about 31,000 pages long.  The case involves many distinct contracts and legal documents. The issues are not routine, and the Court would benefit from an opportunity to discuss them in person with both sides. 1890.001/55701 xvi  ISSUES PRESENTED 1. Breach of Fusselman contracts: (a) Does the evidence support the findings of breach and resulting damages? (b) Is there charge error in the definition of “Smith Energy”? (c) Is there charge error in the definition of “Fusselman Prospect Agreements”? 2. Breach of Bad Billy contract: (a) Is the contract ambiguous? (b) Does the property description satisfy the statute of frauds? 3. Theft: (a) Is there charge error in the definition of “Smith Energy,” such that it includes claims that are untimely under the statute of limitations? (b) Is this a case of bona fide contract dispute and thus not theft? 4. Fiduciary duty: (a) Does the evidence support the finding of breach of fiduciary duty as to the Fusselman projects? (b) Does it support the finding of breach of fiduciary duty as to Bad Billy? (c) Is there charge error? 5. Fraud: (a) Does the evidence support the finding of fraud? (b) Is there charge error in the definition of “Smith Energy? (c) Is there charge error in the inclusion of a duty to disclose? 6. The $5 million forfeiture award: (a) Should the forfeiture be reversed for lack of an underlying tort? (b) Is it the return of compensation? (c) Is there proof of the amounts in Questions 15a and 15b? (d) Is the forfeiture amount too large? (e) Is forfeiture available here as a remedy for fraudulent inducement? 7. Attorney’s Fees: Does the evidence support the award of fees? 8. Election of remedies: May Smith recover forfeiture on top of fees? 9. Partial rescission: May Smith have rescission of the Fusselman contracts “as between” only two of the parties? 10. Fees for Hardwick LLC: Should Hardwick LLC recover fees? 1890.001/55701 xvii  INTRODUCTION Smith Energy accused landman Mark Hardwick of charging too much and not working enough. The jury agreed in part, disagreed in part, and found damages of only $104,000. But Smith had spent $3.5 million on lawyers and wanted a bigger recovery. Smith asked the trial court to add another $5 million in “forfeiture,” which effectively stripped Hardwick of his working interests in the oil and gas projects. To justify that “forfeiture,” Smith argued that Hardwick’s working interests were basically his salary as a landman. According to Smith, if Hardwick did not want to keep laboring on the projects, he could not keep collecting his working interest earnings as a paycheck. 4 RR 18-19, 21. This appeal challenges that portrayal of the working interests as dead wrong. Hardwick’s working interests in the oil and gas projects were not a salary, and he did not get them from Smith. If some of Hardwick’s invoices to Smith for landman services contained errors or overcharges, so be it; Hardwick will pay any of the $104,000 in damages that Smith legitimately established. But those modest damages cannot justify clawing away $5 million in real-property interests, and it cannot justify stacking that $5 million in tort-based forfeiture on top of $3.5 million more in fees for prosecuting the contract case. 1890.001/55701  STATEMENT OF FACTS This appeal revolves around a handful of written contracts and related documents that were executed in 2008, 2009, and 2010. Tabs C-J. This statement of facts will address the circumstances that preceded the contracts, their language, and the 2011 disagreement about compliance with them. Background: Chasing the Fusselman Pinchout The Permian Basin is home to the Fusselman formation, a Silurian Age dolomite at roughly 11,000 feet. 5 RR 260-62. The Fusselman “pinchout” runs for hundreds of miles (6 RR 111) and offers good potential as an oil trap. 5 RR 264. The trick was finding it. People had chased the Fusselman for years. 6 RR 21; 7 RR 241; see 6 RR 136 (“Forever”). Locating the Fusselman pinchout proved devilishly hard, and many efforts ended in failure. 7 RR 241. But failures have educational value. Just as Edison made many unsuccessful light bulbs before inventing one that functioned, the data from each bad Fusselman well helped provide a body of knowledge that eventually paid off. Hence the old euphemism about a bad well—“scientific success and economic failure.” See 6 RR 12. Appellant Mark Hardwick knew about the Fusselman because of his father. 4 RR 58; 5 RR 122-23; 6 RR 21. Hardwick is a landman. He was working in West Texas, along with his friends Steve Blaylock (a geophysicist) and Jerry Elger (a geologist). 4 RR 58-61. Blaylock said that after a number of bad wells, they 1890.001/55701 2 thought that they had learned enough to pursue the Fusselman with some accuracy: “Working with Jerry Elger and Mark [Hardwick], we put together some seismic data in an area … where I had pretty good 3D seismic.” 5 RR 265. “I just started going through, studying all the wells that I had. And I got through with a given area where I remember I had 22 wells in that given area and I went back through and finally worked out a method that I could apply and I think I would have been right in predicting the presence of or the absence of Fusselman on 20 of the wells. I convinced myself that I could, anyway, and so I kind of got excited.” 5 RR 266. They kept honing their methods. The three of them persuaded a client in Wichita Falls to invest in more drilling, but the client’s engineer insisted on changing their preferred drill site, and the well was a dry hole. 5 RR 267. Again, however, they learned from the experience. Mark had previously met Lester Smith, a Houston investor in the oil and gas business. 4 RR 73. Perhaps Mr. Smith might be interested in investing? Mark Hardwick, Blaylock, and Elger decided to approach Mr. Smith. 6 RR 108-09, 134- 36. But they also included their friend Joey Hardin, who had a prior relationship with Mr. Smith. 4 RR 91. They offered Mr. Smith a standard “third for a quarter” arrangement, in which an investor agrees to pay one-third of acquisition, seismic, and drilling costs in exchange for a quarter of the working interest. 5 RR 126-27; 6 RR 10, 18; see 6 1890.001/55701 3 RR 200 (“It’s very common”); 9 RR 13 (“a third for a quarter is a very basic and historic oil and gas transaction”). Mr. Smith invested to the max. 7 RR 242. Instead of a third, he took three thirds, agreeing to pay all of those costs for 75% of the working interest. Id. He did so through his company, Smith Energy. The Fusselman Contracts The four West Texans—Joey Hardin, Steve Blaylock, Jerry Elger, and Mark Hardwick—and Mr. Smith did several Fusselman projects. Although litigation often erupts after deals gone bad, these were “deals gone good” in the sense that everybody made money. See 4 RR 21 (“hugely successful”). Each Fusselman project has a name: PROSPECT NAME CONTRACT North Mound Lake Participation Agreement Tab C (DX-1346)(May 1, 2008) Big Bump Participation Agreement Tab F (DX-1354)(Oct. 19, 2009) On Point Geophysical Exploration Agreement Tab G (DX-1351)(Jan. 2, 2010) Muy Caliente Geophysical Exploration Agreement Tab H (DX-1356)(Jan. 15, 2010) North On Point Extension Geophysical Exploration Agreement (DX-1298)(Dec. 1, 2010) An amended version is at Tab I (DX- 1350)(June 15, 2011) 1890.001/55701 4  The basic idea was this. The five parties would split the working interest, 75% for Smith and 25% for the four West Texans. Smith would “carry” the others on the first few wells (but not all wells) by paying certain costs (but not all costs) – specifically, lease acquisition costs, seismic costs, and drilling costs – until the casing point. The details are unnecessary to develop here. The first contract is a 2008 agreement (DX-1346) between Smith Energy and Joey Hardin’s company RAW Oil & Gas, with RAW then writing a side letter to each of the three other West Texans to address each man’s 6.25% share. See DX-1345. RAW would buy the leases and parcel out working interest shares to Smith, Hardwick, and the others. The later Fusselman contracts are all multilateral deals between Smith and all the West Texans. DX-1298, 1351, 1354, 1356. These contracts have two significant features: 1. They do not classify anybody’s share of the working interest as salary or compensation for services; 2. They do not create a joint venture. In fact, they flatly repudiate joint venture: “It is not the intention of the parties to create, nor shall this agreement be construed as creating, a mining or other partnership, joint venture, agency relationship or association, or to render the parties liable as partners, co-venturers, or principals.” DX-1347 art. VII. Several even underline the phrase “No Partnership.” DX-1298, 1351, 1356 (§ 6.3). 1890.001/55701 5  The Bad Billy Contract In addition to the Fusselman contracts, there is a very different contract called the Bad Billy agreement (Tab J, PX-85). It involves Smith and Hardwick but not the other three West Texans, who thought the Bad Billy play unattractive. 6 RR 112-13; 7 RR 277-78. They were right. The wells were awful, and Bad Billy might as well have been named “Horrible Billy.” 4 RR 192, 235; 5 RR 231. The Bad Billy agreement is a 3-party deal among Smith, Mark Hardwick, and Mark’s brother Paul. PX-85. Unlike the Fusselman contracts, it involves overriding royalty interests, not working interests. Id. Unlike the Fusselman contracts, it refers to the overrides as compensation. Id. It says that Smith wants leases in the Bad Billy area and that Smith will compensate Paul for geology work with a 1.5% override in any leases acquired. Id. Smith will assign Mark a 1% override “in consideration” of Mark overseeing the lease acquisition. Id. Smith will pay Mark all his expenses and—somewhat more controversially—“a day-work brokerage fee.” Id. The contract has a 3-year term, starting Dec. 17, 2010. Id. What about a land description? Where is the “Bad Billy Area”? The area exists somewhere in “Terry, Yoakum, Hockley, Lubbock & Lynn Counties.” PX-85. But the contract does not give a metes and bounds description. It says only that the “Bad Billy Area” is depicted on an Exhibit A: 1890.001/55701 6 The AMI’s black boundary line wanders randomly through the five counties, with no details about location, so the statute of frauds is an issue. Smith and Hardwick fall out in August 2011 The Fusselman wells made money. 5 RR 295; 8 RR 12, 55. Acquisition, seismic, and (some) drilling costs were paid by Smith on the few carried wells. The other costs – e.g., operating expenses, ad valorem taxes, and royalties – were undisputedly paid on all the wells by Hardwick and the other working interest owners from day one, in accordance with their percentages as working interest owners. 5 RR 203; DX-488, 489, 1357; see also CR 3122 (“from the beginning”). 1890.001/55701 7  This success had two side effects. First, the work approached the town of O’Donnell. 5 RR 165. So the last Fusselman contract is called “North On Point Extension / O’Donnell.” Given the proximity to a populated area, Hardwick formed a business entity, just as Joey Hardin had formed RAW Oil and Gas and Jerry Elger had formed Elger Exploration, Inc. 5 RR 205. He formed Mark P. Hardwick LLC. Id. It holds a number of his working interests. 5 RR 205-06. Second, the land work grew exponentially. Hardwick had his hands full. 10 RR 98-103. He and Lester Smith found themselves at odds over what the contracts mean and over how intense the land work actually was. PX-39. The conflict boiled over in August 2011. Hardwick and Smith parted ways as to Hardwick doing further land work. PX-33, 36. They differed sharply over whether Hardwick quit or was fired (5 RR 5, 86; 8 RR 34-43), but that disagreement does not matter to the appeal. What matters is that their relationship soured to the point that Smith sued Hardwick and his LLC. This litigation Smith filed this suit in Harris County. CR 6. The case soon moved because venue was held mandatory in West Texas. In re Hardwick, 426 S.W.3d 151 (Tex. App.—Houston [1st Dist.] 2012, orig. proceeding). By the time of the verdict in Terry County, Smith was on its eighth amended petition (CR 2895) and had spent $3.5 million in attorney’s fees. See Question 24. 1890.001/55701 8  The live petition seeks actual damages, exemplary damages, attorney’s fees, and interest. CR 2926-28. It also asks for “forfeiture of all compensation paid,” including “all assigned mineral interests and overriding royalty interests.” CR 2927. The forfeiture claim may deserve mention because it underpins the trial court’s award of $5 million. The forfeiture claim grows out of Smith’s position that the parties created joint ventures, which involved fiduciary duties. CR 2902. Based on those alleged fiduciary duties, Smith sought forfeiture of Hardwick’s Fusselman working interests. CR 2919. In essence, Smith approaches the case as though Hardwick were an attorney and Smith a client, with Hardwick’s Fusselman working interests being a “fee” that came from the client and thus can be returned to the client in the event of a clear and serious breach of fiduciary duty. CR 3162-65. Hardwick disputed all this. He noted that the working interests never came from Smith in the first place, that they were not a fee to be forfeited, and that there was no joint venture or fiduciary duties in any event. CR 3007-50, 3088-102. The contract claims are straightforward. Smith alleged breach of the Fusselman contracts and the Bad Billy contract. CR 2919-21. For damages, Smith alleged two distinct classes of damages: (1) overcharges, and (2) the cost of hiring replacement landmen to finish Hardwick’s purported responsibilities. 1890.001/55701 9  The overcharge damage allegations are just what they sound like; they accuse Hardwick of inflating his invoices with time that he did not work and with expenses that he should not have included. The replacement landman allegations accuse Hardwick of quitting too soon. Smith argued that the Fusselman contracts required him to do Fusselman land work and to keep doing it for as many years or decades that there is still Fusselman activity going on. Smith further asserted that Hardwick breached the Bad Billy contract by quitting before the end of the 3-year term, resulting in excess cost when Smith had to hire new landmen. The court ruled several of the Fusselman contracts ambiguous with regard to whether Hardwick promised to keep doing land work as long as the Fusselman projects are alive. 11 RR 276. The court ruled the Bad Billy contract ambiguous as to whether Hardwick promised to cap his daily rate at $500. 11 RR 283. The verdict The jury found for Smith on all four theories: (1) contract, (2) fraud, (3) fiduciary duty, and (4) theft. It found damages of $104,000, which consisted of about $79,000 in overcharges, plus $25,000 in replacement landman costs for Bad Billy work. The jury found about $3.5 million in fees for Smith’s trial fees, and another $250,000 in fees for any appeal. See Question 24. 1890.001/55701 10  The jury charge also asked about Hardwick’s working interests. The jury found that Hardwick received $795,056 in working interest earnings after he stopped the landman services and that his working interests had a market value of $4,209,175 in the middle of 2013. See Question 15. Smith obtained findings on four theories but did not elect a remedy. Instead, Smith sought a judgment for all of them stacked on top of each other—actual damages, rescission (despite damages), fees (under the contract and theft theories), and forfeiture (under the tort theories). Specifically, Smith wanted forfeiture of the $795,056 plus the $4,209,175 associated with the Fusselman working interests. The trial court awarded all of the above. STANDARD OF REVIEW Jury findings are reviewed under the normal sufficiency standards. See City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005). Abuse of discretion review applies to rulings on the charge and equitable relief. Thota v. Young, 366 S.W.3d 678, 687 (Tex. 2012); Burrow v. Arce, 997 S.W.2d 229, 245 (Tex. 1999). De novo review applies to the other issues. See Nat’l Prop. Holdings, L.P. v. Westergren, 453 S.W.3d 419, 426 (Tex. 2015) (applicability of statute of frauds); Bowden v. Phillips Petroleum Co., 247 S.W.3d 690, 705 (Tex. 2008) (ambiguity); Figueroa v. Davis, 318 S.W.3d 53, 66 (Tex. App.—Houston [1st Dist.] 2010, no pet.) (availability of prejudgment interest). 1890.001/55701 11  SUMMARY OF THE ARGUMENT The trial court failed to impose meaningful discipline on the plaintiffs’ case. Smith sued on written contracts, but the court failed to enforce them as written. Smith requested a charge that blurs all the Fusselman contracts together as one and defines “Smith” too broadly, but the court submitted it nonetheless. 1. Contract & theft. The contract and theft theories are unsound. The Fusselman contracts do not require Hardwick to do what Smith alleges, and the remaining contract (“Bad Billy”) violates the statute of frauds. The theft theory is either unproven or contaminated by inclusion of time-barred claims. 2. Tort. The tort theories have similar flaws. Smith alleged a fiduciary duty from a joint venture, but the contracts repeatedly disavow joint venture and fiduciary duties. The fraud theory contains layers of charge error. 3. Remedies. The trial court wrongly inflated the recovery by awarding (a) $5 million in “forfeiture”, (b) $3.5 million in unproven attorney’s fees, (c) fees stacked on top of forfeiture, (d) partial rescission of the agreements, and (e) prejudgment interest on the non-compensatory “forfeiture.” 4. LLC. Mark P. Hardwick LLC has its own appeal on the issue of attorney’s fees. The theft statute makes fees mandatory for a prevailing party. Smith sued the LLC for theft but did not prevail against it. As a result, the statute requires an award of fees to LLC. 1890.001/55701 12  ARGUMENT Smith won a verdict for $104,000 in damages. If the trial court had rendered judgment for only that amount, this appeal might never have arisen. The court, however, awarded Smith a judgment for about 90 times that amount. The judgment stacks an oversized forfeiture award on top of an oversized fee award. I. THE CONTRACT AND THEFT THEORIES SHOULD BE REVERSED. Start with contract and theft. Those theories closely resemble each other, except that contract damages were $104,000, whereas the theft damages were only $79,428 because the jury charge restricted the theft damages to overcharge claims. The jury charge combined all five Fusselman contracts into a single bundle, even though the contracts vary in wording. This inappropriate fusion of the agreements enabled Smith to gloss over weaknesses in his case, with the result that the jury found Hardwick guilty of breaking promises that he kept—and of breaking promises that he never even made. A. The Fusselman contract recovery should be reversed. There is legally and factually insufficient evidence that Hardwick breached any of the Fusselman contracts, let alone all of them. Further, the contract damage findings are unsupported. The jury found damages of $36,003 in overcharges. See Question 5(1)(a). It found that those damages “resulted from” a failure to comply. But there is legally and factually insufficient evidence of that. 1890.001/55701 13  At a minimum, there is charge error. The charge collected several different documents and defined them all as the “Fusselman Prospect Agreements.” The first is the North Mound Lake agreement. Hardwick is not even a party to that one, yet the jury found him in breach of the “Fusselman Prospect Agreements.” See Question 3a. The definition is tainted by inclusion of North Mound Lake. 1. The Fusselman part of the contract recovery should be reversed and rendered, because Hardwick did not breach any of the Fusselman contracts, let alone all of them. Hardwick did not breach the Fusselman contracts at all:  He is not a party to the first contract (the North Mound Lake Participation Agreement);  He is a party to the second contract (Big Bump) but made no promise to anybody about land work or its cost.  He is a party to the other contracts, but the only relevant promise is to participate “as may be requested from RAW,” and all agree that he did everything RAW requested. There is zero evidence that the Fusselman contracts were breached. The first contract in the definition of Fusselman Prospect Agreements is the North Mound Lake Participation Agreement (DX-1346). It runs between Smith, RAW Oil & Gas, and RAW Energy. Hardwick cannot have breached a contract to which he was not a party. That is especially true given that the contract requires RAW—not Hardwick—to negotiate with landowners and to “conduct all title investigations.” Id. § 6. 1890.001/55701 14  The definition’s next items are the North Mound Lake Letter Agreements. They consist of three letters from RAW to Blaylock, to Elger, and to Hardwick. See PX-1, DX-86, DX-1345. Hardwick is not a party to the letter to Blaylock or Elger, so he cannot have breached either of those. Hardwick was the recipient of the third RAW letter (PX-1), but there is no evidence that he breached any promise there. The only promise that he arguably made there was to pay his share of certain costs: “Hardwick will pay his way on the completion cost of the first well and all subsequent operations including any additional acreage purchases within the AMI area ....” PX-1. Nothing suggests that Hardwick broke that promise. All agree that Hardwick paid his share of the costs for all the various wells. 6 RR 270. The next Fusselman agreement is Big Bump (DX-1354). This contract has the virtue of including Hardwick as a party. However, it contains no promise for Hardwick to do land work at any given rate or on any given terms. Nothing in the contract obligates Hardwick to do any land work, let alone do it for a certain price. Again, there is no evidence of breach. Finally, there are the remaining Fusselman contracts: On Point, Muy Caliente, North On Point, and Amended North On Point. DX-1351, 1356, 1298, 1350. These contracts include Hardwick as a party. But they do not require him to perform land work. In fact, they provide for the opposite by assigning that job to 1890.001/55701 15 RAW. Section 1.5(b) of each says that “RAW will provide or supervise the land work.” Once again, there is no evidence that Hardwick breached any of these Fusselman contracts. Smith argued that Hardwick had a duty to do land work because the final Fusselman contracts (On Point, Muy Caliente, and the North On Point) contain this sentence in section 1.5: “All Parties will participate with RAW in accomplishing the Geophysical Program as may be requested from RAW from time to time.” That clause does not commit Hardwick to do land work. But even if it did, the most that it might require would be to do what RAW “requested.” Yet there is no evidence that he breached any such obligation. It is undisputed that Hardwick did everything RAW asked him to do. Hardwick’s defense lawyer, the Hon. Rick Strange, asked this simple question to RAW’s principal, Joey Hardin: Q. Have you asked Mark to do any land services that he didn’t do? A. No. 6 RR 247. This Court will find no evidence whatsoever of Hardwick refusing to do any land work “requested” by RAW. The question for all the Fusselman contracts thus boils down to this: Where’s the breach? The evidence shows no breach of those contracts at all. The Court should reverse the recovery of the $36,003. 1890.001/55701 16  2. The Fusselman part of the contract recovery should be reversed and rendered, because no overcharge damages resulted from any breach. Even if the Fusselman contracts had been breached, those contracts have no connection to the overcharge damages found in Question 5(1)(a). The contracts simply do not cap landman charges at $500 a day or at any particular price. Although Smith’s damage expert assumed that the contracts impose such a ceiling (7 RR 10-11), they do not. They never mention the subject. The jury had no basis for finding that the $36,003 in overcharges “resulted from” any failure to comply with the “Fusselman Prospect Agreements.” Hardwick objected to these questions and assailed the findings in post- verdict motions. CR 3012-32; CR 3530-32. He noted that Smith had evidence (but not findings) about oral contracts, and findings (but not evidence) about written contracts. See CR 3012. The disconnect between the written contracts and the supposed oral deals is stark. See 6 RR 239 (“but that was not our gentleman agreement”); 8 RR 82 (“We had an oral agreement”). Hardwick’s JNOV motion made this point in a way that nobody could miss: “The jury’s answer to Question 5.1(a) should also be disregarded because there is no evidence to support this finding.” CR 3028. He went on to point out that there was no evidence “that Mark Hardwick agreed in the written contracts to limit his day rate or to charge no overtime.” Id. 1890.001/55701 17  In his response to the lengthy JNOV motion, Smith could only write three sentences to defend the indefensible finding of Fusselman overcharge damages: The evidence clearly supports the jury’s finding that Hardwick’s breach caused Smith Energy damage. The evidence showed that Hardwick charged for days of work that he could not and did not work. See Plaintiff Exhibit 182A. There was abundant evidence that his billing constituted double billing or overbilling. See Shaw, August 27 at 122-23. CR 3118. That is it. That is all that Smith could say about the evidence supporting the answer to Question 5. As shown earlier, however, no evidence supports the award of $36,003 for overcharge damages that “resulted from” any breach of the Fusselman contracts. Those contracts say nothing about charging or overcharging. The Court should reverse and render the $36,003 recovery, and the Court should award Hardwick his fees (or at least remand to let him pursue them) as prevailing party under the Fusselman contracts. See, e.g., DX-1298, 1351 (§ 6.5); Robbins v. Capozzi, 100 S.W.3d 18, 27 (Tex. App.—Tyler 2002, no pet.). 3. Alternatively, the Fusselman contract recovery should be reversed and remanded because of charge error. The jury charge defines “Smith Energy” and “the Fusselman Agreements.” However, it defines those terms so broadly as to include items that do not belong. This problem infects all four liability theories and constitutes reversible error, per the progeny of Crown Life Ins. Co. v. Casteel, 22 S.W.3d 378 (Tex. 2000). 1890.001/55701 18  First, the term “Fusselman Prospect Agreements” covers several contracts. But the contracts differ significantly. The earliest Fusselman contract runs only between RAW and Smith. DX-1346. Yet the jury found Hardwick liable for breaching the “Fusselman Prospect Agreements.” See Questions 3a & 5. Hardwick cannot have breached a contract to which he was not a party. Nor can he have breached Big Bump, because it has no promise to do land work. Second, the charge defines “Smith Energy Company” as including Smith Energy Company and over two dozen other parties, such as the friends and family members of Mr. Smith who took pieces of Smith’s interest by assignment. The inclusion of extra parties creates severe problems. Trial focused on the Hardwick’s dealings with Mr. Smith, but not with Mr. Smith’s friends and family. Even if the contract was assignable (giving the extra parties a right to sue), there must be evidence on every element of their claims. Take fraud. Fraud requires reliance, but there is insufficient evidence of reliance by those parties. Likewise, theft has a short statute of limitations. If the theft claims by the extra parties were time-barred when assigned over to Smith (which they were), they remain just as untimely when Smith sues on them. The definition of “Smith” built error into the theft claim by including assigned claims from the extra entities. While the other theories will come up later in this brief, the point here is that the 1890.001/55701 19 jury charge was marred by Casteel error because of the way it defined “Smith” and “the Fusselman Prospect Agreements.” The law in this area is familiar to the Court. Broad-form submission is the reigning model for charge practice. TEX. R. CIV. P. 277. But the model has limits: “Rule 277 is not absolute.” Casteel, 22 S.W.3d at 390. Thus, “when the trial court is unsure whether it should submit a particular theory of liability, separating liability theories best serves the policy of judicial economy underlying Rule 277 by avoiding the need for a new trial when the basis for liability cannot be determined.” Id. A trial court can combine different items into a single question as long as each item genuinely belongs. But if an item does not belong, it may infect the whole question. Thus, one “rotten apple” can spoil the whole barrel. This doctrine comes from Casteel and its progeny, such as Harris County v. Smith, 96 S.W.3d 230 (Tex. 2002), which extended the rotten apple concept to situations where part of a submission is unsupported by sufficient evidence. See Bed, Bath & Beyond, Inc. v. Urista, 211 S.W.3d 753, 756 (Tex. 2006) (“Under Casteel and Harris County, we presume that the error was harmful and reversible and a new trial required when we cannot determine whether the jury based its verdict solely on the improperly submitted invalid theory or damage element.”). 1890.001/55701 20  “Submission of an invalid theory involves ‘[a] trial court’s error in instructing a jury to consider erroneous matters.’” Columbia Rio Grande Healthcare, L.P. v. Hawley, 284 S.W.3d 851, 865 (Tex. 2009) (quoting Harris County, 96 S.W.3d at 233). Here such “erroneous matters” appear in two key definitions: Smith Energy Company and the Fusselman Prospect Agreements. Page 3 of the charge defines “Smith Energy Company” as referring to the company “and on behalf of the interests of” more than two dozen other entities. Smith’s argument for including the extra entities in the definition was that the company distributed slices of its oil and gas interests to all the recipients, while later taking back litigation assignments of the right to sue Hardwick in this lawsuit. For lack of a better term, this brief will refer to “tag-along” parties. The tag-along parties did not sue in the lawsuit as plaintiffs, but they assigned their rights to sue Hardwick to Smith, who prosecuted those claims as plaintiff. Hardwick objected to defining Smith this way. 11 RR 398-99; see also 8 RR 231-33, 246-49. He argued that the assigned claims suffered from evidentiary insufficiency as to their elements. The trial court should have sustained his objections. The verdict treats him as breaching all the Fusselman agreements, but he plainly did not breach North Mound Lake or Big Bump. At a minimum, the contract recovery suffers from Casteel error because of the inclusion of the extra parties and because of the combination of all the Fusselman contracts. 1890.001/55701 21  B. The Bad Billy contract recovery should be reversed. The trial court held the Bad Billy agreement ambiguous and asked the jury to construe it. See Question 2; see also 11 RR 283 (trial court ruling of ambiguity). The jury construed it in Smith’s favor and found Hardwick liable. See Question 3. Damages were about $68,000 – i.e., $43,425 in overcharges and $25,448 for the cost of hiring the replacement landmen. See Question 5. 1. The contract (PX-85) is not ambiguous. Question 2 asked whether Hardwick agreed “[i]n the Bad Billy Agreement” that he would “perform landman services for a day work rate of $500.” It told the jury to construe the statement “that Smith shall pay all expenses incurred by Mark in connection with such lease acquisition, plus a day-work brokerage fee.” But that statement says nothing about fixing the fee at $500, and it says nothing about the way such a fee would be computed. The court rewrote the contract. There simply is no $500 rate “[i]n the Bad Billy Agreement.” The agreement says nothing about a $500 rate, any more than it says something about a rate of $1 or $15 million. The writing just does not set the dollar amount. Courts should not supply missing terms in this fashion. The classic example is Stanley Boot, where a loan contract failed to state the interest rate, and the court refused to insert that missing term. See T.O. Stanley Boot Co., Inc. v. Bank of El Paso, 847 S.W.2d 218, 222 (Tex. 1992). 1890.001/55701 22  Sometimes a court can imply a reasonable price, such as in a UCC contract for the sale of goods. But that is not the factual issue that these parties litigated, and it is not what the charge told the jury to find. If the jury had been asked simply about the reasonableness of Hardwick’s rates, it likely would have found for him, because so many people saw his invoices and approved them. Regardless, that is not what Question 2 asks. The overcharge recovery should be reversed. 2. The statute of frauds applies to the Bad Billy claim. The statute of frauds bars the claim for $25,000 as the cost of hiring replacement landmen. Those expenditures occurred after Smith and Hardwick separated in August 2011. But enforcing that part of the bargain is impermissible, because Bad Billy is an agreement to convey real estate, without an adequate land description. Although it attaches a map with a crude drawing, the drawing is too fuzzy to satisfy the statute. The description fails as a matter of law, or at least as a matter of the great weight of the evidence. Hardwick preserved this point by raising it repeatedly. CR 3029-30, 3055, 3532, 3538; see also 11 RR 403. Smith agreed to convey overrides to Hardwick, who agreed to do land work. An overriding royalty interest is real property subject to the statute of frauds. Quigley v. Bennett, 227 S.W.3d 51, 54 (Tex. 2007). Hence, the agreement triggers the statute of frauds, as it refers to a “Lease Acquisition Program” and states that Smith is desirous of “acquiring oil and gas leases.” PX-85. 1890.001/55701 23  The contract “must furnish within itself, or by reference to some other existing writing, the means or data by which the [property] to be conveyed may be identified with reasonable certainty.” Long Trusts v. Griffin, 222 S.W.3d 412, 416 (Tex. 2006). “The essential elements may never be supplied by parol.” Wilson v. Fisher, 144 Tex. 53, 57, 188 S.W.2d 150, 152 (1945). If enough description exists so that a person familiar with the area can locate the premises with reasonable certainty, it can satisfy the statute. Gates v. Asher, 154 Tex. 538, 541, 280 S.W.2d 247, 248-49 (1955). But even if the contracting parties knew and understood what property was intended to be conveyed, their knowledge and intent will not make the contract valid. Morrow v. Shotwell, 477 S.W.2d 538, 540 (Tex. 1972). The text has no description at all. PX-85. It references five counties, an area called the “Bad Billy Area” or “AMI Outline” in “portions” of those counties, and an area that is excluded. There is nothing about tracts, sections, surveys, or acreage size. There is no description of the location, distance, or direction of the lines comprising the irregular boundary lines. There is no recording information. The text itself is plainly inadequate.1 1 See., e.g., Long Trusts, 222 S.W.3d at 416 (description of lessors’ names and each lease’s survey name, term, and net acreage insufficient); Morrow, 477 S.W.2d at 540-41 (description of tract, survey, and county insufficient); Matney v. Odom, 147 Tex. 26, 28-29, 210 S.W.2d 980, 982 (1948) (description of acreage amount, survey, city, county, and relation to nearby courthouse and highway insufficient); Greer v. Greer, 144 Tex. 528, 530-31, 191 S.W.2d 848, 849-50 (1946) (description of acreage amount, survey, county, patent, volume, and abstract numbers insufficient). 1890.001/55701 24  Nor does the attached map suffice. It is true that an “attached map becomes a part of the written contract and can aid a defective written description if the map contains enough necessary descriptive information.” U.S. Enters., Inc. v. Dauley, 535 S.W.2d 623, 628 (Tex. 1976). But not this map. The area depicted on the map cannot be located with reasonable certainty. The location of the irregularly-shaped boundaries is uncertain. The boundary lines cut through portions of several counties, but there is no data to fix the precise spots. There is no information about the width of the boundary lines. There is no information regarding the courses and distances of the boundary lines. There is no scale to determine the length of the lines. There is no identifiable survey or recording information. An equally indeterminate “excluded” area falls in and out of the boundary lines. These problems doom the map.2 The testimony reinforces this conclusion, inasmuch as the only surveyor who testified indicated that the description is inadequate. 10 RR 57; 13 RR (Piper excerpt). The surveyor flatly could not locate the “AMI Outline.” 13 RR at deposition p. 25-27, 66, 80-81. For these reasons, Bad Billy fails the statute. 2 See, e.g., U.S. Enters., 535 S.W.2d at 628-29 (tract location uncertain on map); Sabine Inv. Co. of Tex., Inc. v. Stratton, 549 S.W.2d 247, 249-50 (Tex. Civ. App.—Beaumont 1977, no writ) (courses and distances not provided); Guenther v. Amer-Tex Const. Co., 534 S.W.2d 396, 398 (Tex. Civ. App.—Austin 1976, no writ) (map not drawn to scale did not show size, acreage, recording information, or width, length, and position of boundary lines); Heir of Barrow v. Champion Paper & Fibre Co., 327 S.W.2d 338, 347 (Tex. Civ. App.—Beaumont 1959, writ ref’d n.r.e.) (width of boundary line uncertain). 1890.001/55701 25  This does not undo the parties’ past performance. But it makes the contract unenforceable as to future performance after Smith and Hardwick separated. See Long Trusts, 222 S.W.3d at 417 (“Respondents’ acquisition of interests in the past were completely separate from future transactions and did not insulate the agreements from the Statute of Frauds for wells not drilled”). The Court should reverse the $25,000 in damages found in Question 5 for services after Smith and Hardwick separated. C. There is no theft, and even if there were, the statute of limitations would still bar almost all of the theft recovery. The jury found statutory theft and assessed damages of about $79,000. Those damages do not include the costs of hiring other landmen; they include only overcharges. See Question 18. The question does not have separate blanks for Fusselman and Bad Billy, but the answer of $79,428 matches the earlier findings about overcharges for Fusselman ($36,003) and Bad Billy work ($43,425). The theft recovery has two flaws. First, it has a titanic problem with the statute of limitations. Almost all the damages come from assigned claims, but those claims are untimely. Second, the theft recovery treats a bona fide contract dispute as a crime. When a trial court cannot even tell what a contract means—and a jury has to pick between two reasonable readings—there might be a breach of contract but not statutory theft. 1890.001/55701 26  1. The statute of limitations bars recovery. The Texas Theft Liability Act creates a cause of action for theft. See TEX. CIV. PRAC. & REM. CODE § 134.003. The 2-year statute of limitations applies to theft claims. J&J Sports Prods., Inc. v. JWJ Mgmt., Inc., 324 S.W.3d 823, 832 (Tex. App.—Fort Worth 2010, no pet.); see Jeanbaptiste v. Wells Fargo Bank, N.A., No. 14-10671, at *4 (5th Cir. Nov. 7, 2014) (“A two-year limitations period applies to conversion and TTLA claims.”). Courts widely agree on this.3 Because the assigned claims were not sued on in this case until February 2014 (CR 1286, 1319), Hardwick asserted limitations. CR 3054, 3538; 11 RR 399, 405. Smith responded with the relation-back rule of TEX. CIV. PRAC. & REM. CODE § 16.068. CR 3135. Smith argued that the original petition was filed in November 2011, and that all new claims added in later pleadings count as timely as long as they relate to the same transaction. Id. Relation-back does not let a plaintiff resurrect somebody else’s dead claims via assignment. If P sues timely, P can amend to add his or her own claims. But P cannot collect stale claims belonging to another and turn them from stale to timely. 3 See Cooper v. Green Tree Servicing LLC, 2015 WL 799255, at *3 (N.D. Tex. Feb. 25, 2015); Malik v. ConocoPhillips Co., 2014 WL 3420775, at *5 (E.D. Tex. June 23, 2014); Hoffart v. Wiggins, 2010 WL 816915, at *12 (E.D. Tex. Jan. 30, 2010), adopted & rejected in part, 2010 WL 816863, at *4 (E.D. Tex. Mar. 3, 2010), rev’d in part on other grounds, 406 Fed. Appx. 834 (5th Cir. 2010); Howard v. Sony BMG Music Entm’t, 2007 WL 2537865, at *3 (S.D. Tex. Aug. 31, 2007), aff’d, 293 Fed. Appx. 350 (5th Cir. 2008). 1890.001/55701 27 Goose Creek Consol. I.S.D. v. Jarrar’s Plumbing, Inc., 74 S.W.3d 486, 493 (Tex. App.—Texarkana 2002, pet. denied). A dead claim cannot be resurrected after D’s limitations defense has vested. See Cadle Co. v. Henderson, 982 S.W.2d 543, 546 (Tex. App.—San Antonio 1998, no pet.) (“When the limitations period has run, rights have become ‘vested and perfect,’ and even the Legislature cannot remedy or lengthen the limitations period.”). When TP assigns a claim to P, courts say that P has stepped into TP’s shoes. See Sw. Bell Tel. Co. v. Marketing on Hold Inc., 308 S.W.3d 909, 920 (Tex. 2010) (“stands in the shoes of his assignor”). A defense that was good against TP is good against P: “an assignee or subrogee walks in the shoes of his assignor and takes the assigned rights subject to all defenses which the opposing party might be able to assert against his assignor.” Burns v. Bishop, 48 S.W.3d 459, 466 (Tex. App.— Houston [14th Dist.] 2001, no pet.) (emphasis added); see Houchins v. Scheltz, 590 S.W.2d 745, 751 (Tex. Civ. App.—Houston [14th Dist.] 1979, no writ) (assignee has no greater right to recover on contract than assignor). Where, as here, the claim was time-barred before it was assigned, assigning the claim will not bring it back to life. See Goose Creek, 74 S.W.3d at 493 (“Because an assignee stands in the shoes of the assignor, [P] was subject to the statute of limitations as it applied to [D]’s independent actions for breach and negligence, and was thus barred”). 1890.001/55701 28  The assigned claims were dead when Smith obtained them. Most of the $79,000 in overcharges preceded the blowup of August 2011, and any remaining charges would have been incurred by the end of 2011. The statute would expire on all charges by the end of 2013. In fact, it would have expired on most of them before that, because they were paid earlier. See PX-40, 162, 174; DX-7, 8, 79, 80, 186-90. The theft recovery is time-barred as to assigned claims, and their inclusion contaminates the remainder, per Casteel and Harris County. 2. Breach of a contract should not be theft. The trial court found the language ambiguous, making it impossible for the litigants to know what their contract meant until a jury verdict informed them. Being on the wrong side of a contract dispute is not theft: If a bona fide dispute exists as to the ownership of the property, then the evidence is legally insufficient to sustain a theft conviction. See Hann v. State, 771 S.W.2d 731, 733 (Tex. App.—Fort Worth 1989, no pet.); see also Roper v. State, 917 S.W.2d 128, 132-33 (Tex. App.— Fort Worth 1996, pet. ref’d) (ordering acquittal in a theft case that was based on “a simple case of a civil contract dispute”). Bokor v. State, 114 S.W.3d 558, 560 (Tex. App.—Fort Worth 2002, no pet.); see Jacobs v. State, 230 S.W.3d 225 (Tex. App.—Houston [14th Dist.] 2006, no pet.) (similar). Even if Hardwick is wrong about the contract’s meaning, the fact that it had to go to a jury shows that this case is “a simple case of a civil contract dispute.” Roper, 917 S.W.2d at 132. It is not theft. Id. 1890.001/55701 29 II. THE TORT THEORIES SHOULD BE REVERSED. The fraud and fiduciary duty theories have similar problems: the evidence does not support them, and they have the same Casteel issues just discussed. A. There is no breach of fiduciary duty. The parties to the Fusselman projects disclaimed fiduciary duties. See DX- 1347, art. VII.A (“the parties shall not be considered fiduciaries”); DX-1354 (disclaiming “partnership,” “joint venture,” and “agency”). They did it repeatedly:  “No Partnership.” (DX-1351, § 6.3)  “No Partnership.” (DX-1356, § 6.3)  “No Partnership.” (DX-1298, § 6.3) Thus, Hardwick strenuously objected to the fiduciary duty issue (Question 13). See 11 RR 411 (“there is no evidence of fiduciary duty. There’s no basis at all to ask the jury if Mark owed a fiduciary duty because as a matter of law, he didn’t.”). He did the same with the issues about joint venture (Question 11) and agency (Question 12). 11 RR 408-11.4 The trial court erred in failing to heed. 4 Hardwick reiterated the no-evidence complaints in his JNOV motion. See CR 3047 (“The Jury’s Finding That Mark Hardwick Breached His Fiduciary Duty Should Be Disregarded Because He Owed No Such Duty.”); CR 3048 (“Hardwick was not a member of a joint venture with Smith Energy Company, individually or as defined by the court, and he was not Smith Energy Company’s agent.”); see also CR 3036 (“Hardwick was not a member of a joint venture with Smith Energy”); CR 3037 (“There was no joint venture”); CR 3042 (“The evidence establishes that there was no joint venture as a matter of law”); CR 3044 (“The evidence conclusively establishes that Mark Hardwick was not Smith Energy Company’s (individually) agent, let alone the vast majority of the individuals and entities included within the Court’s definition of Smith Energy Company.”). His motion for new trial is similar. CR 3535-36. 1890.001/55701 30  1. There is no joint venture, as the parties carefully disclaimed any joint venture in writing. Smith alleged a joint venture between Hardwick and Smith because of the Fusselman contracts. See CR 2918 (alleging a joint venture “as a result of the fact that Hardwick and Smith are joint working interest owners”); CR 2902 (“The GEAs each created a joint venture”). But the contracts say the opposite. Start with the North Mound Lake Participation Agreement between Smith and RAW (DX-1346), and the three side letters that brought Blaylock, Elger, and Hardwick into the project (DX-86). The participation agreement says nothing about a joint venture. See DX-1346. Paragraph 11 requires them to sign an operating agreement (DX-1347), which they all did. That agreement disclaims any joint venture. It does so in Article VII’s very first paragraph: “It is not the intention of the parties to create, nor shall this agreement be construed as creating, a mining or other partnership, joint venture, agency relationship or association, or to render the parties liable as partners, co-venturers, or principals.” DX-1347. Article VII goes on to say that “the parties shall not be considered fiduciaries.” Id. Lester Smith signed the operating agreement, as did everyone else involved in the deal: Hardin, Blaylock, Elger, and Hardwick. See id. 1890.001/55701 31  If they had not signed this agreement, the parties might debate the effect of the statutory rule that “ownership of mineral property under a joint operating agreement” is a fact that, “by itself, does not indicate that a person is a partner in the business.” TEX. BUS. ORGS. CODE § 152.052(b)(4). But the operating agreement removes all room for debate. There was no joint venture. The Big Bump contract contains similar terms. DX-1354. The contract has an attached operating agreement, which again states in Article VII that there is no joint venture or partnership, and that the parties “shall not be considered fiduciaries.” Id. The remaining agreements—On Point, Muy Caliente, and North On Point Extension—loudly reject any possibility of a joint venture. Paragraph 6.3 of each one is entitled “No Partnership.” There, the parties renounced any joint venture: “The liabilities of the Parties hereunder shall be several, not joint or collective …. It is not the intention of the Parties to create, nor shall this Agreement be deemed as creating a mining or other partnership or association or to render the Parties liable as partners.” DX-1351; accord DX-1356, DX-1298. The operating agreements go further by rejecting any fiduciary duty between the parties: “the parties shall not be considered fiduciaries or to have established a confidential relationship.” DX-1354, art. VII.A; accord DX-1356, DX-1298. 1890.001/55701 32  So while Smith certainly alleged that the contracts “created a joint venture” (CR 2902), those allegations wither in the face of the contracts. There was no joint venture, and even if there had been, the parties disclaimed any fiduciary duties. Joint venturers have a right to agree that they will not owe fiduciary duties, as the State’s policy of freedom of contract supports almost any bargain made by a joint venture’s members. See TEX. BUS. ORGS. CODE § 152.002(a). 2. There is no agency, because the parties disclaimed it. A similar analysis applies to agency. The Fusselman operating agreements state in Article VII that it is not the intention of the parties to create “a mining or other partnership, joint venture, agency relationship or association.” DX-1347; accord DX-1354, DX-1351, DX-1356, DX-1298. Further, they likewise provide that the “parties shall not be considered fiduciaries.” Id. Smith says that agency existed for Bad Billy, but not Fusselman. CR 3129. If so, agency cannot support the $5 million forfeiture award, because that money (Question 15) relates to Fusselman, not Bad Billy. The most that agency might support would be Bad Billy tort damages (Question 14) of $43,425 in overcharges plus $25,448 in replacement costs, with no fees and no forfeiture of Fusselman working interest money. CR 3092. So the most Smith could recover is $68,873. But even that award has problems. First, there is no proof of any breach of a fiduciary duty related to any Bad Billy agency. What did Hardwick do wrong on 1890.001/55701 33 Bad Billy? According to Smith, he charged too much and stopped too soon. Those acts may be contract breaches but not fiduciary duty breaches. Second, the statute of frauds bars the recovery of the $25,448 in replacement landman costs, because a plaintiff cannot have benefit-of-the bargain damages in tort when the statute of frauds makes the bargain unenforceable, as is true of the Bad Billy contract. Haase v. Glazner, 62 S.W.3d 795, 797-99 (Tex. 2001). Finally, the definition of “Smith” injects Casteel error into the agency claim. As noted earlier, the definition includes all the tag-along parties as “Smith,” but there is no evidence of agency between Hardwick and those parties. 3. The contracts have legal effect. When Hardwick pressed these arguments in his JNOV motion, Smith replied that the contracts do not count. First, Smith claimed that there was testimony about the five partnership factors. CR 3120-24; see CR 3124 (“regardless of the language used in the Fusselman Prospect Agreements or the JOAs, the agreements are not conclusive proof that a joint venture does not exist.”). But that argument fails because it pretends that the contracts are ineffective. Parties cannot end-run their written agreements by taking the stand and asserting, “Oh yes, despite disclaiming a joint venture in writing, we actually had a joint venture because we shared control and all those other things.” 1890.001/55701 34  The whole point of the contractual disclaimers was to define the relations between the parties and to prevent one party from ambushing another party with phony allegations of partnership. Texas does not favor “surprise or accidental partnerships.” Ingram v. Deere, 288 S.W.3d 886, 898 (Tex. 2009). Texas recognizes “the right of persons to define the terms of their business relationships.” Nat’l Plan Adm’rs, Inc. v. Nat’l Health Ins. Co., 235 S.W.3d 695, 702 (Tex. 2007); see Gym-N-I Playgrounds, Inc. v. Snider, 220 S.W.3d 905, 912 (Tex. 2007) (Texas “strongly favors” freedom of contract); Fairfield Ins. Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653, 664 (Tex. 2008) (“utmost liberty of contracting”). Part of this is the freedom to determine when to be bound. See Foreca, S.A. v. GRD Dev. Co., Inc., 758 S.W.2d 744, 745-46 (Tex. 1988); Scott v. Ingle Bros. Pac., Inc., 489 S.W.2d 554, 555 (Tex. 1972). Imagine the consequences of Smith’s position. If parties could not define their relationships in written contracts, how will they ever know what duties they owe each other? They can hire a lawyer and ask, “Am I in a partnership?,” but the lawyer will not be able to say, because any decent lawyer would tell them that if the two sides disagree, it must go to trial. The only way to know how to behave toward another party would be to go ask a jury: “Were we in a joint venture?” What a depressing and unpredictable world it would be if nobody could rely on written contracts such as these. The Court should enforce the contracts as written. 1890.001/55701 35  Smith says that witnesses such as Lester Smith and Steve Blaylock testified to certain factors under the five-factor test for a joint venture. CR 3123. Yes, they said that—despite signing contracts saying the opposite, and despite paying no attention to the writings. See 5 RR 280 (Blaylock: “beat me with a wet rope if I had to read one of those ... I don’t read them”); 6 RR 24 (Blaylock: “I haven’t read through any of them even today.”); 6 RR 30 (Blaylock: “I didn’t read the agreements we signed.”); 7 RR 249 (Smith: “I’m a handshake guy .... I don’t even know if I read the contract.”). But it makes no difference. Such parol evidence about what they felt and thought is legally immaterial. If the contracts are enforceable, the effect is to trump the force of such testimony. In the words of Chief Justice Calvert’s article, such testimony is classified as no evidence because a rule of law bars its consideration. See Calvert, “No Evidence” & “Insufficient Evidence” Points of Error, 38 TEX. L. REV. 361, 361-62 (1960). Second, Smith argued that there was no signature on the operating agreements attached to the contracts for On Point, Muy Caliente, and North On Point Extension. CR 3124. That is an odd position to take, given that those three contracts each positively scream “No Partnership” in section 6.3. Further, Smith signed the operating agreement for North Mound Lake, which disclaims joint venture and fiduciary duty. 1890.001/55701 36  That leaves only the Big Bump participation agreement. In section 11, Smith agreed that upon its execution, the parties would sign the attached operating agreement. See DX-1354. That bound Smith to the terms of the attachment. See In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 135 & n.41 (Tex. 2004) (“[A]n unsigned paper may be incorporated by reference in the paper signed by the person sought to be charged. The language used is not important provided the document signed ... plainly refers to another writing.”); In re Bank One, N.A., 216 S.W.3d 825, 826 (Tex. 2007) (arbitration clause in Bank’s Account Rules and Regulations was incorporated by reference into signature card where customer agreed to be bound by the account rules and regulations). In short, the contracts count. B. There is no fraud. Question 9 asked the jury whether Hardwick committed fraud against Smith Energy either by a misrepresentation or by a nondisclosure. The jury said Yes. The jury found the same damages that it had found on the contract claim: $36,003 in Fusselman overcharges, $43,425 in Bad Billy overcharges, and $25,448 in Bad Billy replacement landman costs. See Question 10. Hardwick repeatedly assailed Question 9. First, he objected to the question as being insufficiently specific. See 11 RR 406 (Mr. Strange: “it’s not limited in scope in any way, shape, form or fashion. Did Mark Hardwick commit fraud against Smith Energy in connection with what?”). Second, he objected to 1890.001/55701 37 including the tag-along parties in the definition of “Smith” (11 RR 406), because there is no evidence of any representation to, or reliance by, the tag-along parties. 11 RR 406-07. Third, he objected to the nondisclosure part of the question, because a duty to disclose would exist only if there were a fiduciary relationship, which there was not. 11 RR 407. Fourth, he assailed its intent element with a no- evidence point in writing after the verdict. CR 3101. Smith’s counsel argued that Hardwick committed fraud by not disclosing that he and Lester Smith read the contracts differently. See 11 RR 323 (“The testimony is certainly unequivocally from Mr. Smith that if he had known that this man’s position was he didn’t have to do anything in order to collect 6 percent, he would have never entered in the contract.”). That is a peculiar notion of fraud, but Smith’s counsel committed himself to it and stressed it in closing argument: “Lester Smith testified, ‘If I had known that I thought that he thought that he didn’t have to do anything in return for this really, really rich deal I was giving him, I’d have never entered into the contract.’ That is the fraud.” 12 RR 62. 1. The fraudulent inducement aspect of the claim fails because it lacks legally and factually sufficient evidence. The fraudulent inducement complaint is untenable. Take the intent element. To prove that Hardwick fraudulently induced the contracts, Smith had to prove that 1890.001/55701 38 Hardwick had a bad intent at the time the parties entered into the contract. See T.O. Stanley Boot Co., 847 S.W.2d at 222. But that lacks the support of legally and factually sufficient evidence. All agreed that Hardwick was an excellent landman and did good work. E.g., 6 RR 50. Lester Smith said so himself. 7 RR 267 (“Mark’s an excellent landman. Very, very good at his job.”); 8 RR 9 (“Mr. Hardwick was an excellent landman and did great work”). Although Smith criticizes him for running out of gas before finishing the race, that is a far cry from starting as a fraud. To the contrary, Hardwick performed extensively under the agreements. Hardwick put in long hours and worked on the projects during 2008, 2009, 2010, and much of 2011. 9 RR 234-35; 10 RR 18, 98, 100-03, 129. He worked himself nearly to the point of exhaustion, because the wells came in so successfully. Performing a contract for years refutes fraudulent inducement. See IKON Office Solutions, Inc. v. Eifert, 125 S.W.3d 113, 124 (Tex. App.—Houston [14th Dist.] 2003, pet. denied); Bank One, Tex., N.A. v. Stewart, 967 S.W.2d 419, 445-46 (Tex. App.—Houston [14th Dist.] 1998, pet. denied); Ensil Int’l Corp. v. Lear Siegler Servs., Inc., 2011 WL 2473067, at *3 (Tex. App.—San Antonio June 22, 2011, no pet.); Reyna v. First Nat’l Bank, 55 S.W.3d 58, 66-68 (Tex. App.—Corpus Christi 2001, no pet.); Bay Colony, Ltd. v. Trendmaker, Inc., 121 F.3d 998, 1006 (5th Cir. 1997). The intent element is unproven. 1890.001/55701 39  Further, there is legally and factually insufficient evidence of a failure to disclose a “material fact.” Question 9 recognizes fraud by non-disclosure. As noted earlier, Smith insisted that Hardwick’s failure to disclose that he read the contracts a certain way was an actionable non-disclosure of a material fact. But that is not a material fact. The Court should render on this theory. Alternatively, the non-disclosure aspect of Question 9 injected Casteel error into the charge. Hardwick owed no duty to disclose, for the reasons given earlier. Thus, at a minimum, the fraud theory should be reversed and remanded because of error in the charge. 2. The rest of the fraud claim is flawed. Smith’s only other argument for fraud relates to overbilling. Smith asserted that overbilling for the Fusselman and Bad Billy work constituted fraud. 12 RR 63-66; CR 3119. At most, the overbilling would justify damages of about $79,000. It would not constitute fraudulent inducement, and it would not justify rescission of the contracts. But the problems with the fraud claim go deeper than that. The jury charge contains more layers of Casteel error. First, the trial court erred in including the tag-along parties in the definition of “Smith.” Those parties have no evidence of fraud whatsoever. CR 2964-65. They conspicuously failed to prove material misrepresentation or reliance. 1890.001/55701 40  This is unsurprising, given that they had no contact with Hardwick. A misstatement, its materiality, and reliance all “require individualized proof.” Peltier Enters., Inc. v. Hilton, 51 S.W.3d 616, 623 (Tex. App.—Tyler 2000, pet. denied); see Grant Thornton LLP v. Suntrust Bank, 133 S.W.3d 342, 355 (Tex. App.—Dallas 2004, pet. denied) (“Proof of reliance or lack of reliance necessarily requires an individualized determination”). There was no effort to prove these individualized aspects of fraud claims as to the tag-along parties. There is simply no evidence that any of them have supportable fraud claims. Second, the tag-along plaintiffs also failed to prove that Hardwick had a duty to disclose information to them. Failure to disclose does not constitute fraud unless there is a duty to disclose. Ins. Co. of N. Am. v. Morris, 981 S.W.2d 667, 674 (Tex. 1998). “Generally, no duty of disclosure arises without evidence of a confidential or fiduciary relationship.” Id. Duty is a matter of law for the court. Bradford v. Vento, 48 S.W.3d 749, 755 (Tex. 2001). There is no evidence that Hardwick had any type of relationship with the tag-along parties, so no duty to speak could arise. Thus, any claim for fraud by nondisclosure to the tag-alongs cannot stand. At a minimum, the Court should reverse and remand the fraud recovery because of error in the charge. 1890.001/55701 41 III. THE ADDITIONAL REMEDIES—$5 MILLION IN FORFEITURE, $3.5 MILLION IN FEES, $750,000 IN INTEREST ON THE FORFEITURE, AND PARTIAL RESCISSION—ARE IMPROPER. The largest dollar amounts in this appeal involve remedies. A. The $5 million forfeiture award is improper. After obtaining only $104,000 in damages from the jury, Smith asked the court to make the recovery nearly 50 times larger. Smith requested a “forfeiture” award for $5,004,231, which is the sum of the dollar figures found in Questions 15a and 15b. See CR 3153-65. Smith got its wish. The judgment awards the amount requested and recites that “forfeiture” of this amount is “necessary to satisfy the public’s interest in protecting fiduciary relationships.” CR 3604. That was error. There should be no forfeiture at all, and certainly not one this large. 1. There is no underlying tort to support forfeiture. No forfeiture is proper. There was no fiduciary duty and no breach, let alone a clear and serious one, for the reasons discussed earlier in section II.A. The Fusselman contracts repeatedly disclaim fiduciary duty. E.g., DX-1298, 1351, 1356. Although Smith says that a fiduciary duty flowed from an agency relationship created by the Bad Billy contract, that is irrelevant; a breach on one project will not support forfeiture as to another. Gregory v. Porter & Hedges, LLP, 398 S.W.3d 881, 887 (Tex. App.—Houston [14th Dist.] 2013, pet. denied). 1890.001/55701 42  Smith may seek to salvage the forfeiture award as a restitutionary remedy for fraudulent inducement. That will not do. There was no fraudulent inducement, for all the reasons discussed in section II.B. Accordingly, the forfeiture award lacks the support of a proper legal predicate. 2. Even if forfeiture were available—so that Hardwick had to “return” his “compensation”—the working interests never came from Smith and were not compensation. Even if there had been a breach to support forfeiture of something, it would not justify turning over the working interest earnings. Smith analogized to a refund that a disloyal lawyer might have to make to a client in an Arce situation. See CR 2919 (pleading for “compensation” to be “forfeited”); 11 RR 288 (“I’m trying to get the value of the compensation that we paid him.”) Smith said that it “simply wants back the compensation that Hardwick did not earn.” CR 3165. The record refutes this myth of “compensation” going “back” to Smith. First, the working interests never came from Smith. They came from RAW. See DX-1298, 1346, 1354, 1351, 1356. Hardwick and friends took the deal to Smith, not vice versa. 6 RR 108-09, 134-36. Second, the working interests were not compensation and they are not conditioned on personal services. Conditions are disfavored in law and would require very clear language. See Rogers v. Ricane Enters., Inc., 772 S.W.2d 76, 79 (Tex. 1989). All a working interest owner must do is pay his bills (6 RR 244), which Hardwick undisputedly did. 1890.001/55701 43  To see the absurdity of Smith’s position, take a hypothetical that shows why Hardwick’s share of the working interest cannot have been salary for land work. What if Hardwick died in a wreck before all the work was done? Smith concedes that forfeiture of the working interests would be improper for that. 11 RR 293-96. Hardwick’s heirs would inherit the working interests and keep getting paid. Id. But that concession proves the point. If the working interest earnings were truly a paycheck for finishing a multi-year job, as Smith claims, they would need to stop if Hardwick was run over by a train. The forfeiture claim is a baseless land grab. 3. The forfeiture award rests on inaccurate factual findings. In Question 15, the jury found that “Hardwick” received $795,056 in working interest earnings after stopping work. It also found that “Hardwick’s” working interests had a market value of $4,209,175 in the middle of 2013. These findings address Hardwick individually—as opposed to the LLC. But the findings are excessive. Hardwick assigned the working interests to LLC in 2011. See DX- 848; DX-1371; 5 RR 205-06. This is undisputed. See id. Thus, most of the $795,056 (Question 15a) was “received” by LLC, not Mark Hardwick. Similarly, the value of “Mark Hardwick’s” working interests (Question 15b) on the relevant date was not $4.2 million, because $2.8 million of that amount belonged to LLC by then. Hardwick laid out the numbers in his new trial motion (CR 3537), and Smith’s response neither quoted nor cited any evidence to contradict them. 1890.001/55701 44  In response to the motion for new trial, Smith claimed that Hardwick was “legally entitled to receive” the various working interests and associated earnings. CR 3643. That may or may not be true, but it makes no difference. The charge did not ask what Hardwick was “legally entitled to receive.” It asked what he “received.” Sufficiency review takes place in light of the charge as submitted, not some hypothetical charge. Osterberg v. Peca, 12 S.W.3d 31, 55 (Tex. 2000); Larson v. Cook Consultants, Inc., 690 S.W.2d 567, 568 (Tex. 1985). Smith also called LLC a “shell” company (CR 3643) but has no alter ego finding to support that belated claim. The answers to Question 15 are simply unsupportable, and the response to the new trial motion tends to suggest that Smith realizes it. 4. The forfeiture amount is too large. If the Court gets this far, it should reduce the award’s size. While trial courts have discretion over forfeiture amounts, see Burrow v. Arce, 997 S.W.2d 229, 246 (Tex.1999), if an award can ever be excessive, this one is. First, the $5 million forfeiture of Fusselman working interest monies dwarfs the damages associated with those projects. Second, the contracts disavow joint ventures and fiduciary duties, so Hardwick had a good reason for any failure to comply. See, e.g., DX-1298, 1347. Third, all agreed that Hardwick did excellent work. 7 RR 267; 8 RR 9. Under these circumstances, such a disproportionately large forfeiture is improper. 1890.001/55701 45  5. The forfeiture cannot be saved as restitution and rescission for fraud. As an alternative, Smith treated the forfeiture as equitable relief to go with rescission as a remedy for fraudulent inducement. CR 3150-69. Smith spoke of restitution. See CR 3156-60. But that argument fails for multiple reasons. To begin with, the law disfavors awarding equitable relief when money damages are available. Money damages are generally an adequate remedy at law. Smith sued for damages on the Fusselman contracts, and although the verdict was less than Smith wanted, the jury awarded something. So if Hardwick breached the Fusselman contracts, the damages make Smith whole. Nothing justifies piling on with “equitable” relief. Smith says that a fraudulent inducement plaintiff can seek “rescission and restitution of the consideration paid.” CR 3156. But Smith does not want that. The remedy Smith got is nothing like “rescission and restitution.” Smith positively loves the Fusselman contracts because they turned out so profitably. Smith wants to keep them in place, not rescind them. The twist is that Smith wants to rewrite the contracts—partway—by readjusting the percentages, so that Hardwick’s share goes down, Smith’s goes up, and there is no change in the percentage for Blaylock, Elger, and RAW. That hardly sounds like rescission. 1890.001/55701 46  Nor does Smith really want restitution of “consideration paid,” because the $5 million in working interest earnings were not “consideration” for the contracts, were not “paid” by Smith, and do not count as restitution in any sense of the word. In substance, the $5 million borders on punitive damages. Smith cites section 54 of a Restatement to shore up the remedy (CR 3465), but that part of the Restatement deals with the return of “specific property in the hands of a defendant, as opposed to a money judgment in the amount of the defendant’s unjust enrichment.” RESTATEMENT (THIRD) OF RESTITUTION & UNJUST ENRICHMENT, Introductory Note at 260 (2011). It imposes an “all-important ‘tracing requirement.’” Id. at 262. Thus, section 54 speaks of a person who has “transferred money or other property” being entitled to recover “it.” Id. § 54. Smith does not want to rescind the Fusselman contracts. Smith wants to pick and choose—keeping some parts and rejecting others. The Court should refuse to let Smith go halfway across the canyon. Texas law strongly disfavors partial rescission: “It is the longstanding general rule in Texas that a rescission of a contract must be in toto.” Costley v. State Farm Fire & Cas. Co., 894 S.W.2d 380, 387 (Tex. App.—Amarillo 1994, writ denied). That rule applies here and condemns the trial court’s decree of rescission “as between” two parties to the five- way set of Fusselman contracts. 1890.001/55701 47  Although the rule against partial rescission has two narrow exceptions, neither applies. The exceptions are for divisible contracts and “extreme” cases. Id. The Fusselman contracts are not plainly divisible. Nor is this case extreme—after all, the fraudulent inducement caused zero damages. Smith alleged that Hardwick would work in perpetuity, but the jury brought back all zeros on that claim. See Questions 10(3)(a)(i), (b)(i), (c)(i). That does not qualify as extreme. See Bryant v. Vaughn, 33 S.W.2d 729, 730 (Tex. 1930) (rescission is improper for fraudulent inducement that causes no damage). In short, the only “consideration” worthy of the name is the money Smith paid in so that RAW could acquire leases in the names of all five participants. That money never went to Hardwick, so he cannot “return” it. Nor is that money the same as the working interests or associated earnings he was ordered to forfeit. The forfeiture award is not supportable as restitution of consideration paid. B. The attorney’s fees should be reduced or eliminated. The $3.5 million fees should be reduced or eliminated. 1. A reversal of the underlying damages will require either a rendition or remand on attorney’s fees. If the Court deletes the damages, it should delete the fees. Dryzer v. Bundren, 2014 WL 1856849, at *5 (Tex. App.—Amarillo June 16, 2014, pet. denied); see Gulf States Utils. Co. v. Low, 79 S.W.3d 561, 567 (Tex. 2002) 1890.001/55701 48 (“Without an actual-damages recovery, a party is not entitled to an attorney’s fees recovery.”). Likewise, if Smith’s damages are disturbed but not eliminated, the fee award would necessarily require reconsideration by the fact finder. The jury was asked to find fees based on the “amount involved and the results obtained.” CR 2985. When the damages are reduced, that changes “the results,” so a retrial on fees is required. Barker v. Eckman, 213 S.W.3d 306, 313-15 (Tex. 2006). 2. Smith failed to segregate fees between recoverable and non- recoverable claims. But the fee award should be reversed no matter how the Court rules on the actual damages. Smith did not prove fees properly. Attempting to inflate the fee award, Smith openly refused to segregate recoverable from unrecoverable fees. In fact, Smith redacted the invoices to hide virtually all signs of what the lawyers were doing. Hardwick preserved these arguments. CR 3055-57, 3459, 3539. Fees cannot be recovered unless authorized by contract or statute. In re Nalle Plastics Family Ltd. P’ship, 406 S.W.3d 168, 172 (Tex. 2013). Thus, “if any attorney’s fees relate solely to a claim for which such fees are unrecoverable, a claimant must segregate recoverable from unrecoverable fees.” Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 313 (Tex. 2006). Here, Smith can recover fees for only the contract and statutory-theft claims. See TEX. CIV. PRAC. & REM. CODE §§ 38.001(8), 134.005(b). Smith cannot recover fees for tort claims. 1890.001/55701 49  Nevertheless, Smith failed to segregate. Hardwick asked Smith’s main fee expert whether he segregated the fees. The expert, Mr. Moore, said No: Q. You have not attempted to allocate any fees to any particular claim or cause of action? A. I guess the answer is no because I don’t know how you could particularly allocate a fee to a particular cause of action when they’ve got about 10 or 12 and you’ve got about 12 or 15. So I guess the answer is no. 7 RR 202; see 7 RR 203 (“I did not attempt to segregate a fee to a particular cause of action”). Moore said that the case involved “interrelated causes of action,” so he did not “know how you break it out.” 7 RR 215. Smith’s lead trial attorney, Rusty Hardin, echoed this in some short follow-up testimony, contending that fees were unsegregated because the causes of action “were all so interrelated” and “impossible to divide.” 7 RR 219-20. Smith seeks to revive the old intertwining exception to segregation, which Tony Gullo explicitly rejected: “To the extent Sterling suggested that a common set of underlying facts necessarily made all claims arising thereform ‘inseparable’ and all legal fees recoverable, it went too far.” 212 S.W.3d at 313; see also MBM Fin. Corp. v. Woodlands Operating Co., L.P., 292 S.W.3d 660, 667 (Tex. 2009) (similar). Tony Gullo “reestablished the rule that attorney’s fees are recoverable only if necessary to recover on a contract or statutory claim allowing them.” Varner v. Cardenas, 218 S.W.3d 68, 69 (Tex. 2007). 1890.001/55701 50  The only time that segregation is not required is “when discrete legal services advance both a recoverable and unrecoverable claim that they are so intertwined that they need not be segregated.” Tony Gullo, 212 S.W.3d at 313-14 (emphasis added). The focus of the exception now is on the work performed, not the facts or claims. Id. “Intertwined facts do not make tort fees recoverable” or any other fees not related to a contract or statute. See id. at 313. Here, any work that Smith’s lawyers performed solely to advance issues not related to the contract or statutory-theft claims cannot lead to fee recovery. Thus, any work done on the following issues must be segregated and excluded from Smith’s fee calculation:  Breach of fiduciary duty  Joint venture  Agency  Fraud  Forfeiture (which includes the working-interest earnings that Hardwick received after he stopped his services, and the value of his working interests)  Exemplary damages  Claims on which Smith did not prevail, such as fraud claims relating to the North On Point Extension GEA amendment (8 RR 235, 238, 252)  Smith’s non-suited claims, such as the fraudulent-transfer claim (8 RR 236-38, 252) 1890.001/55701 51 This partial list shows how many significant issues involved work related only to tort claims. In fact, segregation on this record was impossible. As Hardwick noted in his JNOV motion, the invoices from Smith’s lawyers “are so heavily redacted as to be essentially meaningless.” CR 3056. E.g.:  “1/26/2012 RKH Telephone calls to [redacted]; review [redacted] draft [redacted]”  “12/19/2012 CPC Conduct legal research regarding [redacted] and conduct factual research regarding [redacted]”  “10/25/2013 LH Meeting with Carolyn Courville and Ryan Higgins regarding [redacted] research regarding [redacted]”  “6/19/2014 RH Meeting with Ryan Higgins and Carolyn Courville to [redacted] conference with Carolyn Courville” PX-166. These general descriptions of the work go on for page after page. Id. Were the lawyers working on Smith’s tort claims? Contract claims? Nobody can tell from the invoices, because the subject matter is marked out. The redactions make it impossible to tell what work the plaintiffs’ lawyers did on claims for which fees are recoverable and on claims for which they are not. The failure to segregate warrants at least a reversal and remand. See A.G. Edwards & Sons Inc. v. Beyer, 235 S.W.3d 704, 710 (Tex. 2007). 1890.001/55701 52  3. There is no evidence that the hours worked by Smith’s lawyers were necessary. But the problems go deeper than failure to segregate. Smith had the burden to prove that the fees awarded for the fee-recoverable contract and statutory-theft claims were not only reasonable, but necessary. TEX. CIV. PRAC. & REM. CODE §§ 38.001(8), 134.005(b). Any fees expended solely on non-recoverable claims, by definition, are not necessary. See Tony Gullo, 212 S.W.3d at 311-14. Here, Smith supplied no specific evidence—none—that the hours worked by the attorneys were necessary. See CR 3055-57, 3459, 3539 (Hardwick’s objections). Smith’s fee expert, Bradford Moore, used the lodestar method to calculate trial fees by relating the hours worked for each person who worked on the case multiplied by their hourly rates for a total fee. PX-166, 276-80. A “party choosing the lodestar method of proving attorney’s fees must provide evidence of the time expended on specific tasks to enable the fact finder to meaningfully review the fee application.” Long v. Griffin, 442 S.W.3d 253, 253 (Tex. 2014) (per curiam). “[G]eneralities about tasks performed provide insufficient information for the fact finder to meaningfully review whether the tasks and hours were reasonable and necessary under the lodestar method.” Id. (citing El Apple I, Ltd. v. Olivas, 370 S.W.3d 757, 763 (Tex. 2012)). But Smith offered only generalities, not specifics, about the tasks performed by the attorneys. 1890.001/55701 53  As discussed above, the contemporaneous billing records are heavily redacted. PX-166. They speak only in general terms about the work; such generalities are not evidence of “time spent on specific tasks” for recoverable claims. Long, 442 S.W.3d at 255; see City of Laredo v. Montano, 414 S.W.3d 731, 736 (Tex. 2013) (per curiam) (“lodestar calculation requires certain basic proof, including itemizing specific tasks”). The expert, Moore, concluded that the total amount of fees was “reasonable and necessary” (7 RR 197), but he did not explain how the hours worked satisfied that standard. He conceded that he could not explain the substance of the tasks performed because the invoices were redacted. 7 RR 207-11. This is understandable, since he apparently reviewed only the redacted bills. 7 RR 207, 209. That leaves Smith with the expert’s mere say-so, which is not enough. See Burrow, 997 S.W.2d at 235 (“a claim will not stand or fall on the mere ipse dixit of a credentialed witness.”). Likewise, Moore made no effort to determine whether the billings for the legal support staff included only substantive legal work (possibly recoverable), as opposed to clerical work (not recoverable). 7 RR 204-13. He made that assumption based on his experience with other law firms and the Hardin firm’s reputation. Id. Mr. Hardin did testify that all the staff’s work encompassed legal 1890.001/55701 54 matters (7 RR 220-21), and his testimony can be taken as true, but this testimony says nothing about whether their hours worked were necessary. In sum, under the method that Smith chose to use, no evidence supports the amount of attorney’s fees awarded. No evidence indicates the hours expended on the specific tasks working on claims for which fees may be recovered. Smith offered only generalities, and “[o]ne does not satisfy that obligation by simply proffering evidence of generalities.” Sullivan v. Abraham, 2014 WL 5140289, at *3 (Tex. App.—Amarillo Oct. 13, 2014, pet. filed). The Court should reverse and render as to fees. Alternatively, the Court should reverse and remand. This complaint about evidentiary insufficiency is not some technicality. Smith wants a $3.5 million fee award for recovering a mere $104,000. Such a disproportionate fee award ought to rest on solid proof. If the Court were to approve of Smith’s evidence, the law would have no way of stopping an award at $3.5 million. Why not $10 million next time? Why not $100 million? If all a plaintiff needs to do is what Smith did, reviewing courts will have no way to know when a fee award crosses the line. Smith’s fee award rests on legally and factually insufficient evidence. 1890.001/55701 55  C. The judgment wrongly stacks remedies: Smith cannot have both the $5 million in disgorgement and the $3.5 million in fees. The trial court erred in stacking inconsistent remedies. The most obvious example of this error comes in the stacking of the $5 million disgorgement award on top of the $3.5 million fee award. Smith sought disgorgement on the basis of the tort theories—fiduciary duty and fraud—while seeking fees on the basis of the contract and statutory theft theories. Hardwick asked the court to require an election. See CR 3035 (“At a minimum Plaintiffs must elect a damage theory”); CR 3455 (“election of remedies doctrine and the one-judgment rule”); CR 3456 (similar); CR 3458 (objecting to “multiple recoveries”); CR 3459 (objecting to the fee award under the “election of remedies and one-satisfaction doctrines”). The court erred in failing to do so. A plaintiff is entitled to elect the greatest recovery when the verdict supports relief under multiple theories. See Boyce Iron Works, Inc. v. Sw. Bell Tel. Co., 747 S.W.2d 785, 787 (Tex. 1988) (“When a party tries a case on alternative theories of recovery and a jury returns favorable findings on two or more theories, the party has a right to a judgment on the theory entitling him to the greatest or most favorable relief.”). But the plaintiff cannot stack them all on top of each other. The rule came up in Tony Gullo, which involved three theories, namely contract, fraud, and DTPA: 1890.001/55701 56  For breach of contract, Chapa could recover economic damages and attorney’s fees, but not mental anguish or exemplary damages. For fraud, she could recover economic damages, mental anguish, and exemplary damages, but not attorney’s fees. For a DTPA violation, she could recover economic damages, mental anguish, and attorney’s fees, but not additional damages beyond $21,639 (three times her economic damages). The court of appeals erred by simply awarding them all. Tony Gullo, 212 S.W.3d at 304. Smith won on four theories. The fraud and fiduciary duty theories sound in tort and arguably support disgorgement, but they will not support an award of fees. The contract and theft theories support an award of fees, but not disgorgement. The trial court “erred by simply awarding them all.” Id. Smith cannot mix and match theories. Smith needs to elect “the theory entitling him to the greatest or most favorable relief.” Boyce, 747 S.W.2d at 787. If the rule were otherwise, the plaintiff in Tony Gullo would have been able to cherry-pick by stacking economic losses plus mental anguish plus fees plus exemplary damages. See id. This is not a case where the jury found different damages for each theory. Every overcharge finding is the same from theory to theory—to the last dollar. Every finding of damages for “cover” is also the same from theory to theory. Accordingly, Smith must elect. Id.; see Saden v. Smith, 415 S.W.3d 450, 469 (Tex. App.—Houston [1st Dist.] 2013, pet. denied). 1890.001/55701 57  D. The rescission remedy is improper. The judgment rescinded seven contracts “as between” Smith and Hardwick. Those seven are the first five Fusselman contracts, the amended version of the last Fusselman contract (North On Point Extension / O’Donnell), and Bad Billy. Hardwick objected to rescission (CR 3088-101) because, as noted earlier, the law strongly disfavors partial rescission. See Costley v. State Farm Fire & Cas. Co., 894 S.W.2d 380, 387 (Tex. App.—Amarillo 1994, writ denied). The Court should follow Costley and reverse. E. Interest on forfeiture. Over Hardwick’s objection (CR 3459), the trial court awarded prejudgment interest on forfeiture. Prejudgment interest accrues on actual damages because the plaintiff’s money has been detained: “Prejudgment interest is ‘compensation allowed by law as additional damages for lost use of the money due as damages during the lapse of time between the accrual of the claim and the date of judgment.’” Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 528 (Tex. 1998). But forfeiture does not compensate. Forfeiture has a more punitive aspect and is available even absent actual damages. Because prejudgment interest’s purpose is to “fully compensate the injured party, not to punish the defendant,” Brainard v. Trinity Universal Ins. Co., 216 S.W.3d 809, 812 (Tex. 2006), the award of prejudgment interest on forfeiture is improper. 1890.001/55701 58 IV. LLC Should Recover Fees Because It Prevailed on the Theft Claim. Smith alleged theft against two defendants—Hardwick individually and Hardwick LLC—not one:  “Defendants have intentionally and unlawfully appropriated property”  “Defendants are liable for the damages resulting from such theft.”  “Plaintiffs bring this claim against Defendants pursuant to Chapter 134 of the TEX. CIV. PRAC. & REM. CODE” CR 2923-24. Smith did not prevail on the theft claim against the LLC. A. The Theft Liability Act alters the American Rule by making fees mandatory for a person who “prevails.” The Act has a loser-pays rule: “Each person who prevails in a suit under this chapter shall be awarded court costs and reasonable and necessary attorney’s fees.” § 134.005(b). “The Theft Act is unusual in Texas law in that it requires the court to award attorney’s fees to a party who successfully defends a Theft Act claim, without any prerequisite that the claim is found to be groundless, frivolous, or brought in bad faith.” Air Routing Int’l Corp. (Canada) v. Britannia Airways, Ltd., 150 S.W.3d 682, 686 (Tex. App.—Houston [14th Dist.] 2004, no pet.). B. Under this Court’s reasoning in Dean Foods, the prevailing party on Smith’s theft claim against LLC is not Smith, but LLC. Section 134.005(b) uses the word “prevails” but does not define that word. This Court has shown how to analyze language in comparable enactments. 1890.001/55701 59  In Dean Foods Co. v. Anderson, 178 S.W.3d 449 (Tex. App.—Amarillo 2005, pet. denied), the dispute involved a statutory phrase, “prevailing party.” The Court held that Ms. Anderson prevailed when her late husband’s employer nonsuited its effort to overturn a compensability determination. Id. at 454. The employer argued that its nonsuit kept her from prevailing, but the Court disagreed. Id. Chief Justice Quinn amplified on the analysis in a concurrence. He noted that defendants who win by non-suit routinely recover court costs under Rule 131: “it consistently has been held that the beneficiary of a non-suit, e.g., the defendant when a plaintiff files a non-suit, is the prevailing or successful party for purposes of Rule 131.” Dean, 178 S.W.3d at 456 (Quinn, C.J., concurring). “If we are to retain the uniformity spoken of above, then we cannot but conclude that Anderson was the successful or prevailing party here when Dean Foods filed its non-suit.” Id. As the Chief Justice noted, the Court previously construed the term “prevailing party” in a different statute so as to harmonize with the cases under Rule 131. See City of Amarillo v. Glick, 991 S.W.2d 14 (Tex. App.—Amarillo 1997, pet. denied). Just as in Dean Foods, the statute does not define what it means to prevail. Just as in Dean Foods, the Court should promote consistency in the law by reading the term “prevails” in the Theft Liability Act to include a defendant who is sued for theft but is not found liable for theft. 1890.001/55701 60  C. LLC should recover fees. For these reasons, LLC prevailed and should have recovered fees. Smith sued LLC for theft but did not prevail. Smith neither obtained jury findings nor a judgment for theft against LLC. When LLC raised this point after trial (CR 3079), Smith responded with three contentions. First, Smith said that it did not really sue LLC for theft. CR 3107. But the pleadings say otherwise. CR 2923-24 ¶ 94. The theft count always refers to the “Defendants” in the plural. Id. The petition even asks for damages to be awarded against the two defendants “jointly and severally.” CR 2927. Smith plainly sued LLC for theft. Second, Smith said that a theft defendant does not “prevail” unless there is an affirmative finding of outright innocence. CR 3107. In other words, Smith argued that a defendant does not prevail by merely winning a take-nothing. Id. But Dean Foods proves otherwise. Where a plaintiff sues for $50 million, as Smith did, a defendant who walks away with a take-nothing has prevailed. The only case cited on this point in Smith’s response was a memorandum opinion from San Antonio. See CR 3107 (citing Travel Music of San Antonio, Inc. v. Douglas, 04-00-757-CV, 2002 WL 1058527, at *3 (Tex. App.—San Antonio May 29, 2002, pet. denied)). That decision is unpersuasive. Insisting on a finding of affirmative innocence would complicate trials by making juries answer liability 1890.001/55701 61 questions twice: (1) Is D guilty of theft?, and (2) Is D innocent of theft? The better view is the one in Dean Foods and the Chief Justice’s concurrence. Finally, Smith argued that LLC waived its fee claim by not getting a jury finding on the dollar amount. CR 3108. But Smith told the trial court otherwise. When the trial court was going through draft charge language about fees, the court asked Smith about the “concept” of submitting questions for both defendants. This discussion came up while the court was discussing fees. 11 RR 316-18. The court suggested trying fees to the bench, if both sides consented. Id. at 316. The court was looking for ways to shorten the trial. Id. at 318. In the very next breath, the court raised the issue of whether to have duplicate questions for Hardwick and LLC. Id. Smith told the court that there was no need for findings on behalf of LLC: The Court Well, let’s – let me talk about this concept for just a minute. I noticed that Mr. Strange has, on behalf of the defendant, several questions for Mark Hardwick and Mark Hardwick, LLC. And we don’t need to do LLC, do we? Ms. Hollingsworth No. The Court I mean, we can eliminate that and just go with Mark Hardwick, can’t we? Ms. Hollingsworth Yes, sir. 11 RR 318-19. Smith cannot undo that representation now. 1890.001/55701 62  This Court should reverse that part of the judgment that denies fees to LLC. As a remedy, the Court should either award LLC half the total amount found by the jury or remand the fee issue for trial. If the Court chooses to remand for a trial, the resulting proceedings would be speedy, because a fee dispute such as this can be resolved in less than a day of trial time. PRAYER FOR RELIEF The judgment should be reversed. As to Hardwick individually, the Court should reverse the judgment and render judgment that Smith take nothing or, alternatively, reverse and remand. The Court should reverse the decree of rescission, the award of fees, and the forfeiture. The Court should forbid stacking of forfeiture and fees, and it should require an election of remedies. Any excessive recovery should be reduced or remitted. As to Hardwick LLC, the Court should award LLC its fees in the amount of half of what the jury found in answer to Question 25. Alternatively, the Court should remand LLC’s fee claim for a trial on the proper amount. 1890.001/55701 63  Respectfully submitted, BECK REDDEN LLP By: /s/ David M. Gunn David M. Gunn State Bar No. 08621600 dgunn@beckredden.com Chad Flores State Bar No. 24059759 cflores@beckredden.com Erin H. Huber State Bar No. 24046118 ehuber@beckredden.com 1221 McKinney, Suite 4500 Houston, TX 77010-2010 (713) 951-3700 (713) 951-3720 (Fax) COUNSEL FOR APPELLANTS 1890.001/55701 64  CERTIFICATE OF SERVICE I hereby certify that on September 9, 2015, a true and correct copy of the above and foregoing Brief of Appellants was forwarded to all counsel by the Electronic Service Provider, if registered, otherwise by email, as follows: Rusty Hardin rustyhardin@rustyhardin.com Ryan K. Higgins rhiggins@rustyhardin.com Jeremy Monthy jmonthy@rustyhardin.com Lara Hollingsworth lhollingsworth@rustyhardin.com Carolyn P. Courville ccourville@rustyhardin.com RUSTY HARDIN & ASSOCIATES, LLP 1401 McKinney Street, Suite 2250 Houston, TX 77010 Counsel for Appellees /s/ David M. Gunn David M. Gunn 1890.001/55701 65  CERTIFICATE OF COMPLIANCE 1. This brief complies with the type-volume limitation of Tex. R. App. P. 9.4 because it contains 14,973 words, excluding the parts of the brief exempted by Tex. R. App. P. 9.4(i)(2)(B). 2. This brief complies with the typeface requirements of Tex. R. App. P. 9.4(e) because it has been prepared in a proportionally spaced typeface using Microsoft Word 2007 in 14 point Times New Roman font. Dated: September 9, 2015. /s/ David M. Gunn David M. Gunn Counsel for Appellant 1890.001/55701 66  No. 07-15-00083-CV IN THE SEVENTH COURT OF APPEALS AMARILLO, TEXAS MARK P. HARDWICK, INDIVIDUALLY AND D/B/A MARK P. HARDWICK OIL AND GAS PROPERTIES AND MARK P. HARDWICK, LLC Appellants, v. SMITH ENERGY COMPANY, ON ITS OWN BEHALF AND ON BEHALF OF SMITH ENERGY RESOURCE OIL, LTD., A TEXAS LIMITED PARTNERSHIP, AND ON BEHALF OF SMITH ENERGY PARTNERS I, LTD., A TEXAS LIMITED PARTNERSHIP, Appellees. On Appeal from the 121st District Court, Terry County, Texas Trial Court Cause No. 19,490; The Honorable Rick Morris, Presiding APPENDIX TO BRIEF OF APPELLANTS Tab A Jury Verdict (2 CR 2948-92) B Judgment (2 CR 3600-11) C North Mound Lake Participation Agreement (DX 1346) D North Mound Lake Operating Agreement (DX 1347) E North Mound Lake letter (DX 1345) (incorrectly dated as January 17, 2008 instead of July) F Big Bump Participation Agreement & Operating Agreement (DX 1354) G On Point GEA (DX 1351) H Muy Caliente GEA (DX 1356) I Amended North On Point Extension & O’Donnell GEA (DX 1350) J Bad Billy Agreement (Amended) (PX 85) 1890.001/565701  No. 07-15-00083-CV IN THE SEVENTH COURT OF APPEALS AMARILLO, TEXAS MARK P. HARDWICK, INDIVIDUALLY AND D/B/A MARK P. HARDWICK OIL AND GAS PROPERTIES AND MARK P. HARDWICK, LLC Appellants, v. SMITH ENERGY COMPANY, ON ITS OWN BEHALF AND ON BEHALF OF SMITH ENERGY RESOURCE OIL, LTD., A TEXAS LIMITED PARTNERSHIP, AND ON BEHALF OF SMITH ENERGY PARTNERS I, LTD., A TEXAS LIMITED PARTNERSHIP, Appellees. On Appeal from the 121st District Court, Terry County, Texas Trial Court Cause No. 19,490; The Honorable Rick Morris, Presiding APPENDIX TO BRIEF OF APPELLANTS Tab A Jury Verdict (2 CR 2948-92) B Judgment (2 CR 3600-11) C North Mound Lake Participation Agreement (DX 1346) D North Mound Lake Operating Agreement (DX 1347) E North Mound Lake letter (DX 1345) (incorrectly dated as January 17, 2008 instead of July) F Big Bump Participation Agreement & Operating Agreement (DX 1354) G On Point GEA (DX 1351) H Muy Caliente GEA (DX 1356) I Amended North On Point Extension & O’Donnell GEA (DX 1350) J Bad Billy Agreement (Amended) (PX 85) 1890.001/565701  TAB A Jury Verdict (2 CR 2948-92) :i ·:._ ·-:,..I_ ' CAUSE NO. 19,490 ,.., -I ......., SMI'I'H ENERGY COMPANY, ON § IN THE DISTRICT c~uRt = -., - ~ ITS OWN BEHALF AND ON BEHALF § .r.- r- ;t:D f"'l'l ~ c-- .r.... Ll OF SMITH ENERGY RESOURCE § (.~ G"") ,...,., r,..• OIL, LTD., A TEXAS LIMITED § . r-' r-0 U) r.::~ (r"".:;'~ :;;;;;; PARTNERSHIP, AND ON BEHALF OF § --;c (,/) t::J -i,h ~ ::o SMITH ENERGY PARTNERS I, LTD., § ~1'1 -~ -~· r-ri c-< CJ ATEXASLIMITEDPARTNERSHIP § -I r.->' .. •..!) 0 Plaintiffs, § § § r-· .m. :;;;J ' ;:,;; a - ::::0 co ' ' ~ . . . ' . vs. § TERRY COUNTY, TEXAS § ' ' MARK P. HARDWICK, INDIVIDUALLY § AND D/B/A MARK P. HARDWICK OIL & § GAS PROPERTIES, AND § MARK P. HARDWICK, LLC § § Defendants. § 121 st JUDICIAL DISTRICT COURT'S CHARGE MEMBERS OF THE JURY: After the closing arguments, you will go to the jury room to decide the case, answer the questions that are attached, and reach a verdict. You may discuss the case with other jurors only when you are all together in the jury room. Remember my previous ins~ctions: Do not discuss the case with anyone else, either in person or by any other means. Do not do any independent investigation about the case or conduct any research. Do not look up any words in dictionaries or on the Internet. Do not post information about the case on the Internet. Do not share any special knowledge or experiences with the other jurors. Do not use your phone or any other electronic device during your deliberations for any reason. Any notes you have taken are for your own personal use. You may take your notes back into the jury room and consult them during deliberations, but do not show or read your notes to your fellow jurors during your deliberations. Your notes are not evidence. Each of you should rely on your independent recollection of the evidence and not be influenced by the fact that another juror has or has not taken notes. After you complete your deliberations, the bailiff will collect your notes. When you are released from jury duty, the bailiff will promptly destroy your notes so that nobody can read what you wrote. 1 2948 Here are the instructions for answering the questions. I. Do not let bias, prejudice, or sympathy play any part in your decision. 2. Base your answers only on the evidence admitted in court and on the law that is in these instructions and questions. Do not consider or discuss any evidence that was not admitted in the courtroom. 3. You are to make up your own minds about the facts. You are the sole judges of the credibility of the witnesses and the weight to give their testimony. But on matters of law, you must follow all of my instructions. 4. If my instructions use a word in a way that is different from its ordinary meaning, use the meaning I give you, which will be a proper legal definition. 5. All the questions and answers are important. No one should say that any question or answer is not important. 6. Answer "yes" or "no" to all questions unless you are told otherwise. A "yes" answer must be based on a preponderance of the evidence unless you are told otherwise. Whenever a question requires an answer other than "yes" or "no," your answer must be based on a preponderance of the evidence unless you are told otherwise. The term "preponderance of the evidence" means the greater weight of credible evidence presented in this case. If you do not find that a preponderance of the evidence supports a "yes" answer, then answer "no." A preponderance of the evidence is not measured by the number of witness'es or by the number of documents admitted in evidence. For a fact to be proved by a preponderance of the evidence, you must find that the fact is more likely true than not true. 7. Do not decide who you think should win before you answer the questions and then just answer the questions to match your decision. Answer each question carefully without considering who will win. Do not discuss or consider the effect your answers will have. 8. Do not answer questions by drawing straws or by any method of chance. 9. Some questions might ask you for a dollar amount. Do not agree in advance to decide on a dollar amount by adding up each juror's amount and then figuring the average. 2 2949 ·' 10. Do not trade your answers. For example, do not say, "I will answer this question your way if you answer another question my way." 11. Unless otherwise instructed the answers to the questions must be based on the decision of at least ten of the twelve jurors. The same ten jurors must agree on every answer. Do not agree to be bound by a vote of anything less than ten jurors, even if it would be a majority. As I have said before, if you do not follow these instructions, you will be guilty of juror misconduct, and I might have to order a new trial and start this process over again. This would waste your time and the parties' money, and would require the taxpayers of this county to pay for another trial. If a juror breaks any of these rules, tell that person to stop and report it to me immediately. A fact may be established by direct evidence or by circumstantial evidence or both. A fact is established by direct evidence when proved by documentary evidence or by witnesses who saw the act done or heard the words spoken. A fact is established by circumstantial evidence when it may be fairly and reasonably inferred from other facts proved. The terms set forth below are defined in this charge as follows: I. "Smith Energy Company" refers to itself, and on behalf of the interests of the following persons and/or entities: a. Alec Smith b. A.M. Greene Trust c. Brian Hendry d. Bronze Creek Holdings, Ltd. e. David Garcia f. Elger Exploration g. Janice Holloway h. JOH RAW Energy, L.C. i. Jeff Kimble j. Jennifer Huber k. Julie Rouse I. JZM Oil and Gas,, LLC m. Karen Collier n. Karla Neal o. KB Oil and Gas, LP p. Lawrence E. Glenn q. Lester H. Smith 1999 Revocable Trust r. Lester H. Smith 2004 Family Legacy Trust s. Limor Smith t. Margaret Farmer u. PAH Energy 3 2950  v. Patricia Morille w. Paul Hardwick x. RAW Oil & Gas, Inc. y. Shari Mota) z. Smith Energy Partners I, Ltd. aa. Smith Energy Resource Oil Ltd. bb. Steve Blaylock cc. Stuart Smith & Michelle Hendry 2004 Family Legacy Trust dd. Sue Ashcraft Smith ee. Triple S Energy ff. Vika Bel ova Irrevocable Trust gg. Wanda Ripple hh. Wanda Tollett 2. "Fusselman Prospect Agreements" refers to the following agreements: a.North Mound Lake Participation Agreement. b.North Mound Lake Letter Agreements. c.Big Bump Geophysical Exploration Agreement. d.On Point Geophysical Exploration Agreement. e.Muy Caliente Geophysical Exploration Agreement. f. North On Point Extension/O'Donnell Geophysical Exploration Agreement. g. Amended North On Point Extension/O'Donnell Geophysical Exploration Agreement. 3. "Working interests" refers to the working interests Mark Hardwick received pursuant to the Fusselman Prospect Agreements. "Landman services" refers to the acquisition or supervision of the acquisition of oil and gas leases, performance of curative title work, and maintenance and management of acquired leases. 4 2951 • QUESTIONl Was Mark Hardwick obligated to provide landman services for the Fusselman prospects until the prospects were completed? It is your duty to interpret the following language: "All Parties will participate with RAW in accomplishing the Geophysical Program as may be requested from RAW from time to time." In deciding whether the parties reached an agreement, you may consider what they said and did in light of the surrounding circumstances, including any earlier course of dealing. You may not consider the parties' unexpressed thoughts or intentions. You must decide its meaning by determining the intent of the parties at the time of the agreement. Consider all the facts and circumstances surrounding the making of the agreement, the interpretation placed on the agreement by the parties, and the conduct of the parties. Answer "Yes" or "No." Answer: --'1--+-"'e...._0=---- 5 2952 . ... QUESTION2 In the Bad Billy Agreement of December 17, 2010, did Mark Hardwick agree to perform landman services for a day work rate of $500.00? It is your duty to interpret the following language of the agreement: Smith shall pay all expenses incurred by Mark in connection with such lease acquisition, plus a day-work brokerage fee. In deciding whether the parties reached an agreement, you may consider what they said and did in light of the surrounding circumstances, including any earlier course of dealing. You may not consider the parties' unexpressed thoughts or intentions. You must decide its meaning by determining the intent of the parties at the time of the agreement. Consider all the facts and circumstances surrounding the making of the agreement, the interpretation placed on the agreement by the parties, and the conduct of the parties. Answer "Yes" or "No." Answer: 6 2953  QUESTION3 Did Mark Hardwick fail to comply with the Agreements? Answer "Yes" or "No" for each of the following: a. Fusselman Prospect Agreements ye-s b. Bad Billy Agreement 7 2954 J If you answered "Yes" to any part of Question 3, then answer the following question. Otherwise, do not answer the following question. QUESTION 4 Was Mark Hardwick's failure to comply excused? Failure to comply by Mark Hardwick is excused if compliance is waived by Smith Energy Company. Waiver is an intentional surrender of a known right or intentional conduct inconsistent with claiming the right. Failure to comply with an agreement is excused if a different performance was accepted as full satisfaction of performance of the original obligations of the agreement. Failure to comply by Mark Hardwick is excused by Smith Energy Company's prior repudiation of the same agreement. A party repudiates an agreement when he indicates, by his words or actions, that he is not going to perform his obligations under the agreement in the future, showing a fixed intention to abandon, renounce, and refuse to perform the agreement. Answer "Yes" or "No" for each of the following: a. Fusselman Prospect Agreements )\ 0 b. Bad Billy Agreement hD 8 2955 • j If you answered "Yes" to any part of Question 3 and "No" to any part of Question 4, then answer the following question. Otherwise, do not answer the following question. QUESTIONS What sum of money, if any, if paid now in cash, would fairly and reasonably compensate Smith Energy Company for its damages, if any, that resulted from such failure to comply? · Consider the following elements of damages, if any, and none other. 1. The landman charges that Mark Hardwick overcharged Smith Energy Company, if any. 2. The reasonable and necessary expenses incurred in hiring others to perform the landman services that Mark Hardwick stopped performing, if any: a. The amount of Maner Shaw's increased rate. b. The amount of Ron King's increased rate. c. Maner Shaw's bonus payment. In answering questions about damages, answer each question separately. Do not increase or reduce the amount in one answer because of your answer to any other question about damages. Do not speculate about what any party's ultimate recovery may or may not be. Any recovery will be determined by the court when it applies the law to your answers at the time of judgment. Do not add any amount for interest on damages, if any. Answer separately in dollars and cents for damages, if any. 1. The landman charges that Mark Hardwick overcharged Smith Energy Company, if any. a. Fusselman Prospect Agreements Answer: 4f 3 lo 1 O ~..3 9 2956  b. Bad Billy Agreement Answer: 2. The reasonable and necessary expenses incurred in hiring others to perform the landman services that Mark Hardwick stopped performing, if any: a. The amount of Maner Shaw's increased rate. i. Fusselman Prospect Agreements Answer: 0 ii. Bad Billy Agreement Answer: ---'t~~(._'-.._1.....l ~'o ___ b. The amount of Ron King's increased rate. i. Fusselman Prospect Agreements Answer: 0 ii. Bad Billy Agreement c. Maner Shaw's bonus payment. i. Fusselman Prospect Agreements 0 IO 2957 • ii. Bad Billy Agreement Ansvver: (;) 11 2958  QUESTION6 Did Smith Energy Company fail to comply with one or more of the foil owing agreements, if any? Please Answer "Yes" or "No" for each of the following: A. The Muy Caliente GEA. Answer: (\0 B. The Mitchel County sale to Firewheel Energy, LLC? Answer: (\O C. The Fischer County sale to Gunn Oil Company? t'\ Q Answer: ------'---- D. The Bad Billy Agreement. Answer: n '() E. Payment of invoices submitted by Mark Hardwick for: 1. The Muy Caliente Prospect Area. Answer: l\ D 2. The On Point Prospect Area. Answer: (\ 0 3. The North On Point Extension Prospect Area. Answer: n '° 4. O'Donnell Prospect Area. Answer: tl O 5. The Bad Billy Area. Answer: D <::J 12 2959 J If you answered "Yes" to any part of Question 6, then answer the following question. Otherwise, do not answer the following question. QUESTION7 Was Smith Energy Company's failure to comply excused? Failure to comply by Smith Energy Company, individually, is excused by Mark Hardwick's previous failure to comply with a material obligation of the same agreement. Failure to comply by Smith Energy Company, individually, is excused by Mark Hardwick's prior repudiation of the same agreement. A party repudiates an agreement when he indicates, by his words or actions, that he is not going to perform his obligations under the agreement in the future, showing a fixed intention to abandon, renounce, and refuse to perform the agreement. Failure to comply by Smith Energy Company, individually, is excused if the following circumstances occurred: 1. Mark Hardwick a. by words or conduct made a false representation or concealed material facts, and b. with knowledge of the facts or with knowledge or information that would lead a reasonable person to discover the facts, and c. with the intention that Smith Energy Company would rely on the false representation or concealment in acting or deciding not to act; and 2. Smith Energy Company, individually a. did not know and had no means of knowing the real facts and b. relied to his detriment on the false representation or concealment of material facts. 13 2960 • l Please Answer "Yes" or "No" for each of the following: A. The Muy Caliente GEA. Answer: B. The Mitchel County sale to Firewheel Energy, LLC? Answer: C. The Fischer County sale to Gunn Oil Company? Answer: D. The Bad Billy Agreement. Answer: ------- E. Payment of invoices submitted by Mark Hardwick for: 1. The Muy Caliente Prospect Area. Answer: - - - - - - - 2. The On Point Prospect Area. Answer: - - - - - - - 3. The North On Point Extension Prospect Area. Answer: - - - - - - - 4. O'Donnell Prospect Area. Answer: - - - - - - - 5. The Bad Billy Area. Answer: - - - - - - - 14 2961 ' If you answered "Yes" to any subpart to Question No. 6 and "No" to the same subpart of Question 7, then answer the following question as to the subpart(s) to which you answered "Yes" in Question 6. Otherwise, do not answer the following question or subpart. QUESTIONS What sum of money, if any, if paid now in cash, would fairly and reasonably compensate Mark P. Hardwick for his damages, if any, that resulted from Smith Energy Company's failure to comply with the agreement(s), if any, listed in Question No. 6? Consider the elements of damages listed below and none other. The fair market value of Mark P. Hardwick' s 6% working interest in the leases acquired by Smith Energy Company within the Muy Caliente Area of Mutual Interest that Smith Energy Company failed to convey as of August 2011. The amount of the commission or fee to which Mark P. Hardwick was entitled to receive from the sale of leases in Mitchel County to Firewheel Energy, LLC? The amount of the commission or fee to which Mark P. Hardwick was entitled to receive from the sale of leases in Fischer County to Gunn Oil Company. Four percent of the sales price of the 999.1989 acres within the Bad Billy Area of Mutual Interest identified as "LHS lOOo/o". The amount of Mark P. Hardwick's unpaid fees and expenses for land services provided on the Muy Caliente Prospect Area. The amount of Mark P. Hardwick's unpaid fees and expenses for land services provided on the On Point Prospect Area. The amount of Mark P. Hardwick's unpaid fees and expenses for land services provided on the North On Point Extension Prospect Area. The amount of Mark P. Hardwick's unpaid fees and expenses for land services provided on the O'Donnell Prospect Area The amount of Mark P. Hardwick' s unpaid fees and expenses for land services provided on the Bad Billy Prospect Area. Do not award any sum of money on any element if you have otherwise, under some other element, awarded a sum of money for the same loss. That is, do not 15 2962 • Do not award any sum of money on any element if you have otherwise, under some other element, awarded a sum of money for the same loss. That is, do not compensate twice for the same loss, if any. Do not include interest on any amount of damages you find. Do not include in your answer any amount that you find the person or entity listed below could have avoided by the exercise of reasonable care. Answer IN DOLLARS AND CENTS for damages, if any, that were sustained. A. The Muy Caliente GEA. Answer: B. The Mitchel County sale to Firewheel Energy, LLC? Answer: C. The Fischer County sale to Gunn Oil Company? Answer: D. The Bad Billy Agreement. Answer: - - - - - - - E. Fees, expenses and services rendered for: 1. The Muy Caliente Prospect Area. Answer: - - - - - - - 2. The On Point Prospect Area. Answer: - - - - - - - 3. The North On Point Extension Prospect Area. Answer: 4. O'Donnell Prospect. Answer: 5. The Bad Billy Area. Answer: 16 2963 . , QUESTION9 Did Mark Hardwick commit fraud against Smith Energy Company? Fraud occurs when- 1. a party makes a material misrepresentation, and 2. the misrepresentation is made ~th knowledge of its falsity or made recklessly without any knowledge of the truth and as a positive assertion, and 3. the misrepresentation is made with the intention that it should be acted on by the other party, and 4. the other party relies on the misrepresentation and thereby suffers Injury. "Misrepresentation" means- 1. A false statement of fact, or 2. A promise of future performance made with an intent, at the time the promise was made, not to perform as promised, or 3. A statement of opinion that the maker knows to be false. OR Fraud occurs when- 1. a party fails to disclose a material fact within the knowledge of that party, and 2. the party knows that the other party is ignorant of the fact and does not have an equal opportunity to discover the truth, and 3. the party intends to induce the other party to take some action by failing to disclose the fact, and 4. the other party suffers injury as a result of acting without knowledge of the undisclosed fact. 17 2964 • Answer "Yes" or "No" for each of the following: a. Fusselman Prospect Agreements Answer: --'-"ft,--e.5"------ .. b. Bad Billy Agreement 18 2965 • • If you answered "Yes" to any part of Question 9, then answer the following question. Otherwise, do not answer the following question. QUESTION 10 What sum of money, if any, if paid now in cash, would fairly and reasonably compensate Smith Energy Company for its damages, if any, that resulted from such fraud? Consider the following elements of damages, if any, and none other. 1. The landman charges that Mark Hardwick overcharged Smith Energy Company, if any. 2. Expenses Smith Energy Company paid Mark Hardwick for which he was not entitled to reimbursement, if any. 3. The reasonable and necessary expenses incurred in hiring others to perform the landman services that Mark Hardwick stopped performing. if any: a. The amount of Maner Shaw's increased rate. b. The amount of Ron King's increased rate. c. Maner Shaw's bonus payment. In answering questions about damages, answer each question separately. Do not increase or reduce the amount in one answer because of your answer to any other question about damages. Do not speculate about what any party's ultimate recovery may or may not be. Any recovery will be determined by the court when it applies the law to your answers at the time of judgment. Do not add any amount for interest on damages, if any. Answer separately in dollars and cents for damages, if any. 1. The landman charges that Mark Hardwick overcharged Smith Energy Company, if any. a. Fusselman Prospect Agreements Answer: JI 3 'e ~~~=--->--+~~~~~ av.3 19 2966  b. Bad Billy Agreement Answer: --"4f.___Y._J4-,I _i.._'"2-_S- __ 3. The reasonable and necessary expenses incurred in hiring others to perform the landman services that Mark Hardwick stopped performing, if any: a. The amount of Maner Shaw's increased rate. i. Fusselman Prospect Agreements ii. Bad Billy Agreement Answer: _Jl.......__l=--"4..--1/J--.'\'--f_O_ __ b. The amount of Ron King's increased rate. i. Fusselman Prospect Agreements ii. Bad Billy Agreement a. Maner Shaw's bonus payment. a. Fusselman Prospect Agreements Answer: ---~~----- 0 20 2967 • b. Bad Billy Agreement Ansvver: {) 21 2968  QUESTION 11 Were Mark Hardwick and Smith Energy Company engaged in a joint venture? Consider the following factors in deciding whether Mark Hardwick and Smith Energy Company were engaged in a joint venture: I. the receipt or right to receive a share of profits of the business; 2. an expression of an intent to be partners or joint venturers in the business; 3. the participation or the right to participate in control of the business; 4. sharing or agreeing to share: i. losses of the business, or ii. liability for claims of third parties against the business; and 5. an agreement to contribute or contributing money or property to the business. Answer "Yes" or "No." Answer: --y_,,._,e.._.0=-- 22 2969 • QUESTION12 Was Mark Hardwick acting as Smith Energy Company's agent when performing landman services? An agent is one authorized by another to transact some business for the principal; the relationship is a consensual one between two parties, by which one party acts on behalf of the other, subject to the principal's control, including the right to control the means and details of the process by which the agent will complete his tasks. Answer "Yes" or "No." Answer: 23 2970 :1 If you answered "Yes" to Question 11 or 12, then answer the following question. Otherwise, do not answer the following question. QUESTION 13 Did Mark Hardwick comply with his fiduciary duty to Smith Energy Company? Mark Hardwick owed Smith Energy Company a fiduciary duty. To prove he complied with his duty, Mark Hardwick must show- 1. the transactions in question were fair and equitable to Smith Energy Company; and 2. Mark Hardwick made reasonable use of the confidence that Smith Energy Company placed in him; and 3. Mark Hardwick acted in the utmost good faith and exercised the most scrupulous honesty toward Smith Energy Company; and 4. Mark Hardwick placed the interests of Smith Energy Company before his own, did not use the advantage of his position to gain any benefit for himself at the expense of Smith Energy Company, and did not place himself in any position where his self-interest might conflict with his obligations as a fiduciary; and 5. Mark Hardwick fully and fairly disclosed all important information to Smith Energy Company concerning the transactions. Answer "Yes" or "No." Answer: n0 24 2971  If you answered "No" to Question 13, then answer the following question. Otherwise, do not answer the following question. QUESTION14 What sum of money, if any, if paid now in cash, would fairly and reasonably compensate Smith Energy Company for its damages, if any, that were proximately caused by such conduct? Consider the following elements of damages, if any, and none other. 1. The landman charges that Mark Hardwick overcharged Smith Energy Company, if any. 2. The reasonable and necessary expenses incurred in hiring others to perform the landman services that Mark Hardwick stopped performing, if any: a. The amount of Maner Shaw's increased rate. b. The amount of Ron King's increased rate. ' c. Maner Shaw's bonus payment. In answering questions about damages, answer each question separately. Do not increase or reduce the amount in one answer because of your answer to any other question about damages. Do not speculate about what any party's ultimate recovery may or may not be. Any recovery will be determined by the court when it applies the law to your answers at the time of judgment. Do not add any amount for interest on damages, if any. Answer separately in dollars and cents for damages, if any. 1. The landman charges that Mark Hardwick overcharged Smith Energy Company, if any. i. A Fusselman Prospect Agreements Answer: ii. Bad Billy Agreement 1 .,:_f-_~_--- Answer: _ _ft4-'-·_Lf'--3_,_ __ 1 25 2972 2. The reasonable and necessary expenses incurred in hiring others to perform the landman services that Mark Hardwick stopped performing, if any: a. The amount of Maner Shaw's increased rate. I. Fusselman Prospect Agreements Answer: 0 11. Bad Billy Agreement Answer: 4t I "t-.( I lI0 b. The amount of Ron King's increased rate. I. Fusselman Prospect Agreements Answer: 0 .. 11. Bad Billy Agreement Answer: dl , 1),3.:Jb' c. Maner Shaw's bonus payment. I. Fusselman Prospect Agreements Answer: 0 .. 11. Bad Billy Agreement Answer: C? 26 2973 • • QUESTION 15 What sum of money did Mark Hardwick receive after he stopped performing landman services? Consider the following element, if any, and none other. a. The working interest earnings Mark Hardwick received after he stopped providing landman services on August 12, 2011. b. The market value of Mark Hardwick's working interests as of June 30, 2013. "Market value" means the amount that would be paid in cash by a willing buyer who desires to buy, but is not required to buy, to a willing seller who desires to sell, but is under no necessity of selling. In answering the following questions, answer each question separately. Do not increase or reduce the amount in one answer because of your answer to any other question about damages. Do not speculate about what any party's ultimate recovery may or may not be. Any recovery will be determined by the court when it applies the law to your answers at the time of judgment. Answer separately in dollars and cents, if any. a. The working interest earnings Mark Hardwick received after he stopped providing landman services on August 12, 2011. Answer: 4f '7 qs-; o.s-" I b. The market value of Mark Hardwick' s working interests as of June 30, 2013. Answer: t .JI 4 1 '2- O f ~...S- , 27 2974 .,_ .... If you answered "Yes" to Question 9, or if you answered "No" to Question 13, then answer the following question. Otherwise, do not answer the following question. QUESTION 16 What was the amount of the compensation Mark Hardwick received for performing landman services? Answer in dollar and cents, if any: Answer: ~o,#11-----~'-+-t..:....(<-_S---tl'--O_!TIAbRIGRTTOPU&CRASE: ..................................................................................... 15 IX. INTERNAL REVENUE CODE ELECTION ..................................................................................... 15 X. CLAIMSANDLAWSUITS .................................................................................................................. 15 XI.FORCE MAJEURE ............................................................................................................................... 16 XII.NOTICES ............................................................................................................................................... 16 XIII.TERM OF AGREEMENT .................................................................................................................... 16 XIV. COMPLIANCE WITH LAWS AND REGULATIONS ..................................................................... 16 A. LAWS, REGULATIONS AND ORDERS: ........................................................................................ 16 B. GOVERNING LAW: ......................................................................................................................... 16 C. REGULATORY AGENCIES: .......................................................................................................... 16 XV. MISCELLANEOUS .............................................................................................................................. 17 A. EXECUTION: .................................................................................................................................... 17 B. SUCCESSORS AND ASSIGNS: ....................................................................................................... 17 C. COUNTERPARTS: ............................................................................................................................ 17 D. SEVERABILITY ............................................................................................................................... 17 XVI. OTHER PROVISIONS ......................................................................................................................... 17 ii SEC 189022  A.A.P.L. FORM 610 - MuJEL FORM OPERATING AGREEMENT- 1989 OPERATING AGREEMENT 2 THIS AGREEMENT. entered into by and between _=RA~W~O~il~&~G=as~In~c~.- - - - - - - - - - - - - - - - 3 hereinafter designated and referred to as "Operator," and the signatory party or parties other than Operator, sometimes hereifla:fter referred to individually as "Non-Operator," and collectively as "Non-Operators." WITNESSETH: WHEREAS, the parties to this agreement are owners of Oil and Gas Leases and/or Oil and Gas Interests in the land identified in Exhibit "A," and the parties hereto have reached an agreement to explore and develop these Leases and/or Oil and Gas Interests for the production of Oil and Gas to the extent and as hereinafter provided, NOW, THEREFORE, it is agreed as follows: 10 ARTICLE I. Il DEFINITIONS 12 As used in this agreement, the following words and terms shall have the meanings here ascribed to them: 13 A. The term "AFE" shall mean an Authority for Expenditure prepared by a party to this agreement for the purpose of 14 estimating the costs to be incurred in conducting an operation hereunder. 15 B. The term "Completion" or "Complete" shall mean a single operation intended to complete a well as a producer of Oil 16 and Gas in one or more Zones, including, but not limited to, the setting of production casing, perforating, well stimulation 17 and production testing conducted in such operation. 18 C. The term "Contract Area" shall mean all of the lands, Oil and Gas Leases and/or Oil and Gas Interests intended to be 19 developed and operated for Oil and Gas purposes under this agreement. Such lands, Oil and Gas Leases and Oil and Gas 20 Interests are described in Exhibit 11 A." 21 D. The term "Deepen" shall mean a single operation whereby a well is drilled to an objective Zone below the deepest 22 Zone in which the well was previously drilled, or below the Deepest Zone proposed in the associated AFE, whichever is the 23 lesser. 24 E. The terms "Drilling Party" and "Consenting Party" shall mean a party who agrees to join in and pay its share of the 25 cost of any operation conducted under the provisions of this agreement. 26 F. The term "Drilling Unit" shall mean the area fixed for the drilling of one well by order or rule of any state or federal 27 body having authority. If a Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be the drilling unit as 28 established by the pattern of drilling in the Contract Area unless fixed by express agreement of the Drilling Parties. 29 G. The term 'Drillsitc" shall mean the Oil and Gas Lease or Oil and Gas Interest on which a proposed well is to be 30 located. 31 H. The term "Initial Well" shall mean the well required to be drilled by the parties hereto as provided in Article VI.A. 32 I. The term 'Non-Consent Well' shall mean a well in which less than all parties have conducted an operation as 33 provided in Article VI.8.2. 34 J. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a party who elects not to participate in a 35 proposed operation. 36 K. The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas condensate, and/or all other liquid or gaseous 37 hydrocarbons and other marketable substances produced therewith, unless an intent to limit the inclusiveness of this term is 38 specifically stated. 39 L. The term "Oil and Gas Interests" or "Interests" shall mean unleased fee and mineral interests in Oil and Gas in tracts 40 of land lying within the Contract Area which are owned by panics to this agreement. 1 41 M. The terms "Oil and Gas Lease/ "Lease" and "Leasehold" shall mean the oi1 and gas leases or interests therein 42 covering tracts ofland lying within the Contract Area which are owned by the parties to this agreement. 43 N. The term "Plug Back" shall mean a single operation whereby a deeper Zone is abandoned in order to attempt a 44 Completion in a shallower Zone. i~ 11 11 45 0. The term "Recomp1etion" or Recomplete shall mean an operation whereby a Completion in one Zone abandoned 46 in order to attempt a Completion in a different Zone within the existing wellbore. 47 P. The term "Rework" shall mean an operation conducted in the wellbore of a well after it is Completed to secure, 48 restore, or improve production in a Zone which is currently open to production in the wellbore. Such operations include, but 49 are not limited to, well stimulation operations but exclude any routine repair or maintenance work or drilling, Sidetracking) 50 Deepening, Completing, Recompleting, or Plugging Back of a well. 51 Q. The term 'Sidetrack" shall mean the directional control and intentional deviation of a well from vertical so as to 52 change the bottom hole location unless done to straighten the hole or drill around junk in the hole to overcome other 53 mechanical difficulties. 54 R. The term "Zone" shall mean a stratum of earth containing or thought to contain a common accumulation of Oil and 55 Gas separately producible from any other common accumulation of Oil and Gas. 56 Unless the context otherwise clearly indicates, words used in the singular include the plural, the word "person" includes 57 natural and artificial persons, the plural includes the singular, and any gender includes the masculine, feminine, and neuter. 58 ARTICLE II. 59 EXHIBITS 60 The following exhibits, as indicated below and attached hereto, are incorporated in and made a part hereof: 61 x_ __ A. Exhibit "A," shall include the following information: 62 (I) Description of lands subject to this agreemen~ 63 (2) Restrictions, if any, as to depths, formations, or substances, 64 (3) Parties to agreement with addresses and telephone numbers for notice purposes, 65 (4) Percentages or fractional interests of parties to this agreement, 66 (5) Oil and Gas Leases and/or Oil and Gas Interests subject to this agreement, 67 (6) Burdens on production. 68 X_ 8. Exhibit "B," Form of Lease. __ 69 X_ C. Exhibit "C," Accounting Procedure. __ 70 X_ D. Exhibit "D," Insurance. __ 71 X_ E. Exhibit "E," Gas Balancing Agreement. __ 72 F. elEhillit '!',"~Ion Qiserifflinalion ana CeFtilioa!ion oHlee Sogregalea Faoilities. 73 x 6. E:dfrbit 11 6," 'f"" Pt!l'lneFShi~. 74 H. Other: _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ - 1- SEC 189023  A.A.P .L. FORM 610 - MvJEL FORM OPERATING AGREEMENT - 1989 If any provision of any exhibit, except Exhibits 11 E. 11 irp and 11 G," is inconsistent with any provision contained in the body of this agreement, the provisions in the body of this agreement shall prevail. ARTICLE III. INTERESTS OF PARTIES A. Oil and Gas Interests: If any party owns an Oil and Gas Interest in the Contract Area, that Interest shall be treated for all purposes of this agreement and during the term hereof as if it were covered by the form of Oil and Gas Lease attached hereto as Exhibit "B," and the owner thereof shall be deemed to own both royalty interest in such lease and the interest of the lessee thereunder. B. Interests of Parties in Costs and Production: JO 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. I4 Regardless of which party has contributed any Oil and Gas Lease or Oil and Gas Interest on which royalty or other I5 burdens may be payable and except as otherwise expressly provided in this agreement, each party shall pay or deliver, or I6 cause to be paid or delivered, all burdens on its share of the production from the Contract Area up to, but not in excess of, 17 existing lease burdens 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 long 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 shall indemnify, defend and hold the other parties free from any 25 liability therefor. 26 No party shall ever be responsible, on a price basis higher than the price received by such party, to any other party's 27 lessor or royalty owner, and if such other party1s lessor or royalty owner should demand and receive settlement on a higher 28 price basis, the party contributing the affected Lease shall bear the additional royalty burden attributable to such higher price. 29 Nothing contained in this Article Ill.B. shall be deemed an assignment or cross-assignment of interests covered hereby, 30 and in the event two or more parties contribute to this agreement jointly owned Leases, the parties' undivided interests in 31 said Leaseholds shall be deemed separate leasehold interests for the purposes of this agreement. 32 C. Subsequently Created Interests: 33 If any party has contributed hereto a Lease or lnterest that is burdened with an assignment of production given as security 34 for the payment of money, or if, after the date of this agreement, any party creates an overriding royalty, production 35 payment, net profits interest, assignment of production or other burden payable out of production attributable to its working 36 interest hereunder, such burden shall be deemed a "Subsequently Created Interest." Further, if any party has contributed 37 hereto a Lease or Interest burdened with an overriding royalty, production payment, net profits interests, or other burden 38 payable out of production created prior to the date of this agreement, and such burden is not shown on Exhibit "A," such 39 burden also shall be deemed a Subsequently Created Interest to the extent such burden causes the burdens on such party's 40 Lease or Interest to exceed the amount stipulated in Article lll.B. above. 4I The party whose interest is burdened with the Subsequently Created Interest (the "Burdened Party") shall assume and 42 alone bear, pay and discharge the Subsequently Created Interest and shall indemnify, defend and hold harmless the other 43 parties from and against any liability therefor. Further, if the Burdened Party fails to pay, when due, its share of expenses 44 chargeable hereunder, all provisions of Article Vll.B. shall be enforceable against the Subsequently Created Interest in the 45 same manner as they are enforceable against the working interest of the Burdened Party. If the Burdened Party is required 46 under this agreement to assign or relinquish to any other party, or parties, all or a portion of its working interest and/or the 47 production attributable thereto, said other party, or parties, shall receive said assignment and/or production free and clear of 48 said Subsequently Created lnterest, and the Burdened Party shall indemnify, defend and hold harmless said other party, or 49 parties, from any and all claims and demands for payment asserted by owners of the Subsequently Created Interest. 50 ARTICLE IV. SI TITLES 52 A. Title Examination: 53 Title examination shall be made on the Drillsite of any proposed well prior to commencement of drilling operations and, 54 if a majority in interest of the Drilling· Parties so request or Operator so elects, title examination shall be made on the entire 55 Drilling Unit, or maximum anticipated Drilling Unit, of the well. The opinion will include the ownership of the working 56 interest, minerals, royalty, overriding royalty and production payments under the applicable Leases. Each party contributing 57 Leases and/or Oil and Gas Interests to be included in the Drillsite or Drilling Unit, if appropriate, shall furnish to Operator 58 all abstracts (including federal lease status reports), title opinions, title papers and curative material in its possession free of 59 charge. All such information not in the possession of or made available to Operator by the parties, but necessary for the 60 examination of the title, shall be obtained by Operator. Operator shall cause title to be examined by attorneys on its staff or 6I by outside attorneys. Copies of all title opinions shall be furnished to each Drilling Party. Costs incurred by Operator in 62 procuring abstracts, fees paid outside attorneys for title examination (including preliminary, supplemental, shut-in royalty 63 opinions and division order title opinions) and other direct charges as provided in Exhibit "C" shall be borne by the Drilling 64 Parties in the proportion that the interest of each Drilling Party bears to the total interest of all Drilling Parties as such 65 interests appear in Exhibit •A." Operator shall make no charge for services rendered by its staff attorneys or other personnel 66 in the performance of the above functions. 67 Each party shall be responsible for securing curative matter and pooling amendments or agreements required in 68 connection with Leases or Oil and Gas Interests contributed by such party. Operator shall be responsible for the preparation 69 and recording of pooling designations or declarations and communitization agreements as well as the conduct of hearings 70 before governmental agencies for the securing of spacing or pooling orders or any other orders necessary or appropriate to 71 the conduct of operations hereunder. This shall not prevent any party from appearing on its own behalf at such hearings. 72 Costs incurred by Operator, including fees paid to outside attorneys, which are associated with hearings before governmental 73 agencies, and which costs are necessary and proper for the activities contemplated under this agreement, shall be direct 74 charges to the joint account and shall n~t be covered by the administrative overhead charges as provided in Exhibit 11 C." -2- SEC 189024  A.A.P.L. FORM 610-MGJEL FORM OPERATING AGREEMENT- 1989 Operator shall make no charge for services rendered by its staff attorneys or other personnel in the performance of the above functions. No well shall be drilled on the Contract Area until after (I) the title to the Drill site or Drilling Unit, if appropriate, has 4 been examined as above provided, and (2) the title has been approved by the examining attorney or title has been accepted by 5 all of the Drilling Parties in such well. B. Loss or Failure of Title: I. Failure of Title: Should any Oil and Gas Interest or Oil and Gas Lease be lost through failure of title, which results in a reduction of interest from that shown on Exhibit "A," the party credited with contributing the affected Lease or Interest (including, if applicable, a successor in interest to such party) shall have ninety (90) days from final determination of title lO failure to acquire a new lease or other instrument curing the entirety of the title failure, which acquisition will not be subject 11 to Article Vlll.B., and failing to do so, this agreement, nevertheless, shall continue in force as to all remaining Oil and Gas 12 Leases and Interests; and, I3 (a) The party credited with contributing the Oil and Gas Lease or Interest affected by the title failure (including, if 14 applicable, a successor in interest to such party) shall bear alone the entire loss and it shall not be entitled to recover from 15 Operator or the other parties any development or operating costs which it may have previously paid or incurred, but there 16 shall be no additional liability on its part to the other parties hereto by reason of such title failure; 17 (b) There shall be no retroactive adjustment of expenses incurred or revenues received from the operation of the 18 Lease or Interest which has failed, but the interests of the parties contained on Exhibit 11A11 shall be revised on an acreage 19 basis, as of the time it is determined finally that title failure has occurred, so that the interest of the party whose Lease or 20 Interest is affected by the title failure will thereafter be reduced in the Contract Area by the amount of the Lease or Interest failed; 2I (c) If the proportionate interest of the other parties hereto in any producing well previously drilled on the Contract 22 Area is increased by reason of the title failure, the party who bore the costs incurred in connection with such well attributable 23 to the Lease or Interest which has failed shall receive the proceeds attributable to the increase in such interest (less costs and 24 burdens attributable thereto) until it has been reimbursed for unrecovered costs paid by it in connection with such well 25 attributable to such failed Lease or Interest; 26 (d) Should any person not a party to this agreement, who is determined to be the owner of any Lease or Interest 27 which has failed, pay in any manner any part of the cost of operation, development, or equipment, such amount shall be paid 28 to the party or parties who bore the costs which are so refunded; 29 (e) Any liability to account to a person not a party to this agreement for prior production of Oil and Gas which arises 30 by reason of title failure shall be borne severally by each party (including a predecessor to a current party) who received 31 production for which such accounting is required based on the amount of such production received, and each such party shall 32 severally indemnify, defend and hold harmless all other parties hereto for any such liability to account; 33 (f) No charge shall be made to the joint account for legal expenses, fees or salaries in connection with the defense of 34 the Lease or Interest claimed to have failed, but if the party contributing such Lease or Interest hereto elects to defend its title 35 it shall bear all expenses in connection therewith; and 36 (g) If any party is given credit on Exhibit "A" to a Lease or Interest which is limited solely to ownership of an 37 interest in the wellbore of any well or wells and the production therefrom, such party's absence of interest in the remainder 38 of the Contract Area shall be considered a Failure of Title as to such remaining Contract Area unless that absence of interest 39 is reflected on Exhibit "A." 40 2. Loss by Non-Payment or Erroneous Payment of Amount Due: If, through mistake or oversight, any rental, shut-in well 41 payment, minimum royalty or royalty payment, or other payment necessary to maintain all or a portion of an Oil and Gas 42 Lease or interest is not paid or is erroneously paid, and as a result a Lease or Interest terminates, there shall be no monetary 43 liability against the party who failed to make such payment. Unless the party who failed to make the required payment 44 secures a new Lease or Interest covering the same interest within ninety (90) days from the discovery of the failure to make 45 proper payment, which acquisition will not be subject to Article VIIl.B., the interests of the parties reflected on Exhibit "A" 46 shall be revised on an acreage basis, effective as of the date of termination of the Lease or Interest involved, and the party 47 who failed to make proper payment will no longer be credited with an interest in the Contract Area on account of ownership 48 of the Lease or Interest which has terminated. If the party who failed to make the required payment shall not have been fully 49 reimbursed, at the time of the loss, from the proceeds of the sale of Oil and Gas attributable to the lost Lease or Interest, 50 calculated on an acreage basis, for the development and operating costs previously paid on account of such Lease or Interest, 51 it shall be reimbursed for unrecovered actual costs previously paid by it (but not for its share of the cost of any dry hole 52 previously drilled or wells previously abandoned) from so much of the following as is necessary to effect reimbursement: 53 (a) Proceeds of Oil and Gas produced prior to termination of the Lease or Interest, less operating expenses and lease 54 burdens chargeable hereunder to the person who failed to make payment, previously accrued to the credit of the lost Lease or 55 Interest, on an acreage basis, up to the amount ofwtrecovered costs; 56 (b) Proceeds of Oil and Gas, Jess operating expenses and lease burdens chargeable hereunder to the person who failed 57 to make payment, up to the amount of unrecovered costs attributable to that portion of Oil and Gas thereafter produced and 58 marketed (excluding production from any wells thereafter drilled) which, in the absence of such Lease or Interest termination, 59 would be attributable to the lost Lease or Interest on an acreage basis and which as a result of such Lease or Interest 60 termination is credited to other parties, the proceeds of said portion of the Oil and Gas to be contributed by the other parties 61 in proportion to their respective interests reflected on Exhibit "A"; and, 62 (c) Any monies, up to the amount of unrecovered costs, that may be paid by any party who is, or becomes, the owner 63 of the Lease or Interest lost, for the privilege of participating in the Contract Area or becoming a party to this agreement. 64 3. Other Losses: All losses of Leases or Interests committed to this agreement, other than those set forth in Articles 65 IV.B.l. and IV.B.2. above, shall be joint losses and shall be borne by all parties in proportion to their interests shown on 66 Exhibit "A." This shall include but not be limited to the loss of any Lease or Interest through failure to develop or because 67 express or implied covenants have not been performed (other than performance which requires only the payment of money), 68 and the loss of any Lease by expiration at the end of its primary term if it is not renewed or extended. There shall be no 69 readjustment of interests in the remaining portion of the Contract Area on account ofany joint loss. 70 4. Curing Title: In the event of a Failure of Title under Article IV.B.1. or a loss of title under Article IV.B.2. above, any 71 Lease or Interest acquired by any party hereto (other than the party whose interest has failed or was lost) during the ninety 72 (90) day period provided by Article IV.B. I. and Article IV.B.2. above covering all or a portion of the interest that has failed 73 or was lost shall be offered at cost to the party whose interest has failed or was lost, and the provisions of Article VIII.B. 74 shall not apply to such acquisition. -3- SEC 189025  A.A.P.L. FORM 610- MvJEL FORM OPERATING AGREEMENT- 1989 ARTICLEV. 2 OPERATOR 3 A. Designation and Responsibilities of Operator: -~RA=W~O=i~l&=G=as=I=nc=·------------ shall be the Operator of the Contract Area, and shall conduct and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of this agreement In its performance of services hereunder for the Non-Operators. Operator shall be an independent contractor not subject to the control or direction of the Non-Operators except as to the type of operation to be undertaken in accordance with the election procedures contained in this agreement. Operator shall not be deemed, or hold itself out as, the agent of the Non-Operators with authority to bind them to any obligation or liability assumed or incurred by Operator as to any third 10 party. Operator shall conduct its activities under this agreement as a reasonable prudent operator, in a good and workmanlike 11 manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and 12 regulation, but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred 13 except such as may result from gross negligence or willfu1 misconduct. 14 B. Resignation or Removal of Operator and Selection of Successor: 15 I. Resignation or RemovaJ of Operator: Operator may resign at any time by giving written notice thereof to N on~Operators. 16 If Operator tenninates its legal existence, no longer owns an interest hereunder in the Contract Area, or is no longer capable of 17 serving as Operator, Operator shall be deemed to have resigned without any action by Non-Operators, except the selection of a 18 successor. Oporater Ria;' h• ••me"•G eulj fer geed sass• hj tho affimiati"o "ets of ~leu OpoFll!ora ou.,ing a majeFilj illlerest 19 based en a·l!fleFSBip as shemn en Bx:J:tihit "'\" r=emaining after exsh10iag the ·eting intefest af Operater; s11eJ:t •ate shal1 net Be 20 deemoEI e!ft!sti•;o uRtil a "leH Censeath'l:g Paff)·'s Felin~uisfted iflte1est shall Fe•eft ta it under ether 11 pro"isio•s of this Aniolo, it lleiRg agreod that oaeh Nan Consenting Pa~'s share ef soeh easts and eqHipR>eat 'lill Be that 12 int.,.,! ·1 hiell "'e•IEI ha>·e been ol!argoablo to susll Nen Consenti•g Perl) had it par!ieipatoooponi•g, 15 Plugging Baek, t'51ing; Completing, and Resemploting, afte~tiens "'eei"oe ••d at 33 OB)'-llmo pFior to Ml '""" •fl ll) !he Conse•ting Paf!ies of tllo ~Ian Consenting Pa~'s reoaupmont amaont. Any sooh 34 Rowefloing, Reeomplo!ing er Pl•gging Bael• aporation eondooted doring tho "''eupme•t peRed shall ee deomod pan af tho 35 east •f epeFatieR of said "'Bii and there shall BO addod to !ho sums to be reseuped by the Gaesenting Pal'lies ___% ef 36 tllat por!ioe af !he easts of the Re"'e•lcing; Eesompleti•g e• Pl•gging Baek eporatian "'oioh , •ould ha e b88B ohOfgeaelo te 37 suol! Nan Censonting Paf!) l!aa it panieipatee therei•. If suek a ReworkiRg, Reeompleting •• Plugging Baek oporetion is 38 p•epasod Eftlring soon ,.•a•pment poriod, tl!o-PfO"i&ioos of this Arlielo Vl.B. shall Be applieallle as bet11een said Consenting 39 Patties in said .ell. 40 (El) Rooeuen>OHt llalt6"i. Doriog the poried of time Consenting Parties "'' entitled le resei e ~lao Go•senting Pafl) 's 41 sllOfe of pradootio•, er the p"'eoods thorefrem, Co•sontiag Panios sllall ile responsible for the payment of all ad "alaFOm, 42 prodoetion, se1er0Roe, ""'iso, gatherieg and ethor la,.es, and all re;allj, O"Offiding rayalty and other b•Fdons appliealll• ta 43 ~leR Gensenting p~ 1S share ef pred1:tstieR ft8t exes13teEI b} '\rtisle m.c. 44 In the ease of RR)' Ro•arldng, Siee!R!olting, Ploggieg Ilaok, Reaempleting or Deepening opemtian, !Re Cense•~ng 45 Pani" snail ee pormitted to ...e, free of east, all easing, tlllii•g a•d otlle• eqoipm••t iR the 1.011, but the """ership ef all 46 susff 8E!:ttipmeRt skall remaifl HR6heftg.e6; and eren abaRdB:flfffeRt sf a 1veJJ afteJ s1:1M Re:n er-h·ing; Sidetrael~ieg, Plugging Bae"le, 47 ReeempletiRg eF Deepeniag, the CeaseRtiftg Parties shall ar;;s01:tnt fer an st1eh eEf11i13fft1n-t1 te the e:i· neFS tfteFeef, "'iti'I: eash. 48 parlj ''"i i•g its prepof!io•ate pan ia lplotiee of any eporetioR ueder this Af!iole, the J!att)' eonduatiRg tho ope•atia•s 50 far the Censenti•g Panias shell fHmisll oaeh Non Ceoso11ting Part) witll an in"ORtofl' af the eq•ipment in end eonneeted to 51 the "'ell, ane OR itemioed statement of the east of d•illieg, Sidowael,, in lieu ef an itemi"'d statement 53 ef suoe oest<; ef 0pOR!HOR, mlij SHBmit • detailed StaffJR!eA! of mo•thl> oillings. Eash .....th thoreaf!Of, duri•g !Re time the 54 Gonso•ti•g Paf!ies ere boing reimB•rsed as p•avidod allo e, tho paft) aonduoting the operotiens for the Coe98Hti•g Panias 55 shall furnish tho Nee GeAsoeting Parties »1ith an itomi•ed statement of all easts ene lia~ilkies iReuFFed iR the operaEioR of 56 tho well, tagotller ;,itll a sta!omont of the quanti~ of Gil ana Gas p•oEftiood from it aed tho OJRaunt of prneeees reali•ea !fem 57 ths sah~ ef Uts ·elh · 'GFl~iag ielersst 11r-eel1:1stiea EiuFing the 13reseE1iag menth. lR eletei=minieg the fJ\:IBRtit) ef Oil MEI Ges 58 flFeElueed dtuiag SQ) meath, Goosentiag Parties shaJI use iRd\IStF)' aeeepiea metheEis sueh as Sut e!Jt timhed te met8fiag er 59 perieElie .ell test:s. Pifl) ameunt RSaii2ed from...-tbe.-~e er ether dispesitien ef eqliipmeflt nev ly aGEJUired in seneeGtien .. itJ::i 60 ORY Seon "" ned 9) a ~'en CoRseeting PleR Geasentiflg Pa~ shall 67 E>n'ff fhe &amS' iRt~[ ifi suen well, die matefiaJ and 8t]Yipmeat iB 9f peFtliHing tlleftt$, and the JH0dll:vti0R therefrem as 68 sl;leh }Jee CensentiRg PaR1 \ et1ld t:taue beeR cm.titled ta had it partieipated in the drilliA 0 , Sidetraeldng, Re,,efkieg, 69 Geej>OftiR 0 , Reaampleti.g or Flogging Bao!• of said "•II. TlleroaftOF, suoh ~lo• Conse•ti•g Pafl) sllall be el!a£god-with-;mesos and preduotien """''eidallly lest. AHl ""'"' ""pendiltires 31 i11ourred i11 the taldag i11 kied er separate dispesitie11 by any party ef its prepertie11ale share ef the preduotie11 shall 32 e• eemo ey suoh parlj. A11i parlj taldag it5 share of preduotio11 in leind shall ho required te pay fer 91lly its 33 prapertie11ate saare efsush part efOpefaler's surfaoe faoilities "l!ioh it uses. 34 llaoh parlj• shall eMeeute sush dr•isie11 erdOFS and oemraets as may ee aeeesslll'j fer the sale of its i11terest in 35 preduetiea frem the Contraot ftrea, and, """"Pl as pre'1idod iH Artiele Vll.B., shall ho ••titled te reoei"o paymollt 36 lliTe~ fram the parshaser thereof fer its slNHo ef all preilllotioo. 37 If an3 parlj' fails le make the arrangements Heeessafj' te tal•e in kind er separately dispese ef its propertienale 38 share ef tile Oil and'er Gas preduoed frem the Celltraet Affla, Operator sl!all h!P1e the right, seejeot le the 39 revoeatie11 at .,, ill B) the party 91',.ing it, eut aot tho ollligatio11, to purohase suoh Oil and/er Gas er soil it te otheFS 40 at an3 time aad from timo le li!RO, fer tho aeoeullt of the nen taldag parlj. f.n) suoh p•rollase or sale B) Operator 41 m'* ho tormiaatod ey Operator open al least ten (19) "'*'S ""iltOH aatioe le the eweer ef said prell!stanoos, but Oporatar 51 shall ha1e eo ellllj lo sl!are an3 ""istiag marlfoa er in "'Olis, ElejHipmset anQ J:!Fede.etieR LiA1@SS sush dispesitieA eeueFS sithsr: I. tho ontire ieteFost aflhe parti in all Oil and Gas beases, Oil aee Gas IHterests, · ells, equipmeet and pFedustien; er 10 2. an equal undioilled pCf6ent ef !he par!j's preseet illlornst ie all Oil ane Gas boasos, Oil aed Gas letoresls, ·veils, 11 0EJ:Hq:,ment and J:lreduetiaa in the Centraet P.ation ef sueh 45 aBfete a;e engagoa in arilling, Remorleieg, Deepening, Sidetraeleing, 46 !'lugging Bae!<, testiRg or alte!Hpting le Cemplete er Re 6Bfflplete a ·veil or ells hereu•aor, this agree!Hent shall 47 eon!inue i• fereo uRtil sueh opeflllions haYe Ileen eempleted ana if proauetion results lhereife!H, this agreement 48 shall eoatinue in foreo as prel'idea herein. In tho ., em the well aese•illea in latiele VI.A, o• OR) subseijueRt .. ell 49 arillea kereunaer, ••suits in a Gfl' hale, and ee ether .. oil is G"Jlallle of preaueieg Oil aaEller Gas !fem tile 50 Cenlfoot Area, this agreement shall teffflinate unless drilliag, 9eepORing, Sidotraekieg, Co1Apleting, Re 51 eompleting, Plugging Baek or Re" erl•ing aperations are ee!Hmeneed "'ithin days lfe!H the 52 date ef allaaden1Aont ef said well. "AllOREL FORM OPERATING AGREEMENT- 1989 ACKNOWLEDGMENTS Note: The following forms of acknowledgment are the short forms approved by the Uniform Law on Notarial Acts. The validity and effect of these forms in any state will depend upon the statutes of that state. 4 Acknowledgment in representative capacity: State of Texas SS. County of Lubbock This instrument was acknowledged before me on this President of RAW OIL & GAS, INC. a day of -~·-)~l~ill---.e.,.._____, 2008, by Joe D. Hardin as JO 9 (Seal, if any) lnodn YaQck>3 Title (and Rank) _ _ _ _ _ _ _ _ _ _ _ _ _ __ . SANDRA VALDEZ -~_,_.'-'J_,~....,O--_,_l...,'L-...0........,l'-'l.___ 11 Notary Public, State of Texas My Commission Expires My commission expires: March 23, 2011 12 13 State of Texas SS. 14 County of Lubbock 15 This instrument was acknowledged before me on this }'2, day of _ _ ~~~--e~----~· 2008, by Joe D. Hardin as 16 Manager of RAW ENERGY, LC. 17 SANDRA VALDEZ limdttfL Voilii't Notary Public, State of Texas Title (and Rank) _ _ _ _ _ _ _ _ _ _ _ _ _ __ 18 My Commission ExplreJ 19 March 23, 2011 My commission expires~ l '2 D }1,Q 11 20 State of Texas 21 SS. 22 County of fhrfi2 23 This instrument was acknowledged before me on this _f;J/.JJ day of ~<._..\...,1t!u(\_.e_..._,L"---------~· 2008, by Lester Smith as President of SMITH ENERGY COMPANY. ~ 24 (Seal, if any) JUDITH MILLS --7-1~+1-11--""\.'-"'---------- 25 26 27 9 "' NOTARY PUBLIC State of Texas Comm. Exp. 04-09- 2011 Title (and nk) _ _ _ _ _ _ _ _ _ _ _ _ __ My commission expires: L./-{) q-2,0 )j 28 Individual acknowledgment: 29 State of Texas ) SS. 30 County of Midland ) 31 This instrument was acknowledged before me on this _ _ day of ----------~ 2008, by MARK P. HARDWICK. 32 (Seal, if any) 33 Title (and Rank) _ _ _ _ _ _ _ _ _ _ _ _ _ __ 34 My commission e x p i r e s : - - - - - - - - - - - - 35 36 37 - 19 - SEC 189041  A.A.P.L. FORM 610- MODC.L fORM OPERATING AGREEMENT- \'lb,. IN WITNESS WHEREOF, tliis agreemcnl shall be effective as of the 1st day of May, 2008. OPERATOR Title President Date~//~ I 0=--<-g}_,____ Tax ID or S.S. N o . - - - - - - - - - - NON-OPERA TORS 'NE ~ 10 GY,y:\ )) _ ,,1 A_,J~-- 11 By .12 13 ~~------------ Type or print name Title Manmzer - , - - - - - r - - - - - - - - - _k/t~77i:Ps 14 Date 15 Tax ID or S.S. No. 16 17 18 19 Lester Smitb Type or print name 21) T1tle~£"'1en,,,t~-------------- 21 Date (o 1 btn •Jog 22 Tax 1D or S.S. No._ rz (o - 0 Q 4'-{?'f lz 23 MARK I'. HARDWICK 24 By 25 Date 26 lax ID or S.S. N o . - - - - - - - - · - - - - - 27 28 STEVE BLAYLOCK 29 By - - - - - - - - - - - - - - - - - - - 30 Dale _ _ _ _ _ _ _ _ _ - - - - - - - - 31 Tax ID or S.S. No. 32 ELGi;;R EXPI.ORA'l'ION INC. 33 By----- --------··-·--- 34 ~J;•..,l•"'er,___ _ _ Type or print name 35 Title Pre.~ident 36 Date 37 Ta' ID or S.S. N o . - - - - - - · - - - - - 18. SEC 189042  A.A.PL FORM 610- MODt:.L FORM OPERATING AGREEMENT-1~tl9 ACKNOWLEDGl\IE1'TS Note: The following fonns of acknowledgment arc lhe short fonns approved by the Uniform Law on Notarial Acts. The validity and effect of these fonns in any S[ate will depend upon the statules of that state. Ackn(>wledgmcnt in representative capacity· State of Texas SS, County or Lubbock This instrument was acknowledged before me on this 1.2_ day of --'J,,.....un.,,,'-=e._.----~ 2008, by Joe D. I-Jardin as President of RAW OIL& GAS, INC. 10 (Seal, if any) SANDRA VALDEZ Notary Public, State of Texas ~VOOC!L~ My Commission Expires Title (and R a n k > - - - · - - - - - - - - · - - - - Marc:l! 23, 2011 II M)• commission expires: Q~---- 12 13 State of Texas SS. 14 County of Lubbock 15 This instrument was ac~nowledged before me on this 12.- day of __j_LLne_,_____, 2008) hy Joe D. Hardin as 16 Manager of RAW El'iERGY, LC. 17 18 Title (and Rank) 19 My commission e-)~w~~\_,_JI _______~ 2008, by Joe D. Hardin as 10 SANDRA VALDEZ _lnoOI\O- YaQ.dJ4-.-- Notaiy Public, State of Texas Title (and Rank) My Commission Expires IJ March 23, 20 II My commission expires: Qi_a?) \ffi l 12 13 Slate of Texas ) SS. 14 County of Lubbock ) 15 This instrument was acknowledged before me on chis ~y ---"j~~u1=~\_,}_,_____, of I 2008, by Joe D. Hardm as 16 Manager of RAW ENERGY, LC. 17 (Seal, if any) lD.mrc~ VoDmz-2 SANDRA VALDEZ Title (and Rank) 18 Notary Public, State of Texas My Commission Expires 19 March 23, 2011 My commi.o.;slon expires:------------- 20 Stato of Texas 21 SS. Coumyof 22 'This instrument was acknowledged before me on this - - · · day o f - - - - - - - - _ , 2008, by Lester Smitb as 23 Pre•ident of SMITH ENERGY COMl'ANY. 24 (Seal, if any) 25 'fitle (and Rw1k) 26 My comn1ission expires:----------- 27 28 [ndividual acknowledgment: 29 State ofTex as ) SS. 30 County ot' Midland ) 31 This instrument was acknowkdged before. me on this _ _ day of _ _ _ _ _ _ _ _ _ _ _J 2008. by MARK P. HARDWICK. 32 (Seal, if any) 33 Tille (and Rank) 34 My commission expires:------- _ _ _ __ 35 36 37 - 19- \~ SEC 189045  A.A.P .L. FORM 61 o - MOD. . FORM OPERATING AGREEMENT - L vJ Individual acknowledgment: State ofTcxas ) SS. County of Midland ) This instmment was acknowledged before me on this ~_ES!_ day of -·· July__________ . 2008, by STEVE BLAYLOCK. (Seal, if•ny) -~·~t!k4~:~ c1 t:c)~~-· Notary Public State of Texas Title (and R•nk) _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ My commission expires:_, 6/12/0_9______ _ Io State ofTexas SS. 11 County of _ _ _ _ _ 12 This instrument was acktlowledged before me 011 this _ _ day of . - - - - - - - ' 2008, by Jerry Elger as President of ELGER EXP!.ORATION INC. 13 (Seal, if any) 14 Title (and Rank) 15 My commission expir~s: - - - - - - - - - - - - - - 16 17 18 19 10 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 -20- SEC 189046  A.A.P.L. FORM 610- MOD •. _ FORM OPERATING AGREEMENT- h. , IN WITNESS WHEREOF. tl'" agre<:ment shall be elfoctive as of the 1st day of May. 2008. OPERATOR Type or prin1 name Title President"------- Dote __ /;:/:I/ U I/uf; +r·-+ Tax ID or S.S. N o . - - - - - NON-Ol'ERATORS lO RAW ENERGY, LC 11 lly _ _ _ .. -----··---- l2 Joe D. Hardin Type or pri11t nante LJ 'l'itle .M="'="~ge~'--- l4 Date _ _ _ JS 'fax ID or S.S. No 16 17 SMITH ENERGY COMI'AN\' !8 By l9 ,.Lc..,·s.,lC,_r.,,Sn"'11w'th,__ _ _ -------~-·---- Type or print name 20 Title Pre:;idcm 21 Date 22 23 24 25 26 Tax ID or S.S. N o . - - - · - - - - - - · - - - - - 27 28 STEVE BLAYLOCK 29 By - - - - - - - - - - - - - - - - - · Date._ _ _ _ _ _ _ __ 30 Jl Tax ID or S.S. No. 32 E:(;ER f.XJ'LORA~T!ON INC. --· 33 0-C~~----- . (~l_,, 34 Jerry E ! . , , e = . ' - - - - - - - - - - - - - · Type or print name 35 Title President 36 37 Date 7/ gI/o""-'g,._·_ __ i lax !Dor S.S. No. _li.::2fi.!i.tl._.3,,},,_'7-r--- - 18" SEC 189047  A.A.P.L. FORM 6lu - MOD. i'ORM OPERATING AGREEMENT- L ACKl'iOWLEOGMENTS No1e: The following fonns of acknowledgmenl are the shon fonns approved by lhe Uniform Law "'' Notarial Acts. The validi~; and effect of these foons in any slate will depend upon the statutes oflhul state. Acknowledgment in representative capacity: State ofTexas s~. County ol' Lubbock ) \~day of~\~·------~ This mSlrument was acknowledged before me on lhis President of RAW OIL& GAS, I N C . ! > : : .;· d 2008, by Joe D Hardin as 10 (Seal, if an SAND~A VALDEZ mrrlJiO.\(ill .J=-\ot-+--- Notary Public, State of Texas Title (ond Rank) _ My Commission Expires 11 March 23, 2011 My commissioncxpireQI QO\OO\_\__ 12 13 Stiue of Texas ) ) SS. 14 County of Lubbock ) 15 This lnSlrument was acknowledged before. me on this ~~Y ~y of , 200&, by Joe D. Hardin as 16 M a n a g c r o f R A W E N E R G Y , L C . l " .~ ~·, . ;, 17 SANDRA VALDEZ LlU___l0}(';._ vQS1 . · _ Notary Public, State of Texas My Commission Expires Title (and Rank) _ _ _ _ _ _ _ _ _ _ _ _ _ __ 18 March 23, 2011 19 My commission explres:O!.~~~;?)=·~\Of=_)~l. l 20 Siute of Texas 21 SS. County of _ _ _ __ 22 This instrument was acknowledged before me on this ___ dtty of - - - - - - - - - - ' ' 2008, by Lester Smith as 23 President of SMITH ENERGY COMPANY. 24 (Seal, if any) 25 Title (and Rank) _ _ _ _ _ _ _ _ 26 My commission expires: 27 28 Individual acknowledgment: 29 State of'f«as ) SS. 30 County of Midland ) 3I This instmment was acknowledged before me on this 8!._~ day of _...'l-"=-"'1-------~ 2008, by ~to\RK P. HARDWICK. 32 iS•al, if any) 33 Title (and Rank) 34 LINDSAY RYAN !>AVIS My c-0mmission expires; 35 Notary Pubiic, State of Texas My Commission Expires 36 March 11, 2012 37 - 19. SEC 189048  A.A.P.L. FORM 610 - MOI: FORM OPERATING AGREEMENT- l Individual acknowledgme11t: State ofTexas ) SS. County of Midland ) 4 This instrunu:nt was acknowledged before me on this _ _ day of -----~ 2008, by STEVE BLAYLOCK (Seal, if any) Title (and Rank) My commission expires:-----.. ~·-----·--- ID State of Texas Mi~ SS. ll CountyQf 12 TI1is immument was ackJ'lowledged before me on this ~ day of -'-.<..\-""'""'-\---------> 2008. by Jerry Elger us President of ELGER EXPLORATION fNC, 13 (Soal, if any) 14 LINDSAY RYAN DAVIS Title (and Rank) expire;:-~--·-------- l5 Notary Public. State of Texas My Commission Expires March 11, 2012 My commission 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 36 37 -20- SEC 189049  A.A.P.L. FORM 610-MulJEL FORM OPERATING AGREEMENT- 1989 Individual acknowledgment 2 State of Texas ) SS. County of Midland ) 4 This instrument was acknowledged before me on this _ _ day of _ _ _ _ _ _ _ _ _ _ _ , 2008, by STEVE BLAYLOCK. (Seal, if any) Title (and Rank) _ _ _ _ _ _ _ _ _ _ _ _ _ __ My commission expires: _ _ _ _ _ _ _ _ _ _ __ 10 State ofTexas SS. 11 County of _ _ __ 12 This instrument was acknowledged before me on this _ _ day of - - - - - - - - - - - • 2008, by Jerry Elger as President of ELGER EXPLORATION INC. 13 (Seal, if any) 14 Title (and Rank) _ _ _ _ _ _ _ _ _ _ _ _ _ __ 15 My commission expires: _ _ _ _ _ _ _ _ _ _ __ 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 -20- SEC 189050  JOINT OPERATING PROVISIONS ARTICLE XVI To be attached to and made a part of that certain Joint Operating Agreement dated May 1, 2008, between Raw Oil & Gas, Inc. as Operator and Smith Energy Company, eta!, as Non-Operator A. Royalties. Overriding Royalties and Other Payments: 1. As used herein, the term "Existing Burdens" shall apply separately to each Lease and means all royalties and overriding royalties and other payments carved out of the Leasehold estate with which each Lease covered by this Operating Agreement is burdened as of the effective date hereof. 2. Each party shall pay or deliver, or cause to be paid or delivered, its proportionate part of all Existing Burdens and shall hold the other parties free from any liability therefor. B. Rentals. Shut-in Well Payments and Minimum Royalties: I. All rentals, shut-in well payments and minimum royalties which may be required under the terms of any Lease shall be administered and paid by Operator and charged to the Joint Account except where otherwise expressly provided to the contrary in this Operating Agreement. Any party may request and shall be entitled to receive proper evidence of all such payments. 2. Operator shall diligently attempt to make or cause to be made proper payment of any rentals and/or shut-in well payments and/or minimum royalties under the foregoing provisions, but Operator shall not be held liable to the other parties in damages for the loss of any Lease or interest therein if, through mistake or oversight, any rental and/or shut-in well payment and/or minimum royalty is not paid or is erroneously paid. The loss of any Lease or interest therein which results from Operator's failure to pay or an erroneous payment of rental and/or a shut-in well payment and/or a minimum royalty shall be borne jointly by the parties hereto under the provisions of Article IV.B.3. 3. Each party hereto shall be obligated to bear its proportionate part of any and all rentals necessary to continue in force and effect the Oil and Gas Leases covered by this Agreement unless and until it timely gives the notice provided for in the next sentence hereof. If any party does not wish to bear its proportionate part of any rental necessary to continue in force any Lease covered by this Agreement, such party may give Operator and all other parties hereto written notice of such election, and the party giving such written notice shall be released of obligation to bear its proportionate part of any rentals which accrue under the terms of the Leases specified in such written notice at any time after thirty (30) days after the date Operator receives such party's aforesaid written notice. Unless mutually agreed, otherwise, the proportionate part of the rental attributable to any such Lease which would have been borne by the party giving the aforesaid written notice shall be borne by the parties hereto who do not exercise the aforesaid election, in the proportion that the interest of each bears to the total of their Interests, and the party giving the aforesaid written notice of election not to pay its part of such rental shall assign, without express or implied warranty of title, all of its interest in the Lease or Leases specified in said written notice to the aforesaid parties in the respective proportions that they bear the - rental on any such Lease or Leases. C. Removal of Operator-Vote of all Parties. Operator may at any time be removed with or without cause by the affumative vote of the owners of the majority interest in the Contract Area based upon ownership as shown in Exhibit "A". D. Transition. Upon the selection of the successor operator, the Operator who has been removed or has resigned shall promptly deliver to the successor operator all original records relating to operations on the Contract Area, including current accounting information with regard to the status of the joint account, information concerning all invoices not yet paid by the operator who has resigned or been removed, all logs, maps and all other information concerning operations. Duplicating expenses required by virtue of the change of operators shall be charged to the joint account. E. Financing Statement. The security interest granted to each Operator and Non-Operator under Paragraph VII.B. of this agreement which secures payment of each party's share of costs and expenses of operations shall extend to each such party's share of all Oil and Gas, equipment, fixtures, personal property, accounts, inventory and general intangibles and proceeds or products thereof relating or pertaining to the Leases and lands included in the Contract Area as described in Exhibit "A" attached hereto. For purposes of compliance with TEXAS BUSINESS AND COMMERCE CODE, Sec. 9.302, each party agrees that this instrument shall serve and may be filed as a financing statement to perfect the security interest mutually granted herein. In that regard, each party hereto agrees that its signature below shall be its signature as debtor of an appropriate financing statement, and that for purposes of compliance with the requirements of Sec. 9.402 of the TEXAS BUSINESS AND COMMERCE CODE each secured party and debtor's names and addresses are as follows: SEC 189051  The names and addresses The names and address of secured parties are: of debtors are: SEE EXHIBIT "A" SEE EXHIBIT "A" The collateral to which the securicy Interests apply are all of each debtor's interest in Oil and Gas, equipment, fixtures, personal property, accounts, inventoiy and general intangibles and proceeds or products thereof relating or pertaining to the Oil and Gas Leases covered by this agreement and included in the Contract Area as described in Exhibit "A". F. Deemed Non-Consent for Defaulting Pavment. If the lien conferred in Article VII.B has been enforced, or if any party to this agreement shall fail to pay its share of costs and expenses incurred in operations of the Contract Area for a period of 90 days from the date of Operator's invoice therefor, Operator may notify the affected party of its default by certified mail, return receipt requested, and if such party fails to cure the default within IO days from the date of receipt of Operator's notice, by payment in full of all invoices for operating costs which have been due for more than 30 days, the affected party shall be deemed in non-consent status and for so long as the affected party remains in default it shall have no further access to the Contract Area or information obtained in connection with operations hereunder and shall not be entitled to vote on any matter hereunder. As to any proposed operation in which it otherwise would have the right to participate, such party shall have the right to be a Consenting Party therein only if it pays the amount it is in default before the operation is commenced; otherwise it automatically shall be deemed a Non-Consenting Party to that operation. Nothing herein shall affect each party's right to protest any item charged to the joint account by Operator under the provisions of Article 1.5. ofExhibit "C" attached hereto. G. Trustee's Sale for Defaulting Pavment. If Operator should elect to proceed to foreclose the lien of Operator as against the interest of a Non-Operator having an interest in the Contract Area, this operating agreement does hereby include provisions for non-judicial sale under the laws of the State of Texas and David Cotton is hereby appointed as Trustee for such purpose. Upon such default, said Trustee or Operator shall at least 21 days preceding the date of nonjudicial sale serve written notice of the proposed sale by certified mail to Non-Operator according to records of Operator. Service of such notice shall be deemed completed upon deposit of a notice enclosed in a post-paid wrapper properly addressed to the Non-Operator and each other party obligated to pay such obligations at the most recent address or addresses as shown on the records of Operator in a post office or other official depositoiy under the care and custody of the United States Postal Service. The affidavit of any person having knowledge of the facts to the effect that such service was completed shall be prima facie evidence of the fact of service. After such notice, said Trustee shall proceed to sell all of the Interests of Non-Operator in the Contract Area at public auction to the highest bidder for cash after having given notice of the time and place of sale and in the manner and after the advertisement of such sale as now required by the statutes of the State of Texas in making sales ofreal estate under deeds of trust. Sale of a part of the realty would not exhaust the power of sale and sales may be made from time to time until all of the property is sold or the obligations paid in full. Said Trustee shall have authoricy to appoint an attorney in fact to act as Trustee in conducting the foreclosure sale and executing a deed to the purchasers; and it is further agreed that said Trustee or his successor may sell said property together or in lots and/or parcels as to him shall deem expedient and after such sale as aforesaid shall make, execute and deliver to the purchaser or purchasers thereof good and sufficient deeds, assignments or other lawful conveyances to vest in said purchaser or purchasers title to the Non-Operator's interest in the Contract Area in fee simple together with all personal property used or obtained in connection therewith and together with all of the proceeds of production attributable thereto including proceeds of production held by any party for the payment to Non-Operator. From the proceeds of said sale said Trustee shall first pay all charges, costs and expenses in executing these provisions and secondly pay any sums due by the Trustee for taxes in the preservation of the security and thereafter pay all of the remaining sums to Operator for the satisfaction of the debts of Non-Operator hereunder and the balance, if any, shall be paid to Non-Operator. It is agreed that such sale shall be a perpetual bar against Non-Operator and its heirs, successors and assigns and legal representatives and all other persons claiming under him, them or any of them. It is further agreed that said Trustee or any holder or holders of said obligation of Operator shall have the right to become the purchaser or purchasers at such sale if they are the highest bidder or bidders in which event the bid or bids may be credited upon said indebtedness of Non-Operator. It is stipulated and agreed that in case of any sale hereunder by Trustee or his successor all prerequisites of said sale shall be presumed to have been performed and any conveyance given hereunder, all statements of fact or recitals therein made as to the non-payment of money secured or as to any default under the terms hereof or as to the request of the Trustee to enforce this trust or as to the proper and due appointment of any successor or substitute Trustee or as to the advertisement of sale or the time, place and terms of sale or as to any other preliminary act or thing shall be taken in all courts of law and equicy as prima facie evidence that the facts so stated are true. Operator may appoint a substitute or successor Trustee in the event the Trustee above named is unable for any reason to serve. H. Drill or Out Notwithstanding any provisions to the contrary contained in Article Vl.B. should any Partv hereto. after receiving notice from Operator of a proposal to drill a well on the Contract Area. other than the well provided for in Article VI.A fail to timely notify Operator of its election to participate in such prooosal or should a Partv elect not to participate in the drilling proposal. it is hereby agreed that such partv shall relinquish and assign to the participating parties all of its Leasehold interest in and to the well and the proration unit allocated to such well. Additionally. in such event. such non-participating Partv shall release. relinquish and surrender and forever forfeit proportionately to the participating parties. all of the non-participating party's interest in and to all proration units which are adjoining and/or SEC 189052  contiguous to the proration unit allocated to such proposed well except for any thereof on which a well is situated and in which well the nonparticipating party participated in the drilling. By way of illustration. in the event a 40 acre proration unit in the form of a square is allocated to a proposed well. then a non-participating partv shall forfeit. release and relinquish all interest in such 40 acre proration unit together with the eight immediately surrounding and adjoining 40 acre proration units with the exception indicated. Notwithstanding any provision to the contrary contained in Article VI.. Non-Operator upon receiving Operator's recommendation with respect to an attempted Completion shall within the time period set forth herein, notify Operator of its election to participate in a proposed Completion attempt. Failure to so notify Operator shall be deemed an election by Non-Operator not to participate. In the event that any Non-Operator elects not to participate in the Completion attempt. the Non-Consenting Party shall relinquish and assign to the participating parties all of its Leasehold interest in and to the well and the proration unit allocated to such well, only insofar as to the interval or formation which is subject to the Completion attempt. Additionally, in such event. such non-participating partv shall relinquish and surrender and forever forfeit proportionately to the participating parties, all of the non-participating partv's interest in and to all proration units which are adjoining and/or contiguous to the proration unit allocated to such well, only insofar as to the interval or formation which is subject to the Completion attempt. With regard to Deepening operations, any Non-Consenting Party shall forfeit proportionately to the participating parties all of the non-participating party's interest in depths greater than the depth drilled in an operation for which such non-participating party had previously consented. The interest of any party in such relinquished and forfeited Leasehold rights shall be assigned proportionately to the participating parties by the non-participating party without warranty of title except as to claims. by, through or under Assignor. and shall be free of burdens except those created prior to the time the non-participating party acquired his interest in the Leasehold estate so forfeited. I. Sales Necessitating Separate Measurements. In the event of transfer, sale, encumbrance or other disposition of interest within the Contract Area which necessitates separate measurement of production, the party creating the necessity for such measurement shall alone bear the cost of purchase, installation and operation of such facilities. J. Internal Revenue Code Election. This Operating Agreement shall not create any mining partnership, commercial partnership or other partnership relation or joint venture, arul the liabilities of each of the parties hereto shall be several and not joint. However, solely for Federal and State income tax purposes, the parties elect to be taxed as a partnership in accordance with the Tax Partnership Agreement attached as Exhibit "G" hereto, but such relationship shall not be a partnership to any other extent or for any other purpose. Notwithstanding anything to the contrary herein, the parties hereto agree that, with respect to all operations conducted hereunder, each party hereto agrees to elect to be excluded from the application of Subchapter K of Chapter I of Subtitle A of the Code, and each party agrees to join in the execution of such additional documents and elections as may be required by the Internal Revenue Service in order to effectuate the foregoing. In addition, if the income tax laws of any state in which the parties conduct operations pursuant to the terms of this Agreement contain provisions similar to those contained in Subchapter K of Chapter I of Subtitle A of the Code, the parties hereby agree to elect to be excluded from the application of such provisions. K. Memorandum of Operating Agreement. Within ten (10) days from the execution of this operating Agreement, each party agrees to execute a "Memorandum of Joint Operating Agreement" to be filed of record in Lynn and Terry Counties, Texas, imparting constructive notice that the Contract Area is subject to all of the terms, conditions and provisions contained in this agreement. L. Power of Attorney. Each Non-Operator designates Operator as its respective attorney-in-fact for the purpose of executing on behalf of such Non-Operator all instruments of release; all oil purchase agreements, gas purchase agreements and amendments thereto; all amendments to existing Leases in the Contract Area deemed necessary by Operator and all filings required by regulatory agencies relating to operations on the Contract Area including without limitation all NGPA filings, filings required by the Federal Energy Regulatory Commission and the Railroad Commission of the State of Texas. This Power-of-Attorney may be revoked only by revocation signed and acknowledged by the revoking non-operator, and filed for record in Lynn and Terry Counties, Texas, a copy of which shall be forwarded to operator. M. Area of Mutual Interest. (1) The parties hereto hereby create an Area of Mutual Interest (the "AMI") comprising all of the Contract Area covered by this Operating Agreement. (2) During the term of the AMI, if any party hereto ("the Acquiring Party") acquires any Oil and Gas Lease, or any interest therein, any unleased mineral interest or any farmout, sublease or other contract with respect thereto which covers or affects any lands or minerals lying within the AMI ("the offered Mineral Interest"), the Acquiring Party shall promptly notify each of the other parties hereto ("Offeree") of such acquisition. In such event, such Offeree shall have the right to acquire his or its proportionate interest in the offered Mineral Interest in accordance with the other provisions of this Article XVI I. SEC 189053  (3) Promptly upon acquiring the offered Mineral Interest, the Acquiring Party shall, in writing, advise each Offeree of such acquisition. The notice shall include complete xerox copies of the instruments of acquisition including, by way of example but not of limitation, such copies of the Leases, assignments, subleases, fannouts or other contracts acquired by the Acquiring Party creating or affecting the offered Mineral Interest, together with such copies of paid drafts, plats depicting the exact location of the acreage covered or affected thereby, Lease brokers' reports and any other title data relating thereto. The Acquiring Party shall also enclose an itemized statement of the actual costs and expenses incurred by the Acquiring party in acquiring the offered Mineral Interest ("Acquiring Costs"). Each Offeree shall have a period of fifteen (15) days after receipt of the notice within which to furnish the Acquiring party written notice of his or its election to acquire his or its proportionate interest in the offered Mineral Interest. If, however, a well in search of oil or gas is being drilled on lands situated within the AMI or on lands situated outside the AMI of which the result could be expected to materially affect the value of the offered Mineral Interest, each Offeree shall have a period of forty-eight (48) hours after receipt of the notice (exclusive of Saturdays, Sundays and legal holidays) within which to elect to acquire his or its proportionate interest in the offered Mineral Interest. It is provided, however, that the forty-eight (48) hour election period shall not apply unless the Acquiring Party shall give written notice to each Offeree within two (2) days after the date on which the Acquiring party acquired the offered Mineral Interest exclusive of Saturdays, Sundays and legal holidays. In addition thereto, the Acquiring Party shall also: (i) furnish each Offeree with the approximate location of the well then being drilled and the name of the operator or drilling contractor drilling the well; and (ii) specifically advise each Offeree that each Offeree shall have a period of forty-eight (48) hours (inclusive of Saturdays, Sundays and legal holidays) within which to elect to acquire his or its proportionate interest in the offered Mineral Interest. The above information shall be in addition to the information and copies of instruments to be furnished in connection with the acquisition of the offered Mineral Interest as provided hereinabove. If the Acquiring Party does not receive written notice of election from any Offeree to acquire his or its proportionate interest within the fifteen (IS) day or forty-eight (48) hour period, as the case may be, such failure shall constitute an election by such Offeree not to acquire his or its interest in the offered Mineral Interest. Written notice from the Acquiring Party to each Offeree and written notice of election from each Offeree to the Acquiring Party shall be deemed given when delivered if delivered in person, one day after deposit with an overnight carrier such as Federal Express for delivery on the next calendar day and the day of transmission by telecopy (if confirmed by notice sent by Federal Express or a similar overnight carrier for receipt the next day). Each Offeree accepting the offered Mineral Interest shall be entitled to participate in the offered Mineral Interest in the proportion to which his or its ownership interest as set forth in Exhibit "A" bears to the total ownership Interests as set forth in Exhibit "A" of the Acquiring Party and all other Offerees who have elected to acquire their proportionate interest in the offered Mineral Interest. Promptly after the period for the election has expired, the Acquiring Party shall invoice each Offeree electing to acquire his or its Interests in the offered Mineral Interest for his or its proportionate part of the Acquisition Costs. In the event an Offeree elects not to acquire his or its proportionate interest therein, then the Acquiring Party and each of the other Offerees who elect to participate in the offered Mineral Interest shall bear the Acquisition Costs attributable to such non-acquiring Offeree's interest in the proportion to which such participating party's expense bearing interest in the AMI at such time bears to the aggregate expense-bearing interest in the AMI at such time of the Acquiring Party and such other Offerees who so elect to participate. Each Offeree shall itnmediately reimburse the Acquiring Party for his or its share of the Acquisition Costs as reflected by the invoice. Upon receipt of such reimbursement or, in the case of a farmout or similar agreement at the time the acquiring party receives its assigmnent or other instrument, the Acquiring Party shall execute and deliver an appropriate, recordable assignment to each participating Offeree. If the Acquiring Party does not receive the amount due from a participating Offeree within five (5) days after receipt by such Offeree of the invoice for its share of the Acquisition Costs, the Acquiring Party may, at his or its election and without prejudice to other existing remedies, give written notice to such delinquent party that the failure of the Acquiring Party to receive the amount due within forty-eight (48) hours (exclusive of Saturdays, Sundays and legal holidays) after receipt of such notice by the delinquent Offeree shall constitute a withdrawal by the delinquent Offeree of its former election to acquire the interest and such Offeree shall no longer have the right to acquire an interest in the offered Mineral Interest. In the event the Acquiring Party does not receive the amount due within such forty-eight (48) hour period, the delinquent Offeree shall be deemed to have elected not to participate and the Acquiring Party shall succeed to and own the entirety of the interest in the offered Mineral Interest which the delinquent Offeree would have owned and the Acquiring party shall bear the delinquent Offeree's proportionate share of the Acquisition Costs. (4) In the event less than all of the Offerees elect to acquire their proportionate interest in the offered Mineral Interest, then the portion of the lands covered by the offered Mineral Interest shall be automatically deleted from the AMI and the Contract Area covered hereby without the necessity of Operator or any Non-Operator executing a document amending the AMI and this Operating Agreement to reduce the AMI and the Contract Area to exclude such lands therefrom. The Acquiring Party and the Offerees electing to acquire the Interests in the offered Mineral Interest shall be deemed to have agreed to operate the offered Mineral Interest in accordance with the tenns and provisions of this Operating Agreement, except that the offered Mineral Interest shall constitute the Contract Area covered thereby. Exhibit "A" shall list the names and addresses of the parties owning the offered Mineral Interest and the Interests in which they own the same, and Operator shall be named Operator therein unless Operator did not participate in acquiring his interest in the offered Mineral Interest, in which event the parties agreeing to participate in the offered Mineral Interest shall select an Operator from among themselves, which Operator shall be elected by the affirmative vote of two or more such parties owning a majorily interest based on their ownership of the offered Mineral Interest, and not on the number of parties electing to participate. The Acquiring Party and the Offerees electing to acquire their Interests in the offered Mineral Interest shall enter into an Operating Agreement reflecting the same immediately after agreeing to own jointly the offered Mineral Interest, but the failure to enter itnmediately into such an Operating Agreement shall not SEC 189054 prevent the owners of the offered Mineral Interest from operating, developing and maintaining the same in accordance with the tenns hereof, unless Operator elects not to participate and such parties are unable to agree on the election of an operator. (5) Any assignment made by the Acquiring Party shall be made free and clear of any burdens placed thereon by the Acquiring Party but otherwise without warranty of title, except as to acts by, through and under the Acquiring Party, but not otherwise. The assignment shall be expressly made subject to and each assignee shall expressly assume his or its portion of all of the obligations imposed by the instrument creating or affecting the offered Mineral Interest. (6) If the interest of any party hereto in the AMI should vest in three or more parties, those parties shall designate one of them to whom all notices provided for in this AMI are to be given and shall promptly furnish the other parties hereto the name and address of the designated party. If the Acquiring Party has not received the name and address of the designated party, the notice of the acquisition shall be directed to all of the parties having an interest in the AMI according to the Exhibit "A" which is then a part of this Operating Agreement. (7) If the instrument creating or affecting the offered Mineral Interest covers lands situated both within and outside the AMI, the Acquiring Party may, at his or its option, offer either all of the offered Mineral Interest or only that portion of the offered Mineral Interest covering lands situated within the AMI. If less than the entirety is offered, the Acquisition Costs shall be prorated between the acreage covered by the offered Mineral Interest situated within the AMI and the acreage situated outside the AMI and the Acquiring Party shall bear all of the Acquisition Costs attributable to such outside acreage and the Acquiring Party and the Offerees who elect to participate shall bear their proportionate share of the Acquisition Costs attributable to the acreage within the AMI. If the entirety of the premises covered by the Mineral Interest is offered and each party hereto acquires it proportionate interest therein, the lands lying outside the AMI shall become a part of the Contract Area covered hereby and the AMI shall thereby be automatically enlarged without the necessity of operator or any Non-Operator executing a document amending the AMI and this Operating Agreement to enlarge the AMI to include such lands lying outside the AMI. (8) If two or more of the offered Mineral Interests are included in the same notice, each Offeree shall have the separate right of election as to each offered Mineral Interest. (9) The provisions of the AMI shall not apply to acquisitions resulting from a merger, consolidation, reorganization or an acquisition from a parent, subsidiary or affiliated corporation, or, as to individuals, from ascendants or descendants or trusts of which such parties are beneficiaries. The provisions hereof shall also not apply to sales and acquisitions between partners in a partnership which is a party hereto, or ventures in a joint venture which is a party hereto, norto the acquisition by any party hereto of all or any part of the interest of another party hereto. (JO) Each party hereto stipulates and represents to the other parties hereto that he or it is not now and shall not become hereafter a party to any other area of mutual interest agreement involving all or any portion of the land comprising the AMI. SEC 189055  EXHIBIT"A" Attached to and made a part of Operating Agreement dated May I, 2008, between RAW Oil & Gas Inc. as Operator and Smith Energy Company, eta!, as Non-Operators PART I: CONTRACT & AMI AREA Section 39, Block E, EL&RR Ry. Co. Survey, Lynn and Terry Counties, Texas (640.00 ac.), and Section 0, A-1181, No Block, No Survey, Lynn County, Texas (this Section is located just to the East of Section 39 described above) PART II: PARTIES, INTEREST AND ADDRESSES FOR NOTICE PURPOSES Percentage of Names and Addresses Working Interest Owned '-.\ £)'~· {: '--" ~ Raw Oil & d~. Inc. 1.00 12312 Slide Roa4 Lubbock, Texas 79424 Raw Energy, L.C. 5.25 12312 Slide Road Lubbock, Texas 79424 )_<· Smith Energy Company 75.00 Lester Smith, President P.O. Box 52890 Houston, Texas 77052 Attention: Judy Mills Mark P. Hardwick 6.25 P.O. Box213 Midland, Texas 79702 Steve Blaylock 6.25 214 W. Texas, Suite 306 Midland Texas 79701 Elger Exploration Inc. 6.25 P.O. Box 2623 Midland, Texas 79702 SEC 189056  This is an Amended Exhibit "A" which is dated September 15•• 2009 for the purpose of the addition of additional owners and their interest. EXHIBIT"A" Attached to and made a part of Operating Agreement dated May l, 2008, between RAW Oil & Gas Inc. as Operator and Smith Energy Company, eta!, as Non-Operators PART I: • CONTRACT & AMI AREA Section 39, Block E, EL&RR Ry. Co. Survey, Lynn and Terry Counties, Texas (640.00 ac.), and Section 0, A-1181, No Block, No Survey, Lynn County, Texas (this Section is located just to the East of Section 39 described above) PART II: PARTIES, INTEREST AND ADDRESSES FOR NOTICE PURPOSES Before Casing Point After Casing Point of the Names and Addresses of the First Well First Well And all Subsequent Operations Raw Oil & Gas, Inc. -1.3334%- 1.00% 12312 Slide Road Lubbock, Texas 79424 Raw Energy, L.C. -0%- 6.25% 12312 Slide Road Lubbock, Texas79424 Smith Energy Company 93.3331% 10.00% Lester Smith, President P.O. Box 52890 Houston, Texas 77052 Mark P. Hardwick -0%- 6.25% P.O. Box213 Midland, Texas 79702 Steve Blaylock -0%- 6.25% 214 W. Texas, Suite 306 Midland Texas 79701 Elger Exp !oration Inc. -0%- 6.25% P.O. Box 2623 Midland, Texas 79702 A.M. Greene Trust P.O. Box 94364 2.6667% 2.0% Lubbock, Texas 79493 P.A.H. Energy Company 1.3334% 1.0% 1025 Martin Houston, Texas 77018 B Shale Investments Ltd. 1.3334% 1.0% I 00 Congress Ave, Suite 1600 Austin Texas 78701 Smith Energy Partners I -0%- 60.00% P.O. Box 52890 Houston, Texas 77052 SEC 189057  EXHIBIT"B" Attached to and made a part of Operating Agreement dated May I, 2008, between RAW Oil & Gas Inc., as Operator and Smith Energy Company, eta!, as Non-Operators. Produccrs88(7.(i9)PaidUp with 640 Acres Pooling Prm~sion OIL, GAS AND MINERAL LEASE THIS AGREEMENT made this between Lessor (whether one or more), whose address is - - - - - - - - - - - - · a n d _ _ _ _ _ _ _ _ _ _ _ _ _ _ , Lessee, WITNESSETH: l. Lessor, in consideration of Ten Dollars and other valuable consideration ($10.00 and OVC), receipt of which is hereby acknowledged, and of the covenants and agreements of lessee hereinafter contained, does hereby grant, lease and let unto lessee the land covered hereby for the purposes and with the exclusive right of exploring, drilling, mining and operating for, producing and owning oil, gas, sulphur and all other minerals (whether or not similar to those mentioned), together with the right to make surveys on said land, lay pipe lines, establish and utilize facilities for surface or subsurface disposal of salt water, construct roads and bridges, dig canals, build tanks, power stations, telephone lines, employee houses and other structures on said land, necessary or useful in lessee's operations in exploring, drilling for, producing, treating, storing and transporting minerals produced from the land covered hereby or any land adjacent thereto. The land covered hereby, herein called "said land'', is located in the Counties of , State of Texas, and is described as follows: This lease also covers and includes, in addition to that above described, all land, if any, contiguous or adjacent to or adjoining the land above described and (a) owned or claimed by lessor by limitation, prescription, possession, reversion or unrecorded instrument or (b) as to which lessor has a preference right of acquisition. Lessor agrees to execute any supplemental instrument requested by lessee for a more complete or accurate description of said land. For the purpose of detennining the amount of any bonus or other payment hereunder, said land shall be deemed to contain _ _ _acres, whether actually containing more or less, and the above recital of acreage in any tract shall be deemed to be the true acreage thereof. Lessor accepts the bonus as lump sum consideration for this lease and all rights and options hereunder. 2. Unless sooner terminated or longer kept in force under other provisions hereof, this lease shall remain in force for a term of ___years from the date hereof. hereinafter called "primary term~', and as long thereafter as operations, as hereinafter defined, are conducted upon said land with no cessation for more than ninety (90) consecutive days. 3. As royalty, lessee covenants and agrees: (a) To deliver to the credit of lessor, in the pipe line to which lessee may connect its wells, the equal _ __ ,fall oil produced and saved by lessee from said land, or from time to time, at the option of lessee, to pay lessor the average posted market price of such _ __ pruc of such oil at the wells as of the day it is run to the pipe line or storage tanks, lessor's interest, in either case, to bear _ _ _ of the cost of treating oil to render it marketable pipe line oil; (b) To pay lessor on gas and casinghead gas produced from said land (I) when sold by lessee, _ _ _ )of the amount realized by lessee, computed at the mouth of the well, or (2) when used by lessee off said land or in the manufacture of gasoline or other products, the market value, at the mouth of the well, of _ _ _ of such gas and casinghead gas~ (c) To pay lessor on all other mincra1s mined and marketed or utilized by lessee from said land, one tenth either in kind or value at the well or mine at lessee's election, except that on sulphur mined and marketed the royalty shall be one dollar ($1.00) per long ton. If, at the expiration of the primary tenn or any time or times thereafter, there is any well on said land or on lands with which said lands or any portion thereof has been pooled, capable of producing oil or gas, and all such wells are shut-in, this lease shall, nevertheless, continue in force as though operations were being conducted on said land for so long as said wells are shut-in, and thereafter this lease may be continued in force as if no shut-in had occurred. · Lessee covenants and agrees to use reasonable diligence to produce, utilize, or market the minerals capable of being produced from said wells, but in the exercise of such diligence, lessee shall not be obligated to install or furnish facilities other than well facilities and ordinary lease facilities of flow lines, separator, and lease tank, and shall not be required to settle labor trouble or to market gas upon tenns unacceptable to lessee. If, at any time or times after the expiration of the primary term, all such wells are shut-in for a period of ninety consecutive days, and during such time there are no operations on said land, then at or before the expiration of said ninety day period, lessee shall pay or tender, by check or draft of lessee, as royalty, a sum equal to one dollar ($1.00) for each acre of land then covered hereby. Lessee shall make like payments or tenders at or before the end of each anniversary of the expiration of said ninety day period if upon such anniversary this lease is being continued in force solely by reason of the provisions of this paragraph. Each such payment or tender shall be made to the parties who at the time of payment would be entitled to receive the royalties which would be paid uoder this lease if the wells were producing, and may be deposited in the Bank a t - - - - - - - - - - - - - - , or its successors, which shall continue as the depositories, regardless of changes in the ownership of shut-in royalty. If at any time that lessee pays or tenders shut-in royalty, two or more parties are, or claim to be, entitled to receive same, lessee may, in lieu of any other method of payment herein provided, pay or tender such shut-in royalty , in the manner above specified, either jointly to such parties or separately to each in accordance with their respective ownership thereof, as lessee may elect. Any payment hereunder may be made by check or draft of lessee deposited in the mail or delivered to the party entitled to receive payment or to a depository bank provided for above on or before the last date for payment. Nothing herein shall impair lessee's right to release as provided in paragraph 5 hereof. In the event of assignment of this lease in whole or in part, liability for payment hereunder shall rest exclusively on the then owner or owners of this lease, severally as to acreage owned by each. 4. Lessee is hereby granted the right, at its option, to pool or unitize any land covered by this lease with any other land covered by this lease, and/or with a..,v other land, lease, or leases, as to any or aU minerals or horizons, so as to establish units containing not more than 80 surface acres, plus I0% acreage tolerance; 1ed, however, units may be established as to any one or more horizons, or existing units may be enlarged as to any one or more horizons, so as to contain not than 640 surface acres plus 10% acreage tolerance, if limited to one or more of the following: (I) gas, other than casinghead gas, (2) liquid hydrocarbons (condensate) which are not liquids in the subsurface reservoir, (3) minerals produced from wells classified as gas wells by the conservation agency having jurisdiction. If larger units than any of those herein pennitted, either at the time established, or after enlargement, are required under any governmental rule or order, for the drilling or operation of a well at a regular location, or for obtaining maximum allowable from any well to be drilled, drilling, or already drilled, any such unit may be established or enlarged to conform to the size required by such governmental order or rule. Lessee shall exercise said option as to each desired unit by executing an instrument identifying such unit and filing it for record in the public office in which this lease is recorded. Each of the said options may be exercised by the lessee at any time and from time to time while this lease is in force, and whether before or after production has been established either on said land, or on the portion of said land included in the unit, or on other land unitized therewith. A unit established hereunder shall be valid and effective for all purposes of this lease even though there may be mineral, royalty, or leasehold interests in lands within the unit which are not effectively pooled or unitized. Any operations conducted on any part of such unitized land shall be considered, for all purposes, except the payment of royalty, operations conducted upon said land under this lease. There shall be allocated to the land covered by this lease within each such unit (or to each separate tract within the unit ifthe lease covers separate tracts within the unit) that proportion of the total production of unitized minerals from the unit, after deducting any used in lease or unit operations, which the number of surface acres in such land (or in each such separate tract) covered by this lease within the unit bears to the total number of surface acres in the unit, and the production so allocated shall be considered for all purposes, including payment or delivery of royalty, overriding royalty and any other payments out of production, to be the entire production of unitized minerals from the land to which allocated in the same manner as though produced therefrom. under the terms of this lease. The owner of the reversionary estate of any term royalty or mineral estate agrees that the accmal of royalties pursuant to this paragraph or of shut-in royalties from a well on the unit shall satisfy any limitation oftenn requiring production of oil or gas. The formation of any unit hereunder which includes land not covered by this lease shall not have the effi:ct of exchanging or transferring any interest under this lease (including, without limitation any shut-in royalty which may become payable under this lease) between parties.owning interests in land covered by this lease and parties owning interests in land not covered by this lease. Neither shall it impair the right of the lessee to release as provided in paragraph 5 hereof, except that lessee may not so release as to lands within a unit while there are operations thereon for unitized minerals unless all pooled leases are released as to lands within the unit. At any time while this lease is in force lessee may dissolve any unit established hereunder by filing for record in the public office where this lease is recorded a declaration to that effect. if at that time no operations are being conducted thereon for unitized minerals. Subject to the provisions of this paragraph 4, a unit once established hereunder shall remain in force so long as any lease subject thereto shall remain in force. If this lease now or hereafter covers separate tracts, no pooling or unitization of royalty interests as between any such separate tracts is intended or shall be implied or result merely from the inclusion of such separate tracts within this lease but lessee shall nevertheless have the right to pool or unitize as provided in this paragraph 4 with consequent allocation of production as herein provided. As used in this paragraph 4, the words "separate tract" mean any tract with royalty ownership differing, now or hereafter, either as to parties or amounts, from that as to any other part of the leased premises. 5. Lessee may at any time and from time to time execute and deliver to lessor or file for record a release or releases of this lease as to any part or all of said land or of any mineral or horizon thereunder, and thereby be relieved of all obligations, as to the released acreage or interest. SEC 189058  6. Whenever used in this lease the " .. : "operations" shall mean operations for and any of the .ollowing: drilling, testing, completing, reworking, recompleting, deepening, plugging back or repairing of a weU in search for or in an endeavor to obtain production of oil, gas, sulphur or other minerals, excavating a mine, production of oil, gas, sulphur or other mineral, whether or not in paying quantities. 7. Lessee shall have the use, free from royalty, of water, other than from lessor's water wells, and ofoil and gas produced from said land in all operations hereunder. Lessee shall have the right at any time to remove all machinery and fixtures placed on said land, including the right to draw and remove casing. No well shall be drilled. ~earer than 200 feet to the house or barn now on said land without the consent of the lessor. Lessee shall pay for damages caused by its operations to growing crops and timber on said land. 8. The rights and estate of any party hereto may be assigned from time to time in whole or in part as to any mineral or horizon. All of the covenants, obligations, and considerations of this lease shall extend to and be binding upon the parties hereto, their heirs, successors, assigns, and successive assigns. No change or division in the ownership of said land, royalties, or other moneys, or any part thereof, howsoever effected, shall increase the obligations or diminish the rights of Jessee, including, but not limited to, the location and drilling of wells and the measurement of production. Notwithstanding any other actual or constructive knowledge or notice thereof of or to lessee, its successors or assigns, no change or division in the ownership of said land or of the royalties, or other moneys, or the right to receive the same, howsoever effected, shall be binding upon the then record owner of this lease until thirty (30) days after there has been furnished to such record owner at his or its principal place of business by lessor or lessor's heirs, successors, or assigns, notice of such change or division, supported by either originals or duly certified copies of the instruments which have been properly filed for record and which evidence such change or division, and of such court records and proceedings, transcripts, or other documents as shall be necessary in the opinion of such record owner to establish the validity of such change or division. If any such change in ownership occurs by reason of the death of the owner, lessee may, nevertheless pay or tender such royalties, or other moneys, or part thereof, to the credit of the decedent in a depository bank provided for above. 9. In the event lessor considers that Jessee has not complied with all its obligations hereunder, both express and implied, lessor shall notify Jessee in writing, setting out specificaHy in what respects lessee has breached this contract. Lessee shall then have sixty (60) days after receipt of said notice within which to meet or commence to meet all or any part of the breaches alleged by lessor. The service of said notice shall be precedent to the bringing of any action by lessor on said lease for any cause, and no such action shall be brought until the lapse of sixty {60) days after service of such notice on lessee. Neither the service of said notice nor the doing of any acts by lessee aimed to meet all or any of the alleged breaches shall be deemed an admission or presumption that Jessee has failed to perform all its obligations hereunder. If this lease is canceled for any cause, it shall nevertheless remain in force and effect as to (I) sufficient acreage around each well as to which there are operations to constitute a drilling or maximum allowable unit under applicable governmental regulations, (but in no event less than forty acres), such acreage to be designated by lessee as nearly as practicable in the form of a square centered at the well, or in such shape as then existing spaeing rules require; and (2) any part of said Jand included in a pooled unit on which there are operations. Lessee shall also have such easements on said land as are necessary to operations on the acreage so retained. I 0. Lessor hereby warrants and agrees to defend title to said land against the claims of all persons whomsoever. Lessor's rights and interests hereunder shall be charged primarily with any mortgages, taxes or other liens, or interest and other charges on said land, but lessor agrees that lessee shall have the right at any time to pay or reduce same for lessor, either before or after maturity, and be subrogated to the rights of the holder thereof and to deduct amounts so paid from royalties or other payments payable or which may become payable to lessor and/or assigns under this lease. If this lease covers a Jess interest in the oil, gas, sulphur, or other minerals in all or any part of said land than the entire and undivided fee simple estate (whether lessor's interest is herein specified or not), or no interest therein, then " 'yalties and other moneys accruing from any part as to which this lease covers less than such full interest, shall be paid only in the proportion which the interest 1, if any, covered by this lease, bears to the whole and undivided fee simple estate therein. All royalty interest covered by this lease (whether or not owned by 1..,,or) shall be paid out of the royalty herein provided. This lease shall be binding upon each party who executes it without regard to whether it is executed by all those named herein as lessor. IL If while this lease is in force, at, or after the expiration of the primary term hereof, it is not being continued in force by reason of the shut-in well provisions of paragraph 3 hereof, and Jessee is not conducting operations on said land by reason of(!) any Jaw, order, rule or regulation, (whether or not subsequently determined to be invalid) or (2) any other cause, whether similar or dissimilar, (except financial) beyond the reasonable control oflessee, the primary term hereof shall be extended until the first anniversary date hereof occurring ninety (90) or more days following the removal of such delaying cause, and this lease may be extended thereafter by operations as if such delayed had not occurred. IN WITNESS WHEREOF, this instrument is executed on the date first above written. LESSOR: By: Printed Name: Title: lDNo.: ACKNOWLEDGEMENT STATE OF _ _ _ _ _ _ __ CORPORATE COUNTY OF _ _ _ _ _ _ _ _ __ Before me, the undersigned Notary Public, personally a p p e a r e d _ - - - . , - , - - - - - - - - - - - - - - - - - - - - - - - - - known to me to be the person whose name is subscribed to the foregoing instrument and known to me to be of - - - - - - - - a corporation, and acknowledged to me that he or she executed the same as the act of said corporation for the purposes therein set forth. Given under my hand and seal of office this ____ day of _ _ _ _ _ _ _ _ _ _ _ _ , 2008. Notary Public in and for the State of _ _ _ _ __ My commission expires:---------- SEC 189059  COPAS 1984 ONSHORE Recommended by the Council of Petroleum Accountants ~---------so_cieties--~O~A~ EXHIBIT "CJ' Attached to and made a part of Joint Operating Agreement dated Mav 1. 2008 by and between RAW Oil & Gas. Inc .. as Operator and Smith Energy Company eta!. as Non-Operators. ACCOUNT/NC PROCEDURE 10 II JOINT OPERATIONS 12 13 L GENERAL PROVISIONS 14 15 !. Definitions 16 17 "Joint Property" shall mean the real and personal property subject to the agreement to which this Accounting Procedure 18 is attached. 19 "Joint Operations" shall mean all operations necessary or proper for the development, operation, protection and 20 maintenance of the Joint Property. 21 "Joint Account" shall mean the account showing the charges paid and credits received in the conduct of the Joint 22 Operations and which are to be shared by the Parties. 23 "Operator" shall mean the party designated to conduct the Jqint Operations. 24 ''Non-Operators" shall mean the Parties to this agreement other than the Operator. 05 "Parties" shall mean Operator and Non-Operators. "First Level Supervisors" shall mean those employees whose primary function in Joint Operations is the direct 27 supervision of other employees and/or contract labor directly employed on the Joint Property in a field operating 28 capacity. 29 "Technical Employees" shal1 mean those employees having specia1 and specific engineering, geological or other 30 professional skills, and whose primary function in Joint Operations is the handling of specific operating conditions and 31 problems for the benefit of the Joint Property. 32 "Personal Expenses" shall mean travel and other reasonable reimbursable expenses of Operator's employees. 33 "Material" shall mean personal property, equipment or supplies acquired or held for use on the Joint Property. 34 "Controllable Materia1" shall mean Material which at the time is so classified in the Material Classification Manual as 35 most recently recommended by the Council or Petroleum Accountants Societies. 36 37 2. Statement and Billings 38 39 Operator shall bill Non-Operators on or before the last day of each month for their proportionate share of the Joint 40 Account for the preceding month. Such bills will be accompanied by statements which identify the authority for 41 expenditure, lease or facility, and all charges and credits summarized by appropriate classifications of investment and 42 expense ~xcept that items of Controllable Material and unusual charges and credits shall be separately identified and 43 fully described in detaiL 44 45 3. Advances and Payments by Non-Operators 46 A. Unless otherwise provided for in the agreement, the Operator may require the Non-Operators to advance their share of estimated cash outlay for the succeeding month's operation within fifteen ( 15) days after receipt of the 49 billing or by the first day of the month for which the advance is required, whichever is later. Operator shall adjust 50 each monthly billing to reflect advances received from the Non-Operators. 51 52 B. Each Non-Operator shall pay its proportion of all bills within fifteen (15) days after receipt. If payment is not made 53 within such time, the unpaid balance shall bear interest monthly at the prime rate in effect at Peoples Bank Lubbock 54 on the first day of the month in which delinquency occurs plus 1% or the 55 maximum contract rate permitted by the applicable usury laws in the state in which the Joint Property is located, 56 whichever is the lesser. plus attorney's fees, court costs, and other costs in connection with the collection of unpaid 57 amounts 58 59 4. Adjustments 60 61 Payment of any such bills shall not prejudice the right of any Non-Operator to protest or question the correctness thereof; 62 provided, however, all bills and statements rendered to Non-Operators by Operator during any calendar year shall 63 conclusively be presumed to be true and correct after twenty-four (24) months following the end of any such calendar 64 year, unless within the said twenty-four (24) month period a Non-Operator takes written exception thereto and makes 65 claim on Operator for adjustment. No adjustment favorable to Operator shall be made unless it is made within the same 66 prescribed period. The. provisions of this paragraph shall not prevent adjustments resulting from a physical inventory of 67 Controllable Material as provided for in Section V. 68 69 70 COPYRIGHT © 1985 by the Council of Petroleum Accountants Societies. - 1- SEC 189060  COPAS 1984 ONSHORE Recommended by the Council of Petroleum Accountants ~---------Societi_es--W~A~ 5. Audits A A Non-Operator, upon notice in writing to Operator and all other Non-Operators, shall have the right to audit Operator's accounts and records relating to the Joint Account for any calendar year within the twenty-four (24) month period following the end of such calendar year; provided, however, the making of an audit shall not extend the time for the taking of written exception to and the adjustments of accounts as provided for in Paragraph 4 of this Section I. Where there are two or more Non-Operators, the Non-Operators shall make every reasonable effort to conduct a joint audit in a manner which will result in a minimum of inconvenience to the Operator. Operator shall bear no portion of the Non-Operators 1 audit cost incurred under thls 10 paragraph unless agreed to by the Operator. The audits shall not be conducted more than once each year II without prior approval of Operator, except upon the resignation or remova1 of the Operator, and shall be made 12 at the expense of those Non-Operators approving such audit. 13 14 B. The Operator shall reply in writing to an audit report within 180 days after receipt of such report. 15 16 6. Approval By Non-Operators 17 18 Where an approval or other agreement of the Parties or Non-Operators is expressly required under other sections of this 19 Accounting Procedure and if the agreement to which this Accounting Procedure is attached contains no 20 contrary provisions in regard thereto, Operator shall notify all Non-Operators of the Operators proposal, and the 21 agreement or approval ofa majority in interest of the Non-Operators shall be controlling on all Non-Operators. 22 23 24 II. DIRECT CHARGES 25 6 Operator shall charge the Joint Account with the following items: 27 28 I. Ecological and Environmental 29 30 Costs incurred for the benefit of the Joint Property as a result of governmental or regulatory requirements to satisfy 31 environmental considerations applicable to the Joint Operations. Such costs may include surveys of an ecological or 32 archaeological nature and pollution control procedures as required by applicable Jaws and regulations. 33 34 2. Rentals and Royalties 35 36 Lease rentals and royalties paid by Operator for the Joint Operations. 37 38 3. Labor 39 40 A. (1) Salaries and wages of Operator's field employees directly employed on the Joint Property in the conduct of 41 Joint Operations. 42 43 (2) Salaries of First level Supervisors in the field. 44 45 (3) Salaries and wages of Technical Employees directly employed on the Joint Property if such charges are 46 excluded from the overhead rates. <7 (4) Salaries and wages of Technical Employees either temporarily or permanently assigned to and directly 49 employed in the operation or the Joint Property if such charges are excluded from the overhead rates. 50 51 B. Operators cost of holiday, vacation, sickness and disability benefits and other customary allowances paid to 52 employees whose salaries and wages are chargeable to the Joint Account under Paragraph 3A of this Section II. 11 53 Such costs under this Paragraph 3B may be charged on a when and as paid basis 11 or by "percentage assessment" 54 on the amount of salaries and wages chargeable to the Joint Account under Paragraph 3A of this Section II. If 55 percentage assessment is used, the rate shall be based on the Operator's cost experience. 56 57 C. Expenditures or contributions made pursuant to assessments imposed by governmental authority which are 58 applicable to Operator's costs chargeable to the Joint Account under Paragraphs 3A and 3B of this Section II. 59 60 D. Personal Expenses of those employees whose salaries and wages are chargeable to the Joint Account under 61 Paragraphs 3A and 3B of this Section II. 62 63 4. Employee Benefits 64 65 Operator's current costs or established plans for employees1 group life insurance, hospitalization, pension, retirement, 66 stock purchase, thrift, bonus, and other benefit plans of a like nature, applicable to Operators labor cost chargeable to the 67 Joint Account under Paragraphs 3A and 3B Of this Section II shall be Operator's actual cost not to exceed the percent 68 most recently recommended by the Council of Petro1eum Accountants Societies. 69 70 -2- SEC 189061  COPAS 1984 ONSHORE Recommended by the Council of Petroleum Accountants ~---------so_cieties--CO~A~ 5. Material Material purchased or furnished by Operator for use on the Joint Property as provided under Section IV. Only such Material shall be purchased for or transferred to the Joint Property as may be required for immediate use and is reasonably practical and consistent with efficient and economical operations. The accumulation of surplus stocks shall be avoided. 6. Transportation 9 10 Transportation of employees and Material necessary for the Joint Operations but subject to the following limitations: 11 12 A. If Material is moved to the Joint Property from the Operator's warehouse or other properties, no charge shall be 13 made to the Joint Account for a distance greater than the distance from the nearest reliable supply store where like 14 material is normally available or railway receiving point nearest the Joint Property unless agreed to by the Parties. 15 16 B. If surplus Material is moved to Operator's warehouse or other storage point, no charge shall be made to the Joint 17 Account for a distance greater than the distance to the nearest reliable supply store where like material is normally 18 available, or railway receiving point nearest the Joint Property unless agreed to by the Parties. No charge shall be 19 made to the Joint Account for moving Material to other properties belonging to Operator, unless agreed to by the 20 Parties. 21 22 C. In the application of subparagraphs A and B above, the option to equalize or charge . actual trucking cost is 23 available when the actual charge is $400 or less excluding accessorial charges. The $400 will be adjusted to the 24 amount most recently recommended by the Council of Petroleum Accountants Societies. 75 7. Services 27 28 The cost of contract services, equipment and utilities provided by outside sources, except services excluded by Paragraph 29 10 of Section II and Paragraph i, ii, and iii, of Section III. The cost of professional consultant services and contract 30 services of technical personnel directly engaged on the Joint Property if such charges are excluded from the overhead 31 rates. The cost of professional consultant services or contract services of technical personnel not directly engaged on the 32 Joint Property shall not be charged to the Joint Account.if directly engaged in the operation (not administration) of the joint property. 33 34 8. Equipment and Facilities Furnished By Operator 35 36 A. Operator shall charge the Joint Account for use of Operator owned equipment and facilities at rates commensurate 37 with costs of ownership and operation. Such rates shall include costs of maintenance, repairs, other operating 38 expense, insurance, taxes, depreciation, and interest on gross investment less accumulated depreciation not to 39 exceed eighteen percent 18 %) per annum. Such rates shall not exceed average commercial 40 rates currently prevailing In the immediate area of the Joint Property. 41 42 B. In lieu of charges in Paragraph 8A above, Operator may elect to use average commercial rates prevailing in the 43 immediate area of the Joint Property less 20%. ~ For automotive equipment, Operator may elect to use rates 44 published by the Petroleum Motor Transport Association. 45 46 9. Damages and Losses to Joint Property '7 All costs or expenses necessary for the repair or replacement of Joint Property made necessary because of damages or 49 losses incurred by fire, flood, storm, theft, accident, or other cause, except those resulting from Operator's gross 50 negligence or willful misconduct. Operator shall furnish Non-Operator written notice of damages or losses incurred as 51 soon as practicable after a report thereof has been received by Operator. 52 53 JO. Legal Expense 54 55 Expense of handling, investigating and settling litigation or claims, discharging of liens, payment of judgments and 56 amounts paid for settlement of claims incurred in or resulting from operations under the agreement or necessary to 57 protect or recover the Joint Property, except that no charge for services of Operator's legal staff or fees or expense of 58 outside attorneys shall be made unless previously agreed to by the Parties. AU other legal expense is considered to be 59 covered by the overhead provisions of Section III unless otherwise agreed to by the Parties, except as provided in Section 60 I, Paragraph 3. 61 62 11. Taxes 63 64 All taxes of every kind and nature assessed or levied upon or in connection with the Joint Property, the operation thereof, 65 or the production therefrom, and which taxes have been paid by the Operator for the benefit of the Parties. If the ad 66 valorem taxes are based in whole or in part upon separate ~aluations of each party's working interest, then 67 notwithstanding anything to the contrary herein, charges to the Joint Account shall be made and paid by the Parties 68 hereto in accordance with the tax value generated by each party's working interest. 69 70 -3- SEC 189062  COPAS 1984 ONSHORE Recommended by the Council of Petroleum Accountants ~---------so_cieties--CO~A~ 12. Insurance Net premiums paid for insurance required to be carried for the Joint Operations for the protection of the Parties. In the event Joint Operations are conducted in a state in which Operator may act as self-insurer for Worker's Compensation and/or Employers Liability under the respective state's laws, Operator may, at its election, include the risk under its self- insurance program and in that event, Operator shall include a charge at Operator's cost not to exceed manual rates. 13. Abandonment and Reclamation 9 10 Costs incurred for abandonment of the Joint Property, including costs required by governmental or other regulatory 11 authority. 12 13 14. Communications 14 15 Cost of acquiring, leasing, installing, operating, repairing and maintaining communication systems, including radio and 16 microwave facilities directly serving the Joint Property In the event communication facilities/systems serving the Joint 17 Property are Operator owned, charges to the Joint Account shall be made as provided in Paragraph 8 of this Section II. 18 19 15. Other Expenditures 20 21 Any other expenditure not covered or dealt with in the foregoing provisions of this Section II, or in Section 111 and which 22 is of direct benefit to the Joint Property and is incurred by the Operator in the necessary and proper conduct of the Joint 23 Operations. 24 '5 llL OVERHEAD 27 28 1. Overhead • Drilling and Producing Operations 29 30 As compensation for administrative, supervision. office services and warehousing costs, Operator shall charge 31 drilling and producing operations on either: 32 33 ( X ) Fixed Rate Basis. Paragraph IA. or 34 ( ) Percentage Basis. Paragraph lB 35 36 Unless otherwise agreed to by the Parties, such charge shall be in lieu of costs and expenses of all offices and 37 salaries or wages plus applicable burdens and expenses of all personnel, except those directly chargeable under 38 Paragraph 3A, Section II. The cost and expense of services from outside sources in connection with matters of 39 taxation, traffic, accounting or matters before or involving governmental agencies shall be considered as included in 40 the overhead rates provided for in the above selected Paragraph of this Section Ill unless such cost and expense are 41 agreed to by the Parties as a direct charge to the Joint Account. 42 43 ii. The salaries, wages and Persona] Expenses of Technical Employees and/or the cost of professional consultant 44 services and contract services of technical personnel directly employed on the Joint Property: 45 46 ) shall be covered by the overhead rates, or ( X ) shall not be covered by the overhead rates. 49 iii. The salaries, wages and Personal Expenses of Technical Employees and/or costs of professional consultant services 50 and contract services of technical personnel either temporarily or permanently assigned to and directly employed in 51 the operation of the Joint Property: 52 53 ( ) shall be covered by the overhead rates, or 54 ( X ) shall not be covered by the overhead rates. 55 56 A. Overhead - Fixed Rate Basis 57 58 (1) Operator shall charge the Joint Account at the following rates per well per month: 59 60 Drilling Well Rate $._ _~7~50~0~,0~0~---------- 61 (Prorated for less than a full month) 62 63 Producing Well Rate $_~7=50=·=00~------- 64 65 (2) Application of Overhead - Fixed Rate Basis shall be as follows: 66 67 (a) Drilling Well Rate 68 69 (1) Charges for drilling wells shall begin on the date the well is spudded and terminate on the date 70 the drilling rig, completion rig, or other units used in completion of the well is released, whichever -4- SEC 189063  COPAS 1984 ONSHORE Recommended by 1he Council of Petroleum Accountants ~---------Societi_••--CO~A~ is later, except that no charge shall be made during suspension of drilling or completion operations for fifteen ( 15) or more consecutive calendar days. (2) Charges for wells undergoing any type of workover or recompletion for a period of five (5) consecutive work days or more shall be made at the drilling well rate. Such charges shall be applied for the period from date workover operations, with rig or other units used in workover, commence through date of rig or other unit release, except that no charge shall be made during suspension of operations for fifteen ( 15) or more consecutive calendar days. IO (b) Producing Well Rates II 12 (1) An active well either produced or injected into for any portion of the month shall be considered as 13 a one-well charge for the entire month. 14 15 (2) Each active completion in a multi-completed well in which production is not commingled down 16 hole shall be considered as a one-well charge providing each completion is considered a separate 17 well by the governing regulatory authority. 18 19 (3) An inactive gas well shut in because of overproduction or failure of purchaser to take the 20 production shall be considered as a one-well charge providing the gas well is directly connected to 21 a permanent sales outlet. 22 23 (4) A one-well charge shall be made for the month in which plugging and abandonment operations 24 are completed on any welL This one-well charge shall be made whether or not the well has 15 produced except when drilling well rate applies. 27 (5) All other inactive wells (including but not limited to inactive wells covered by unit allowable, lease 28 allowable, transferred allowable, etc.) shall not qualify for an overhead charge. 29 30 (3) The well rates shall be adjusted as of the first day of April each year following the effective date of the 31 agreement to which this Accounting Procedure is attached. The adjustment shall be computed by multiplying 32 the rate currently in use by the percentage increase or decrease in the average weekly earnings of Crude 33 Petroleum and Gas Production Workers for the last calendar year compared to the calendar year preceding as 34 shown by the index of average weekly earnings of Crude Petroleum and Gas Production Workers as published 35 by the United States Department of Labor, Bureau of Labor Statistics, or the equivalent Canadian index as 36 published by Statistics Canada, as applicable. The adjusted rates shall be the rates currently in use, plus or 37 minus the computed adjustment. 38 39 B. Overhead - Percentage Basis 40 41 (I) Operator shall charge the Joint Account at the following rates: 42 43 (a) Development 44 45 _ _ _ _ _ _ _ _ _ _Percent( _ _ _ _%) of the cost of development of the Joint Property exclusive of costs 46 provided under Paragraph I 0 of Section II and all salvage credits. '7 (b) Operating 49 50 - - - - - - - - - P e r c e n t (_ _ _%) of the cost of operating the Joint Property exclusive of costs provided 51 under Paragraphs 2 and lO of Section II, aJI salvage credits, the value of injected substances purchased 52 for secondary recovery and all taxes and assessments which are levied, assessed and paid upon the 53 mineral interest in and to the Joint Property. 54 55 (2) Application of Overhead -Percentage Basis shall be as folio\\~: 56 57 For the purpose of determining charges on a percentage basis under Paragraph I B of this Section III, 58 development shall include all costs in connection with drilling, redrilling, deepening, or any remedial 59 operations on any or all wells involving the use of drilling rig and crew capable of drilling to the producing 60 interval on the Joint Property; also, preliminaiy expenditures necessary in preparation for drilling and 61 expenditures incurred in abandoning when the well is not completed as a producer, and original cost of 62 construction or installation of fixed assets, the expansion of fixed assets and any other project clearly 63 discernible as a fixed asset, except Major Construction as defined in Paragraph 2 of this Section Ill. All other 64 costs shall be considered as operating. 65 66 2. Overhead - Major Construction 67 68 To compensate Operator for overhead costs incurred in the construction and installation of fixed assets, the expansion of 69 fixed assets, and any other project clearly discernible as a fixed asset required for the development and operation of the 70 Joint Property, Operator shall either negotiate a rate prior to the beginning of . construction, or shall charge the Joint -5- SEC 189064  COPAS 1964 ONSHORE Recommended by the Council of Petroleum Accountants ~---------so_cietie•--co~A~ Account for overhead based on the following rates for any Major Construction project in excess of$, _ _ _ _ _ _ _ _ _ _ __ A. __5 _ _ % of first $100,000 or total cost ifless, plus B. __3 _ _ % of costs in excess of$l00,000 but less than $1,000,000, plus C. __2 __ % of costs in excess of$l ,OOO,OOO. Total C-Ost shall mean the gross oost of any one project. For the purpose of this paragraph, the component parts of a single 10 pr~ject shall not be treated separately and the cost of drilling and workover wells and artificial lift equipment shall be 11 excluded. 12 13 3. Catastrophe Overhead 14 15 To compensate Operator for overhead costs incurred in the event of expenditures resulting from a single occurrence due 16 to oil spill, blowout, explosion, fire, stonn, hurricane, or other catastrophes as agreed to by the Parties, which are 17 necessary to restore the Joint Property to the equivalent condition that existed prior to the event causing the 18 expenditures, Operator shall either negotiate a rate prior to charging the Joint Account or shall charge the Joint Account 19 for overhead based on the following rates: 20 21 A. __5__ % of total costs through $100,000; plus 22 23 B. _ _3__ % of total costs in excess of$100,000 but less than $1,000,000; plus 24 05 C. __2__ % of total oosts in excess of$!,000,000. 27 Expenditures subject to the overheads above will not be reduced by insurance recoveries, and no other overhead 28 provisions of this Section III shall apply. 29 30 4. Amendment of Rates 31 32 The overhead rates provided for in this Section III may be amended from time to time only by mutual agreement 33 between the Parties hereto if, in practice, the rates are found to be insufficient or excessive. 34 35 36 IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS 37 38 Operator is responsible for Joint Account Material and shal1 make proper and timely charges and credits for all Material 39 movements affecting the Joint Property. Operator shall provide all Material for use on the Joint Property; however, at 40 Operator's optmn, such Material may be supplied by the Non-Operator. Operator shall make timely disposition of idle and/or 41 surplus Material, such disposal being made either through sale to Operator or Non-Operator, division in kind, or sale to 42 outsiders. Operator may purchase, but shall be under no obligation to purchase, interest of Non-Operators in surplus condition 43 A or B Material. The disposal of surplus Controllable Material not purchased by the Operator shall be agreed to by the Parties. 44 45 1. Purchases 46 Material purchased shall be charged at the price paid by Operator after deduction of all discounts received. In case of Material found to be defective or returned to vendor for any other reasons, credit shall be passed to the Joint Account 49 when adjustment has been received by the Operator. 50 51 2. Transfers and Dispositions 52 53 Material furnished to the Joint Property and Material transferred from the Joint Property or disposed of by the Operator, 54 unless otherwise agreed to by the Parties, shall be priced on the following basis exclusive of cash discounts: 55 56 A. New Material (Condition A) 57 58 ( 1) Tubular Goods Other than Line Pipe 59 (a) Tubular goods, sized 2 3/8 inches OD and larger, except line pipe, shall be priced at current new price available from area 60 vendors effective as of date of movement plus transportation cost using the 80,000 61 pound carload weight basis to the railway receiving point nearest the Joint Property for which 62 published rail rates for tubular goods exist. If the 80,000 pound rail rate is not offered, the 70,000 pound 63 or 90,000 pound rail rate may be used. Freight charges for tubing will be calculated from Lorain, Ohio 64 and casing from Youngstown, Ohio. 65 66 (b) For grades which are special to one mill only, prices shall be computed at the mill base of that mill plus 67 transportation cost from that mill to the railway receiving point nearest the Joint Property as provided 68 above in Paragraph 2.A.( I)(a). For transportation cost from points other than Eastern mills, the 30,000 69 70 -6- SEC 189065  COPAS 1984 ONSHORE Recommended by the Council of Petroleum Accountants ,-----------soc_ieties--CO~A~ pound Oil Field Haulers Association interstate truck rate shall be used. (c) Special end finish tubular goods shall be priced at the lowest published out-of-stock price, f.o.b. Houston, Texas, plus transportation cost, using Oil Field Haulers Association interstate 30,000 pound truck rate, to the railway receiving point nearest the Joint Property. (d) Macaroni tubing (size less than 2 3/8 inch OD) shall be priced at the lowest published out~of~stock prices f.o.b. the supplier plus transportation costs. using the Oil Field Haulers Association interstate truck rate per weight of tubing transferred, to the railway receiving point nearest the Joint Property. 10 11 (2) Line Pipe 12 13 (a) Line pipe movements (except size 24 inch OD and larger with walls 'l.i inch and over) 30,000 pounds or 14 more shall be priced under provisions of tubular goods pricing in Paragraph A.(l)(a) as provided above. 15 Freight charges shall be calculated from Lorain, Ohio. 16 17 (b) Line Pipe movements (except size 24 inch OD) and larger with walls % inch and over) less than 30,000 18 pounds shall be priced at Eastern mill published carload base prices effective as of date of shipment, 19 plus 20 percent, plus transportation costs based on freight rates as set forth under provisions of tubular 20 goods pricing in Paragraph A.(1 )(a) as provided above. Freight charges shall be calculated from Lorain, 21 Ohio. 22 23 (c) Line pipe 24 inch OD and over and '!. inch wall and larger shall be priced f.o.b. the point of 24 manufacture at current new published prices plus transportation cost to the railway receiving point -; nearest the Joint Property. 27 (d) Line pipe, including fabricated line pipe, drive pipe and conduit not listed on published price lists shall 28 be priced at quoted prices plus freight to the railway receiving point nearest the Joint Property or at 29 pnces agreed to by the Parties. 30 31 (3) Other Material shall be priced at the current new price, in effect at date of movement, as listed by a reliable 32 supply store nearest the Joint Property, or point of manufacture, plus transportation costs, if applicable, to the 33 railway receiving point nearest the Joint Property. 34 35 (4) Unused new Material, except tubular goods, moved from the Joint Property shall be priced at the current 36 new price, in effect on date of movement, as listed by a reliable supply store nearest the Joint Property, or 37 point of manufacture, plus transportation costs, if applicable, to the railway receiving point nearest the Joint 38 Property. Unused new tubulars will be priced as provided above in Paragraph 2.A.(l) and (2). 39 40 B. Good Used Material (Condition B) 41 42 Material in sound and serviceable condition and suitable for reuse without reconditioning: 43 44 (1) Material moved to the Joint Property 45 46 At seventy-five percent (75%) of current new price, as determined by Paragraph A. (2) Material used on and moved from the Joint Property 49 50 (a) At seventy-five percent (75%) of current new price, as determined by Paragraph A, if Material was 51 originally charged to the Joint Account as new Material or 52 53 (b) At sixty-five percent (65%) of current new price, as determined by Paragraph A, if Material was 54 originally charged to the Joint Account as used Material 55 56 (3) Material not used on and moved from the Joint Property 57 58 At seventy-five percent (75%) of current new price as determined by Paragraph A. 59 60 The cost of reconditioning, if any, shall be absorbed by the transferring property. 61 62 C. Other Used Material 63 64 (I) Condition C 65 66 Material which is not in sound and serviceable condition and not suitable for its original function until 67 after reconditioning shall be priced at fifty percent (50%) of current new price as detennined by 68 Paragraph A. The cost of reconditioning shall be charged to the receiving property, provided Condition 69 C value plus cost of reconditioning does not exceed Condition B value. 70 -7- SEC 189066  COPAS 1984 ONSHORE Recommended by the Council of Petroleum Accountants ~---------Societ_ies--CO~A~ (2) Condition D Material, exc1uding junk, no 1onger suitable for its original purpose, but usable for some other purpose shall be priced on a basis commensurate with its use. Operator may dispose of Condition D Material under procedures normally used by Operator without prior approval of Non-Operators. (a) Casing, tubing, or drill pipe used as line pipe shall be priced as Grade A and B seamless line pipe of comparable size and weight. Used casing, tubing or drill pipe utilized as line pipe shall be priced at used line pipe prices. 10 11 (b) Casing, tubing or drill pipe used as higher pressure service lines than standard line pipe, e.g. 12 power oil Jines, shall be priced under normal pricing procedures for casing, tubing. or drill pipe. 13 Upset tubular goods shall be priced on a non upset basis. 14 15 (3) Condition E 16 17 Junk shall be priced at prevailing prices. Operator may dispose of Condition E Material under 18 procedures normally utilized by Operator without prior approval ofNon·Operators. 19 20 D. Obsolete Material 21 22 Material which is serviceable and usable for its original function but condition and/or value of such Material 23 is not equivalent to that which would justify a price as provided above may be specially priced as agreed to by 24 the Parties. Such price should result in the Joint Account being charged with the value of the service 15 rendered by such Material. 27 E. Pricing Conditions 28 29 (1) Loading or unloading costs may be charged to the Joint Account at the rate of twenty-five cents (25¢) 30 per hundred weight on all tubular goods movements, in lieu of actual loading or unloading costs 31 sustained at the stocking point. The above rate shall be adjusted as of the first day of April each year 32 following January l, 1985 by the same percentage increase or decrease used to adjust overhead rates in 33 Section rn, Paragraph l.A.(3). Each year, the rate calculated shall be rounded to the nearest cent and 34 shall be the rate in effect until the first day of April next year. Such rate shall be published each year 35 by the Council of Petroleum Accountants Societies. 36 37 (2) Material involving erection costs shall be charged at applicable percentage of the current knocked-down 38 price of new Material. 39 40 3. Premium Prices 41 42 Whenever Material is not readily obtainable at published or listed pnces because of national emergencies. strikes or other 43 unusual causes over which the Operator has no control, the Operator may charge the Joint Account for the required 44 Material at the Operator's actual cost incurred in providing such Material, in making it suitable for use, and in moving it 45 to the Joint Property~ provided notice in writing is furnished to Non-Operators of the proposed charge prior to billing 46 Non·Operators for such Material. Each Non-Operator shall have the right~ by so electing and notifying Operator within '7 ten days after receiving notice from Operator, to furnish in kind all or part of his share of such Material suitable for use and acceptable to Operator. 49 50 4. Warranty of Material Furnished By Operator 51 52 Operator does not warrant the Material furnished. In case of defective Material, credit shall not be passed to the Joint 53 Account until adjustment has been received by Operator from the manufacturers or their agents. 54 55 56 V. INVENTORIES 57 58 The Operator shall maintain detailed records of Controllable Material. 59 60 I. Periodic Inventories, Notice and Representation 61 62 At reasonable intervals, inventories shall be taken by Operator of the Joint Account Controllable Material. Written notice 63 of intention to take inventory shall be given by Operator at least thirty (30) days before any inventory is to begin so that 64 Non·Operators may be represented when any inventory is taken. Failure of Non·Operators to be represented at an 65 inventory shall bind Non·Operators to accept the inventory taken by Operator. 66 67 2. Reconciliation and Adjustment of Inventories 68 69 Adjustments to the Joint Account resulting from the reconciliation of a physical inventory shall be made within six 70 months following the taking of the inventory. Inventory adjustments shall be made by Operator to the Joint Account for -8- SEC 189067  COPAS 1984 ONSHORE Recommended by the Council of Petroleum Accountants _ _ _ _ _ _ _ _ _ _soc_ieties--~O~A~ overages and shortages, but, Operator shall be held accountable only for shortages due to lack of reasonable diligence. 3. Special Inventories Special inventories may be taken whenever there is any sale, change of interest, or change of Operator in the Joint Property. It shall be the duty of the party selling to notify all other Parties as quickly as possible after the transfer of interest takes place. In such cases, both the seller and the purchaser shall be governed by such inventory. In cases involving a change of Operator, all Parties shall be governed by such inventory. IO 4. Expense of Conducting Inventories II 12 A. The expense of conducting periodic inventories shall not be charged to the Joint Account unless agreed to by the 13 Parties. 14 15 B. The expense of conducting special inventories shall be charged to the Parties requesting such inventories, except 16 inventories required due to change of Operator shall be charged to the Joint Account. 17 18 19 20 21 22 23 24 15 ,7 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 '7 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 -9- SEC 189068  EXHIBIT"D" Attached to and made a part of Operating Agreement dated May 1, 2008, between RAW Oil & Gas Inc., as Operator and Smith Energy Company, eta!, as Non-Operators. INSURANCE Operator shall carry and maintain at all times the following insurance with respect to all operations under this Agreement: a) Insurance which shall comply with the Workmen's Compensation Laws of the State in which operations hereunder are conducted. b) Employers' Liability Insurance with limits ofnot less than $1,000,000 for each occurrence. c) Comprehensive General Liability Insurance with limits of not less than (i) $1,000,000 for each occurrence for bodily injury, and (ii) $1,000,000 for each occurrence for property damage. Operator shall provide an AFE insurance program with coverage as follows: Premises and operations, sudden and accidental pollution, underground resources, products and completed operations, and blowout, cratering and explosion coverage. d) Automobile Liability Insurance, including owned, hired and non-hired vehicles, with combined single limits of $500,000. e) Coverages in subparagraphs (c) and (d) above shall include Non-Operators as Additional Insured. f) Excess Liability Coverage in excess of the coverage in subparagraphs (a), (b), (c), (d) and (e) above with a combined single limit for Bodily Injury and Property Damage ofnot less than $1,000,000 for each occurrence. g) All premiums on the above provided for insurance shall be charged to the Joint Account. Except as may be otherwise expressly provided in the Operating Agreement to which this Exhibit is attached, the Joint Account shall be charged with all liabilities and expenditures resulting from any claims, damages, or losses against which Operator is not required to carry insurance. h) Operator shall not be liable to Non-Operators for loss, suffered on account of the insufficiency of insurance carried, or of the insurer with whom carried, nor shall Operator be liable to Non-Operators for any loss accruing by reason of Operator's inability to provide or maintain the insurance specified above, provided, however, that if at any time Operator is unable to obtain or maintain such insurance, Operator shall promptly notify Non-Operators in writing of such fact and Non-Operators may obtain and maintain such insurance at their expense. SEC 189069  EXHIBIT"E" Attached to and made a part of Operating Agreement dated May I, 2008, between RAW Oil & Gas Inc., as Operator and Smith Energy Company, eta!, as Non-Operators. GAS BALANCING AGREEMENT The parties to the Operating Agreement to which this agreement is attached own the working interest in the gas rights underlying the Contract Area covered by such agreement in accordance with the percentages of participation as set forth in Exhibit "A" to the Operating Agreement. Each party has made (or will make) arrangements to sell or utilize its share of the gas well gas produced from the Contract Area. However, the respective gas markets of the parties may be limited from time to time; therefore, to permit the parties as much flexibility as possible in meeting the demands of their respective markets, the parties hereto agree to the following storage arrangement: Section I. From and after the date of initial delivery of gas well gas from any proration unit within the Contract Area, during any period when the market of a party is not sufficient to take that party's full share of the gas well gas produced, the other parties shall be entitled to produce each month, in addition to their own share of production, that portion of any other party's share of production which said party is unable to market, or its purchaser does not take, of the allowable gas production assigned to such proration unit by the appropriate regulatory authority having jurisdiction in the premises or at the maximum efficient rate, ifno such allowable gas production is so assigned, except, however, that no party shall be entitled to take or deliver to a purchaser gas production in excess of three hundred percent (300%) of its share of allowable gas production or maximum efficient rate unless that party has gas in storage. The parties hereto shall share in and own the lease condensate (liquid hydrocarbons recovered from such gas by lease equipment) in accordance with their respective above specified interests, upon and subject to the terms of the Operating Agreement. Section2. A party taking less than its full share of the gas well gas produced shall be credited with gas in storage on a BTU basis equal to its full share of the total gas well gas produced, less such party's share of such gas used in lease operations or vented or lost, and less that portion of such gas such party took or delivered to the purchaser. Operator will maintain a running account of the gas balance as between the parties hereto and will furnish each party monthly statements showing the total quantity of gas well gas produced, the portion thereof used in lease operations, vented or lost, the total quantity of gas well gas delivered to market, and the monthly and cumulative total over and under delivery of each party on an MCF and on a BTU basis. Section 3. After notice, any party may at any time begin taking or delivering to a purchaser its full share of the gas well gas produced (less such party's share of such gas used in the lease operations, vented or lost). To allow the recovery of gas in storage and to balance the gas account of the parties in accordance with their respective interests, a party with gas well gas in storage shall be entitled to take or deliver to a purchaser its full share of the gas well gas produced (less such party's share of such gas used in lease operations, vented or lost), plus a share of gas not exceeding its gas in storage determined by multiplying (l) twenty-five percent (25%), by (2) the interest in the proration unit's current production (less such party's share of such gas used in lease operations, vented or lost) of the party or parties without gas in storage, by (3) a fraction, the numerator of which is the interest in the proration unit of such party with gas in storage and the denominator of which is the total percentage interest in the proration unit of all parties with gas in storage. Section4. Nothing herein shall be construed to deny any party the right, from time to time, to produce and take or deliver to its purchaser its full share of the allowable gas production to meet the deliverability tests required by its purchaser. Each party shall at all times use its best efforts to regulate its takes and deliveries from the Contract Area so that wells will not be shut in for over producing the allowable, if any, assigned thereto by the regulatory authority having jurisdiction. Section 5. Each party producing or taking or delivering gas well gas to its purchaser shall pay any and all royalties and production taxes due on such gas. Section 6. Should production of gas well gas from a proration unit be permanently discontinued before the gas account is balanced, settlement will be made between the parties for gas which has not been recovered by any party from storage. In making SEC 189070 such settlement, if there is any party whose gas has not been recovered from storage, or a party who has sold more than jt, .ras 79424 January 17, 2008 Mark P. Hardwick P.O. Box 213 Midland, Texas 79702 Re: N. Mound Lake Prospect Section 39, Block E, EL&RR Ry. Co. Lynn and Terry Counties, Texas Dear Mark: This letter is to set out our verbal agreement of your participation in RAW Energy's N. Mound Lake Prospect covering the lands captioned above. RAW Energy, L.C. has is entering into certain Oil and Gas Leases covering the above captioned lands. RAW agrees to assign Mark P. Hardwick a 6.25% leasehold interest, delivering the same net revenue that the leases are originally burdened with retaining no additional ORRI. RAW further agrees to carry Mark P. Hardwick for the 6.25% percent leasehold working interest to the casing point in the first well drilled on the lease. This carried interest also includes all leasehold cost prior to drilling the first well. Hardwick will pay his way on the completion cost of the first well and all subsequent operations including any additional acreage purchases within the AMI area as defined in the Joint Operating agreement which is governing the prospects operations. Additionally, RAW anticipates selling the prospect with a Geological cost of $50,000.00 charged to the buyer. Upon selling the prospect, RAW will pay Hardwick $12,500.00 of the total Geological cost. RAW's obligations above will be proportionally reduced as to the amount of Leasehold Interest RAW acquires. If RAW acquires 50% of the leasehold, its above obligations will be reduced by one-half. Thank you and if the above adequately stated our verbal agreement covering the Parks Prospect, please indicate by signing below and returning one copy of this letter to my office. a!J.LL- ~ truly yours, DEFENDANT’S TRIAL EXHIBIT 1345 __________________ SECA274635  TAB F Big Bump Participation Agreement & Operating Agreement (DX 1354) 6   BIG BUMP PROSPECT LYNN COUNTY, TEXAS PARTICIPATION AGREEMENT This Participation Agreement (the "Agreement") dated and effective as of the 19th day of October, 2009 (the "Effective Date"), is entered into by and between RAW Oil & Gas, Inc. ("RAW"), JDH RAW Energy, L.C., formerly known as RAW Energy, L.C. ("RAW LC"), Mark P. Hardwick ("Hardwick"), Steve Blaylock ("Blaylock"), Elger Exploration, Inc. ("Elger"), and Smith Energy Company ("Smith"). Hardwick, Blaylock, and Elger are at times referred to collectively as the "RAW Participants" and, together with Smith, the "Participants". The Participants, RAW and RAW LC, are at times referred to individually as a "Party" and collectively as the "Parties." WHEREAS, RAW LC is purchasing Leases covering the lands set out on Exhibit "A", attached hereto ("Prospect Area"); and WHEREAS, the Parties have agreed to participate in a program to explore for and develop oil and gas within the Prospect Area in the undivided percentages set forth below, all in accordance with the terms herein; and WHEREAS, the Parties intend that Smith shall own an undivided 75.0% interest in and to the Leases acquired covering the lands defined in Exhibit "A", and Smith shall pay 100.0% of the acreage and land costs associated with the Prospects. (Acreage cost should average between $100.00 and $300.00 per acre and the land cost will consist of brokerage, leasing, and title opinion cost). In addition, a onetime geological prospect generation fee of $50,000.00 will be payable by Smith upon the execution of this Agreement. Smith shall pay 100.0% of all expenses incurred in connection with the drilling expenses (through the casing point election) on the first well drilled on the Prospect. Smith shall pay 75.0% of all expenses incurred in connection with the equipping, completion and lease operating. The Participants shall become parties to the AAPL Form 610-1989 Joint Operating Agreement ("Operating Agreement"), dated November 1, 2009, naming RAW as Operator and covering operations with respect to the Leases. (If RAW is unable to secure Leases and or assignments or farmouts on I 00% of the mineral/leasehold interest in the initial drillsite tract, Smith 's obligations above will be proportionally reduced in relation to the amount of interest RAW has acquired. This proportionate reduction includes, but is not limited to, land cost, acreage cost, drilling and completion cost. This does not include the one time geological cost of $50,000.00 which is payable upon the execution ofthis Agreement. ) NOW, THEREFORE, for and in consideration of the premises and the mutual covenants, agreements and obligations set forth herein and to be performed, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged by the Parties hereto, the Parties agree as follows: 1. Definitions. (a) "Affiliate" means, with respect to any party, a person or entity that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the party in question. As used in the definition of "Affiliate", the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a party, whether through ownership of voting securities, by contract or otherwise. (b) "Prospect Area" shall mean the areas defined on Exhibit "A". DEFENDANT’S TRIAL EXHIBIT 1354 __________________ SEC 189648  (c) "Casing Point Election" means the well has been drilled to the objective depth, at which time the owners of the majority of the interests will decide whether to commit additional dollars to "setting pipe" to attempt a completion or to plug and abandon as non-commercial. 2. Representations and Warranties of RAW. RAW represents and warrants to Participants the following: (a) Without making any warranty or representation of any kind relating to the title of any lessor to the minerals covered by the Leases (any such warranty being expressly disclaimed), RAW represents and warrants that it is the owner of such of the rights of lessee under the Leases as are to be assigned to Participants pursuant to the provisions hereof; that it has good and sufficient title to such interest and rights; and that it has the right, power and authority to sell and transfer said interests and rights to Participants. (b) There are no proceedings, judgments or liens now pending or, to the knowledge of RAW threatened against RAW which would affect the Leases or the Prospect Area except those as have been previously disclosed to Participants in writing. (c) The interest in the Leases to be assigned to Participants will be assigned free and clear of any liens, claims or encumbrances upon said Leases created by, through or under RAW. 3. Covenants of RAW. RAW, as Operator under the Operating Agreement, covenants and agrees to perform the tenns of, and provide the documents, information and data required by, Schedule A attached hereto. 4. Acknowledgments by the Parties. The Parties acknowledge and agree to the following: (a) The Parties shall execute and record in Lynn County, Texas a memorandum of this Agreement. (b) The Parties represent and warrant to each other that the interests in the Leases acquired by them hereunder are being acquired for investment only and not with a view to any "distribution" (as such term is used in the Securities Act of 1993, as amended) thereof, and neither of them shall offer to sell or otherwise dispose of the Leases so acquired by it in violation of any of the registration requirements of the Securities Act of 1993, as amended, or any applicable state securities laws, and that each of the Parties qualifies as an "accredited investor" as defined in Regulation D under the Securities Act of 1993, as amended. (c) The Parties represent and warrant to each other that each has received information regarding the interest in the Leases being acquired by it pursuant to this Agreement, each has been provided access to any and all written information, documents and materials that it has requested, has obtained to the satisfaction of itself and its counsel answers to all inquiries made by it and has been given an opportunity to obtain all answers and information that it believes necessary or appropriate to evaluate the suitability of an investment in the interests in the Leases being acquired by it; and, in evaluating the suitability of an investment therein, neither it nor its counsel has relied upon any representations or other information (whether oral or written) other than as set forth herefn. (d) The Parties represent and warrant to each other that (i) each can bear the economic risk of losing its entire investment in the interests in the Leases, and (ii) each has adequate means for providing for its current financial needs and contingencies, does not have as an investment objective the immediate receipt of income and has no need for liquidity in an investment in such interests. 2 SEC 189649  5. Interests Assigned to the Participants. (a) RAW LC hereby agrees to assign to Smith 75.0% of 8/Sths of its rights and interests existing under each of the Leases, burdened only by the royalty payable to the Lessor of each Lease, without any other reduction. Immediately on payment of all initial acreage, geological and land costs for which Smith is obligated to RAW in this Agreement, Smith shall be entitled to an assignment of its working interest, and related net revenue interest, in the area earned by such participation. (b) RAW LC hereby agrees to assign to each of the RAW Participants 6.25% of 8/8ths of its rights and interests existing under the Leases. When assignments of record title to the Leases are made by RAW, each of the RAW Participants shall receive an assignment of its proportionate undivided working interest and attributable net revenue interest in and to each Lease in which the Participants are entitled to receive an interest pursuant to this Participation Agreement and the Operating Agreement. (c) Except as stated in paragraph S(a) above, the interests assigned to each Participant pursuant to this Agreement are hereby expressly assigned subject to their proportionate part of all of the terms, covenants, reversionary interests and other production burdens referenced in the following: (i) each Lease; and (ii) the Operating Agreement referenced in paragraph 11 below. 6. Duties and Role of RAW. RAW has been designated the Operator in accordance with the Operating Agreement. As such, RAW, in addition to any other duties assigned to it pursuant to the Operating Agreement, shall have the overall responsibility to conduct all negotiations with landowners in the Prospect Area, conduct all title investigations required by this Agreement, conduct drilling operations, select acreage to lease, and carry out production operations. 7. Participation of the Parties in the Prospect Area 3D Seismic, and Subsequent Wells. (a) Smith agrees to reimburse RAW for 100.0% of the acreage and land costs associated with the Prospect Area. In addition, upon execution of this agreement, Smith will pay a one-time $50,000 geological/geophysical prospect generation fee to RAW, Hardwick, Blaylock and Elger, in equal shares. For consideration for payment of the prospect fee, Smith shall have the right to view all 3D seismic data and all geophysical and all geophysical and geologic data and interpretations in the possession of any other Party, subject to any confidentiality or license items relating to the 3D data. (b) It is understood and agreed that RAW, as Operator, will use its commercially reasonable efforts to commence operations for the drilling of the initial well as the Prospect well promptly after the relevant Leases have been acquired, but, in any event, no later than April 1, 2010 unless otherwise agreed by the holders of a majority of the Interests. Enclosed herewith is RA W's Authorization For Expenditure ("AFE") which shows the total estimated costs to drill, complete and equip such well. In no event, without the written approval of the holders of a majority of the Interests, shall a lapse of the AFE serve to extend the time within which Operator is required to commence operations for the drilling of a well. (c) RAW and the RAW Participants shall be collectively entitled to an undivided 25.0% working interest carried to the casing point on the initial well drilled on the Prospect Area. All subsequent wells will be on a heads-up basis. (d) As to all wells drilled within the Prospect Area, each will be subject to a casing point election at which, if any Party elects not to participate in such drilling or completion, such Party will relinquish and 3 SEC 189650 assign to the participating Parties all of its or their leasehold interests in and to the well and the Prospect Area as defined in Exhibit "A". In the event that any Party elects not to participate in a completion attempt, the non-consenting Party will be subject to the provisions in the governing JOA. (e) No Party shall have the right to reinstatement of an interest in a well or acreage relinquished in accordance with this Section 7, whether by payment of a cash penalty, production penalty, or otherwise. (f) In the event of a default by RAW or RAW LC or RAW Participants, as defined and described in Article VII of the Operating Agreement, the Participants shall have the right to exercise any and all remedies available to the non-defaulting Parties specified in Article VII of the Operating Agreement, which are incorporated herein by reference. 8. Area of Mutual Interest ("AMI") and Right of First Refusal. (a) No Party, either directly or through an Affiliate, may transfer or acquire any lease, royalty, overriding royalty or other interest of any type in the mineral estate or any petroleum exploration or seismic license (individually and collectively an "Interest"), or participate in the acquisition of any Interest from a third party holding any Interest, which Interest is located partially or entirely within the Prospect Area, other than in accordance with the provisions of this paragraph and the Operating Agreement. (b) The parties to this Participation Agreement hereby create an Area of Mutual Interest ("AMI"), which will consist of all of the lands included within the Contract Area described in Exhibit "A" to the Operating Agreement dated November 1, 2009. The AMI shall remain in effect for so long as any Lease in which some or all of the Parties own an interest remains in effect or until January 1, 2020, whichever first occurs. The Parties hereby incorporate by reference the provisions of Article XVl,M of the Operating Agreement into this Agreement as is set out in full as the AMI terms and procedures. (c) The Parties to this Participation Agreement hereby grant to each other a preferential right to purchase all or any part of a Party's Interest which is to be Transferred to any third party other than a Permitted Assignee, all as defined below. (i) If the Party desires to Transfer, as defined below, its Interests, or any portion, in this Agreement or the AMI (a "Transferor Party(ies)"), Transferor Party(ies) must first provide written notice of such intent to the other Parties. If the proposed Transfer is to a Permitted Assignee, the non- transferring Parties shall not have a Right of First Refusal as to that Transfer. If the proposed Transfer is to a Party other than a Permitted Assignee, as defined below, the non-transferring Parties shall then have the right ("Right of First Refusal"), but not the obligation, to purchase their proportionate share of the offered portion of the Interests pursuant to this paragraph. The non-Transferor Parties shall have thirty (30) days from receipt of such notice within which to determine whether it or they elect to purchase the offered Interests. If the proposed Transfer is to a Permitted Assignee, the non-Transferor will not have a Right of First Refusal but the Permitted Assignee must ratify this Agreement and the applicable Operating Agreement and the Transferor shall be jointly and severally liable for all liabilities and obligations of the Permitted Assignee under this Agreement and the Operating Agreement. "Transfer" means any sale, lease, conveyance, gift, transfer, exchange, assignment, disposition by will or inheritance or other disposition of (or any agreement or arrangement to sell, lease, convey, gift, transfer, exchange, assign, or otherwise dispose of) all or any portion of the Transferor Parties' Interests in any manner, 4 SEC 189651 directly or indirectly, whether for money, other consideration or otherwise. "Permitted Assignee" means: (w) a spouse, descendants or relative of the Transferor Party; (x) the spouse, descendants or relative of the controlling person of a Transferor Party or the spouse, descendants or relative of a manager of a Transferor Party; (y) a legal entity including but not limited to any Trust, partnership, or company controlled by the Transferor Party or by the spouse, descendants or relatives of the Transferor Party; and (z) any employee, consultant or person under contract to a Transferor Party (or any Trust, entity or partnership owned by such person). (ii) If the Transfer contemplated by section 8(c)(i) above results from a bona fide offer to purchase from a third party, exercise of the non-Transferor Parties' Right of First Refusal shall be based on the same terms and conditions as the third party offer. If the Transfer contemplated by section 8(c)(i) above is not the result of a bona fide third party offer, the non-Transferor and the Transferor Parties shall attempt to agree upon a purchase price for the Transferred Interests. In the event the Parties fail to agree upon a purchase price for the Transferred Interests within ten (10) days after exercise by the non-Transferor Parties of their Right of First Refusal, then the Transferor Party shall not be allowed to Transfer the Transferred Interest to the third party and the Non-Transferor Party shall not be entitled to purchase the Transferred Interest. The provisions of Section 8 shall apply to any future Transfer by the Transferor Party. 9. Financing. Any party shall have the right to arrange its own financing for any wells or other projects to be conducted on the Prospect Area without any obligation to provide, or assist the other in obtaining, similar financing. No party shall encumber the rights and interests of any other party in the Prospect Area. A Party shall have the right to pledge, mortgage or encumber all or any part of its interest in the Prospect Area without triggering a Right of First Refusal under Section 8; provided that any pledge, mortgage or encumbrance will be subject to the following restrictions and conditions: (i) the lender or secured party shall acknowledge in writing that the interest pledged is subject to this Agreement and the Operating Agreement; (ii) the document creating the pledge or encumbrance must expressly state that upon foreclosure on the pledged interest, the lender or secured party will receive the pledged interest subject to this Agreement and the Operating Agreement; and (iii) prior to any subsequent Transfer of the interest by the lender or secured party, the lender or secured party must comply with the procedures set forth in Section 8(c)(ii) and the other Parties shall have the Right of First Refusal set forth in Section 8(c)(ii). IO. Indemnification. Each party shall indemnify, defend and save harmless each other party and its officers, directors, employees, agents and attorneys, and each of them (the "Indemnified Parties"), from and against any and all commenced or threatened claims, actions, suits, litigation, administrative or enforcement proceedings or investigations (including any proceeding or action under any federal or state law) and other legal proceedings, and all damages, costs, interest charges, counsel fees and other expenses and penalties related thereto (collectively "Claims" or individually a "Claim") which any of the Indemnified Parties may sustain or incur by reason of or arising from or related to (i) any breach by the indemnifying party of any representation, warranty, covenant or agreement or (ii) the transfer by or through the indemnifying party of any interests herein or in the Lease. The indemnification set forth in this Section 10 shall not cover any Claim arising from or related to any gross negligence or willful misconduct of an Indemnified Party. 5 SEC 189652  11. Operating Agreement. Upon execution of this Agreement, Participants agree to execute the Operating Agreement substantially in the form attached hereto as Exhibit B. In the event of conflict between the provisions of this Agreement and the Operating Agreement, the provisions of this Agreement shall be controlling. In any assignment executed by any Party conveying part or all of the interests acquired by it pursuant hereto, such Party agrees to include the following provision: The Interests conveyed hereby are subject to the terms and provisions of that certain Participation Agreement dated effective October 19, 2009 and that certain Operating Agreement dated November 1, 2009, between RAW Oil & Gas, Inc. as Operator, and Smith Energy Company, et al as Non-Operators. 12. Confidentiality. Each Party agrees that the terms of this Agreement and all information obtained or derived from the drilling operations conducted on the Prospect and all geologic and engineering information, data and interpretations relating to the Prospect or the Contract Area is proprietary to the Parties and constitute valuable Trade secrets. Therefore, the Parties agree to maintain the confidentiality of all such information and no Party shall have the right to disclose or Transfer any data or information to a third party without the written consent of all Parties; provided a Party may show the information to consultants and advisors under contract to the Party who has acknowledged in writing that the data is subject to the restrictions in this Agreement. 13. Survival of Representations and Warranties. All representations and warranties contained herein or made in writing in connection herewith shall survive the execution hereof for a period of one (1) year after the date hereof except for those set forth in Section 2(a) and Section 2(c) which shall survive without limitation as to time. All covenants contained herein shall survive without limitation as to time. 14. Additional Acts. Each Party will execute and deliver all such other and additional instruments and will do such other acts and things as may be necessary to assure more fully to the other that all respective rights intended to be conveyed and granted are conveyed and granted. 15. Notices. All notices or other communications given pursuant hereto shall be deemed given when delivered, if delivered in person; one (1) day after deposit with an overnight carrier such as Federal Express for delivery on the next calendar day; the day of transmission by telecopy (if confirmed by notice sent by Federal Express or a similar overnight carrier for receipt the next day); or five (5) days after mailing if sent certified mail, return receipt requested. All notices shall be given at the following addresses, unless any party changing its notice address shall notify all other parties in writing of such change: RAW Oil & Gas, Inc. JOH RAW Energy, L.C. 12312 Slide Road Lubbock, Texas 79424 Attn: Joe D. Hardin Fax: (806) 77 l-7766 Smith Energy Company Attn: Lester Smith, President l 001 Fannin, Suite 3850, Houston, Texas 77002 Fax: (713) 759-0706 6 SEC 189653  Mark P. Hardwick P. 0. Box 213 Midland, Texas 79702 Steve Blaylock 214 West Texas, Suite 306 Midland, Texas 7970 I Elger Exploration, Inc. P. 0. Box 2623 Midland, Texas 79702 Attention: Jerry Elger, President 16. Governing Law. The interpretation, validity and enforceability of this Agreement shall be governed by the laws of the State of Texas other than its conflict oflaw principles. 17. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. RAW OIL & GAS, INC. JDH RAW ENERGY, L.C. By: By: Joe D. Hardin, President Joe D. Hardin, Manager ELGER EXPLORATION, INC. By: ~~~~~~Jj;~~~~~­ Jerry Elger, President Mark P. Hardwick Steve Blaylock 7 SEC 189654  SCHEDULE A 1. Prior to commencing operations on a well, RAW shall furnish or cause to be furnished to Participants a location plat, an AFE detailing estimated dry hole and completion costs, the date of commencement of operations, the proposed spud date and a drilling title opinion covering the drillsite tract along with copies of any curative documents obtained in connection therewith. 2. RAW shall provide to Participants, upon request, a seismic and/or subsurface map depicting the structure(s) to be encountered and, on request, make available the data used to make such map. 3. RAW shall furnish or cause to be furnished to Participants the date drilling is commenced, daily drilling reports, by fax and in writing, containing customary information; and advance notice of coring, testing and running surveys so that a representative can be present and have access to all well information. 4. With respect to all wells, RAW shall test or cause to be tested all prospective hydrocarbon bearing horizons, run appropriate electric logs and furnish to Participants a field print, copy of such log(s) and other well data. 5. After well completion, RAW shall furnish or cause to be furnished to Participants a final print of log(s) and notices to all governmental authorities. 8 SEC 189655  EXHIBIT "A" Attached to and made a part of Participation Agreement dated October 19, 2008, by and between RAW Oil & Gas, Inc., JOH Raw Energy, L.C., Smith Energy Company, Mark P. Hardwick, Steve Blaylock, and Elger Exploration, Inc. Prospect and AMI Area Section 55, Abstract 394, Georgetown Ry. Co. Survey, Lynn County, Texas (640.00 ac.) South Half of Section 57, Abstract_, Georgetown Ry. Co. Survey, Lynn County, Texas (320.00 ac.) West 200 Acres of Section 20, Abstract 948, D&SE Ry. Co. Survey, Lynn County, Texas (200 ac.) North 200 Acres of Section 7, Abstract 998, Block C-40, PSL Survey, Lynn County, Texas (200 ac.) 9 SEC 189656  EXHIBIT "B" Attached to and made a part of Participation Agreement dated November 1, 2009, between RAW Oil & Gas Inc., as Operator and Smith Energy Company, etal, as Non-Operators A.A.P.L. FORM 610 - 1989 MODEL FORM OPERA TING AGREEMENT BIG BUMP PROSPECT OPERATING AGREEMENT DATED NOVEMBER 1 2009 OPERATOR RAW Oil & Gas Inc. COUN1Y OR PARISH OF _L"'"YN'--N _ _ _ _ _ _ _ _ _ , STATE OF _T_E"""X""A_S_ _ __ COPYRIGHT 1989 - ALL RIGHTS RESERVF.D AMERICAN ASSOCIATION Of PETROLEUM LANDMEN, 4100 FOSSIL CREEK Bl.VD. FORT WORTH, TEXAS, 76137, APPROVl'Jl FORM. AA.P.I... NO. 610 ·-1989 SEC 189657  A.AP .L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 TABLE OF CONTENTS Article Title ~ I. DEFINITIONS .......................................................................................................................................... I II. EXHIBITS ................................................................................................................................................ ! m. INTERESTS OF PARTIES ...................................................................................................................... 2 A. OIL AND GAS INTERESTS: .............................................................................................................. 2 B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION: .............................................................. 2 C. SUBSEQUENTLY CREATED INTERESTS: ...................................................................................... 2 JV. TITLES ....... :............................................................................................................................................. 2 A. TITLE EXAMINATION: ...................................................................................................................... 2 B. LOSS OR FAJLURE OF TITLE: ........................................................................................................... 3 I . Failure of Title............................................................................................................................... 3 2. Loss by Non-Payment or Erroneous Payment of Amount Due ........................................................ 3 3. Other Losses .................................................................................................................................. 3 4. Curing Title ................................................................................................................................... 3 V. OPERATOR ............................................................................................................................................. 4 A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR: .......................................................... ..4 B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR: .................. 4 !. Resignation or Removal of Operator ............................................................................................. .4 2. Selection of Successor Operator..................................................................................................... 4 3. Effect of Bankruptcy .................................................................................................................... .4 C. EMPLOYEES AND CONTRACTORS: ............................................................................................... 4 D. RIGHTS AND DUTIES OF OPERA TOR: ........................................................................................... 4 I. Competitive Rates and Use of Affiliates ......................................................................................... 4 2. Discharge of Joint Accowit Obligations ......................................................................................... 4 3. Protection from Liens .................................................................................................................... 4 4. Custody ofFunds........................................................................................................................... 5 5. Access to Contract Area and Records ............................................................................................. 5 6. Filing and Furnishing Governmental Reports ................................................................................. 5 1. Drilling and Testing Operations ..................................................................................................... S 8. Cost Estimates ............................................................................................................................... 5 9. Insurance ....................................................................................................................................... 5 VI. DRILLING AND DEVELOPMENT ........................................................................................................ 5 A. INITIAL WELL: ................................................................................................................................... 5 B. SUBSEQUENT OPERATIONS: .......................................................................................................... 5 1. Proposed Operations .................................................................................. ,................................... 5 2. Operations by Less Than All Parties .............................................................................................. 6 3. Stand-By Costs .............................................................................................................................. 7 4. Deepening ..................................................................................................................................... 8 5. Sidetracking .................................................................................................................................. 8 6. Order of Preference ofOperations .................................................................................................. 8 1. Conformity to Spacing Pattem ....................................................................................................... 9 8. PayingWells ....................................................................................................................-............. 9 C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK: .............................................. 9 I. Completion.................................................................................................................................... 9 2. Rework, Recomplete or Plug Back ................................................................................................. 9 D. OTHER OPERATIONS: ....................................................................................................................... 9 E. ABANDONMENT OF WELLS: ........................................................................................................... 9 I. Abandonment of Dry Holes ........................................................................................................... 9 2. Abandonment of Wells That Have Produced ................................................................................ 10 3. Abandonment ofNon-ConsentOperations ................................................................................... 10 F. TERMINATION OF OPERATIONS: .................................................................................................. 10 G. TAKINGPRODUCTIONINKIND: ................................................................................................... 10 (Option 1) Gas Balancing Agreement ............................................................................................... 10 (Option 2) No Gas Balancing Agreement.. ........................................................................................ 11 VII. EXPENDITURES AND LIABILITY OF PARTIES ............................................................................. 11 A. L!AB!LlTY OF PARTIES: ................................................................................................................ 11 B. LIENS AND SECURITY INTERESTS: .............................................................................................. 12 C. ADVANCES: ...................................................................................................................................... 12 D. DEFAULTS AND REMEDIES: .......................................................................................................... 12 1. Suspension ofRights ................................................................................................................... 13 2. Suit for Damages ......................................................................................................................... 13 3. Deemed Non-Consent. ................................................................................................................. 13 4. Advance Payment........................................................................................................................ 13 5. Costs and Attorneys' Fees............................................................................................................ 13 E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES: ..................................... 13 F. TAXES: ............................................................................................................................................... 13 VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST .................................................. 14 A. SURRENDER OF LEASES: ............................................................................................................... 14 B. RENEWAL OR EXTENSION OF LEASES: ....................................................................................... 14 C. ACREAGE OR CASH CONTRIBUTIONS: ........................................................................................ 14 SEC 189658 A.AP.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 TABLE OF CONTENTS D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST: .................................................. 15 E. WAIVER OF RIGHTS TO PARTITION: ...................................................................................... 15 F. PREFBRBl'mAL RIGHT TO PURCHASE: .................................................................................. 15 IX. INTERNAL REVENUE CODE ELECTION ............................................................... ;.................. 15 X. CLAIMSANDLAWSUITS ............................................................................................................. 15 XI. FORCE MAJEURE .......................................................................................................................... 16 XU. NOTICES .......................................................................................................................................... 16 XIII. TERM OF AGREEMENT ............................................................................................................... 16 XIV. COMPLIANCE WITH LAWS AND REGULATJONS................................................................... 16 A. LAWS, REGULATIONS AND ORDERS: .................................................................................... 16 B. GOVERNING LAW: .................................................................................................................... 16 C. REGULATORY AGENCIES: ...................................................................................................... 16 XV, MISCELLANEOUS ......................................................................................................................... 17 A. EXECUTION: ............................................................................................................................... 17 B. SUCCESSORS AND ASSIGNS: ................................................................................................... 17 C. COUNTERPARTS: ....................................................................................................................... 17 D. SEVERABILITY .......................................................................................................................... 17 XVI. OTHER PROVISIONS..................................................................................................................... 17 ii SEC 189659  A.AP .L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 OPERATING AGREEMENT 2 THIS AGREEMENT, entered into by and botwcen _..,R..,A~W'"'O~i~I=&"G~a~s~l..,nc"'.---------------~ hereinafter designated and referred to as "Operator," and the signatory party or parties other than Operator, sometimes hereinafter referred to individually as 'Non-Operator," and collectively as "Non-Operatm. • S WITNESSETH: 6 WHEREAS, the parties to this agreement are ownen of Oil and Gas Leases and/or Oil and Gas Interests in the land identified in Exhibit "A.' and the parties hereto have reached an agreement 10 ""plore and develop these Leases and/or Oil and Gas Interests ror tho production of Oil and Gas lo the .. ient and as hereinafter provided, NOW, THEREFORE, ii is agreed as follows: I0 ARTICLE I. 11 DEFINITIONS 12 As used in this agreeanent, the foHowing words and terms shalJ have the meanings here ascnbed to them: 13 A. The term "AFE" shall mean an Authority for fapenditure prepared by a party to this agreement for the purpose of 14 estimating the costs to be incurred in conducting an operation hereunder. 15 B. The term "Completion" or "Complete" shaU mean a single operation inCended to oompJctc a well as a producer of OH 16 and Gas in one or more Zones, including. but not limited to. the setting of production casing. perforating. well stimulation 17 and production testing conducted in such operation. 18 C. The term 'Contract Arca" shall mean all of the lands, Oil and Gas Leases and/or Oil and Gas lntere•ts intended to be 19 developed and operated for Oil and Gas purposes under this agroement. Such lands, Oil and Gas Lease.< and Oil and Gas 20 lnterests are described 1n Ex.hihit h A. n 21 D. The term 'Deepen" shall mean a single operation whereby a well is drilled lo an objective Zone below the deepest 22 Zone in which the well was previously drilled. or below the Deepest Zone proposed in the associated AFE. whichever is the 23 lesser. 24 E. The terms "Drilling Part)'" and "Conscn~ng Party" shall mean a party who agrees to join in and pay its share of the 25 cost of any operation conducted under the provisions of this agreement. 26 F. The term "Drilling Unit" shall mean the area fixed fur lhe chilling of one well by order or rule of any slate or federal 27 body having authority. If a Drilling Unit is not fi•ed by any i;uch 11ile or order, a Drilling Unit shall be the drilling unit as 28 ~blished by the pattern of drilling in the Contract Arca unless fixed by express agreement of the Drilling Parties. 29 G. Tho term 'Drillsite' shall mean the Oil and Gas !,ease or Oil and Ga• Interest on which a proposed well is to be 30 located. 31 H. The term 'Initial Well' shall mean the well required lo be drilled by the parties hereto as provided in Article Vi.A. 32 I, The tcnn "Non-Consent WeTI" shall mean a wen in which less than an parties have conducted an operation as 33 provided in Article vt.B.2 . .34 J. The tenns "Non.Drilling Party" and "Non-Consenting Party" shall mean a party who elects not to participate in a 35 proposed operation. 36 K. The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas condensate, and/or all other liquid or gaseous 37 hydrocarbons and other marketable substances produced therewith, unless an intent to limit the inclusiveness of this term is 38 >"pc:Cifically >1ated. 39 L 1110 term "Oil and Gas Interests" or "Interests' shall mean unleased ree and mineral interests in Oil and Gas in tracts 40 of land lying within the Contract Area which are owned by parties to this agreement. 41 M. The tenns 'Oil and Gas Lease.' "Lease" and "Leasehold' shall mean the oil and gas leases or intcreSIS therein 42 covering tracts of land lying within the Contract Arca which are owned by the parties to this agreement. 43 N. The tenn "Plug Back" sha.U mean a single operation whereby a deeper Zone is abandoned in order to attempt a 44 Completion in a shallower Zone. 45 0. The term "Recompletion" or "Rccornpletc" shall mean an operaiion whereby a Completion in ooe Zone is abandoned 46 in a·der to attempt a Completion in a different Zone within the existing wellhorc, 47 P. The term "Rework" shall mean an operation conducted in the wellbore of a well after it is Completed 1.0 secure, 48 restore, or improve production in a Zone which is currently open to productiun in the wellhore. Such operations incJude, but 49 are not limited to, well stimulation operations but exclude any routine repair or maintenance work or drilling. Sidetracking, 50 Deepening, Completing. Rccomplcting, or Plugging Back ofa well Sl Q. The term "Sidetrack" shall mean the directional control and intentional deviation of a weJI from vertical so as to S2 change the bottom hole location unless done to straighten the hole or drill around junk in the hole to overcome other 53 mechanical difficulties. 54 R. The term nzone" shall mean a h11'atum of earth con1aining or thoughi to contain a common accumulation of OH and SS Gas separately producible from any other common accumulation of Oii and Ga.'1. 56 Unless the context otherwise clearly indicates, words used in the singular include the plural. the word 'person" includes 57 natural and artificial persons, the plural in(>ludes the singular, and any gender includes the masculine, feminine, and neuter. 58 ARTICLE II. 59 EXllJBITS 60 The following exhibits. as indicaled below and attached hereto, are incorporated in and made a part hereof: 61 __ X_ A. Exhibit "A." shall include the foUowing infonnation: 62 ( I) Description oflands subject to this agreement, 63 (2) R""'ictions, if any, as to depths, formations, or substances, 64 (3) Parties to agreement with addres"" and telephone 1111mbers for notice purposes. 65 (4) Percentages or fractional interests of parties to this agreement, 66 (S) Oil and Gas Leases and/or Oil and Gas Interests subject lo this agrecmen~ 67 (6) Bwdens on production. 68 __ x_ B. Exhibit 'B.' Fonn of Lease. 69 _x__ C. Exhibit ·c." Accounting J'Tocedure. 70 _x_ D. Exhibit "D," Insurance. 71 _x__ E. Exhibit"'E,•GasBaU.ncingAgrecment. 72 F. &.hib1C "F." Plan Pisel'iminatiee Md CertiReatiert afNen Segt'eg&led Faei!iliee. 73 _x__ G. Exhibit "G,' Tax Partnership. 74 H. O t h e r ' - - - - - - - - - - - - - - - - - - - - - - - - -1- SEC 189660  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 I If any provision of any CJthibi~ except Exhibits "E," "F" and "G 1" is inconsistent with any provision contained in 2 the body of this agreement, the provisions in the body of this agreement shall prevail. ARTICLE Ill. INTERESTS OF PARTIES A. OU and Cas Interests: If any party owns an Oil and Gas lntem;t in the Contract Arca, that Interest shall be treated fur all purposes of d1is agreement and during the term hereof as if it were covered by the fonn of Oil and Gas Lease attached hereto as Exhibit "B,' and the owner thereof shall be deemed to own both royalty interest in such lease and the interest of the les.'iOO thereunder. 9 D. Interest> of Parnes In Costs and Production: 10 Unless changed by other provisions. all costs and liabilities inCU!Ted in operations under this agreement shall be borne 11 and paid, and all equipment and materials acquired in operations on the Contract Aroa shall be owned, by the parties as their 12 interest.~ arc set forth in Exhibit "A.,. In the same manner, the parties sha11 also own a1t production of Oil and Gas &om the 13 Contract Area subject, however, to the payment ofroyaltics and other burdens on productian as described hereafter. 14 Regardless of which party has contributed any Oil and Gas Lease or Oil and Gas Intere.len Or01aters e >Bing a msjeFi~ iRterest 19 heaed an e ttemhip as shewn oo E.i1hihft """ •etwlining aAer Melt1di11g the eting iHleresfi ef Opemter, 9\teh ete &he:ll net he 20 dootl1etl offeo1;. e uotil e · • illeA ••~•• ha• hoe• deli Ofed le lhe 9peroler h) e lie• Opefillef t!e!eiling lhe alleged y the tenns hereof as a 29 Non-Operator. A change of a eerporate name or structure of Operator or transfer of Operator's interest to any single 30 subsidiary. parent or successor corporation shal1 not be the basis for removal ofOperator. 31 2. Selectirm of Successor Operator; Upon the resignation or removal of Operator under any provision of this agreement. a 32 successor Operator shall be selected by the parties. The SU""""8or Operator shall be selected from the parties owning an 33 interest in the Contract Arca at the time such successor Operator is selected. The successor Operator shall be selected by the 34 affirmative vote of two (2) or more parties owning a majority interest based on ownership ..as shown on Exhibit "A"'; 35 provided, however. if an Operator which has hc:cn removed or is deemed to have resigned fails to vote or votes only to 36 •ucceed itself, the successor Operator shall be selected by the af'finnativc vote of the party or parties owning a majority 37 interest based on ownership u shown on E~hibit "A" remaining after excluding the voting interest of the Operator that was 38 removed or resigned. The former Operator shall promptly deliver to the succes.rts, and well logs. 33 (c) Operator shall adequately test all Zones encountered which may reasonably be expected to be capable of producing 34 Oil and Gas in paying quantities as a result of examination of the electric log or any other logs or cores or tests conducted JS hereunder. 36 8. Cost Estimates· Upon request of any Consenting Party, Operator shaJJ furnish estimates of current and cumulative: costs 37 incurred for the joint account at reasonable intervals during the conduct of any operation pursuant Lo this agreement. 38 Operator shall not be held liable for errors in sueb estimates so long as the estimates are made in good faith. 39 9, ~ At all rimes while operations are conduoted hereunder, Operator shall comply with the workers 40 compensation law of the state where the operation.< are being conducted: provided, however. that Operator may be a self- 41 insurer for liability under said compensation laws in which event the only charge that shall be made to the joint account •hall 42 be as provided in Exhibit 'C, • Operator shall also carry or pmvide insurance for the benefit of the joint aeccunt of the parties 43 as outlined in Bxhibit 'D' attached hereto and made a part hereof. Operator shall require all eontJactors engaged in worlc on 44 or for the Contract Area to comply with the workers compensation law of the state where the operations are being conducted 45 and to maintain such other insurance as Operator may require. 46 In the event automobile liability insurance is specified in said Exhibit ~n: or subsequently receives the approval of the 1 47 parties, no direct charge shall be made by Operator for premiums paid for such insurance for Operator's automotive 48 equipment 49 ARTICLE VI. SO DRILLING AND DEVEl.OPMENT SI A. Initial Well: 52 Onorbcforethe_l_'1_dayof_,,_A,.pn..,·,_1_ _ _ _~,2010, Operator shall commence the drilling of the Initial 53 Well at the following location: 54 ss Mutually agreed upon location within the Contract Area to be determined at a later date by all the parties to this 56 Agreement 57 58 59 60 61 and shall thereafter continue the drilling of the well with due diligence to penetrate the Fusselman Formation. 62 63 64 6S 66 The drillins of the Initial Well and the ):611icipation !herein by all parties is obligatory, subject to Article Vl.C. I. aa to participation 67 in Completion operations and Article Vl.F. os to termination ofoperations and Article XI as to occurrence of force majeure. 68 B. Subsequent Operations: 69 !. Proposed Operations· lfany party hereto should desire to drill any woll on the Contract Arca other than the lnilial Well. or 70 if any party should desire to Rework, Sidetrack. Deepen. Reeomplcte or Plug Back a dry hole or a well no longer capable of 71 producing in paying quantities in which such party has not otherwise relinquished its interest in the proposed objective Zone under 72 thil; agreement. the party desiring to drill, Rework. Sidel18ck, Deepen, Recomplele or Plug Back such a well shall give wriUen 73 notice of the proposed operation to the parties who have not otherwise relinquished their interest in such objective Zone 74 -s - SEC 189664  A.A.P.L. FORM 610- MODEL FORM OPERATING AGREEMENT-1989 under this agreement and to all other parties in the case of a proposal for Sidetracking or Deepening, specifying the w011< to be pcrfonncd, the location, proposed depth. o~ecfrve Zone and the estimated cost of the operation. The partie5 to whom such a notice is delivered shall h•ve thirty (JO) days after receipt of the notice within which lo notify the party proposing 1o do the work whether they elect to participate in the cost of the proposed operation. If a drilling rig is on location, notice of a proposal to Rework, Sidetrack. Rccomplctc, Plug Back or Deepen may be given by telephooe and the response period shall be limited to forty- eight (48) hours, exclusive of Saturday, Sunday and legal holidays. Failure of a party to whom such notice is delivered to reply within the period above fixed shall constitute an election by that party not to participate in the cost of the proposed operation. 8 Any proposal by a party to conduct an operation conflicting with the operation initially proposed shall be delivered to all parties 9 within the time and in the manner provided in Article Vi.B.6. 10 If all parties to whom such notice is delivered elect to participate in such a proposed operation, the parties shall be 11 contractually committed to participate therein provided such operations are commenced within the time pertod hereafter set 12 forth, and Operator shall, no later than ninety (90) days after expiration or the notice pcrind of thirty (30) days (or as Il promptly as practicable after the expiration of the forty-eight (48) hour period when a drilling rig is on location. as the case 14 may be). actually commence the proposed operation and thereafter complete it with due diligence at the 1isk and expense of 1S the parties participating therein; provided, however, soid commenoomeot date may be e.peration for the 35 account of the Consenting Parties, or (ii) designate one of the Consenting Parties as Operator to perfonn such work. The 36 rights and duties granted to and imposed upon the Operator under lhis agreement are granted to and imposed upon the party 37 designated as Operator fur an operation in which the original Operator is a Non-Consenting Party. Consenting Parties, when 38 conducting operations on the Contract Arca pursuant to this Article Vi.B.2 .. shall comply with all terms and conditions of this 39 agreemenl. 40 lf less than all parties approve any proposed operation, the proposing party, immediately after the expiration of the 41 applicable notice period, shall advise aH Parties of the total interest of the parties approving such operation and its 42 recommendation as to whether the Consenting Parties should proceed with the operation as proposed. f,ach Consenting Party, 43 within forty-eight (48) hours (exelusive of Saturday, Sunday, and legal holidays) after delivery of such notice, shall advise the 44 proposing party of iti; desire to (i) limit participation to such party•s interest as shown on Exhibit "A" or (ii) carry only its 4S proportionate part (determined by dividing such party's interest in the Contract Area by Ille interesls or all Consenting Parties in 46 the Contract Arca) of Non-Consenting Parties' interests, or (iii) call')' its proportionate part (determined a.• provided in (ii)) of 47 Non..Conscnting Parties' interest~ together with all or a portion of its proportionate part of any Non-Consenting Parties' 48 interests that any Consenting Par(y did not elect to take. Any interest of Non-Consenting Parties !hat is not carried by a 49 Consenting Party shall be deemod to be canied by the party proposing the oporation if such party does not withdraw ils SO proposal. Failure to advise the proposing party within the time r"'luired shall be deemed an election under (i). in the event a 5f drilling rig is on location, notice may he given by lelcphonc, and the time permilted for such a response shall not exceed a 52 total of forty-eight (48) hours (exclusive of Saturday, Sunday and leglll holidays). The proposing party, at irs election. may 53 withdraw such proposal if d1ere is less than 100% participation and shall notify all parties of such decision within ten (10) 54 days. or within twenty-four (24) hours if a drilling rig is on location, followins expiration of the applicable =ponse period 55 if 100% subscription to the proposed operation is obtained, the proposing party shall promptly notify the Conoenting Parties S6 of their proportionate interests in the operation and the party serving as Operator shall commence such operation within the 57 period provided in Article Vl.B. l., subject to the same exlension right as provided !herein. 58 (b) Relinquishment of Interest for Non·Particination The entire cost aod risk of conducting such operations shall be 59 borne by the Consenting Parties in the proportions they have eiected to bear same under the terms of the preceding 60 pantgrapl1. Consenting Parties shall keep the Jcaschold estates involved in such opemtions free and clear of an liens and 61 encumbrances of every kind c~ted by or arising from the operations of the Consenting Parties.. If such an operation results 62 in • dry hole, then subject lo Articles Vl.B.6. and Vi.E.l .. the Consenting Parties shall plug and abandon lhc well and restore 63 Che surface Jocation at their sole cost. risk and ~pense; proYidcd, however, - that those Ncm~Con.ir;;enting Parties that 64 participated in the drilling. Deepening nr Sidetracking of the well shall remain liable for, and shall pay, their proportionate 65 shares of the cost of plugging and abandoning the well and restoring the sur18ce location insofar on1y &'iii those costs were not 66 increased by lhe subsequent operations of the Consenting Parties. If any well drilled. Reworked, Sidetracked, Deepened. 67 Recompleted or Plugged Back under the provisions of this Article resulrs in a well capable of producing Oil and/or Gas in 68 paying quantities, the Consenting Parties shall Complete and equip the well to produce at their sole cost and risk, and the 69 well shall then be I.urned over to Operator (if the Operator did not eonduet the operation) and shall be operated by it al the 70 ~pcnse and for the account of the Consenting Parties. Upon commencement of operations for the drilling, Reworking. 71 Sidetracking. Recompleting, Deepening or Plugging Back of any such well by Consenting Parties in accordance with the 72 provisions or this Arliclo, each Non-Consenting Party shall be deemed to have relinquished to Consenting Parties, and the 73 Consenting Parties shall own and be entitled to receive. in proportion to their respective interests, all of such Non- 74 Consenting Party's interest in the well and share of production therefrom or. in the case of a Reworking. Sidetracking, -6- SEC 189665  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT-1989 Deepening, Recomplcting or Plugging Back. or a Completion pursuant to Article Vl.C. I. Option No. 2, all of such Non- Consenting Party's interest in the production obtained from the operation in which the Non-Consenting Party did not elect to participate. SHeft 1eliftqttishmeRt shall he efteeti e wntil ifle pt'eeeeEls ef Ute sale ef &t1ek share, ealet1:l&teEI at ihe ell, er lllllfket velue thereef if sueh share is not said (eftet' dedueliiig opplieable ad 1olerem, produelion, ,. , Ofilfleo, end eiEOiso ""'""· ro,eft). 81efl 8ing Fe)&Jt=) 8"8 ether ialeiMls Aat eneeptec:J ~ a&.fiiele JlloC JJQYBhle 0bl ef 8f fftBBSUf'ed h~ 0 tfte predY:etlBR fi:elfl sueh ell aeSft:liftg .. ith Pl!!fl'eet te aueh interest Ufttil it re erta), shall eq\:t&I the tetal efthe felleniftg: (i) 9' ef eeeJt :siteh Jtlen Censenting PaFt3 1s ehere ef the east ef en) ne 1) HEJttired sktrfoee eqliip111eAt be) efttl the nellheed eefffleetiens (iABhtding hut net lifflited te .1ieelE limks, sepamte..,, treMee, Jl'tlfflping etfttipffteM end )'ipi~, plus IQQ" e( ee:eh aueh Nen G:cm:tenting Pett)•,~ Mere af the eest ef epeudian ef Ole ~ eJJ eenruneneieg dth fiast 10 f"6Eltiet.iaR and e&fttiRUing ltfttil eeeh s.ieh NM CeaseNiflg Ptu=lf!i Felin"YisAeEI iRterest shall re eA te it undBI ether 11 Jn'e.isieM er ~is ·\ftieie; it beii g ag1eed that eaeh >Jen GaRsemting Paft)'s shaFe af s~eh eaals and f1E1t1ip111en:E nill 1!.e that 12 iRterest • hieh , ewld ha e he:eR ehargeebJe ta sweh 1"en Gftff:eAting Pert) had it partieipated iR the ' ell fiiem the heginRiflg IJ efthe epemtiens; Bftd 14 (ii) " of {B) lliet paRi•• •f the ........ onpeeoos er drilling, Re· e1'11iog, SidelrftelUliono reeei ed """"' 'rlielo 1 1111.C., 16 Bnd af (b) Iha! porlien of !Ito eosl of ne•I) aequired eq•;pmont in tho '1ell (to Bnd inel•lling the .. ellheed ooftftos~ene). 17 1hieh eHld he e been ehRFgeable te sYeh NeR GeooefltiRg Pefty if it had partiaipaled thetein. 18 Net; ithstanll:ing an:i1hiRg te the ean&ef) iH this "'Kiele "l.R., if t1't ell Eieea ttet 1eeeh the dee~esl ehjaeti e Zane 19 EleseA8ed ie ~e eeti.ee JH'ElpesiRg tfte ell far reasaas Mher theft lhe ~eet11HleFiag ef i=sani•e er Jl"BS~eall) h"RpeRettuhle 20 whs&mee Bl' etheF eeedi6eft iH th hale Fe•uieHng fuFJher aJ!eNMeBS ~metieeble, Qpenlier shell gi e Aetiee llaereef te eaeh 21 ~leR Cttnsentittg Paff) fte s"9mit1efl er etefl fer an e:lteJ'fta& e prapesal wuier ''4iele VI,B.6. la !IFilt fhe , ell le a 22 shelle1 er lel'ta theft the deepest elajeeti e ~eee prepeseS in tfle natiee l:tfleler flieh the ell •89 dflille&, a11d eaeh st1ek Nen 23 Ceftsenting Pllf-t.) shall he e the epHen te p&Ptieipale in the initinl f'FtpeseB Se"'J'letian ef 1fte nell h~· p&)ing its sflere ef '1te 24 eeot of dfilling lhe oil ta ilS ael'"'I dep!ll, ealo•leled in Ille "'""""' pro illed in .'Riolo \'l.11,4. (a). If 811) Ne• ••"1 25 Censenti•g Perl) Elooe •et eleet to pBfliail'&lo iR lite firs! CemplotioR pFopesed fer •••h ell. lite rolinqwi&flmeRt "'" iei••• 26 27 (e) R:e•' efleing Reeeme'leting er PlttggiRg Reek. An eteetien oot te l'ftl"lieipate in the drillieg. Sideuaeking-er 28 Deepening af a well sl\all he deemed RR eleetiefl net ta pertieipate in Em)' Re 1efldeg BF Plugging BaelE eruw&tiBH pF8J'BS6d in 29 i:ieeh a •'tell, er peftien lhereef, le ftieh the initial Heft eenseRt eleetiern e,,pliefi thet is eatldueted at e:n) time priet ta NII 30 reee et") 1') tffe Gen!lentittg Partiee ef the Men Cefte;eHliflg PMt)'a eec t:1p1 ellt smeunt. SirAilatl), an eleatieA HAt tD 31 fl&Ftieipate iA the Gs1fff'letiag er Reeampfeting ef t1 , ell NU &o dee1llad ftfl elaetien flat te paffieipate in e, Ref'I erking 32 8f!SNtiefl prApeseEi itt s.aeh a ell, er pertiea ~1ereef, te kieh the initial f\BR eenseHl eleetien applied that is eendt:te~ at 33 Ml) lilf1e pAer h1 ft:tll reee1ei1 ~ tbe GenseHting PeFties ef lite ~le" CeaseAtiag Paff)'fi 1eeettpa1e1I antetlfll. ..,") sueh 34 Rei eFlefflg. Reeempllting er P4klggiRg Baek epeRttieR eenEleeted Elurieg the 1eieeWJjment J'efied sh&ll he deemed pMt ef the JS ees• er eperatien ef BSid • ell BBB tlJere shall "e added te the StllRS te be reeel:!f,led h) d=!:e CeHsenting PaRies % er 36 thnt per4ieR af tfte eesls ef ti.a Re Blhing, Reeeft1J3leting er PlwggiHg Baek eperaliee hieh 'BYIEI ha e heea ehaf'geeble te 37 sueh >lea Ce11seniing PeFty had it paffieipated therein. [f 9"1ek a R:e eflting, ReeempieHng eF Pht&gieg Raek epeFBMeH is 38 pre:peseEf duriflg Neh reeet:tpmeflt peried, the fff'0 isieAS ef this AFtiele '/l.R, shall he applieahle as het eeA said ('e:nsenting 39 PeAiee in said ·neU. 40 (~ Reeeaament Mettem 9urittg the peAad ~f time Gsnseeting PaJ'ties ei=e efttit:led: te Feeei e ~Jen CeaseRting Pai:ty's 41 shate ef pFBd1:1:etieft, er Ike praeeeds tha=effem, COHsenting Parties &flail he 1espaMihte fer the f'B)menl ef all ad alePem, 42 pl"Btlt:tetien, se em:Ree, eneise, gatftet=fftg Elflfl ether tanes. eed all re;alty, eveffidiftg re>yalf) aftd ether hurdens eppliee'hle le 43 ~leA Co••OReRg PeR)''• eha,. of poed•etie• eot eieSJ!IBAing eriefalien, the Censenting- 4S J~tni shall he peuniHeEI t6 ttse, Wee af east, eJJ easi11g, hdiiflg end etJu,, eti11ip1nenl ifl the ., elJ, htd t:he e, ..ieFShif' ef ell 46 S(,leh eq~ipffU,Q:l l'lh&IJ remaifl Mflehanged; MEI wp1m ahattdenment ef a ell aftet stteft R:e efl1i1tt; Sillet:raeltiRg, Phtggins: Baelt, 47 Reeet11plelittg eF JJeepenittg, the G°BRSeRtieg l'afties shell aeeeant: far all s1:1.elt eqwiptt1ent lH the e >''Heffi thereef, 11'ffA eaelt 48 paff) reeei 1lngite preJla"ieftate pert in hind eFift 'Blue, lees east ef8ft1 age. 49 Wilhi11 nin11C, (QQ) de)s after t.Jte eefftf!letien ef Bil) epemtiea \:tfldw lftis /' rtiele.. the paff>; eeHdtteting the epereti6ft11 so fer dte Censerit:iHg Pllfties shefl fin!l:ieh eaeh ~fen CeRSlfftling Paff) ilk BR iA1eftCef) er the BtftliJ11Reat ie llRd eeaAeeteel te SI the ell, end "" it.,.i•ed sl&teRl'"'t of lite east of drilliR@, Sidetmelting, Qooponing, Plugging Beel<, le61ing. GeRlpleting. S2 R.eeempleting; and eEtuippiAg the "'e!J fer fJreduetien; av, at ile eptien, the epemting peflt), iR Jieq ef M iteMii!ed statement 53 of s•oh easts ef ap""'9oe, ml>) 011b1nit a dellliled Btateineat of menthli billings. Ileen mo•th thmoller, Eilffoing Ille time !Ito S4 Cense11ting Paities are heh1g Pei1Jt8Htwed as ~Fe' iSed 11he• e; the parf) aa11'1weffRg the e~emti&Rfl fer lhe Censeftlt11g P-ftfll'ies SS shall fumish 1he ~Jea CenseBting Pftrties "'it-II &fl itemiHd skttemSAt ef all e&sts Md liahilities ifl:e1:1Red in the ep,,.&t:ieH ef 56 the , ell, together i!h a •lel""10Rt ef lhe iJUB6lil) of Qil lftd G.. produeed Ihm it Bnd tho "'"""nt of !"O•••El• rooli•ed f1'1m S? the sale ef tire ell's eff1:iRg h~teFest rffldt:uttien during the preeediRg menth. bt BetBftAining the quantil) ef Oil Bftd Gae SS pt=edueed d11Fir.g an) 1t1eftth CeAsentiflg · Paftie.9 shall use iRdtisk) aeeef'teel JHedtetls sHeh as bHt neE liHdteEI ta reetefing 8f 1 59 ,,eHeElie ell tesls. "'n, ame~Ht 1ealii!ed iem the sale 1:n· et~a dispesitien ef BEtttiPft"'eRt nenl) aeq1:1iFeEI iJ'.l eeMeotieft itlt 60 ••) •••h op.,.tieo hieh , ••Id ha e been o oed hi a Nen Ganse11tiAg PllFI) had it parlieipeted lltOFBiR •hall be ereditetl 61 agefttel the teta1 u1tetumed ee• ef the erl; deRe and sf tile eq1:1ip1fleM J!l:lt'eli&!lell iR BMer1t1itiiHg 'ht!IB the intere!il: ef si.1eh 62 Nen GeAsSRtiAg J•B~ shall re efl ta it B5 aha e lff'B ided; anel if there is a eredit WBBee. it shall he paid te &Heh )fen 63 CeAaeetittg Pafl). 64 If and , hSR ~e CenseRtiag Parties 1eeaur hm a >'eR Gsnsee!iRg Aftl'f) 1s t=elififj'Hi!Med iHleFeSl file ametmte P'JS ided 65 fer &be e, the reli1tEj1:1ishetl iRteresls ef suel=t )lef'.l CeMeffiiHg Pflfl!i shell e'dtematieall) te ert te it as ef 7.00 &.RI. on the ft') 66 felle iflg the flay en hieh sueh reeeapment eeeHF&;; aREI. lfem and afttJP s1u1ft R11ersieR, s1:1eff >feH CenseHtieg Ptu4} shell 67 e• 'fl \he same ittlefeet ie stteh neH, the lft8terieJ aet:I e~ipl'nerit ie 8F !'Bl'taiHieg therete, ead lfte JH8duetion thet"effeffl tttt 68 eweh ~Jefl Cafleefttiflg Paw,, etthl ha e been etttitled te had it J1eflieipat9B iP the drillieg, SidetfaaltiRg. R:e efhi11t; 69 &eef3eAiRg, Rt$eempfeting er Phtg:ging Baelt ef said • ell. lllereaftier, sseh >left GeneeHling Pen, shell he ehmged ,, ith attd 70 shall pe) its pFepertienate pan af the Nrlher aests er d=te epUFBtian ef said ell in aeeeuianee ~th the leFMs ef this 71 agreeR1eN aaEI Snhit.il "'7" aK:aaked 'hePeta. 12 3. Stand-By Cosl.: When a well which has boen drilled or Deepened has reached its authorized depth and all tosts have 73 been completed and tho results !hc'!'COf furnished to the parties, or when operations on the well have been otherwise 74 tcnninatcd pursuant to Article VLF .• stand-by costs incum:d pending response to a party's notice proposing a Reworking• . 7. SEC 189666  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 Sidetracking, Deepening, Recompleting. Plugging Back or Completing operation in •uch a well (including the period required under Article Vl.B.6. to resolve competing proposals) shall be charged and borne as part of the drilling or Dccpcning operation ju•t completed. Stand-by cosls subsequent lo all parties responding. or expiration of the response time pennitted, 4 whichever first oocurs, and prior lo agreement as to the participating interests of all Consenting Parties pursuant to the terms 5 of the second grammatical paragraph of Article Vl.B.2. (a), shall be charged to and borne as part or the proposed operation, 6 but if the propo.'181 is subsequently withdrawn because of insufficient participation, such stand-by costs shall he allocated between the Consenting Parties in the proportion each Consenting Party's interest as shown on Exhibit "A" bears to the total interest as shown on Exhibit "A" of all Consenting Parties. 9 In the event that notice for a Sidetracking operalion is given while lhe drilling rig to be uWized is on location, any party 10 may request and receive up to five (5) additional days after expiration of the forty-eight hour response period specified in 11 Article Vl.B.1. within which to respond by paying for all stand-by costs and other cosL< incurred during such ele of producing in paying 29 quanlities, b"UCh Non..Consenting Party shall pay (or reimburse Consenting Panies for, ~ the case may be) that share of costs 30 and expenses incurred in connecti'Cntcring said well. The Non-Consenting Parties' proportionate part (based 42 on the percentage of such well Non-Consenting Party would have owned had it previously participated in such Non.Consent 43 Well) of the costs of salvable materials and equipment remaining in the hole and solvable surface equipment used in 44 connection with such well shall be determined in accordance with Exhibit "C." If the C'.onscnting Parties have recouped the 45 cost of drilling, Completing. and equ;pping the well at the time such Deepening operation is conducted. then a Non~ 46 Consenting Party may participate in the Deepening of the well with no payment for costs incuned prior to re-entering the 47 well for Deepening 48 The foregoing shall not imply a right of any Consenting Party to propose any Deepening for a NotK:onsent Well prior 49 to the drilling of such well to its lnit1al ObjC(..1.ivc without the consent of the other Consenting Parties. as provided in Article 50 Vl.F. SI S. Sjdetracking: Any party having the right to partieipale in a proposed Sidetracking operation that does not own an 52 interest in the affected wclJbore at the time of the notice shall. upon electing to participate. tender to the we11borc ownc:rs its 53 proportionate share (equal to its interest in lhe Siderracking operation) of the value of that portion of the existing wel!bore 54 to be utilized as follows: SS (a) If the proposal is for Sidetracking an ellr1Y is or includes and Oil and Gas Interest, such party shall cxecule and deliver to the non- 38 abandoning pat1y or parties an oil and gas 1..... limited to the wcllbore and the Zone then open to production, for a tenn of 39 one (I) year and so long thereafter as Oil and/or Gas is produced fiom the Zone covered thereby, such lease to be on the form 40 attached as Exhibit "B.' The assignmcnls or leases so limited shall encompass the Drilling Unit upon which the well is located 41 The payments by. and lhe assignments or leases to. the assignees shalJ be in a ratio based upon the relationship of tbcir 42 respective percentage of participation in the Contract Area to the aggregate of the percentages of participation in the Contract 43 Area of aU assigqees. There shall be no readjustmmt of jnterest.s in the remaining portions of the Contract Area. 44 Thereafter. abandoning parties shall have no further responsibility. liability, or interest in the operation of or production 45 from the well in the Zone then open other than the royalties retained in any lease made under the terrns of this Article. Upon 46 request. Operator shall continue to operate the assigned well for the account of the non-abandoning parties at the rates and 47 charges contemplated by this agreement, plus any additional cost and charges which 1nay arise as the result of the separate 48 ownership of the assigned well. Upon proposed abandonment of the producing Zone assigned or lea.•ed, the assignor or lessor 49 shnll then have lhe option to repurchase ils prior interest in the well (using the sanie valuation formula) and participale in 50 further operations therein subject to the provisions hereof. SI 3. Abandonment of Non-Con.•ent Operations: The provisions of Arlicle Vl.E.I. or Vl.E.2. above shall be applicable as !i2 between Consenting Parties in lhc event of the proposed abandonment of an)' well excepted from said Articles: provided, SJ however, no well shall be pennanently plugged and abandoned unless and until all parties having the right to conduct further 54 operations therein have been notified of the proposed abandonment and afforded the opporltlnify to elect to lake over the well SS in accordance wilh the provisions of this Article Vl.E.; and provided further. that Non.Consenting Parties wlm own an interest 56 in a portion of the weU shall pay their pmportionate share.s of abandonment and surface reslora.lion emit for such well as S1 provided in Article VI. B.2.(b). 58 F. TerminationofOperations: 59 , Upon the commencement of an operation for the drilling, Reworking. Sidetracking, Plugging Back. Deepening, testing, 60 Completion or plugging of a well, including but not limited to the Initial Well, such operation shall not be tenninated without 61 consent of parties bearing S0.0% of the tosts of such operation; provided. however, that in the event granite or other 62 practically impenetrable substance or condition in tho hole is encountered which renders further operations impractical, 63 Opa-ator may disconti11ue operations and give notice of such condition in the manner provided in Article Vl.B.1, and the 64 provisions of Article VI. B. or VI. E shall thereaft.,. apply to such operation, as appropriate. 6S C. Taking Production In Kind: 66 D Qption No. I; Gas Balanclng Agreement Attached 67 Each party shall take in kind or separately dispose of ils proportionate share of all Oil and Gas produced from the 68 Contract Area. exclusive of production which may be used in development and producing operations and in preparing and 69 troating Oil and Gas for marketing purposes and production unavoidably lost Any extra expenditure incurred in the taking 70 in kind or separate disposition by any party of its proportionate share of the production shaU be borne by such party. Any 71 party taking its share of production jn kfod shall be required to pay for only it-. proportionate share of such part of n Operator's surface facilities which it uses. 73 Eaoh party shall eJf Oil shall be only fur such reasonable periods of lime 10 as are consistent with the minimum needs of the industry under the particular circumstances. but in no event for a 11 period in ~c:esi; of one ( I) year. 12 Any such sale by Operator shall be in a manner commercially reasonable und... the circumstances but Operator 13 shall have no duty to share any existing market or lo obtain a price equal to that received under any existing 14 market The sale or delivery by Operator of a non-laking party's share of Oil under the terms of any exisling IS oontracl of Operator shall not give the non-taking party any interest in or make the non-taking party a party to said 16 oonlract. No purchase shall be made by Operator without first giving the non-taking party at leas! ten (IO) days 17 written notioc of such intended purchase and the price to be paid or the pricing basis to be used. 18 All parties shall give timely written notice lo Operator of their Gas marketing arrangements for the following 19 monU1, excluding price, and shall notify Operator immediately in the event of a change in such arrangements. 20 Operator shall maintain records of all marketing a1Tangements, and of volumes actually sold or transported, which 21 reCOl·ds shall be made available to Non.Operators upon reasonable request. 22 In the event one or more parties' separate disposition of its share of the Gas causes split-stream deliveries to separate 23 pipelines and/or deliveries which on a day-to-day basis for any roason are not exactly equal to a party's respective proportion- 24 ate share of total Gas sales to be allocated to h. the balancing or acocunting between the parties shall be in accordance with 2S any Oas balancing agreement between the parties hereto, whether such an agreement is attached as Exhibit "E 11 or is a 26 separate agreement Operator shall give notice to all parties of the first sales of Gas Ii-om any well under this agreement 27 6-.Qptiee Ne. Z1 Ne Gas R1daffelng 14 gRemeHtf 28 Be.eh pa~ ska.II te11e iR Jded er sepamtely dis'pese ef its pt'epe~ieAate share af all Oil eaeJ Gas predli6ed fiBuolien upon ot J..,st ten (IQl M)~ ••ritte• n•tiee ltl GpOf&ler 43 ~e e11ereise it& Fight le take in IEittS, er HeJ*tPBlel) Sispttse ef, its share ef all Qil eneffar Gas not fSFB ie:usl, deli\emed 44 te a 131:1Feh&Se1:, pre.ided:; he e eF, l:hat the eR"eeti e date ef Bft3 sueh Fe•eeatien ma) lrn tleJ'eFFed at OpH.ef"a 4S eleelieft fer a peried ttef le e~eeeEi ftinet, f99~ .,s if Ope,,.teF he8 eemft'liH1ul rnfeff predi:ieheH te a purehaiae 46 eennet ha ieg a temt e1~tendiflg heyood R\le~ ten ( 1Q) Ela) peried. AH) ptnehaee er aa1e hy OpBR1ter ef &fl) atheP 47 f'Bfll> 's sltare ef Oil aHd/eP Gas shell he afll) fer sueh rease11a\ile peFieds ef tiFHe es BFe eeHsisteflt ith the 48 MiHimNm needs ef the inelw:s~ ttRder tfte peftietdeF eiretimsfaHees, P1d In AB e eflt Mr a pefleG in eJieefls sf sne (1) 49 year, so tl1fl) sueh side h) Gpereter shall he in a maHner eammereiell) FEu1oenahJe uruler the eire1;1msteneeB, hut QpomleP 51 shall ha e ftB dttl) te shaFe en, SA"isting markel er ffBF16peRatien &l'ftlltgeft'l!Bftt Bf l'6 ehkiin a pFiee 8f' lranApefteliae 52 fee eetYBI ts that reaei ed wnder BA) eitisting mefhet er llv.nspertatien ammge1"ent. ne se:le er deli• Elf)' h) 53 Operater ef a nen te.lEiRg f18fl)'s shale ef 'PreEltletien tt:nder ~e tBf'lllf'I ef BR) eni!llillg eentreet ef OpeF&ter shall nee 54 gi e '4te neR t&IEiRg paft) an} interest in er make the neR ral1iRg ~ a fl&#) te said eeRtmet Ne r:n1nihase ef QjJ SS &Ail Gas ftftd RS sale er Gas shall he made hl QpeNtef i~eut first gi iRg lhe RBR tahittg JIBl'l) left de)S n't'iUen S6 aetiee ef s"eft ieten&ed F~Fehese Eh 1i:8le and lfte pfiee ta he pa:id eF '1ze ,,.;ei g bMis te Be ttseel Qpef&ter slleH giwe 51 nsEioe te ell J'll'Y'Eim e f#t:e Ii ~•sale sfWlffl /rem aRj 11 ell enddo lhis ~~Olftdffi S8 "It paFties &hall gi e t:ifflel) ; Pit!teit netiee h Qpemter ef theiF Gas fMflteting &1Uflge1'1eflts far lke fe11e ing S9 ffleftth, e1~eluding pf'iee1 &flEI ~U ne~~ · Gpeffltef immMiatel) in the e eRt ef e ehaflle in Mteh arrangemeftls. 60 QpeNteF shell ftlBintein reeeff19 ef elJ ff1Ef:fftetiRg Bf'fMgefftentll, SAd ef 'alHrHBB eeltially seJd 0J tmf15j38ff;eel, hieA 61 reeerds shall hie lfHMle aareilehle te NeR 9peRt~efl wpen ff.ftSeRS:lde Felijttefi; 62 ARTICLE VU. 63 EXPENDITURES AND LIABILITY OF PARTIES 64 A. Liability of Parties: 65 The liabilily of the parties shall be several, not join\ or collective. Each party •hall be responsible only for ll> obligations, 66 and shall be liable only for its proportionate share of the cosls of developing and operating the Conlract Area. Accordingly, the 67 liens granted among the parties in Article Vll.B. are given to secure only the debts of each severally, and no party shall have 68 any liability lo third parties hcrounder to salisfy the default of any other party in the paymenl of any expense or obligation 69 hereunder. Jt is not the intention of the parties to crea~ nor shalJ this agreement be constnied as creating. a mining or other 70 partnership, joint venture. agency relationshjp or association. or to render the parties liable as partners. co~venturers, or 71 principals. In their relations with each other under this agreement, the parties shall not be considered fiduciaries or to have 72 established a confidential relationship but mth.,. shall be free to act on an arm's-length basis in accordance with their own 73 respective self-interest. subject, however, to the obligation of the parties to act in good faith in their dealings wilh each other 74 with respect to aclivitics hereunder. - 11 - SEC 189670  A.A.P.L. FORM 610-MODELFORM OPERATING AGREEMENT- 1989 B. Liens and Seairlty lntorests: 2 F.ach party grants to the other parties hereto a lien upon any interest it now owns or hereafter acquires in Oil and Gas 3 Leases and Oil and Gas Interests in the Contract Area, and a security int.crcst and/or purchase money security interest in any 4 interest it now owns or hereafter acquires in the personal property and fi<111res on or used or obtained for use in connection S therewith. to secure performance of aJJ of its obligations under this agreement including but not limited to payment of expense. inlerest and fees. the proper disbursement of all monies paid hctcunder. the assignment or relinquishment of interest in Oil and Gas Leases as required hereunder, and the proper perfonnancc of operations hereunder. Such lien and security interest granted by each party hereto shall include such party's lessehold interests, working interests, operating rights, and royally and overriding royalty interests in the Contract Area now owned or hereafter acquired and in Jands pooled or unitized therewith or I0 otherwise becoming .suqject to this agreement, the Oil and Gas when extracted therefrom and equipment situated thereon or 11 used or oblained for use in connection therewith (including. without limitation, all wells, tools, and tubular goods), and accounts 12 (including., Without limitation, accounts arising ftom gas imba1anc:e£ or from the sale of Oil and/or Gas at the wellhead), 13 contract rights, inventory and general intangibles relating thereto or arising thcrefiom, and all proceeds and products of the 14 foregoing. 15 To perfect the lien and security agreement provided herein, each party hereto •hall execute and ••knowledge the recording 16 supplement andlor any financing statement prepared and submitted by any party hereto in conjunction hel'ewith or at any time 17 following execution hereof, and Operator is authorized to file this agreement or the recording supplement executed herewith as 18 a lien or mongage in the applicable real estate records and as a financing statement with the proper officer under the Unifonn I9 Commen:ial Code in the state in which the Contract Area is situated and such other states as Operator shall deem appropriate 20 to perfect the security interest granted hereunder. Any party may file this agreement, the recording supplement executed 21 herewith, or such other documents as it deems necessary as a lien or mortgage in the applicable real estate records and/or a 22 financing statement with tl1e proper officer under the Unifonn {',ommercial Code. 23 F.ach part)' represents and warrants to the other parties hereto that the lien and security interest granted by such party to 24 U1e other parties shall be a lirsl and prior lien, and each party hereby agrees to maintain the priorily of said lien and ..,curity 2S intere&.1 against all persons acquiring an interest in Oil and Gas Leases and Interests covered by this agreement by. through or 26 under such pony. Ali patties acquiring an interest in Oil and Gas Leases and Oil and Gas lnteresl• covered by this agrocmcnt, 27 whether by assignment, merger, mortgage, operation of' law, or othci·w1se. shall he deemed to have taken subject 28 to the lien and security interest granted by this Article Vll.B. o.s to aH obligations attribulabfc to such interest hereunder 29 whether or not such obligations arise before nr after such interest is acquired. 30 To the extent that parties have a security intcl'e&t under the lJnifonn Commercial Code of the state in which the 31 Contract Area is situated, they shall be cntided to exercise the right8 and remedies of a secured party under the Code. 32 The bringing of a suit and the obtaining of judgment by a party for the secured indebtedness shall not be deemed an 33 election of remedies or otherwise affect !he lien rights or security interest as security for the payment thereof. In 34 addition, upon defilult by any party in the payment of its share of e'Uch payment hereunder. then in addition lo the remedies provided in Article Vll.B. or elsewhere in this agreemen~ the 74 remedies spcciriod below shall be applicable. For purposes of this Article Vll.D., all notices and elections shall be delivered • 12- SEC 189671  A.A.P.L. FORM 610- MODEL FORM OPERATINGAGREEMENT-1989 only by Operator. except that Operator shall deliver any such notice and election requested by a non-defaulting Non.Operator, and when Opeiator is the party in dcfilult, the applicablo notices and election.< can be delivered by any Non.Operator. 3 Election of any one or more of the following remedies shall not preclude the subsequent use of any other remedy specified 4 below or otherwise available to a non-defaulting party. I. Susoensioo of Rights: Any party may deliver to the party in delilult a Notice of Defiiul~ which shall specify the default, specify the action to be taken to cure the defilul~ and specifY that failure 10 take such action will resull in lhe e>.ercisc of one or more of the remedies provided in this Article. If d10 default is n<>l cured within thirty (30) days of the delivery of such Notice of Dcfiwl~ all of the right• nf the defuulting party granted by this agreement may upon notice he suspended until the defuult is cured. without prejudice to the right of the non-BralC valuations of each pi.rt.y•s working interest, then notwithstanding anything to the contrary herein, charges to 72 the joint account shall be made and paid by the ·parties hereto in accordance with tho tax value generated by each party's 73 working interest. Operator shall hill the other parties for their proportionate shares of all tax payments in tho manner 74 provided in Exhibit 'C." - 13 - SEC 189672  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 If Operator considers any tax assessment improper. Operator may. at its discretion, protest within the time and manner 2 prescribed by law, and prosecute the protest to a final determination, unless all parties agigoing party shall he rclioved from all obligations thereafter accruing, but no! theretofore 25 accrued, with respect to the interest ••signed or leased and the operation of any well attributable thereto, and the assigning patty 26 shall have no further int..-..! in the a'5igned or leased premises and its equipment and production other than the royalties retained 27 in any lease made under the lC.."nTI8 of this Article. The party assignee or lessee shall pay to the party assignor or lessor the 28 reasonable salvage value of the latter's interest in any well's salvable materials and equipment attributable to the assigned or leased 29 acreage. The value of all salvable materials and equipment shall be determined in accordance with the provisions of Exhibit "C," less 30 the estimated cost of salvaging and the estimated cost of plugging and abandoning and restoring the :;urface. If such value is less 31 than such costs. then the party assignor or lessor shall pay to the party assignee or lessee the amount of such deficit, If the 32 assignment or lease is in favor of more than one party, the interest shall be shared by such parties in the proportions that tho 33 interest of each bears k> the total interest of all such parties. If the interest of the parties to whom the assignment is to be made 34 varies according 10 depth. then the interest assigned shall similarly reflect such variances. 35 Any assignment, lease or sun-ender made under this provision shall not reduce or change the assignor's. lessor's or summdcring 36 party 1s interest as it was immediately berorc the assignment.. lease or surrender in the balance of the Contract A~ and the acreage 37 assigned. leased or surrendered, and subsequent operations thereon. shall not thereafter be subject to the terms and provisions of this 38 agreement but shall be deemed subject to an Operating Agreement in the fonn of this agreeinent. 39 R. Renewal or Extension of Leases: 40 If any party secures a renewal or replacement of an Oil and Gas Lease or Interest subject to this agreement, then all other parties 41 shall be notified promptly upon such acquisition or, in the case of a replacement Lease taken before expiration of an existing Leaset 42 promptly upon expiration of tho existing Lease. The parties notified shall have the right for a period of thirty (30) days following 43 delivery of such notice in which 10 elect to participate in the ownership of the renewnl or replacement Lease. insofar as such Lease 44 affects lands within the Contract A.rea, by paying lo the party who acquired tt their proportionate shares of the acquisition cost 45 allocated to that part of such Lease within the Contract Area, which shall be in proportion to the inlereSt held at that time by the 46 parties in the C.ootract Area. Esch party who participates in the purchase of a renewal or replacement Lease shall be given an 47 assignment of its proportionate interest therein by the acquiring party. 48 If some, but less than all, of the parties elect to participate in the purchase of a renewal or replacement Lease, it shall be owned 49 by the parties who elect to participate therein, in a ratio based upon the relationship of their respective percentage of participation in 50 the Contract Area to the aggregate of lhe percentages of participation in the Contract Area of all parties participating in U1e 51 purch•sc ofsucb renewal or replacement !,ca.<" The acquisition ofa renewal or replacement I.ease by any or all of the parties hereto 52 shall not cause a readjustment of the interests of the parties stated in Exhibit ••A," but any renewal or replacement Lease in which 53 less than all partieo e!ec( to participate shall not be subject to this agreement but shall be deemed subject to a separate Operating 54 AgTOCment in the form of this agreement. SS If tho interest• of die parties in the Contract Area vary according lo depth, then their right to participate proportion&tely in 56 renewal or replacement Leases and their right to receive an assignment of intere.crt sha11 also reflect such depth variances. 57 The provisions of this Article shall apply to renewal or replacement Leases whether they are for the entire intcrc'SI covered by S8 the expiring Lease or cover only a portion of its area or an interest therein. Any renewal or replacement Lease taken before the 59 expiration of its predecessor LeaSCt or taken or contracted for or becoming effective within six {6} months after the expiratkm of the 60 existing Lease, shall be subject to this provision so long as this agreement is in effect at the time of such acquisition or at the time 61 the renewal or replacement Lease becomos effective; but any Lease taken or contracted for more than six (6) months after tho 62 expiration of an existing Lease shall not be deemed a renewal or replacement Lease and shall not be subjccl to the provisions of this 63 agreement 64 The provisions in this Article shall also be applicable to extensions of Oil and Gas l..casei. 65 C. Acreage or Cub Contributions: 66 While this agreement is in force, if any party contracts for a contribution of cash tQwards the drilling of a well or any other 67 operation on the Contract Are&, such contribution shall be paid to the party who conducted the drilling or other operation and •hall 68 be applied by it agaillSI the cost of' such drilling or other operation. If the contribution be in the form of acreage, the party to whom 69 the contribution is made shall promptly tender an assignment of the acreage. without wmanty of tide, to the DrilJing Parties jn the 70 proportions said Drilling Partie.'i shared the cost of drilling the well. Such acreage shall become a separate C.ontract Area and, to the 71 extent poHib1c. be governed by provisions idimtica1 to this agreement. Each party shall promptly notify all other parties of any 72 acreage or cash contributions it may obtain in suppttt of any well or any other operation on the Contract Area. The above 73 provisions shall also be applicable to optional rights to earn acreage outside the Contract Ar""' which arc in support of well drilled 74 inside Comract Area. Contributions under the paragraph do not include proceeds li"om the aclual sale of working interest in a well or lease - 15 - SEC 189673  A.A.P.L. FORM 610- MODEL FORM OPERATING AGREEMENT - 1989 hen>Under. If any party contracls for any consideration relating to disposition uf such party's shitrc of substances produced hereunder, 3 such consideration shall not be deemed a contribution as contemplated in this Article Vlll.C. 4 O. Assignment; Maintenance ofUniform Interest: Fflr-the pt:1fJH:t5e ef maintainil'ig klnifermi~ er e .. flership ift the Cenh'aet )rea in tfle Oil anti Gas beeses. Oil ftftd Gas IAtetie!M, · elh, eqsirment and J"f'&dweffeR ea• ~d B) this agreemeRl ne Jl&ft) shall e;eU, en&Ymher, tRmafer er Alftlee ether di~esilien ef il6 interest in \he Oil and Gas beoses and QiJ aed Oas 1Mere5te embraeed 1'1thie the Gentre~l +ree e1 in eUs, equipmertt Bftd prettYetien unless sueh tlispesitiafl ee •ers eitker1 l. lfle entiFe ffttec.,es~ eftlJe peff) iR alJ Qjl llHB Gas l.Nses, Qil end Ges l"terest:&, ells, eq11ipl"Re1tt and preduetien, er to 2. aft eqoel 1:1nEli iEled pereent ef llie pertf9 preseHt intef&5t in all Qit and Gas beases, Qil and Gas lt1le:8*, ells, iI 8f!Uipmenl end JH'fHftliJtien in the Cet*eet ~ea. 12 Every sale, encumbrance, transfer or other disposition made by any party shall be made cxpres.•IY subjecl to this agreement 13 and shall he made wilhoul prqudico to the right of the other parties, and any aansferc:o of an own=hip interosl in any Oil and 14 Gas Lea"' ar Interest shall be deemed a party to this agreement as to lhe interest conveyed from and after the effective date of IS the transfer of ownership; provided. however, that the other parties shall not he required lo recognize any such sale, 16 encumbrance. transfer or other disposition for any purpose hereunder until thirty (30) days after they have received a copy or the I7 instrument of transfer or othc.r satisfactory evidence thereof in writing from the transferor or transferee. No assignment or other 18 disposition of interest by a pa1ty shall reliove such party of obligations previously incurred by such party hereunder with respect 19 lo the interest transferred. including without limitation the obligation of a party to pay all costs attributable to an operalion 20 conducted hereunder in which such party has agreed to participate prior to making such as..,ignmcntt and the lien and security 21 interest granted by Article Vll.B. shall continue to burden the intO"ost lransfcrred to ••cure payment of any such obligations. 22 Jr, at any time the interest of any party is divided among and owned by four or more CCPOwners., Operator, at its discretion, 23 may require &uch co-owners to appoint a single trustee or agent with full authority lo receive notices, approve CO pelt ef it!i interests uHtler this atfeemeftf, er its rigltffl aHEI iHtet=e5tfi in ~e Gan~rael 36 A.tree, it shall pFem~ g;Le •ffiUee netiee le Ute etlu,.· f'lai=aes, with NII intbAMtie11 eetieeu1ir:g lei prepeseEI Eiispesitie:t1, \1hieh 37 sfletl in"1htde the name and address ef the fH'e!tf'eelt e lfefteferee ( fte mllM Be read), illiag &ffd el.Jie ta p1::1Fehese), th pttrehase 38 priee. a legal deset if'JiieH e;ttffieient te itlemif.i the pFepert), atn:l aH ether teilflft af the eft'er. The e~er= ~es shall then ha e efl 39 eplianal prier r;gl1l, faf a J)tlfied ef ten £J.ed by Section 761 of the Code and 53 the regulations promulgated thereunder. Operator is authorized and directed to execute on behalf of each party hen:by affecled S4 such evidence of this election as may be required by the Secretary of the Treasury of the United States or the Federal Internal SS Revenue Service, including specifically, but no! by way of limitation, all of the returns, statements. and lhe data required by 56 Treasury Regulation § 1,761. Should there be any requirement that each party hereby affected give further evidence of this S7 election, each such party shall execute such documents and furnish such other evidence ., may be required by tho Federal Internal S8 Revenue Service or as may be necessary lo evidence this eleclion. No such party shall give any notices or take any other action 59 inconsistent with the election made hereby. If any present or future income tax laws of the state or states in which the Contract 60 Area is located or any future income tax laws of the United States contain provisions similar to those in Subchapter "K." Chapter 61 I, Subtitle •A,' of the Code, under which an election similar lo that provided by Section 761 of the Code is permitted, each party 62 hereby affected shall make such election as may be permitted or required by such laws. In making the foregoing election, each 63 such party 5tates that the income derived by such J*Tty frum operations hereunder can be adequately determinod without the 64 computation of partnership taxable income. 65 ARTICLE X. 66 Cl.AIMS ANI> LAWSUITS 67 Operator may settle any single uninsured third party damage claim or suit arising from operations hereunder if the expenditure 68 does not exoccd five thousand Dollars($ S000.00 land if the payment is in eomplele settlement 69 of such claim or suit. If the amount required for settlement e1tcccds the above amount, the parties hereto shall assume and take over 70 the further handling of the claim or suit, unless such authority is delegated to Operator. All costs and expenses of handling settling, 71 m· otherwise discharging such claim or suit shaU be a the joint expense of the parties participating in the operation from which the 72 claim or suit arises. If a claim is made against any party or if any part)' is sued on account of any matter arising tom operations 73 lten:under over which such individual has no control because of the rights given Operator by this alireement, such party shall 74 immediately notify all od1er parties. and the claim or suit shall be treated as any other claim or suit involving operations hereunder. - IS· SEC 189674  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 ARTICLE XI. FORCEMAJEURE lf any party is rendered unable, wholly or in port, by force majeurc to carry out its obl.igations under this agreement. other than the obligation to indemnify or make money payments or furnish security, that party shall give to all other parties prompt written notice of the force majeure with reasonably futt particulars concerning it; thereupon. the obligations of the party giving the notice, so fur as they are affected by the force majeure, shall he suspended during. but no longer than, the continuance of lhe force majeure. The tenn "force: majeure." as here employed, shall mean an act of God, strike. lockout. or other industrial disturbance, act of the public enemy, war, blockade, public riot. lightening, fire, storm, flood or other act of nature, explosion, govc:mmental action, govemmentaJ delay, restraint or inaction, unavailability or equipment, and any other I0 cause, whether of the kind spccifica11y cnwnmted abo\le or otherwise, which is not reasonably within the control of the party 1J claiming suspension. 12 The affected party shall u:se an reasonable diligence to remove the force majcurc situation as qujckJy as practicable. The 13 requirement that any force majeure shall be remedied with all reasonable dispatoh shall not require the settlement of strikes. 14 lockouts, or other labor difficulty by the party involved, contrary to its wishes: how all such difficuhies shall be handled shall 1S be entirely within the discretion of the party concerned. 16 ARTICLE XII, 17 NOTICES 18 AU notices au!hori!'£d or required between the parties hy any of the provisions of this agreement, unless otherwise 19 .specifically provided. shall be in ~ting and delivered in person or by United States mail. courier service, Lelegram, telex, 20 teJccopicr or any other fonn of facsimile, postage or charges prepaid, and addressed to such parties at •he adhses listed on 21 Exhibit "A." All telephone or oral notices permitted by this agreement shall be confirmed immediately thereafler by writtcn 22 notice. The originating notice given under any provision hcreo f shal1 be deemed delivered only when nx:eivcd by the party to 23 whom such notice is directed, and the time for such party to deliver any notice in response thereto shall run tmm the date 24 the originating notice is received. "Receipt" for purposes of this agreement with respect ta wrjttcn noliee delivered hereunder 2S shall be actual delivery of the notice lo the address of the party to be notified •pecified in accordance with this agreement, or 26 to the telecopy, facsimile or telex machine of such party. The second or any responsive notice shall be deeincd delivered when 27 deposited in the United States maiJ or at the office of the courier or telegraph service. or upon transmittal by telex, telecopy 28 or filcsimile, or when personally delivered to the party to be notified, provided, that when response is required within 24 or 29 48 hours, such response shall be given orally or by telephone, tole., telecopy or other facsilnile within such period. Each party 30 shall have the right to change its address at any rime, and &om time to time, by giving written notice thereof to all other 31 pa.rtk~. If a party is not available to receive notice orally or by telephone when a party attempts to deliver a notice required 32 to be delivered within 24 or 48 hours, the notice may be delivered in writing by any other method specified herein and shall 33 be deemed delivered in the same marmcr provided above for any responsive notice. 34 ARTICLE xm. 35 TERM OF AGREEMENT 36 This agreement shall remain in full force and effect a.< to the Oil and Gas Leases and/or Oil and Gas Interests suQject 37 hereto for the period of time selected below; provided, however, no party hereto shall ever be construed as having any right tide 38 or interest in or to any Lease or Oil and Gas Interest contributed by any other party beyond the term of this agreement 39 D Optjon No. I; So long as any cf the Oil and Gas Looses sul!icct to this agreement remain or BT• continued in 40 force as to any pert of the Contract Area, whether by production, extension, renewal or otherwise. 41 a OptiAR Ne. 2. IR the eweftt the uell dese1;hed ie Artiete "I.A.• er Ml) SllbSeflllent .. ell drilled URder 88)' pre isien 42 e( this agreen1eM; results ie ~e Ge111~lelien ef a Vi elJ as s 'lit ell eapehJe ef pFeduelieft pf Oil andleF Gas in p11:ying 43 EfH&ntities, ~is agreeitteAt Rhall eefttin11e in feree se leng as a~ su.eh ell is eapobte er JWB8uetiefl. enel ft:lr an 44 adtiitieflftl pe1ie8 ef de's theveeft:er. J'M•ided, he ~er. itj f!rier te the t9lpiratien ef sueh 4S additieNH JHFied, ene er mere ef the paftiC'S' hersts SRI engaged in drilliHg, Re eR1iflg, IJeepefting. Sjdef!l'eelfiRg; 46 Plttggiag Bael~. testif'lg er affempting ~ Cemfl'lete BF Re eemplete a ell ar "eUs heMtmder, this agreeffleht shell 47 eeflf:int1e in fbfee unHJ 51=1eh epe1atiens ha.e heeR eem11leted anti if pre8t1etie11 res1:1:lt!I thePefram, this agreement 48 shall eeAl:ifttfe in fe11ee as p1e,ideEI ReFeirt. J 1 ~he eunt the eD f:lesefihe6 i1t "fliele VI.A, "' &"7 su1'se4uenl nell 49 clrilh1d heiret1RdE11, Fest.ilts ln a ElP; hale. &HS ne ether well i" eapehle ef predtteiflg Oil art'4't1r Geff ftiem tfle SO Cefflftl:e~ 'Pea. this agreement shall terminete 1:tHla'ii drilling; Seepl!fting; Sidetmelcirtg. Gamp1etintt R:e 51 eemploli•g; Ple any 74 rights, privileges, or obligations which Non-Operators may have under federal or state Jaws or under rules, regulations or - 16. SEC 189675  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 orders promulgated under such laws in reference to oi1, gas and mineral operations, including the location, operation. or production of wells, on tracts offsetting or adjacent to the Contract Area. With respect to the operations hereunder, Non-Operators agree to release Operator from any and all losses, damages, injuries. claims and causes of action arising out of, incident to or resulting directly or indirectly from Operator's interpretation or application or ndes, rulings. regulations or orders of the Department of Energy or Federal I!nergy Regulatory Commission or predecessor or successor agencies to the extent such interpretation or application was made in good faith and does not constitute gross negligence. Each Non-Operator further agre,. lo reimburse Operator for such Non-Operators share of production or any refund. fine, levy or other governmental sanction that Operator may be required to pay as a result of such 9 an incorrect interpretation or application, together with interest and penalties thereon owing by Operator a.• • result of such I0 incorrect interpretation or application. II ARTICLE KV, 12 MISCELLANEOUS 13 A. Execution: 14 This agreement shall be binding upon each Non-Operator when this agreement or a counterpart thereof has been IS ective for all purposes of this lease even though there may be mineral, royalty, or leasehold interests in lands within the unit which are not effectively pooled or unitized. Any operations oonducl.ed on any part of such unitized land shall be consi~, for all purposes, c•e<.')lt the payment of royalty, operations conducted upon said land under this lease. There shall be allocated tu the land covered by this lease within each such unit (or to each separate tract within the unit if the lease covers separate tracts w1thin the unit) that proportion of the tolal production or uniti1.ed minerals from the unit1 after deducting any used in lease or unit operations, which the number of surface acres in such land (or in each •uch separate tract) covered by this lease within the unit bcara to the total numbcr of surfitce acres in the unit, and the production so allocated shall be considered for all purposes, including payment or delivery ofroyally, overriding royalty and any other payments oul of production, to be the entire production of uniti7.ed minerals &om the land to which allocated in the same manner a.• the ugh produced tbcrofrom under the terms of the• lease. Tho owner of the reversionacy ..tale of any term royalty or mineral estate agrees that the accnial of royalties pursuant to this paragraph or of shut-in royalties from a well on the unil shall satisfy any limilation of tmn requiring production ofoil or gas. The formation of any unit hereunder which includes land not covered by this lease shall not have the e!fect of exchanging or transfen-ing any interest under this lease (including. without limitation any shut-in royalty which may become payable under this lease) between parties owning interests in land covered by this lease and parties owning inlereSts in land not covered by this lease. Neither shall it impair the right of the lessee to release as provided in paragraph S hereof. except that lesaee may not so release as to lancL• wilhin a unit while there are operalions thereon for unitized minerals unless all pooled leases are rclcascd as to lands within tho unit At any time while this lease is in furce lessee may dissolve any onit established hereunder by filing for record in the public office where this lease is recorded a declaration to that effect. if at that time no operations are being conducted thereon for unitized minerals. Subject to the provisions ofthi.c; paragraph 4, a unit once established hcrconder shall remain in force so long as any lease subject thereto shall remain in force. If this lease now or hereafter covers separate tracts, no pooling or unitization of royalty interests as between any such separate tracts is intended or shall be implied or result mere£y &om tho inclusion of such separate tracts wi1hin 1his lease bu~ li:ssee shall nevertheless have the right lo pool or unitize as provided in this paragraph 4 with conse.qucnt allocation of production as herein provided As used in this paragraph 4, the words "separate tract" mean any tract with royalty ownership differing, now or hereafter, either aa to parties or tllllOUnts, from that as to any other part of the Jea.c;ed premi$CS. 5. Lessee may at any time and from ti1nc to time execute and deliver to lessor nr file for record a release or releases of this ll>ISC as to any part or all ofsakl land or ofany mineral or horiwn !hereunder, and lhcn:by be relieved of all oblig111ions, as to tho released acreage or interest. 6. Whenever used in this lease the word "operations" shall mean operations for and any ofthe following: dn1ling. testing. completing, reworlticc in wriling to Operator and all other Non-Operators, s11all have lhc right lo audit Operator's accounts and records relating to the Joint Account for any calendar year within the twcnty·four (24) month period lbllowing the end of such calendar year; provided, however, the making of an audit shall not C11:tend lhc time for the taking of written ~ception to and the adjustments of accounts as provided for in P•rab'111Ph 4 of this section I. WhcR> thCR> arc rwo or more Non-Operators. the Non-Operators n-OperatOlli approving such audit. 13 14 B. The Operator shall reply in writing to an audit report within 180 day> ancr receipt of such n:port. 15 16 6. Approval By Non-OPonuon 17 18 Where; an approval or other agreement cf the Parties or Non-Operators is expressJy required under other sections of 1his 19 Accounting Procedure and if the agreemenl to ·which this Accounting Procedure is attachod contains no 20 contrary provision.< in regard thereto, Operator shall notify all Non-Opcraton of the Operators proposal, and tho 21 agreement or approval or a majority in inteR$1'. of the Non-Operators shall be controlling on all Non-Opcruton. 22 23 24 II. DIRECT CHARGES 25 26 Operator shall charge !he Joint Account with the following hems: 27 28 29 '· Ecolog:lcal and Environmental 30 Costs incurred for the benefit of the Joint Property as a result of gnvcmrilcntal or rcguhuory requirements to sati~fy 31 environmental considerations applicable to the Joint Operations. Sucl1 costs may include surveys of an ecological or 32 archaeological nature and pollution control procedures as required by applicable la\W and regulations. 33 34 2. Rentals and Royalties 35 36 Lease rentals and royaltie:J paid by Operator for lhc Joint Operations. 37 38 3. Labor 39 40 A. (l) Salaries and wagos or Operators field employees directly employed on the Joint Property in the conduct of 41 Joint Operations. 42 43 (2) Salaries of first level SupeiviSO!ll in the field, 44 45 (3) salaries and wages of Tcc:hnical Employees dircclly employed on the Joint Property if such charges arc 46 cltch1ded from the overhead rates. 47 48 (4) Salaries and Wll80S of Teclmioal Employees cilbor temporarily or pormoncntly assigned to ond directly 49 employed in the operalion or the Joint Property if such charges arc excluded from the overhead rates. so 51 B. Operator's cost of holiday, vacation, sickness and di$1bi1ity benefits and other c!JStomary allowances. paid to 52 employees whose salaries and wages are chargeahlc to the Joint Account under Paragraph JA of this Seclion 11. 53 Such costs lU1der this Paragraph 38 may be charged on a ''when and as paid basis'' or by 11 pcrcentagc a.s.scssmcnt" 54 on the amount of RB:Jaries and wages chargeable 10 the Joint Account under Paragraph 3A of this Section IL Jr SS percentage IS9CSStnCnt is used, the rate shall be based on the Operator's cost experience, 56 57 C. Eitpenditurcs or contributions made pul'!Wlnl to asscs.wents imposed by governmental authority which oro 58 applicable 10 Operator's costs chargeable lo the Joint Account under Paragraphs 3A and 38 of lhis Section II. 59 60 D. Personal Expenses of those employees whooe salaries and wages arc chargeable to the Joint Account under 61 Parasraphs 3A and 3B of this section 11. 62 63 Employee Bcnenb 64 65 Operator's current costs or c.c;rablishcd plans for employees' group life insurance. hospi1alization, pension, rtlirement, 66 stock purchase, thrift, bonus, and other benefit plans of a like nature, applicabfo to Opcratoi's labor cost chargeable to the 67 Joinf Acco~m! under Paragraphs JA and 38 af Oris Section H shall be Opclator's actual cost not 10 exceed the percent 68 moSI recently recommended by the Council of Petroleum Accounlants Socielies. 69 70 -2- SEC 189689  ~S 1984 ONSHORE .Jmpert.y if such charges are excluded fi'om the ovcrlicad 31 ralcs. The cost of professional consultant services or contract SCfVi~ of technical personnel nol directly engaged on the 32 Joinl Property shall not be charged to the Joint Account.if directly engaged in the operation (not odminist1'tion) of tho joint property, 33 34 8. Equipment and Faeilitie1 Furnished By Operator 35 36 A. Operator shall charge the Joint Account for use of Operator owned equipment and facilities at rates cammcnsurate 37 with costs of ownend!ip and opcralion. Such rates shall inch1de co.ti or maintenance. repairs, other operating 38 expense. insurance, taxes, depreciation. and interest on gross investment less accumulated depreciation not to 39 exceed eighteen percet)I %) per annum. Such rat.cs shall not exceed average commercial 40 rates currently prevailing in the immcdiale area of the Joint Property. 41 42 B. Jn lieu of charges in Paragraph 8A obove. Operator may elect to use average commercial rates prevailing in the 43 immediate area of !he Joint Propeny less 20%. For automotive eqt.tipmcnl, Operator may elect to use rates 44 published by the Petroleum Motor Transpon Associa1ion. 45 46 9. Damages and l.os11e& to Joint Property 47 48 All co.~s or expenses necessaiy for tho repair or replacemenl of Joint Property made necessaiy because of damages nr 49 lcmes incurred by tire, noodt storm, theft, accidcnl, or other cause. except those resulting from Operator's gross 50 negligence or willful misconduct. Operator shall furnish Non-Opcmtor wriuen notice of damages or losses incurred as 51 soon as practicable aRcr a rcpon thereof has been reccived by Operator. 52 53 10. Legal Expenlliic 54 SS Expense of handling. invcstiga1ing and settling litigation or clai~ discharging of lien&t payment of judgments ond 56 amounts paid for senlcmcnt of claims incurred in or resulting from operations under the agreement or necessary to 57 protect or recover the Joint Property. except that no charge for services of Operator's legal staff or fees or CXpt:ns4: of 58 outside uttomoys s.ha!1 he made unles.s previous!)' agreed to by the Parties. All other legal expense is considered to be 59 covered by the overhead provisions of Section UI unless otherwise agreed to by the Parties. excepl as provided in Section 60 I, Paragraph 3. 61 62 11. Tu:cs 63 64 AJI taxes of every kind imd nature assc:ssc:d or levied upon or in connection with the Joinl Propcny, the operation thereof, 65 or the production therefrom, and which taxes have been paid by the Operator for the benefit of the Parties. If t'hc ad 66 valorem taxes arc based in whole or in part upon separate valuations of each pany's working interest, then 67 notwithstand~ng any1hing to the COlltrary herein. charges to the Joint Account shall be made and paid by the Parties 68 hereto in accordance with the lax value generated by each party's working in1erest 69 70 -3- SEC 189690  ''IS 1984 ONSHORE m1mende1l by the C on either: 32 33 ( X ) Fixed Rate Basis, Paragraph IA, or 34 ( ) Pen:cn1agc nasi~ Poragraph IB JS 36 Uni~ otherwise agreed to hy the Parties,, such charge shall be in lieu of costs and expenses of ell offices and 37 salaries or wages plw; applicable burdens and expenses of all pcraonnel, excepl those directly chargeable under 38 Paragraph JA.. Section II, The cost and e;11.pense of services from outside sources in connection with matters of 39 taxation, traffic, accounting or mettcrs before or involving; governmental agencies shlll1 be considered as included in 40 the overhead rates provided. for in the above ·selected Parabrr&ph of this Section 111 unless such cost and expense arc 41 agreed to by the Parties as a direct charge to the Join1 Account. 42 43 ii, The salaries. wages and Perr.onal Expenses of Technical Employees nndlor the cost of prof~onal consultant 44 services and contract services of technical personnel directly empioyed cm the Join I Property: 4S 46 ) shall be covered by the overhead rates. or 47 ( X ) shall nOI be covered hy the overhead rates. 48 49 iii. The salaries. wages and Personal Expenses of Technical Employee.~ and/or costs of profemional consultant services so and contract services of technical personnel either temporarily or permanently assigned to and di reedy employed in SJ the operation of the Joint Property: S2 Sl ) shall he covered by the overhead ralcs, or S4 ( X ) shall nnl be covered by the overhead raics. SS 56 A. Overhead - Fixed Rate Basis S7 SS (I) Operalorshall charge th<: Joint Account at the following rates per well per month: S9 60 Drilling Well Rate s. __,~s~o~o~oo~---------- 61 (Prnraled for less than e full month) 62 63 Producing Wen Rate $,_--'7"'S'"O"'OO"-------- 64 6S (2) Application uf Overhcad - Fixed Rate Dasis shall be as follows: 66 67 (a) Drilling Well Rate 68 69 (I) Charges for drilling wells shall begin on the date the well is spudded and tonninatc on the date 70 1hc drilling rig, completion rig, or other unils used in completion of the well is released, whichever -4- SEC 189691  ·~s 1984 ONSHORE 11T1mended by the Council 01 t'etroleum Accountants r---------5-ocletle_s --COPA~ is later, except that no charge shall be made during suspension of drilling or completion operations for fifteen (IS) or more consecutive calendar days. 4 (2) Charges for wells undergoing any lypo or workover or recompletion for a period of five (5) s consecutive worl:. days or more shall be made at lhc drilling well rate. Such charges shall he applied for the period from date workover opcra1ions. with rig or other units ust.-d in workovcr. commence rhrough date or rig °'other unit release, except that no charge shall be made during suspension of operations for fifteen (IS) or more consecutive calendar days. 10 (b) Producing Well Ralcs II 12 (I) An active well either produced or injected into for any portion of the month shall be considered as 13 a one--well charge for the entire month. 14 IS (2) Each active complctfon in a multi-<:ompt~ed well in which production i~ not commingled down 16 hole 5ludl be consjdcred as a ooc~well charge providing each completion is considered a separate 17 well by the governing regulatory authority, 18 19 (3) An inactive gas well shut in bocausc of overproduction or failure of purchaser to take the 20 production shall he considered as a one·wetl charge providing lhc gas well is dircclly connected to 21 e. permancni sales outh:1. 22 23 (4} A one-well charge !ihall be made for the month in which plugging and abandonmenl operatioos 24 are completed on any well. This oric--well charge shall be made whether or not the well has 2S produced except when drilling well rate applies. 26 27 (S) All other inaclivc wells (including but not limited to inactive wells covered by wlit l*llowable, lease 28 allowable, transferred allowable, elc.) shall not qualify for an overhead charge. 29 30 (3) The well rau:s shall be adju~od "" or the first day or April oach yeor rollowing lhe etTcctivo dare or the 31 il(.'feemenl lo which this Accounting Procedure is attached. The adjustmenl shall be computed by multiplying 32 the nue cuTTCnlly in use by the percentage increase or decrease in the overage weekly earnings of Crude 33 Petroleum and Gas Production Workem fbr the last cu.lender year compared to the caJendar year preceding: as 34 shown by the index of avera1:ore weekly earnings of Crude Petroleum and Oa.ll Production Workers as published 35 by the United States Department of Labor, Bureau or Labor Statistics, or the equivalent Canadian index as 36 published by Statistics Canada, as applicable. The adjusted rates shall be lhc rates currenlly in use, plus or 37 minus the computed adjustment. 38 39 B. Overhead· Percentage Basis 40 41 (1) Operator shall chaTije lhe Jotn1 Accoun1 at the roll owing rates: 42 43 (•) Development 44 45 _ _ _ _ _ _ _ _ _ _ ,Percent ______%) of the cost of development of the Joint Pmpe11y exclusive of costs 46 provided under Para1:,Jtaph IO or Section II and all salvage crcdit.'i. 47 48 (b) Operaling 49 so -------~-Percent (_ _ _ _%) of the cost of operating the Joint Property e:ic:cl usivc of cams provided SI under Parngraphs 2 and 1O of Section I~ all salvege credit.s. the value of inj~ted i:.11bstanc:e:s purchased S2 for secondary recovery 1U1d all taxes and assessments which arc levied. assessed and paid upon the SJ mineral interest in and to the Joint Property. S4 SS (2) Application of Overhead • Percentage llusis shall be as follows: 56 57 For the purpose or determining charges on a pen;enlagc basis under Paragraph I B or this Section rn, S8 development sha11 include all costs in connection with drilling, rcdrilling. deepening, ot any remedial 59 operations on any or all wells involving the use of drilling rig and crew capable of drilling to the producing 60 interval on the Join! Property; also, preliminary expenditures necessary~ in preparation for drilling and 61 ex~nditurcs incurred in abandoning when the well is not completed as a producer, and original c:ost of 62 comtrue1ion or installation of fixed assets. the expansion of fixed asset!' and any other project cletrly 63 discernible as a fixed asset, except Major Construction as defined in Para1.'Tilph 2 of this Section III. All other 64 costs shall be considcral as operating. 65 66 2. Overhead - Major Comtruction 67 68 To compensate Operator for overhead co.5ts incurred in the construction and installation of fixed ;mets, the expansion of 69 fixed assets, and any other project clearly discernible as a fixed asset required for the developm..-nl and opcJll.lion of the 70 Joint Property, Operator shall either negotiate a rate prior to the beginning or construction, or Mall charge the Joint .5. SEC 189692  \S 1984 ONSfiORE '1T1mended by the Council OT ~·etroleum Accountants r-----------5-ocleti•_· --CO~A~ Accouru ror overhead based on the following rates for any Major Construction p~iect in excC$ofS_ _ _ _ _ _ _ _ _ _ _ _ _. A. ___i_ % offirst SI 00,000 ortDlal cost if h:ss. plus B. __J__ %ofc"'1sin cxCC!lhl basis lo the railway n.>Cciving point nearest the Joint Property for which 62 published rail rates for tubular goods exist. If the 801000 pound rail rate is not offered. rhc 701000 pound 63 or 90,000 pound rail rate may be used, Freight chaq,res for tubing will be calculated from Lorain, Ohio 64 and casing from Youngstown, Ohio. 65 66 (b) Por grades which arc sµcc:ial to one mill only, prices shall be computed at the mill base of ihat mill plus 67 transportation cost from that mill to the railway receiving Point nearest the Joint Property as provided 68 above in ParasraPh 2.A.(l)(a). For transportarion cost from points other than Eastern mills, tho 30,000 69 70 -6- SEC 189693  \S 1984 ONSHORE 1mmended by the Council or Petroleum Accountants .---------Soeleu_ •• --COPA~ pound Oil Field Haulers AS!iOciation intcrstacc truck rate shall be used. (c) Spocial end finish tubular goods shall be priced al the lowest published out-or->iDCk price, f,o,b, llouston, Texas. plus transportation cost. using Oil Field llaulcrs Association inlcn>talc 30,000 pound truck rate, to the railway receiving point nearest tlle Joint Property. {d) Macaroni tubing (size less than 2 318 inch OD) shall be priced at the lowest published out-cf-stock prices f.o.b. the supplier plus transportation costs. using the Oil Field Haulers Association interstate truck rate per weight of tubing transferred, to the railway receiving point nearest the Joint Property. 10 II (2) Line Pipe 12 13 {a) Linc: pipe movements (except size 24 inch OD and larger with wa!ll'! % inch and over) 30,000 pounds or 14 more shalJ be priced under provisions of lubular goodi; pricing in Paragraph A.(l)(a) as provided above. 15 frcighl charges shall be calculalcd fmm Lorain, Ohio. 16 17 (b) Line Pipe mavements cc~ccpt size 24 inch OD) und larger with walls % inch and over) less than 30,000 18 pounds shall be priced at Ea.~cm mill published carload base prices effective a.11, of dale of shipment, 19 plus 20 percent, plw. transportation costs based on freighl rates as .set forth under provisions of tubular 20 goods pricing in Paragraph A.(l)(a) as provided above. Freighl charges shall be calculated fmm LoOOn, 21 Ohio. 22 23 {c) Line pipe 24 inch OD and over and II inch wall and huger shall be priced f,o,b, lho point cf 24 manufacture at cu11c:nt new published prices plus transportation cost to the railway receiving point 25 nearesl the Joint Property. 26 27 (d) Llne pipe. including fabricated line pipe, drive pipe and conduit not listed cm pUblishcd price lists shall 28 be priced at quoted prices plus ft'eight ta the railway receiving point neara;t lhe Joint Property or at 29 prices agreed to by !he Parties. 30 31 (3) Other Mai.erial shall be priced at the current new price, in eff'ect al date of movement, BS listed by a reliable 32 supply store nearesl Ille Joint Property, or point of manuracture, plus transportation costs. if applicahle, to the 33 railway receiving point nearest the Joint Property. 34 35 (4) Unused new Material, except tubular goods. moved from tho Joint Property shall he priced at the current 36 new price, In effect on date of movement, as listed by a reliable supply store nearest the Joint Property, or 37 point of manufac1uro, plus lransportation cost~ if applicable, to lhe railway ,...eiving point n.....t tho Joint 38 Property, Unused new tubulars will be priced as provided above in Paragraph Z.A.0) and (2). 39 40 B. Good Used Material {Condition B) 41 42 Material in sound and serviceable conditioo Qnd suitable for reuse without reconditioning: 43 44 (I) Material moved to rhc loinr Property 45 46 Al seventy·five percent (75%) of current n~-w price. as deletmined by Paragraph A. 47 48 (2) Maicrlal u.h A, if Material was 54 originally charged to the Joint Account a.' n'ied Material 55 56 {3) Material not used on 11nd moved from the Joint Property 57 58 At seventy-five percent (75%) of current new price as determined by Paragraph A. 59 60 The cost ofrccondi1ionin& ifuny, shall be absorbed by the transferring propert)'. 61 62 C, Other Used Ma1erlol 63 64 {I) Condition c 65 66 Material which is not in sound and serviceable condition and not suitable for its original function until 67 a0cr reconditioning shall be priced al fifty pen;ell! (5()%) of CUIT'Clll - price BS. detennincd by 68 Paragraph A. The cost of recondi1ioning shall be charged to lhc receiving propeny, provided Condition 69 C value plus cost of reconditioning docs not exceed Condition B value. 70 -7- SEC 189694  S 1984 ONSHORE nmended by the Council ot tJetroleum Accountants .------------Societle_s --CO~A~ (2) Condition D Matcrial 1 excluding junk, no longer suitable for its original purpose, but usable for some other purpose sh!ltl be priced on a basis commensurate with its use. Operator may dispose of Condition D Material under procedures nonnally used by Operator without prior approval of Non-Operators. (a) Casing, tubing, or drill pipe used as line pipe shall be priced as Grade A and B seamless line pipe of comparable size and weight. Used casing, tubing or drill pipe utilized as line pipe shall be priced at used line pipe prices. 10 II (h) Casing, tubing or drill pipe used as higbcr pressure service lines than $1&ndanl line pipe, e.g. 12 power oil lines, shall he priced under normal pricing procedures for casing, tubing, or drill pipe. 13 UJl'Cl tubular goods shol 1be priocd on a non upset basis. 14 IS (3) Condition E 16 17 Junk shall be priced at prevailing prices. Operator may dispose or Condition E Material under 18 procedures nonnally utilized by Operator without prior approval cf Non-Operators, 19 20 D. Obsolete Material 21 22 Material which is sctviceablc and usable for 1ts originaJ function but condition and/or value of such Material 23 is not equivalent to that which would ju.\"tify a price· as provided abtwe may be speciaUy priced as agreed lo by 24 the Patties. Such price should result In the Joint Account being cbargcd with the value of the servic:c 2S rendered by Sllch Matetial. 26 27 l!. Pricing Conditions 28 29 (I) Loading or unlnading costs muy be charged to the Joint Accounl at the rare ar twenty--tive ccms (2St) JO per hundred weigh! on all tubular goods movements. in lieu of actual laading or unloading costs JI susraincd a1 the Slocking poinr. The above rate shall be adjusted a.~ of the first day of April each year 32 following January 1, 1985 by the same percentage incrcar.e or decrease used 10 adjust overhead rates in 33 Section Ill, Paragraph 1.A.(3). Each year, the rate calculated sh!lll be rounded to the nearest cent and 34 shall be the rate in effect until the finit day of April next year. StJch rate shall be publi~1ed each year JS by the Council of Petroleum Accountants Societies. 36 37 (2) Material involving erection costs shall be charged at applicable percentage of the cummt knocked-down 38 price of new Material. 39 40 J. Premium rr1ccs 41 42 Whenever Material is not readily obtainable at published or listed prices because of national emergencies. strikes or other 43 unusual cnuses over which the Operator has no control, the Operator may charge the Joint Account for the ~uired 44 Material at the Operator's actual cost incurred in providing such Material, in making tr sui!ablc for use, and In moving it 4S to Lhc Joint Property; provided notice in writing is furnished to Non-Operators of the proposed charge prior to bilJing 46 Non-Operators for such Material. Each Non-Operator shall have the right, by so electing and notifying Operalor within 47 len days after receiving notice from Operator, to furnish in kind all or JXllt of his share of such Material suitable for use 48 and acceptable to Operator. 49 so 4, Warranty of Material Furnished By Opcratllr 51 S2 Operator docs not warrant the Material furnished, Jn case of detective Material, credit shall not be passed to the Jolnf SJ Account unlil adjustment has been received by Operator from the manufacturers or their agents. S4 SS S6 V. INVENTORIES 57 58 The Opcralor shall maintain detailed records of Controllable Material. S9 60 I. Periodic Inventoriu, Notice 1md Representation 61 62 At reasonable intervals, inventories shall be taken hy Operator of rhe: Joint Account C.ontroUablc Material. Wrilten notice 63 of intention lo take innnlory shall be given by Operator at leasl thiny (30) days before any inventory is lo begin so lhal 64 Non-Operators may he represented when any inventory is 1aken. failure of Non-Operaton; to be represented at an 6S inventory shall bind Non-Operators to accept lhe inventory ralc.en by Operator. 66 67 z. Reconciliation and Adjustment of Inventories 68 69 Adjustments to the Joint Account resulting from the reconciliation of a physical inventory shall be made within six 70 monlhs following the taking of the inventory. Inventory adjwitments shall be made by Operator to the Joint Account for -8- SEC 189695  \S 1984 ONSHORE Anmendod by the Council ot Pelrcleum Accountants . - - - - - - - - - - - - s o c _ 1 e 1 1 e s_ _ COPA~ overages and shortagos, blJI, Operator shall be held accountable only for shortages due to lack of reasonable diligence. 3. Special Jnventorics Special invencories may be taken whenever there is any sale, c:hange of interest, or chanbre of Operator in the Joint Property. It shall be the duty of the pany selling to notify all other Parties as quickly as possible after the transfer of interest tak~ place. In such C8SCSi both the seller and the purchaser shall be governed by wch inventory. In cases involving a chan1.re of Operator, all Parties shall he governed by such inventory. 10 4. Expense of Conducting Inventories ll 12 A. The expense of conducting periodic inventories shall not be charged to the Joint Account unless agreed lo b)I the 13 Parties. 14 IS S. The expense of conducting specild inventories shall be charged to_ the Parties requesting such inventories. except 16 inventories required due lo change of Operator shall be charged to the Joint Account. 17 18 19 20 21 22 23 24 25 26 27 28 29 .10 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 so 51 52 53 54 SS S6 S7 58 59 60 61 62 63 64 65 66 67 68 69 70 -9- SEC 189696  EXHIBIT"D" Attached to and made a part of Operating Agreement dated November I, 2009, between RAW Oil & Gas Inc., as Operator and Smith Energy Company, etal, as Non-Operators. INSURANCE Operator shall carry and maintain at all times the following insurance with respect to all operations under this Agreement: a) Insurance which shall comply with the Workmen's Compensation Laws of the State in which operations hereunder are conducted. b) Employers' Liability Insurance with limits ofnot less than $1,000,000 for each occurrence. c) Comprehensive General Liability Insurance with limits ofnot less than (i) $1,000,000 for each occurrence for bodily injury, and (ii) $1,000,000 for each occurrence for property damage. Operator shall provide an APE insurance program with coverage as follows: Premises and operations, sudden and accidental pollution, underground resources, products and completed operations, and blowout, cratering and explosion coverage. d) Automobile Liability Insurance, including owned, hired and non-hired vehicles, with combined single limits of $500,000. e) Coverages in subparagraphs (c) and (d) above shall include Non-Operators as Additional Insured. f) facess Liability Coverage in excess of the coverage in subparagraphs (a), (b), (c), (d) and (e) above with a combined single limit for Bodily Injury and Property Damage of not less than $1,000,000 for each occurrence. g) All premiums on the above provided for insurance shall be charged to the Joint Account. Except as may be otherwise expressly provided in the Operating Agreement to which this Exhibit is attached, the Joint Acrount shall be charged with all liabilities and expenditures resulting from any claims, damages, or losses against which Operator is not required to carry insurance. b) Operator shall not be liable to Non-Operators for loss, suffered on account of the insufficiency of insurance carried, or of the insurer with whom carried, nor shall Operator be liable to Non-Operators for any loss accruing by reason of Operator's inability to provide or maintain the insurance specified above, provided, however, that if at any time Operator is unable to obtain or maintain such insurance, Operator shall promptly notify Non-Operators in writing of such met and Non-Operators may obtain and maintain such insurance at their expense. SEC 189697  EXHIBIT"E" Attached to and made a part of Operating Agreement dated November !, 2009, between RAW Oil & Gas Inc., as 'Operator and Smith Energy Company, etal, as Non-Operators. GAS BALANCING AGREEMENT The parties to the Operating Agreement to which this agreement is attached own the working interest in the gas rights underlying the Contract Area covered by such agreement in accordance with the percentages of participation as set forth in Exhibit "A" to the Operating Agreement. Each party has made (or will make) arrangements to sell or utilize its share of the gas well gas produced from the Contract Area. However, the respective gas markets of the parties may be limited from time to time; therefure, to permit the parties as much flexibility as possible in meeting the demands of their respective markets, the parties hereto agree to the following storage arrangement: Section I. From and after the date of initial delivery of gas well gas from any proration unit within the Contract Area, during any period when the market of a party is not sufficient to take that party's full share of the gas well gas produced, the other parties shall be entitled to produce each month, in addition to their own share of production, that portion of any other party's share of production which said party is unable to market, or its purchaser does not take, of the allowable gas production assigned to such proration unit by the appropriate regulatory authority having jurisdiction in the premises or at the maximum efficient rate, if no such allowable gas production is so assigned, except, however, that no party shall be entitled to take or deliver to a purchaser gas production in excess of three hundred percent (300%) of its share of allowable gas production or maximum efficient rate unless that party has gas in storage. The parties hereto shall share in and own the lease condensate (liquid hydrocarbons recovered from such gas by lease equipment) in accordance with their respective above specified interests, upon and subject to the terms of the Operating Agreement. Section 2. A party taking less than its full share of the gas well gas produced shall be credited with gas in storage on a BTU basis equal to its full share of the total gas weU gas produced, less such party's share of such gas used in lease operations or vented or los~ and less that portion of .oruch · gas such party took or delivered to the purchaser. a Operator will maintain running account of the gas balanee as between the parties hereto and will furnish each party monthly statements showing the total quantity of gas well gas produced, the portion thereof used in lease operations, vented or lost, the total quantity of gas well gas delivered to market, and the monthly and cumulative total over and under delivery of each party on an MCF and on a BTU basis. Section 3. After notice, any party may at any time begin taking or delivering to a purchaser its full share of the gas well gas produced (less such party's share of such gas used in the lease operations, vented or lost). To allow the recovery of gas in storage and to balance the gas account of the parties in accordance with their respective interests, a party with gas well gas in storage shall be entitled to take or deliver to a purchaser its full share of the gas well gas produced (less such party's share of such gas used in lease operations, vented or lost), plus a share of gas not exceeding its gas in storage determined by multiplying (1) twenty-five percent (25%), by (2) the interest in the proration unit's current production (less such party's share of such gas used in lease operations, vented or lost) of the party or parties without gas in storage, by (3) a fraction, the numerator of which is the interest in the proration unit of such party with gas in storage and the denominator of which is the total percentage interest in the proration unit of all parties with gas in storage. Section 4. Nothing herein shall be construed to deny any party the right, from time to time, to produce and take or deliver to its purchaser its full share of the allowable gas production to meet the deliverability tests required by its purchaser. Each party shall at all times use its best efforts to regulate its takes and deliveries from the Contract Area so that wells will not be shut in for over producing the allowable, if any, assigned thereto by the regulatory authority having jurisdiction. Section 5. Each party producing or taking or delivering gas well gas to its purchaser shall pay any and all royalties and production taxes due on such gas. Section 6. SEC 189698  Should production of gas well gas from a proration unit be permanently discontinued before the gas account is balanced, settlement will be made between the parties for gas which has not been recovered by any party from storage. In making such settlement, ifthere is any party whose gas has not been recovered from storage, or a party who has sold more than its share of gas well gas, then the amount owed (as hereinafter defined) by each of the latter shall be forwarded to the operator who shall allocate the sum of such amounts and pay the former in proration to the respective ownerships in gas not recovered from storage. The amount owed by each party who has sold more than its share of gas well gas shall be the weighted average of the amounts received by such party upon sale of such gas during the period or periods overproduction is accrued by such party, less base lease royalty and taxes paid thereon; provided, however, that as to gas sold in interstate commerce by such party, such amounts shall be based upon that portion of the rate or rates not subject to refund applicable to and collected for the volumes sold during such period or periods by such party under orders of the regulatory body having jurisdiction which are final at the time of such settlement, plus any additional collected amounts which are not ultimately required by said body to be refunded, such additional collected amounts to be accounted for at such time as final determination is made with respect thereto. For the purpose of the preceding sentence, the weighted average of the amounts received by such party shall be determined by weighting the respective amounts received for such gas on the basis of volumes of overproduction that accrue hereunder to the account of such party during the period for which such amount was received. As to any gas which any party hereto may talce for its own use or sell to a third party purchaser affiliated with such selling party such swn or amount of money for the amount of such gas thereof shall be based upon the rate which would have been received by the under produced party as if such gas had been taken during the period or periods of underproduction under its contract with a nonaffiliated third party purchaser, but, if the underproduced party has no such contract, such sum or amount of money shall be based on the average rate received by other parties hereto fur their share of gas during the affected period. Section 7. This agreement shall constitute a separate agreement as to each proration unit within the Contract Area and shall become effective in accordance with its terms and shall remain in force and effect as long as the Operating Agreement to which it is attached remains in effect, and shall inure to the benefit of and be binding upon the parties, their succesaors, legal representatives and assigns. Section 8. Nothing herein shall change or affect each party's obligations to pay its proportionate share of all costs and liabilities incurred in lease operations in accordance with and subject to the provisions of the Operating Agreement. SEC 189699  EXHIBIT"G" Attached to and made a part of Operating Agreement dated November I, 2009, between RAW Oil & Gas Inc., as Operator and Smith Energy Company, eta!, as Non-Operators TAX PARTNERSHIP PROVISIONS I. RELA110NSHIP OF THE PARTIES. This agreement shall not create any mmmg partnership, commercial partnership or other partnership relating or joint venture, and the liabilities of each of the parties hereto shall be several and not joint. However, solely for the Unites States federal income tax purposes, this agreement shall be considered as a partnership, but such relationship shall be considered as a partnership, but such relationship shall not be a partnership to any other extent or fur any other purposes. 2. ELECTION TO REMAIN WITIIlN SUBCHAPTER K. Notwithstanding anything to the contrary herein or in the Operating Agreement (the "Operating Agreement") to which this is also to be considered an Exhibit, the parties hereto agree with respeet to all operations conducted hereunder: Each party, now having or hereinafter acquiring an interest under this agreement, agrees not to elect to be excluded from the application ofSubchapter K of Chapter l of Subtitle A of the Internal Revenue Code of 1986, as amended (the "Code"), and each party agrees to join in the exeeution of such additional documents and elections as may be required by the Internal Revenue Service in order to effectuate the foregoing. In addition, if the income tax laws of any state in which the parties conduct operations pursuant to the terms of this Exhibit or the Operating Agreement, contained provisions similar to those contained in Subchapter K of Chapter 1 of Subtitle A of the Code, the parties hereby agree not to elect to be excluded from the application of such provisions. 3. INCOME TAX COMPLIANCE AND CAPITAL ACCOUNTS The Operator shall prepare and file all required federal and state partnership income tax returns. In preparing such returns Operator shall use its best efforts and in doing so shall incur no liability to any other party with regard to such returns. Not less than two weeks prior to the due date (including extensions) Operator shall submit to each party a copy of the return as proposed for review. The Operator shall establish and maintain rair market C'FMV") capital accounts and tax basis capital accounts fur each party. Operator shall submit to each party along with the copy of any proposed partnership income tax return an accounting of its respective capital accounts as of the end of the tax return period. Each party agrees to furnish to Operator not later than 30 days before the return due date (including extensions) such infurmation relating to the operations conducted under this agreement as may be required for the proper preparation of such returns and capital accounts. 4. TAX MATTERS PARTNER 4.1 Operator is Tax Matters Partner. Operator is designated ta11 matters partner ("TMP") as defined in Internal Revenue Code (Code) Section 623 l(a)(7). In the event of any change in operator, the party serving as TMP for a given taxable year shall continue as TMP with respect to all matters concerning such year. The TMP and oilier parties shall use their best efforts to comply wi1h responsibilities outlined in this section and in Code Sections 6222 through 6232 and 6050K (including any Treasury Regulations promulgated thereunder) and in doing so shall incur no liability to any other party. Notwithstanding TMP's obligation to use its be.~t efforts in the fulfillment of its responsibilities, TMP shall not be required to incur any expenses for the preparation for, or pursuance of administrative, or judicial proceedings, unless the parties agree on a method for sharing such expenses. 4.2 lnfonnation requested by TMP. The parties shall furnish TMP within two weeks from the receipt of the request with such information (including information specified in Code Sections 6230(e) and 6050(k) as TMP may reasonably request to permit it to provide the Internal Revenue Service with sufficient infonnation for purposes of Code Seetions 6233 and 6050K. 4.3 TMP Agreements with IRS. The TMP shall not agree to any extensions of the statute of limitations for making assessments on behalf of any other party without first obtaining the written consent of that party. The TMP shall not bind any other party to a settlement agreement in tax audits without obtaining the concurrence of any such party. Any other party who enters into a settlement agreement witb the Secretary of the Treasury with respect to MKB/EXHG.WPF SEC 189700  any partnership items, as defined by Code Section 623 l(a)(3), shall notify the other parties of such settlement agreement and its terms within 90 days from the date of settlement. 4.4 Inconsistent Treatment of Partnership Item. If any party intends to file a notice of inconsistent treatment under Code Section 6222(b), such party shall, prior to the filing of sucb notice, notify the TMP of such intent and the manner in which the Party's intended treatment ofa partnership item is (or may be) inconsistent with the treatment of that item by the partnership. Within one week of receipt the TMP shall remit copies of such notification to other parties to the partnership. If any inconsistency notice is filed solely because of the party not having received a Schedule K-1 in time for filing of its income tax return, the TMP need not be notified. 4.5 Reauest for Administrative Adjustment. No party shall file a request pursuant to Code Section 6227 for an administrative adjustment of partnership items for any partnership taxable year without first notifying all other parties. If all other parties agree with the request adjustment, the TMP shall file the request for administrative adjustment on behalf of the partnership. If unanimous consent is not obtained within the period required to timely file the request for administrative adjustment, if shorter, any party, including the TMP, may file a request for administrative adjustment on its own behalf. 4.6 Judicial Proceedings. Any party intending to file a petition under Code Section 6226, 6228 or any other Code Section with respect to any partnership item, or other tax matters involving the partnership, shall notify the other parties of such intention and the nature of the contemplated proceeding. In the case where the TMP is the Party intending to file such petition, such notice shall be given within a reasonable time to allow the other parties to participate in the choosing of the forum in which stich petition will be filed. If the parties do not agree on the appropriate forum, then the appropriate forum shall be decided by majority vote. Each party shall have a vote in accordance with its percentage interest in the partnership for the year under audit. If a majority cannot agree, the TMP shall choose the forum. If a party intends to seek review of any court decision rendered as a result of such proceeding such party shall notify the other parties. 4.7 Windfall Profit Tax. The parties agree to take appropriate action under Code Section 6232(c) and any treasury regulations thereunder to assure that items required to compute the Windfall Profit Tax as imposed by Chapter 45 of the code not be \Teated as partnership items. 5. ELECTIONS 5.1 General Elections. For both income tax return and capital account purposes, the partnership shall elect (a) to deduct currently intangible drilling and development costs ("JDC"), (b) to use minimum allowable acceleration tax method and the shortest permissible tax life for depreciation purposes, (c) to use the accrual method of accounting, (d) to report income on a calendar year basis, and (e) dispositions of depreciable assets shall be accounted for under the General Asset account method to the e~tent permitted by Code Section J68(i)(4). 5.2 Depletion. Solely for fMV capital account purposes, depletion shall be calculated by using simulated percentage depletion within the meaning ofTreasury Regulation Section 1.704-1 (b)(2)(iv)(k)(2). 5.3 Other Elections. Any other elections must be approved by the affirmative vote of two (2) or more parties owning a majority interest based on the post payout ownership as shown in Exhibit "A". 6. CAPITAL CONTRIBtmONS AND FMV CAPITAL ACCOUNTS 6.1 Capital Contributions. The respective capital contributions of each party to the partnership shall be (a) each party's interest in the oil and gas leases committed to this partnership, and all properties associated with the leases, and (b) afl amounts paid by each party in connection with acquisition, e~ploration, development and operation of the leases, and all other costs characterized as contributions or expenses home by such party under this partnership. The contribution of the leases and any other properties committed to this partnership shall be made by each party's agreement to hold legal title to its interest in such leases or any other properties as nominee for this partnership. 6.2 FMV Capital Accounts. The FMV capital accounts shall be increased and decreased as follows: (a) The FMV capital accounts shall be increased by: (i) the amount of money and the fair market value of any property contributed by each party, respectively, to the partnership (net ofliabilities assumed by the partnership or to which the contributed property is subject); (ii) that party's Sec. 7 .1 allocated share of Partnership income and gains, or items thereof; (iii) any basis increases required by Code Sections 48(q) and 1016(a)(22); and (iv) that party's share of Code Section 705(aXl)(B) and (C) items. (b) The fMV capital accounts shall be decreased by: (i) the amount of money and the fair market value of property distributed to each party (net ofliabilities assumed by such party or to which the MKB/EXHG.WPE' SEC 189701  property is subject); (ii) that Party's Sec. 7.l alfocated share of partnership loss and deductions, or items thereof; (iii) any basis decreases required by Code Sections 48(9) and 1016(a)(22); and (iv) that parties share of Code Section 705(a)(2)(B) items and Code Section 709 nondeductible and nonamortizable items. "Fair market value" when it applies to property contributed by a party to the partnership shall be assumed to equal the adjusted basis, as defined in Code Section I 011, of that property unless the parties agree otherwise in a separate written agreement. 7. PARTNERSHIP ALLOCATIONS 7 .1 FMV Capital Account Allocations. Each item of income, gain, loss or deduction shall be allocated to each party as follows: (a) Actual or deemed income from the sale, exchange distribution or other disposition of production shall be allocated to the party entitled to such production or the proceeds from the sale of such production. In the event that deemed income arising from the in-kind distribution of production equals that fair market value of the production distributed to a party, the parties recognize that the corresponding adjustments would be net zero adjustment and accordingly, may be omitted form the FMV capital accounts; (b) Exploration cost, !DC, operating and maintenance cost shall be allocated to each party in accordance with its respective contribution to such cost; (c) Depreciation shall be allocated to each party in accordance with its contribution to the FMV capital accowit adjusted basis to the widerlying asset; (d) Simulated depletion shall be allocated to each party in accordance with its FMV capital account adjusted basis in each oil and gas property; (e) Loss (or simulated loss) upon the sale, exchange, distribution, abandonment or the disposition of depreciable or depletable property, shall be allocated to the parties in the ratio of their respective FMV capital account adjusted basis in the depreciable or depletable property; (t) Gain (or simulated gain) upon the sale, exchange, distribution, or other disposition of depreciable or depletable property, sha 11 be allocated to the parties so that the FMV capital account balances of the parties with respect to such property will most closely reflect their respective percentage or fractional interest under the agreement; (g) Costs or expenses of any other kind shall be allocated to and accounted for by each party in accordance with its respective contribution to such costs or expense.~; and, (h) Any other income item shall be allocated to the parties in accordance with the allocation of the realization. 7.2 Tax Returns and Tax Basis Capital Account Allocations (a) Unless otherwise expressly provided herein the allocations of partnership items of income, gain, loss or deduction for tax return and tax basis capital accounts purposes shall be the same as those contained in Section 7. I; (b) The parties recognize that under Code Section 6 I 3A(C)(7)(D) the depletion allowance is to be computed separately by each party. For this purpose, each party's share of the adjusted tax basis of each oil and gas properly shall be equal to its contribution to the adjusted tax basis of such property; (c) The parties recognize that under Code Section 613A(C)(7)(D) the computation of gain or loss on the taxable disposition of an oil or gas property is to be computed separately by each party. For this purpose the portion of the total amount realized by the partnership that represents a recovery of simulated adjusted basis in an oil and gas property will be allocated to the parties in the same ratio that simulated depletion is allocated to them under Sec. 7.l(d). Any additional amount realized will be allocated in accordance with the ratio of simulated gain allocation for such property under Sec. 7. l(t); (d) Depreciation shall be allocated to each party in accordance with its contribution to the adjusted tax basis of the depreciable asset; (e) Any recapture of depreciation, !DC, and other items of deduction or credit shall, to the extent possible, be allocated among the parties in accordance with their sharing of the depreciation, JDC MKB/EXHG.WPf SEC 189702  or other item of deduction or credit which is recaptured; (f) The qualified investment for investment tax credit (ifreinstated) purposes with respect to any property shall be allocated among the parties in accordance with their respective contributions to the qualified investment {as defined in the code) in such property; (g) For partnership property which has a value in the FMV capital accounts which differs from the adjusted tax basis of such property, any tax items relating to such property will be allocated to the parties in a manner which takes into account the variation between the adjusted tax basis of such property and its FMV capital account value under Code Section 704(c); and, (h) The income attributable to take-in-kind production will not be reflected on the tax return. 8. DISTIUBUTION UPON TERMINATION 8.1 Termination. Termination !iliall occur on the earlier of the termination of the partnership under Code Section 708(b)(J) or the date upon which the partnership ceases to be a going concern. Upon termination the business shall be wound-up and concluded, and the assets shall be distributed to the parties as described below by the end of such calendar year (or, if later, within 90 days after the date of such termination). All assets shall be distributed to the parties as provided in Sections 8.2 through 8.4. 8.2 Reversion. First, all money representing unexpended contributions by any party and any property where no interest has been earned in that property under the agreement by any other party shall be returned to the contributor. , 8.3 Balancing. Second, the FMV capital accounts of the parties shall be determined under this Section 8.3. The Operator shall take the actions specified under this Section 8.3 in order to cause the ratio of the parties FMV capital accolll!ts to reflect as closely as possible their percentage interests under the agreement. The ratio of a party's FMV capital account is represented by a fraction, the numerator of which is the party's FMV capital account balance and the denominator of which is the sum of all parties FMV capital account balances. Such actions are hereafter referred to as "balancing the FMV capital accounts", and when completed, the FMV capital accounts of the parties shall be referred to as being "balanced". The matter in which the FMV capital accounts of the parties are to be balanced under this Section 8.3 shall be determined as follows: (a) The fair market value of all partnership properties shall be determined and the gain or loss for each property which would have resulted if a sale thereof at such fuir market value bad occurred shall be allocated in accordance with Section 7.l(e) and (f). If thereafter, any party has a negative FMV capital account balance, that is, a balance less than zero, such party shall contribute an amount of money to the partnership sufficient to achieve a zero balance FMV capital account. Any party may contribute an amolll!t of money to the partnership to fucilitate the balancing of the FMV capital accounts. IfFMV capital accounts are not balanced, Section 8.3(b) or (c) shall apply; (b} If all the parties consent, any money or an undivided interest in certain selected properties shall be distributed to one or more parties as necessary for the purpose of balancing the FMV capital accounts; (c) Unless (b) above applies, an widivided interest in each and every property shall be distributed to one or more parties in accordance with the ratios of their FMV capital accounts; (d) If a property is to be valued under (a) above or distributed pursuant to (b) or (c) above, the fair market value of the property shall be agreed to by the parties. In the event all of the parties do not reach agreement as to the fuir market value of property, the Operator shall cause a nationally recognized independent engineering firm to prepare an evaluation of fair market value of such property. 8.4 Final Distribution. Third, after the FMV capital accounts of the parties have been adjusted, pursuant to Section 8.3 above, all other remaining property and interest then held by the partnership shall be distributed to the parties in accordance with their FMV capital account balances. 9. TRANSFERS. SURVIVORSHIP AND CORRESPONDENCE 9.1 Transfers. These partnership provisions shall inure to the benefit of and be binding upon the parties hereto and their successors and assigns. The parties agree that if any one of them makes a sale or assignment of its interest under this agreement, such sale or assignment will be structured, if possible, so as not to cause a termination under Code Section 708(b)(l)(B). 9.2 Survivorship. Any termination of the agreement shall not effect the continuing application of the Tax MKB/EXHG.WPF SEC 189703  Partnership Provisions as necessary for the termination and liquidation of the Tax Partnership. 9.3 Correspondence. All correspondence relating to the preparation and filing of the partnership's income tax returns and capital accounts shall be forwarded to: RAW Oil & Gas, Inc. 12312 Slide Road Lubbock, Texas 79424 MKB/EXHG.WPF SEC 189704  MEMORANDUM OF OPERATING AGREEMENT AND FINANCING STATEMENT LO This Memorandum of Operating Agreement and Financing Statement (hereinafter called "Memorandum") shall be effective when the Operating Agreement referred to in Paragraph 2.0 below becomes effective, that being November 1, 2009. 2.0 The parties hereto have entered into an Operating Agreement, providing for the development and production of crude oil, natural gas and associated substances from the lands described on Exhibit "A" attached hereto (hereinafter called the "Contract Area"}, and designating RAW OIL & GAS, INC. as Operator to conduct such operations. 3.0 The Operating Agreement provides for certain liens and/or security interests to secure payment by the parties of their respective share of costs under the Operating Agreement. The Operating Agreement contains an Accounting Procedure along with other provisions which supplement the lien and/or security interest provisions, including non-consent clauses which provide that parties who elect not to participate in certain operations shall be deemed to have relinquished their interest until the consenting parties are able to recover their costs of such operations plus a specified amount. Should any person or firm desire additional information regarding the Operating Agreement or wish to inspect a copy of the Operating Agreement, said person or firm should contact the Operator. 4.0 The purpose of this Memorandum is to more fully describe and implement the liens and/or security interests provided for in the Operating Agreement, and to place third parties on notice thereof. 5.0 In consideration of the mutual rights and obligations of the parties hereunder, the parties hereto agree as follows: 5.1 The Operator shall conduct and direct and have full control of all Operations on the Contract Area as permitted and required by, and within the limits of the Operating Agreement. 5.2 The liability of the parties shall be several, not joint or collective. Each party shall be responsible only for its obligations and shall be liable only for its proportionate share of costs. 5.3 Each Non-Operator grants to Operator a lien upon its oil and gas rights in the Contract Area, and a security interest in its share of oil and or gas when extracted and its interest in all equipment, to secure payment of its share of expense, together with interest thereon at the rate provided in the Accounting Procedure referred to in Paragraph 3.0 above. To the extent that Operator has a security interest under the Uniform Commercial Code of he state, Operator shall be entitled to exercise the rights and remedies of a secured party under the Code. The bringing of a suit and the obtaining ofjudgment by Operator for the secured indebtedness shall not be deemed an election of remedies or otherwise affect the rights or security interest for the payment thereof. 5.4 The Operator grants to Non-Operators a lien and security interest equivalent to that granted to Operator as described in Paragraph 5.3 above, to secure payment by Operator of its own share of costs when due. 6.0 For purposes of protecting said liens and security interest, the parties hereto agree that this Memorandum shall cover all right, title and interest of the debtor(s) in: 6.1 Property Subject to Security Interests (A) All personal property located upon or used in connection with the Contract Area. (B) All fixtures on the Contract Area. (C) All oil, gas and associated substances of value in, on or under the Contract Area which may be extracted therefrom. (DJ All accounts resulting from the sale of the items described in subparagraph (C) at the wellhead of every well located on the Contract Area or on lands pooled therewith. (E) All items used, useful, or purchased for the production, treatment, storage, transportation, manufacture, or sale of the items described in subparagraph (C). (F) All accounts, contract rights, rights under any gas balancing agreement, general intangibles, equipment, inventory, farmout rights, option furmout rights, acreage and or cash contributions, and conversion rights, whether now owned or existing or hereafter acquired or arising, including but not limited to all interest in any partnership, limited partnership, association, joint venture, or other entity or enterprise that holds, owns, or controls any interest in the Contract Area or in any property encumbered by this Memorandum. (G) All severed and extracted oil, gas, and associated substances now or hereafter produced from or attributable to the Contract Area, including without limitation oil, gas and associated substances in tanks or pipelines or otherwise held for treatment, transportation, manufacture, processing or sale. SEC 189705  (H) All the proceeds and products of the items described in the foregoing paragraphs now existing or hereafter arising, and all substitutions therefur, replacements thereof, or accessions thereto. (I) All personal property and fixtures now and hereafter acquired in furtherance of the purposes of this Operating Agreement. Certain of the above-described items are or are to become fixtures on the Contract Area. (J) The proceeds and products of collateral are also covered. 6.2 Property Subject to Liens (A) All real property within the Contract Area, including all oil, gas and associated substances of value in, on or under the Contract Area which may be extracted therefrom. (B) All fixtures within the Contract Area. (C) All real property and fixtures now and hereafter acquired in furtherance of the purposes of this Operating Agreement. 7 .0 The above items will be financed at the wellhead of the well or wells located on the Contract Area, and this Memorandum is to be filed for record in the real estate records of the county or counties in which the Contract Area is located, and in the Uniform Commercial Code records. All parties who have executed the Operating Agreement and all farmors and option fanuors who have granted support within the Contract Area are identified on Exhibit A. 8.0 On default of any covenant or condition of the Operating Agreement, in addition to any other remedy afforded by law or the practice of this state, each party to the agreement and any successor to such party by assignment, operation of law, or otherwise, shall have, and is hereby given and vested with the power and authority to take possession of and sell any interest which the defaulting party has in the subject lands and to foreclose this lien in the manner provided by law. 9.0 Upon expiration of the subject Operating Agreement and the satisfuction of all debts, the Operator shall file of record a release and termination on behalf of all parties concerned. Upon the filing of such release and termination, all benefits and obligations under this Memorandum shall terminate as to all parties who have executed or ratified this Memorandum. In addition, the Operator shall have the right to file a continuation statement on behalf of all parties who have executed or ratified this Memorandum. 10.0 It is understood and agreed by the parties hereto that if any part, term, or provision of this Memorandum is by the courts held to be illegal or in conflict with any Jaw of the state where made, the validity of the remaining portions or provisions shall not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Memorandum did not contain the particular part, term or provision held to be invalid. 11.0 This Memorandum shall be binding upon and shall inure to the benefit of the parties hereto and to their respective heirs, devisees, legal representatives, successors and assigns. The fuilure of one or more persons owning an interest in the Contract Area to execute this Memorandum shall not in any manner affect the validity of the Memorandum as to those persons who have executed this Memorandum. 12.0 A party having an interest in the Contract Area can ratify this Memorandum by execution and delivery of an instrument of ratification, adopting and entering into this Memorandum, and such ratification shall have the same effect as if the ratifying party had executed this Memorandum or a counterpart thereof. By execution or ratification of this Memorandum, such party hereby consents to its ratification and adoption by any party who may have or may acquire any interest in the Contract Area. 13.0 This Memorandum may be executed or ratified in one or more counterparts and all of the executed or ratified counterparts shall together constitute one instrument. For purposes ofrecording, only one copy of this Memorandum with individual signature pages attached thereto needs to be filed of record. Names and addresses: RAW OIL & GAS, INC. RAW ENERGY, L.C. 12312 Slide Road 12312 Slide Road Lubbock. Texas79424 Lubbock, Texas 79424 By: By: Name: Joe D. Hardin Name: Joe D. Hardin Title: President Title: Manager SEC 189706  SMITH ENERGY COMPANY P.O. Box 52890 Houston, Texas 770 Attn.: JudyMills By: Name: Title: President MARK P. HARDWICK STEVE BLAYLOCK P.O. Box 213 214 W. Texas, Suite 306 Midland, Texas 79702 Midland, Texas 79701 ELGER EXPLORATION INC. P.O. Box 2623 Midland, Texas 79702 By: Name: Jerry Elger Title: STATE OF TEXAS § COUNTY OF LUBBOCK § This instrument was acknowledged by me on this _ _ _ day of _ _ _ _ _ _ _ _ _, 2008 by Joe D. Hardin as President of RAW OIL & GAS, INC. Notary Public in and for the State of Texas STATE OF TEXAS § COUNTY OF LUBBOCK § This instrument was acknowledged by me on this _ _ _ day of _ _ _ _ _ _ _ _ _, 2008 by Joe D. Hardin as Manager ofRAW ENERGY, LC. Notary Public in and fur the State of Texas STATE OF TEXAS § COUNTY OF _ _ _ _ __ This instrument was acknowledged by me on this _ _ _ day of _ _ _ _ _ _ _ _, 2008 by Lester Smith, as President of SMITH ENERGY COMPANY. Notary Public in and for the State of Texas SEC 189707  STATE OF TEXAS COUNTY OF MIDLAND This instrument was acknowledged by me on this _ _ _ day of - - - - - - - - ' ' 2008 by MARK P. HARDWICK. Notary Public in and for the State of Texas STATE OF TEXAS COUNTY OF MIDLAND This instrument was acknowledged by me on this _ _ _ day o f - - - - - - - - ' 2008 by STEVE BLAYLOCK. Notary Public in and fur the State of Texas STATE OF TEXAS COUNTY OF MIDLAND § This instrument was acknowledged by me 011 this _ _ _ day of _ _ _ _ _ _ _ _, 2008 by Jerry Elger, as ofELGER EXPLORATION. Notary Public in and for the State of Texas SEC 189708  EXHIBIT"A" Attached to and made a part of Memorandum of Operating Agreement and Financing Statement between RAW Oil & Gas, Inc., as Operator and Smith Energy Company, eta!, as Non-Operators dated November I, 2009 CONTRACT AREA Section 55, Abstract 394, Georgetown Ry. Co. Survey, Lynn County, Texas (640.00 ac.) South Half of Section 57, Abstract_, Georgetown Ry. Co. Survey, Lynn County, Texas (320.00 ac.) West 200 Acres of Section 20, Abstract 948, D&SE Ry. Co. Survey, Lynn County, Texas (200 ac.) North 200 Acres of Section 7, Abstract 998, Block C-40, PSL Survey Lynn County, Texas (200 ac.) SEC 189709  TAB G On Point GEA (DX 1351) 7   GEOPHYSICAL EXPLORATION AGREEMENT ON POINT PROGRAM AREA LYNN AND TERRY COUNTIES, TEXAS This Geophysical Exploration Agreement (the "Agreement") dated and effective as of January 2, 2010 (the "Effective Date"), is entered into by and between RAW Oil & Gas, Inc. ("RAW"), JDH RAW Energy, L.C., formerly known as RAW Energy, L.C. ("RAW LC"), Mark P. Hardwick ("Hardwick"), Steve Blaylock ("Blaylock"), Elger Exploration, Inc. ("Elger"), and Smith Energy Company ("Smith"). Hardwick, Blaylock, and Elger are at times referred to collectively as the "RAW Participants" and, together with Smith, the "Participants." The Participants, RAW and RAW LC, are at times referred to individually as a "Party" and collectively as the "Parties." WHEREAS, RAW proposes to conduct a 3-D seismic survey covering approximately 45 square miles in Lynn and Terry Counties, Texas, as depicted on Exhibit A attached hereto (such lands, as the area may be amended from time to time as provided herein, are referred to herein as the "Program Area"); and WHEREAS, RAW intends to utilize such 3-D seismic data and existing geologic data to generate Prospects within the Program Area; and WHEREAS, Participants desire to participate with RAW in the 3-D seismic survey and to participate in Prospects generated within the Program Area; and WHEREAS, this Agreement is to establish the Parties' respective rights and obligations with regard to participation in- the shooting, processing and interpretation of the 3-D seismic survey, the generation of Prospects, the acquisition of Leases within the Program Area, and the exploration, development, and production of oil and gas from Prospects generated using the 3-D seismic data. NOW, THEREFORE, in consideration of the mutual covenants herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows: ARTICLE I Geophysical Program 1.1 Scope and Supervision of Geophysical Program. The Parties have agreed that a three-dimensional geophysical program (the "On Point Program" or the "Geophysical Program") will be conducted across the Program Area. The scope and design of the Geophysical Program will be determined by RAW, subject to Smith's final written approval. RAW will conduct or supervise third Parties in conducting the Geophysical Program, including permitting, data acquisition, processing and interpretation of the Data Program (as defined below). 1.2 Ownership and Confidentiality of Data. (a) All data resulting from the Geophysical Program ("Program Data") shall be owned by the Parties who pay for the costs of the Geophysical Program (the "Program Data Owners"), who will be represented in this Agreement by Smith Energy Company as their agent and nominee. Notwithstanding the provisions of Article V, Smith shall have the right to allow third parties to participate in Smith's DEFENDANT’S CJM l 92236v.6 TRIAL EXHIBIT 1351 __________________ SEC 190185 rights and obligations under this Agreement so long as such parties ratify this Agreement and a copy of the ratification is furnished to RAW. All such ratifying Parties shall be referred to as the "Smith WI Participants." Upon ratification of this Agreement, the Smith WI Participants shall be entitled to and shall bear their proportionate share of Smith's rights and obligations under this Agreement, including rights as Program Data Owners proportionate to their cost bearing interest in the 3D Survey Costs. Upon request, all Parties shall be entitled to receive a copy of the Program Data, including all tapes and reproducibles. Each Party shall have the right to use the Program Data in connection with exploration and development of the Program Area for the benefit of the Parties during the Term, as defined in Section 2.5 below, but no Party other than Smith shall have the right to sell, trade, license or exchange ("Transfer") the Program Data without the prior written consent of Smith. Upon an approved Transfer of any of the Program Data, all proceeds of such sale shall be payable to and delivered to the Program Data Owners. Upon expiration of the Term, all copies of the Program Data and (if requested in writing by Smith) all interpretations derived from the Program Data will be returned to Smith on behalf of the Program Data Owners. (b) During the Term of this Agreement or so long as any Lease or Joint Operating Agreement within the Program Area is in force and effect, each of the Parties shall maintain the confidentiality of the Program Data; provided, however, that with prior written notice to Smith and RAW identifying the proposed recipient of the Data, each Party may furnish a copy of the relevant portion of the Program Data to (i) the Parties' lessors, to the extent required under applicable Leases and/or Permits covering lands in the Program Area, (ii) such Party's bona fide consultants, and (iii) to prospective third Party purchasers of an interest in a Prospect. Any consultant or prospective purchaser to whom access to any portion of the Program Data is provided shall enter into a confidentiality and non-competition agreement, which shall inure to the benefit of all of the Parties, pursuant to which such third Party shall agree to maintain the confidentiality of the Program Data and to use the Program Data solely for the purpose of rendering consulting services or evaluating the Prospect, as the case may be. The consultant shall immediately return the Program Data upon the completion of the work for which the consultant was engaged. The consultant shall not be not permitted to retain any copies of the Program Data or any analysis of interpretations of the Program Data after completion of the work for which consultant was engaged. In connection with the disclosure of any portion of the Program Data to a potential third-Party purchaser or participant as permitted under this section, the Program Data shall at all times remain in the control of the Party disclosing the Program Data and no third party shall be allowed to copy, or to receive copies, of the Program Data including tapes and/or reproducibles. Such confidentiality and non-compete agreement shall also include an agreement and obligation that such consultant or prospective purchaser must offer to the Parties at actual cost any interest that may be acquired by such third party in lands covered by the disclosed data within a specified period, such period to be no less than 36 months after disclosure of the data. 1.3 Costs of Geophysical Program. Smith, along with the Smith WI Participants, will pay one hundred percent ( 100%) of all Seismic Survey Costs associated with the conduct of the Geophysical Program (including any additional seismic conducted within the AMI and any purchased seismic data that has been authorized in writing by Smith) including, but not limited to, the costs associated with three dimensional ("3~D") seismic acquisition, seismic permitting and damages, processing, interpretation, reproduction and any other costs associated with the Geophysical Program. RAW has estimated the 3-D Seismic Survey Costs for the acquisition of new 3D seismic data to be $32,000/square mile, which amount includes, but is not limited to (i) costs and expenses of acquiring all necessary geophysical permits from third parties, including landman and brokers' fees; (ii) costs of shooting the seismic survey, including surface damages payable to third Parties; and (iii) costs and 2 CJM 192236v.6 SEC 190186 expenses associated with processing Program Data derived from the geophysical operations on the Program Area and/or merging such Program Data with other 3-D Data and other geologic data (collectively, "3D Survey Costs"). Smith, on its own behalf and along with the Smith WI Participants as to their share, agrees to reimburse RAW for 100% of the actual Seismic Survey Costs. An invoice for the Seismic Survey Costs will be prepared and submitted by RAW to Smith with a copy to each Program Data Owner monthly according to COPAS standards as such costs are incurred. Smith, along with the Smith WI Participants, shall pay directly to RAW the amount billed within thirty (30) days after receipt. Subject to the prior approval of Smith, RAW shall have the right to purchase existing 3D seismic data and the acquisition cost shall be included in the 3D Survey Costs to be paid by Smith and the Smith WI Participants. 1.4 Acquisition of Seismic Permits; Amendment of Program Area.. RAW shall be responsible for acquiring sufficient seismic permits or other rights to conduct the Geophysical Program, and shall notify Participants when it has completed the acquisition of such permits and other rights. If RAW is unable to obtain seismic permits or other rights sufficient to grant it the right to conduct the Geophysical Program over sufficient acreage within the Program Area to properly image substantially all of the Program Area, RAW may, upon written notice to Smith, amend the Program Area to remove acreage as to which such seismic permits or other rights have not been obtained. Such notice shall include a description of the acreage to be removed, a reasonably detailed description of the efforts made to acquire the permits, RA W's reasons for removing the acreage, and a description of the anticipated impact of such removal on the survey and the generation of Prospects. With the prior written approval of Smith, RAW may substitute contiguous or nearby acreage for the acreage so removed. If RAW desires to substitute acreage, it shall notify Smith and all other Participants of the proposed substitution, including a description of the acreage to be removed, a description of the substitute acreage, and the reasons for such substitution. Smith shall have 10 days after receipt of such notice to approve or disapprove the substitution. Failure to respond within such 10 day period shall be deemed to be approval of the substitution. 1.5 Contributions of the Parties. All Parties will participate with RAW in accomplishing the Geophysical Program as may be requested from RAW from time to time. The primary responsibilities of RAW are as follows: (a) RAW shall be Operator of the project to be conducted pursuant to this Agreement. RAW shall coordinate all land and geological functions, conduct the Geophysical Program and operate all wells drilling or drilled on each Prospect Area. (b) RAW will provide or supervise the land work on the Program Area, including negotiating and obtaining seismic options, lease options and leases, and settling surface damages for conducting the Geophysical Program and for subsequent exploration and production operations. (c) RAW will promptly analyze and interpret the Program Data obtained from the Geophysical Program. (d) RAW will provide the geological subsurface expertise to integrate the Program Data with all available geologic and well data to evaluate the Program Area including analyzing well logs in the area, and providing geological mapping and interpretation. (e) RAW will provide to Participants copies of all maps and interpretations relating to the Geophysical Program and the Program Area currently available and as developed pursuant to this Agreement. 3 CJM 192236v.6 SEC 190187  RAW will not charge a consulting fee but will charge an overhead fee of $7,500 per month while third-party crews are working in the field during the Geophysical Program conducted under this Agreement. RAW also will be entitled to the Operator's overhead under each Operating Agreement. 1.6 Reports; Meetings. RAW shall distribute a written report on the status of all activities within the Program Area to the Parties on at least a monthly basis. During the first year of the Term, the Parties shall meet quarterly (unless waived by Smith) at a mutually agreeable time, either in Smith's offices or by teleconference to review the Program's activities ("Quarterly Meeting"). At least five (5) days prior to each Quarterly Meeting, RAW shall furnish to Participant (i) a written agenda listing any Prospects to be presented at the meeting and listing other items of business to be discussed at the Quarterly Meeting, and (ii) a brief written report summarizing the status of the program's activities, including the status of seismic acquisition and processing, prospect generation, lease acquisition, drilling operations, and other matters to be discussed at the Quarterly Meeting. 1.7 Completion of the Geophysical Program. The Geophysical Program will be completed for purposes of this Agreement when final processed, migrated seismic sections have been delivered to Participants by the third-party seismic contractors preparing such data. RAW will use all commercially reasonable efforts to commence the field work relating to the Geophysical Program no later than February 15, 2010, to have the data acquisition portion of the Geophysical Program completed within 45 days thereafter and to have all Program Data analyzed with the initial Prospect proposed to the Parties no later than April 30, 2010. ARTICLE II Participation Terms and Area of Mutual Interest 2.1 Interests of the Participants. (a) Smith and the Smith WI Participants shall be entitled to receive a collective 76.6667% of 8/8ths of all rights and interests acquired within the Program Area, burdened only by the royalty payable to the Lessor of each Lease, without any other reduction or burden. Immediately on payment of all 3D Seismic Costs, geological and land costs for which Smith is obligated to RAW in this Agreement, Smith and the Smith WI Participants shall be entitled to an assignment of their working interest, and related net revenue interest, in each of the Leases acquired. (b) RAW LC hereby agrees to assign to each of the three other RAW Participants 5.833325% of 8/8ths of RAW LC' s rights and interests existing under the Leases and RAW LC will retain an undivided 5.833325% of 8/81h interest. When assignments of record title to the Leases are made by RAW, each of the RAW Participants shall receive an assignment of its proportionate undivided working interest and attributable net revenue interest in and to each Lease in which the Participants are entitled to receive an interest pursuant to this Participation Agreement and the Operating Agreement. (c) Except as stated in Section 2.l(a) above, the interests assigned to each Participant pursuant to this Agreement are hereby expressly assigned subject to their proportionate part of all of the terms, ·covenants, reversionary interests and other production burdens referenced in the following: (i) each Lease; and 4 CJM 192236v.6 SEC 190188  (ii) the Operating Agreement referenced in Article V below. 2.2 Participation of the Parties in the Prospect Area and Subsequent Wells. (a) Upon execution of this Agreement, Smith, on its own behalf and along with the Smith WI Participants, will pay a one-time $150,000 geological/geophysical prospect generation fee to RAW, Hardwick, Blaylock and Elger, in equal 25% shares. (b) It is understood and agreed that RAW, as Operator, will use its commercially reasonable efforts to commence operations for the drilling of the initial well on the first Prospect promptly after the relevant Leases have been acquired, but, in any event, no later than June 1, 2010 unless otherwise agreed by Smith. Enclosed herewith is RA W's Authorization For Expenditure ("AFE") which shows the current total estimated costs to drill, complete and equip a well to be drilled to a depth sufficient to test the Fusselman Formation, approximately 11,100 feet. RAW will submit an updated AFE for the initial well and each subsequent well in accordance with Section 3 .1. In no event, without the written approval of Smith, shall a lapse of the AFB serve to extend the time within which Operator is required to commence operations for the drilling of a well. (c) RAW and the RAW Participants shall be collectively entitled to an undivided 23.3333% working interest carried to the casing point on the initial well drilled pursuant to this Agreement within the Program Area and the next two wells drilled within the Program Area for a total of three wells carried to the casing point. All subsequent wells drilled by the Parties anywhere in the Program Area will be on a heads-up basis with each participating Party paying its working interest share of the costs of subsequent wells or being subject to the relinquishment provisions of this Agreement or the non-consent provisions in accordance with the applicable Operating Agreement. (d) As to all wells drilled within the Program Area, the applicable Operating Agreement will provide that each well will be subject to a casing point election at which, if any Party elects not to participate in a completion, such Party will relinquish and assign to the participating Parties all of its or their leasehold interests in and to the area specified in the Operating Agreement, as defined for each well prior to commencement of drilling on that Prospect. In the event that any Party elects not to participate in a completion attempt, the non-consenting Party will be subject to the provisions in the governing Operating Agreement. (e) No Party shall have the right to reinstatement of an interest in a well or acreage relinquished in accordance with this Section 2.2 or in accordance with the applicable Operating Agreement, whether by payment of a cash penalty, production penalty, or otherwise. (f) In the event of a "Default" by any Party, as defined and described in Article VII of the Operating Agreement, the other Parties shall have the right to exercise any and all remedies available to the non- defaulting Parties specified in Article VII of the Operating Agreement, which provisions are incorporated herein by reference. 2.3 Payment for and Ownership of Oil and Gas Interests. Until the first three (3) wells have been drilled to test the Fusselman Formation pursuant to this Agreement, Smith, along with the Smith WI Participants, shall pay all of the costs of acquiring Oil and Gas Interests (including any lease options or the exercise of any lease option) in the Program Area on the Prospect or Prospects approved by Smith. While Smith is paying 100% of the lease or option costs, no lease or option shall be purchased by any Party without the prior approval of Smith. After the first three (3) wells have been drilled, the costs of 5 CJM 192236v.6 SEC 190189 acquiring any additional Oil and Gas Interests (including bonuses, delay rentals, !ease e-}}i~nS°LQ!li)>r shut in payments relating.to leases) in the Program Area thereafter shall be borne by the Parties who own an interest in the applicable Prospect Area in the proportions set forth on Exhibit B, Column D, attached hereto. If a Party does not pay its share of Lease obligations and costs when due, that Party will relinquish all of its interest in that Lease or Oil and Gas Interest. All Oil and Gas Interests shall be owned by the Parties in the percentage interests set forth on Exhibit B, except as such undivided interests may be modified by the operation of Sections 2.4, 2.5, and 3.4 hereof or by non-payment of Lease cost obligations. 2.4 Delay Rentals and Shut-In Royalties. At any time any delay rentals, shut-in royalties, Lease extension payments or other sums ("Rentals") necessary to perpetuate any Oil and Gas Interests becomes due and owing, RAW shall pay such Rentals and invoice all other Parties for their proportionate share thereof. Each Party agrees to pay its proportionate share (as determined by Exhibit B, Column D, or the Party's participation percentage in that Prospect, if different) of such Rentals within fifteen (15) days of receipt of an invoice therefore. RAW shall have no liability to the other Parties hereto for failure to pay such Rentals when due provided RAW has acted in good faith. 2.5 Area of Mutual Interest and Term. The Parties have agreed to and do hereby establish an Area of Mutual Interest ("AMI") which shall encompass all of the Program Area as depicted on the plat attached hereto as Exhibit A. The AMI shall remain in force for a period of ten (10) years from the date hereof, unless sooner tenninated by the Parties (the "Term"). Upon expiration of the IO-year Tenn, this Agreement shall tenninate; provided that the obligation to return the Data and other information (if requested) under Section l.2(a) shall survive termination of this Agreement. Should any Party own on the date hereof, or acquire at any time during the Term, an interest in (i) a lease covering lands, any part of which are located within the AMI or (ii) an option or a fann-in covering lands any part of which are within the AMI (an interest so owned or acquired insofar and only insofar as it covers lands within the AMI being herein called an "Acquired Interest"), such Party (the "Acquiring Party") shall promptly notify the other Parties, in writing, of such acquisition, the consideration paid or to be paid for the Acquired Interest, any other obligations (including, without limitation, drilling obligations) undertaken or to be undertaken as a part of such acquisition and any other terms of such acquisition. Each of the Parties shall, within thirty (30) days after the receipt of such notice, notify the Acquiring Party in writing, whether or not it wishes to participate in such acquisition; provided that failure of a Party to respond within the time and in the manner set forth above shall be deemed an election not to participate in such acquisition. 2.6 Effect of Election to Participate. Should a Party elect to participate in an acquisition of an Acquired Interest, such Party shall be assigned its proportionate part (being the percentage specified for such Party in the table set forth in Exhibit B) of the Acquired Interest by the Acquiring Party, and shall upon receipt of such assignment, pay, or to the extent not yet due, agree to pay when due) its part of the direct costs incurred by the Acquiring Party in making such acquisition and agrees to assume its proportionate part of any other obligations which are undertaken as part of such acquisition. If the costs or o_bligations relate to the lands outside the AMI as well as to lands inside the AMI, such costs and/or obligations shall be allocated between such areas on an acreage basis. Lease acquisition costs shall be paid in accordance with Section 2.3 above. If less than all of the Parties elect to participate in such acquisition, the proportionate parts for the Parties electing to participate shall, unless the Parties agreeing to participate agree otherwise, be the percentage determined by dividing, for each participating Party, the proportionate part otherwise applicable (if all Parties had participated) to such participating Party by the total proportionate parts for all participating Parties, provided, however, that in no event shall a Party electing to participate be required to participate for a percentage greater than that set forth for such Party 6 CJM 192236v.6 SEC 190190  on Exhibit B hereto. 2.7 Exercise of Options. Should any Party propose to exercise an option to lease with respect to some or all of the lands covered thereby, it shall notify the other Parties in the same manner provided for in Section 2.5 above with respect to acquisitions of Acquired Interests and each such other Party shall elect to participate or to not participate in the exercise of such Option in the same manner as provided in Section 2.5. The effective elections to participate in such an exercise of an Option and the payment of costs and the ownership of interests in the lease acquired pursuant to such exercise, shall be handled in the same manner provided in Sections 2.3 and 2.4. ARTICLE ID Prospect Designation and Participation 3.1 Prospect Designation. Upon completion of the interpretation of the Program Data, RAW will delineate proposed Prospects for exploration and development within the Program Area and distribute to each Party a list and description of each proposed Prospect. The Parties will then meet and RAW will make a presentation on each Prospect, including (i) the proposed location for the initial well on the Prospect (and the date by which drilling of such initial well is anticipated to be commenced and an AFE covering the estimated costs of drilling and completing such initial well), and (ii) the acreage which RAW would include in the Prospect Area. The acreage proposed to be included in a Prospect shall not include any acreage included in any other Prospect Area. The Parties will attempt to agree on the Prospect and the Prospect Area to be included in each Prospect in accordance with Sections 3.2 and 3.3. Notwithstanding the above, in the event the Parties do not reach agreement as to the Prospect Area for any Prospect within 60 days after the initial Prospect proposal, Smith shall have the right to make the final decision as to the delineation of the Prospect and the Prospect Area. The Parties shall document their participation percentages in writing in Exhibit A to the Operating Agreement for that Prospect Area and from that point forward each Prospect Area shall be governed by a separate Operating Agreement in the form of Exhibit C in accordance with Article IV. The Parties acknowledge that they may acquire Leases or participation rights by farm-in or otherwise as to lands that are subject to an existing third- party operating agreement. In that event, the Parties will take the act'ions necessary to harmonize the operating agreements to the extent reasonably practical, but the Operating Agreement contemplated by this Agreement will govern as between the Parties in the event of conflict. "Prospect" shall mean the area included in a geologic structural or stratigraphic trap or enclosure which based on available data is reasonably believed to have the potential for accumulations of hydrocarbons in commercial quantities. "Prospect Area" means all lands within a contiguous geographical area (not including lands within the Prospect Area for another Prospect previously designated pursuant to the terms of this Agreement) which are believed by the proposing Party to contain all of the Prospect; it being understood that a Prospect Area shall include all depths within the contiguous geographical area so identified. 3.2 Proposals by Parties for Prospects. After the meeting described in Section 3 .1 above (or, if such meeting does not occur within thirty (30) days of the completion of the interpretation of the Program Data, then at any time more than 45 days after the completion of the interpretation of the Program Data by RAW) any Party may propose that a portion of the Program Area be designated as a Prospect by giving written notice to the other Parties containing the same information described in Section 3 .1. The Prospect and Prospect Area will be determined in the same manner specified in Section 3 .1. 7 CJM l 92236v.6 SEC 190191 3.3 Response to a Prospect Proposal. Each Party desiring to participate in a Prospect proposed under Section 3.1 or Section 3.2 shall notify RAW, in writing, within thirty (30) days after receipt of such proposal of its election regarding participation in the proposed Prospect and stating whether or not such Party agrees with the acreage being proposed for inclusion in the Prospect by the proposing Parties. An election to participate in a Prospect which contains no statement as to whether the Party agrees with the acreage proposed for inclusion in the Prospect Area shall be deemed agreement to the acreage proposed for inclusion in the Prospect Area. A Party who elects not to participate in the Prospect and who disagrees with the acreage proposed to be included in the Prospect Area shall give notice of such disagreement to all Parties within the time and in the manner provided above for elections to participate. A Party failing to respond, within the time and in the manner provided above, to a proposal for a Prospect, or a Party responding and electing to not participate in a Prospect but making no statement as to whether it agrees with the acreage proposed to be included in the Prospect will be deemed to have elected not to participate in the Prospect and to have agreed to the acreage proposed to be included in the Prospect Area. If no other Party elects to join the proposing Party in creating a Prospect, then the proposing Party may develop the Prospect Area for such Prospect for its own account at its own expense and the terms of this Agreement (other than the terms relating to restrictions and ownership of the Program Data which shall apply) shall not apply to the Prospect Area for that Prospect. 3.4 Relinquishment of Interests by Non-Participating Parties. If a Party agrees, or elects (or is deemed to have elected) not to participate in a particular Prospect Area, then such Party shall relinquish all right, title and interest in such Prospect Area without any right of reimbursement for costs incurred up to the relinquishment date (including, without limitation, rights under leases, options or farm-ins insofar as they cover the Prospect Area, overriding royalty interests, carried interests and backin interests) to the Parties electing to participate in such Prospect Area in proportion to the percentages in which such participating Parties participate in such Prospect Area. If the initial well is not commenced on such prospect within 180 days after the date the Prospect Area is finalized, a new Prospect proposal shall be required and the non-participating Parties shall once again have the right to participate in that Prospect in accordance with the procedures in this Agreement. ARTICLE IV Operations 4.1 Drilling Operations. All operations on each Prospect Area, commencing with the establishment of such Prospect Area, shall be governed by a separate operating agreement ("Operating Agreement") in the form attached hereto as Exhibit C (with appropriate insertions and exhibits reflecting the agreements hereunder on the Prospect Area, participation percentages and initial well), and this Agreement shall no longer have any application to such Prospect Area, except with respect to the ownership of Program Data as provided for in Section 1.2 above and except for matters provided for in this Article IV. 4.2 Operator. It is agreed and understood that RAW shall be designated as Operator in the Operating Agreement executed for each Prospect Area in which it participates. As to any Prospect Area in which RAW has elected not to participate, Smith shall designate an operator of said Prospect Area. 4.3 AMI for Prospect Area. Commencing with the establishment of a Prospect Area, such Prospect Area shall from that time forward no longer be subject to the AMI provided for in Article II and shall thereafter be considered covered instead by a new Prospect Area specific AMI. The new AMI shall (i) be binding on all Parties (whether or not they participated, or had rights to participate in such Prospect Area), (ii) consist of such Prospect Area, (iii) remain in effect until the later to occur of the Term of this 8 CJM 192236v.6 SEC 190192 Agreement or the date the Operating Agreement for such Prospect Area terminates, and (iv) be governed by the same terms set forth in Sections 2.3 and 2.4 except that the term proportion or proportionate part (as such term is used in Section 2.3 or 2.4) shall mean the percentages in which the Parties participate in such Prospect Area. Any portion of the Program Area not included in a designated Prospect Area shall continue to be subject to the AMI provided for in Article II. 4.4 Limitation on Number of AFE's. The Parties agree that during the first 12 months of the Tenn no more than three (3) active well proposals and AFE's shall be outstanding at any one time under this Agreement and the On Point Agreement, on a combined basis. 4.5 Exercise of Options in Prospect Area. With respect to each Prospect Area, an option to acquire oil and gas interests to the extent it covers such Prospect Area, may be exercised by any Party owning an interest therein insofar as such option covers land within a Prospect Area. The leases acquired by such exercise shall be owned and, subject to Section 2.2 above, paid for by the Parties participating in such Prospect Area in the proportions in which they participated in that Prospect Area. It is recognized that some options may limit the number of times they may be exercised, and, in such event, several Prospect Areas may have to be combined in a single exercise of such an Option (and such exercise may have to be deferred until such a consolidated exercise is practical). ARTICLEV Restrictions on Transfers and Right of First Refusal 5.1 General Restriction on Transfer. Except as otherwise provided in Section 1.2 with respect to Smith, no Party, either directly or through an Affiliate, may transfer or acquire any lease, royalty, overriding royalty or other interest of any type in the mineral estate or any petroleum exploration or seismic license (individually and collectively an "Interest"), or participate in the acquisition of any Interest from a third party holding any Interest, which Interest is located partially or entirely within the Program Area, other than in accordance with the provisions of this Agreement and the applicable Operating Agreement, if any. 5.2 Preferential Right to Purchase. As long as Smith Energy owns an Interest in the Program Area or in a Contract Area under an Operating Agreement, the Parties hereby grant to each other a preferential right to purchase all or any part of a Party's Interest in this Agreement or in the lands subject to the applicable Operating Agreement which is to be Transferred to any third party other than a Permitted Assignee, all as defined below. This preferential right to purchase under this Agreement shall no longer apply to any Party after Smith has transferred all of its rights under this Agreement and shall no longer apply as to a Contract Area governed by an Operating Agreement after Smith has transferred or relinquished all of its rights to the lands in the Contract Area governed by that Operating Agreement. (a) If any Party desires to Transfer, as defined below, its Interests, or any portion, in this Agreement or the AMI (a "Transferor Party(ies)"), Transferor Party(ies) must first provide written notice of such intent to the other Parties. If the proposed Transfer is to a Permitted Assignee, the non-transferring Parties shall not have a Right of First Refusal as to that Transfer. If the proposed Transfer is to a person other than a Permitted Assignee, as defined below, the non-transferring Parties shall then have the right ("Right of First Refusal"), but not the obligation, to purchase their proportionate share of the offered portion of the Interests pursuant to this paragraph. The non-Transferor Parties shall have thirty (30) days from receipt of such notice within which to determine whether it or they elect to purchase the offered Interests. If the proposed Transfer is to a Permitted Assignee, the non-Transferor will not have a Right of 9 CJM 192236v.6 SEC 190193 First Refusal but the Permitted Assignee must ratify this Agreement and the applicable Operating Agreement and the Transferor shall be jointly and severally liable for all liabilities and obligations of the Permitted Assignee under this Agreement and the Operating Agreement. "Transfer" means any sale, lease, conveyance, gift, transfer, exchange, assignment, disposition by will or inheritance or other disposition of (or any agreement or arrangement to sell, lease, convey, gift, transfer, exchange, assign, or otherwise dispose of) all or any portion of the Transferor Parties' Interests in any manner, directly or indirectly, whether for money, other consideration or otherwise. "Permitted Assignee" means: (w) a spouse, descendants or relative of the Transferor Party; (x) the spouse, descendants or relative of the controlling person of a Transferor Party or the spouse, descendants or relative of a manager of a Transferor Party; (y) a legal entity including but not limited to any Trust, partnership, or company controlled by the Transferor Party or by the spouse, descendants or relatives of the Transferor Party; and (z) any employee, consultant or person under contract to a Transferor Party (or any Trust, entity or partnership owned by such person). (b) If the Transfer contemplated by section S.2(a) above results from a bona fide offer to purchase from a third party, exercise of the non-Transferor Parties' Right of First Refusal shall be based on the same terms and conditions as the third party offer. If the Transfer contemplated by section S.2(a) above is not the result of a bona fide third party offer, the non-Transferor and the Transferor Parties shall attempt to agree upon a purchase price for the Transferred Interests. In the event the Parties fail to agree upon a purchase price for the Transferred Interests within ten ( 10) days after exercise by the non-Transferor Parties of their Right of First Refusal, then the Transferor Party shall not be allowed to Transfer the Transferred Interest to the third party and the Non-Transferor Party shall not be entitled to purchase the Transferred Interest. If a bona fide offer to purchase is subsequently received or a price is established for the Transferred Interest, the provisions of this Section S.2(b) shall be followed as to the new offer or price. The provisions of Article V shall apply to any future Transfer by the Transferor Party. 5.3 Financing. Any Party shall have the right to arrange its own financing for any wells or other projects to be conducted on one or more Prospect Areas without any obligation to provide, or assist the other in obtaining, similar financing. No Party shall encumber the rights and interests of any other Party in a Prospect Area. A Party shall have the right to pledge, mortgage or encumber all or any part of its Interest in one or more Prospect Areas without triggering a Right of First Refusal under Article V; provided that any pledge, mortgage or encumbrance will be subject to the following restrictions and conditions: (a) the lender or secured party shall acknowledge in writing that the interest pledged is subject to this Agreement and the Operating Agreement; (b) the document creating the pledge or encumbrance must expressly state that upon foreclosure on the pledged interest, the lender or secured party will receive the pledged interest subject to this Agreement and the Operating Agreement; and (c) prior to any subsequent Transfer of the interest by the lender or secured party, the lender or secured party must comply with the procedures set forth in Section S.2(b) and the other Parties shall have the Right of First Refusal set forth in Section S.2(b). 5.4 Tag Along Rights. In the event Smith intends to sell all of its rights under this Agreement to a third party, Smith shall provide written notice to the other Parties of the intended sale. When the intended sale terms are established, Smith shall outline the intended terms to all Parties. Each Party will have the right and option for fifteen (IS) days after receipt of the intended sale terms to elect to sell its interest along with the interest of Smith so long as the purchaser of Smith's interest agrees to purchase the additional Party's(ies') interest(s). Smith shall have the sole authority to negotiate the terms of the sale and the 10 CJM 192236v.6 SEC 190194 other Parties will have the election to sell or not to sell on the same terms as negotiated by Smith. The tag along rights granted in this Section shall not apply to a sale by Smith of all its interest in a Contract Area governed by an Operating Agreement. ARTICLE VI Miscellaneous 6.1 Elections. Each Party to this Agreement has the right to make separate and independent elections regarding all aspects of the Agreement, including but not limited to Acquired Interests and well participation. 6.2 Notices. All notices and other communications required or permitted under this Agreement shall be in writing and unless otherwise specifically provided, shall be delivered personally, or by mail, telecopy or delivery service to the addresses set forth below the signatures of the Parties and shall be considered delivered upon the date of receipt. Each Party may specify as its proper address, any other post office address within the continental limits of the United States by giving notice to the other Parties, in the manner provided in this section, at least ten (10) days prior to the effective date of such change of address. 6.3 No Partnership. The liabilities of the Parties hereunder shall be several, not joint or collective. Each Party shall be liable only for its cost bearing share of all liabilities and obligations arising under this Agreement as set forth on Exhibit B hereto and each Party's share of the liabilities and obligations arising under any applicable Operating Agreement, as set forth on the Exhibit A to the applicable Operating Agreement. It is not the intention of the Parties to create, nor shall this Agreement be deemed as creating a mining or other partnership or association or to render the Parties liable as partners. 6.4 Internal Revenue Code Election. The provisions of Article IX of the form of Operating Agreement attached hereto shall constitute the agreement between the Parties regarding applicable provisions of the Internal Revenue Code. 6.5 Enforcement. Should any Party hereto be forced to resort to legal action to enforce the provisions hereof, the prevailing Party shall be entitled to reasonable attorneys' fees and all court costs incurred in such legal action. The Parties agree that the exclusive venue for all disputes arising under this Agreement shall be in Harris County, Texas. 6.6 Title. No Party warrants title to interests it is contributing to the Program Area except by, through and under itself, and not otherwise. Each Party agrees to furnish to the other Parties any title data in its possession or available to it. 6. 7 Multiple Counterparts. This Agreement may be executed in any number of counterparts, none of which needs to be executed by all Parties, and shall be binding upon each P;:i.rty executing such a counterpart as if all Parties had executed the same instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 11 CJM 192236v.6 SEC 190195 EXECUTED to be effective as of the Effective Date. RAW OIL & GAS, INC. JDH RAW ENERGY, L.C. ELGER EXPLORATION, INC. By:~.:J::::.===:;;;::;!~~~-4.:z:__~~~~ Name: -=~9-).-'-<....!~~~~:u,.t:i~~--- Title: -~~~~~li!IA.L__ _ _ _ __ SMITH ENERGY COMP ANY By. ~ ~w:c\JZ:. Lester H. Smith, President 1 12 CJM 192236v.6 SEC 190196  EXHIBIT A Attached to Geophysical Exploration Agreement Dated January 2, 2010, Among RAW, RAW LC, Hardwick, Blaylock, Elger and Smith Outline and Description of On Point Program Area The following lands are all located in Terry County, Texas Section 3, Abstract 13, Blk. 4X, EL & RR Ry. Co. Survey, Terry County, Texas (640.00 ac.) Section 4, Abstract 455, Blk. 4X, EL & RR Ry. Co. Survey, Terry County, Texas (640.00 ac.) Section 84, Abstract 824, Blk. 4X, EL & RR Ry. Co. Survey, Terry County, Texas (640.00 ac.) Section 87, Abstract 220, Blk. 4X, D & SE Ry. Co. Survey, Terry County, Texas (640.00 ac.) Section 89, Abstract 219, Blk. 4X, D & SE Ry. Co. Survey, Terry County, Texas (640.00 ac.) Section 90, Abstract 739, Blk. 4X, D & SE Ry. Co. Survey, Terry County, Texas (640.00 ac.) Section 91, Abstract 221, Blk. 4X, D & SE Ry. Co. Survey, Terry County, Texas (640.00 ac.) Section 92, Abstract 588, Blk. 4X, D & SE Ry. Co. Survey, Terry County, Texas (640.00 ac.) Section 2, Abstract 740, Blk. T, Dallas & Wichita Ry. Co. Survey, Terry County, Texas (640.00 ac.) Section 3, Abstract 152, Blk. T, Dallas & Wichita Ry. Co. Survey, Terry County, Texas (640.00 ac.) Section 4, Abstract 737, Blk. T, Dallas & Wichita Ry. Co. Survey, Terry County, Texas (640.00 ac.) South Half (S/2) of Section 32, Abstract 587, Blk. E, EL & RR Ry. Co. Survey, Terry County, Texas (320.00 ac.) 13 CJM 192236v.6 SEC 190197  Section 37, Abstract 783, Blk. E, EL & RR Ry. Co. Survey, Terry County, Texas (640.00 ac.) Section 40, Abstract 589, Blk. E, EL & RR Ry. Co. Survey, Terry County, Texas (640.00 ac.) Section 45, Abstract 789, Blk. E, EL & RR Ry. Co. Survey, Terry County, Texas (640.00 ac.) The following lands are all located in Terry and Lynn Counties, Texas South Half (S/2) of Section 38, Abstract 590, Blk. E, EL & RR Ry. Co. Survey, Terry & Lynn Counties, Texas (320.00 ac.) lei~ ...:or-tJ,flJ.Ofi\tJ.C. ~j Section 39, Abstract 787, Blk. E, EL & RR Ry. Co. Survey, Terry & Lynn Counties, Texas v(640.00 ac.) ·· · · Section 46, Abstract 1270, Blk. E, EL & RR Ry. Co. Survey, Terry & Lynn Counties, Texas (640.00 ac.) Section 47, Abstract 786, Blk. E, EL & RR Ry. Co. Survey, Terry & Lynn Counties, Texas (640.00 ac.) Section 8, Abstract 780, Blk. C-42, PSL Survey, Terry & Lynn Counties, Texas (640.00 ac.) The following lands are all located in Lynn County, Texas Section 43, Abstract 344, Blk. E, EL & RR Ry. Co. Survey, Lynn County, Texas (640.00 ac.) West Half (W/2) of Section 44, Abstract 776 and 1158, Blk. E, EL & RR Ry. Co. Survey, Lynn County, Texas (320.00 ac.) Section 49, Abstract 349, Blk. E, EL & RR Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Section 50, Abstract 892, 1180, 1229, and 1230, Blk. E, EL & RR Ry. Co. Survey, Lynn County, Texas (640.00 ac.) 14 CJM 192236v.6 SEC 190198  South Half (S/2) & Northwest Quarter (NW/4) bf Section 16, Abstract 689, 1080, and 1081, Blk. 9, TT Ry. Co. Survey, Lynn County, Texas (480.00 ac.) West Half (W/2) of Section 19, Abstract 397, Georgetown Ry. Co. Survey, Lynn County, Texas (320.00 ac.) Section 3, Abstract 859 and 995, Blk. C-42, PSL Survey, Lynn County, Texas (640.00 ac.) Section 4, Abstract 856, Blk. C-42, PSL Survey, Lynn County, Texas (640.00 ac.) Section 5, Abstract 1092 and 1292, Blk. C-42, PSL Survey, Lynn County, Texas (640.00 ac.) Section 6, Abstract 857, Blk. C-42, PSL Survey, Lynn County, Texas (640.00 ac.) Section 7, Abstract 765, Blk. C-42, PSL Survey, Lynn County, Texas (640.00 ac.) North Half (N/2) & Southeast Quarter (SE/4) of Section 10, Abstract 887, Blk. Y, EL & RR Ry. Co. Survey, Lynn County, Texas (480.00 ac.) Section 11, Abstract 353, Blk. Y, EL & RR Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Northeast Quarter (NE/4) of Section 12, Abstract 839, Blk. Y, EL & RR Ry. Co. Survey, Lynn County, Texas (160.00 ac.) Section 1, Abstract 364, EL & RR Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Section 2, Abstract 769, EL & RR Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Section 3, Abstract 365, EL & RR Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Section I, Abstract 375, Blk. A-1, EL & RR Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Section 2, Abstract 890, Blk. A-1, EL & RR Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Northeast Quarter (NE/4) of Section 13, Abstract 369, Blk. A-1, EL & RR Ry. Co. Survey, Lynn County, Texas (160.00 ac.) 15 CJM l 92236v.6 SEC 190199  Section 16, Abstract 770, Blk. A-1, EL & RR Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Section 17, Abstract 367, Blk. A-1, EL & RR Ry. Co. Survey, Lynn County, Texas (640.00 ac.) North Two Hundred Acres (N/200 Acres) of Section 7, Abstract 998, Blk. C-40, PSL Survey, Lynn County, Texas (200.00 ac.) West Half (W/2) of Section 234, Abstract 912, Blk. 1, L & SV Ry. Co. Survey, Lynn County, Texas (320.00 ac.) w/~ -r riJ, fl10UND l.111<-b Section 0 (SF 5845), Abstract 89,3, 1177, and 1181, No Block, No Survey, Lynn County, Texas (this Section is located just to the East of Section 39, Abstract 787, Blk. E, EL & RR Ry. Co. Survey, Terry & Lynn Counties, Texas) (640.00 .... ----·-- .. ~- ac.) ·Section 19, Abstract 342, D & SE Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Section 20, Abstract 948, D & SE Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Section 51, Abstract 405, HE & WT Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Section 52, Abstract 829, HE & WT Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Section 55, Abstract 398, Georgetown Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Section 56, Abstract 828 and I 040, Georgetown Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Section 57, Abstract 399, Georgetown Ry. Co. Survey, Lynn County, Texas (640.00 ac.) Section 58, Abstract 846, Georgetown Ry. Co. Survey, Lynn County, Texas (640.00 ac.) The following acreage is listed above but is excluded from the AMI and Prospect Area because it was previously included in the BIG 16 CJM 192236v.6 SEC 190200  BUMP Prospect Area and AML This acreage will be included in the On Point 3-D shoot however. Section 55, Abstract 394, Georgetown Ry. Co. Survey, Lynn County, Texas (640.00 ac.) South Half of Section 57, Abstract 399, Georgetown Ry. Co. Survey, Lynn County, Texas (320.00 ac.) West 200 Acres of Section 20, Abstract 948, D&SE Ry. Co. Survey, Lynn County, Texas (200 ac.) North 200 Acres of Section 7, Abstract 998, Block C-40, PSL Survey Lynn County, Texas (200 ac.) The following acreage is listed above but is excluded from the AMI and Prospect Area because it was previously included in the N. MOUND LAKE Prospect Area and AML This acreage will be included in the On Point 3-D shoot however. Section 39, Block E, EL&RR Ry. Co. Survey, Lynn and Terry Counties, Texas (640.00 ac.) Section 0, A-1181, No Block, No Survey, Lynn County, Texas (this Section is located just to the East of Section 39 described above) 17 CJM 192236v.6 SEC 190201  EXHIBITB Attached to On Point Geophysical Exploration Agreement Dated January 2, 2010, Among RAW, RAW LC, Hardwick, Blaylock, Elger and Smith Oil and Gas Interests Schedule A. B. C. D. ~ Geophysical Program Costs Share § 2.3 Oil and Gas Working Interest After Interest Acquisition Casing Point on First 3 Cost Share Until Wells and In All First 3 Wells Subsequent Operations Drilled Smith Energy Company 100% 100%* 76.66700% RAW Oil & Gas, Inc. 0 JDH RAW Energy, L.C. 5.833325% Mark P. Hardwick 5.833325% Steve Blaylock 5.833325% Elger Exploration, Inc. 5.833325% 100.000000% *Until first three wells have been drilled to casing point 18 CJM l 92236v.6 SEC 190202  EXECUTED to be effective as of the Effective Date. RAW OIL & GAS, INC. JDH RAW ENERGY, L.C. By: --1-.F:::::c=-":......+r------.-'~-....:......:::::......::=---­ Name: ~_,,J.~~LJ.-lt.~~~----=::~--~ Title: ----A--41--1"'.-Y...:.~~~~~-==---- ELGER EXPLORATION, INC. By: -f.---=::::::=::~f--1~'--b.~;i';::;::.--:..--~ Nam:'-:::.,......,.~~Lll'-'~,-P-~~~'3!0.----- Title: --=--t-:.-M111~F8~"""'~----- ::~~'~:~ Lester H. Smith, President 12 CJM 192236v.6 SEC 190203  EXECUTED to be effective as of the Effective Date. RAW OIL & GAS, INC. ~~ Title: JDH RAW ENERGY, L.C. ELGER EXPLORATION, INC. By: Nam=e:C::::=:;i~~~~V-r:::l~~---- Title: --~~>l-'~am..~----- SMITH ENERGY COMP ANY By: ~l~PY,t5h Lester H. Smith, President · 12 CJM l 92236v.6 SEC 190204  Exhibit "C" to the On Point Participation Agreement Dated January 2, 2010 A.A.P.L. FORM 610 - 1989 MODEL FORM OPERATING AGREEMENT ON POINT PROSPECT OPERATING AGREEMENT DATED January 2 2010 OPERATOR RAW Oil & Gas Inc. COUNTY OR PARISH OF LYNN and TERRY , STATE OF _T_E_XA_S_ __ COPYRIGHT 1989 - ALL RIGHTS RESERVED AMERICAN ASSOCIATION OF PETROLEUM LANDMEN, 4100 FOSSIL CREEK BLVD. FORT WORT/I, TEXAS, 76137, APPROVED FORM. A.A.P.l. NO. 610 -1989 SEC 190218  A.A.P.L. FORM 610-MODELFORM OPERATING AGREEMENT-1989 TABLE OF CONTENTS Article ~ Em -I. DEFINITIONS .......................................................................................................................................... ! II. EXHIBITS ................................................................................................................................................ ! Ill. INTERESTS OF PARTIES ...................................................................................................................... 2 A. OIL AND GAS INTERESTS: .............................................................................................................. 2 B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION: .............................................................. 2 C. SUBSEQUENTLY CREATED INTERESTS: ...................................................................................... 2 IV. TITLES ..................................................................................................................................................... 2 A. TITLE EXAMINATION: ...................................................................................................................... 2 B. WSSORFAILUREOFTITLE: ........................................................................................................... 3 I. Failure ofTitle............................................................................................................................... 3 2. Loss by Non· Payment or Erroneous Payment of Amount Due ........................................................ 3 3. Other Losses .................................................................................................................................. 3 4. Curing Title ................................................................................................................................... 3 V. OPERATOR ............................................................................................................................................. 4 A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR: ............................................................ 4 B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR: .................. 4 1. Resignation or Removal ofOperator .............................................................................................. 4 2. Selection of Successor Operator..................................................................................................... 4 3. Elfuct of Bankruptcy ..................................................................................................................... 4 C. EMPWYEES AND CONTRACTORS: ............................................................................................... 4 D. RIGHTS AND DUTIES OF OPERATOR: .......................................................................................... .4 1. Competitive Rates and Use of Affiliates ........................................................................................ .4 2. Discharge of Joint Account Obligations ........................................................................................ .4 3. Protection from Liens .................................................................................................................... 4 4. Custody ofFunds ........................................................................................................................... 5 5. Access to Conlract Area and Records ............................................................................................. 5 6. Filing and Furnishing Governmental Reports ................................................................................. 5 7. Drilling and Testing Operations ..................................................................................................... 5 8. Cost Estimates ............................................................................................................................... 5 9. Insurance....................................................................................................................................... 5 VI, DRILLING AND DEVELOPMENT ........................................................................................................ 5 A. INITIAL WELL: ................................................................................................................................... 5 B. SUBSEQUENT OPERATIONS: .......................................................................................................... 5 I . Proposed Operations ...................................................................................................................... 5 2. Operations by Less Than All Parties .............................................................................................. 6 3. Stand-By Costs .............................................................................................................................. 7 4. Deepening ..................................................................................................................................... 8 5. Sidetracking .................................................................................................................................. 8 6. Order of Preference ofOperations.................................................................................................. 8 7. Conformity to Spacing Pattern ....................................................................................................... 9 8, Paying Wells ................................................................................................................................. 9 C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK: .............................................. 9 I. Completion.................................................................................................................................... 9 2. Rework, Recomplete or Plug Back ................................................................................................. 9 D. OTHEROPERATIONS: ....................................................................................................................... 9 E. ABANDONMENT OF WELLS: ........................................................................................................... 9 I. Abaodonment ofDryHoles ........................................................................................................... 9 2. Abandonment of Wells That Have Produced ................................................................................ 10 3. Abandonment ofNon-Consent Operations ................................................................................... 10 F. TERMINATION OF OPERATIONS: .................................................................................................. 10 G. TAKING PRODUCTION IN KIND: ................................................................................................... 10 (Option I) Gas Balancing Agreement ............................................................................................... 10 (Option 2) No Gas Balancing Agreement .......................................................................................... 11 VII. EXPENDITURES AND LIABILITY OF PARTIES ............................................................................. 11 A. LIABILITY OF PARTIES: ................................................................................................................ 11 B. LIENS AND SECURITY INTERESTS: .............................................................................................. 12 C. ADVANCES: ...................................................................................................................................... 12 D. DEFAULTS AND REMEDIES: .......................................................................................................... 12 I. Suspension of Rights ................................................................................................................... 13 2. Suit for Damages ......................................................................................................................... 13 3. Deemed Non-Consent .................................................................................................................. 13 4. Advance Payment.. ...................................................................................................................... 13 5. Costs and Attorneys' Fees............................................................................................................ 13 E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES: ..................................... 13 F. TAXES: ............................................................................................................................................... 13 VIII. ACOUISITION. MAINTENANCE OR TRANSFER OF INTEREST .................................................. 14 A. SURRENDER OF LEASES: ............................................................................................................... 14 B. RENEWAL OR EXTENSION OF LEASES: ....................................................................................... 14 C. ACREAGEORCASHCONTRIBUTIONS: ........................................................................................ 14 SEC 190219 A.A.P.L. FORM 610- MODEL FORM OPERATING AGREEMENT- 1989 TABLE OF CONTENTS D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST: .................................................. 15 E. WANER OF RIGITTS TO PARTITION: ...................................................................................... 15 F. PRilF!iiRil~lTIAL RIGHT TO PURCHASE: .................................................................................. 15 IX. INTERNAL REVENUE CODE ELECTION .................................................................................. 15 X. CLAIMS AND LAWSUITS ............................................................................................................. 15 XL FORCE MAJEURE .......................................................................................................................... 16 XII. NOTJCES.......................................................................................................................................... 16 XIII.TERM OF AGREEMENT ............................................................................................................... 16 XIV. COMPLIANCE WITH LAWS AND REGULATIONS ................................................................... 16 A. LAWS, REGULATIONS AND ORDERS: .................................................................................... 16 B. GOVERNING LAW; .................................................................................................................... 16 C. REGULATORY AGENCIES: ...................................................................................................... 16 XV. MISCELLANEOUS ......................................................................................................................... 17 A. EXECUTION: ............................................................................................................................... 17 B. SUCCESSORS AND ASSIGNS: ................................................................................................... 17 C. COUNTERPARTS: ....................................................................................................................... 17 D. SEVERABILITY .......................................................................................................................... 17 XVI. OTHER PROVISIONS ..................................................................................................................... 17 ii SEC 190220  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989 OPERATING AGREEMENT THIS AGREEMENT, entered into by and between -~R~A~W~O~i~I~&~G~·"'=•ul~nc~·---------------~ hereinafter designated and referred to as HOpcrator." and the signatory party or partjes other than OperatGf, sometimes hereinafter referred to individually as "Non-Operator," and eollectively as "Non-Operators.• WITNESSETH: WHEREAS, the parties to this agreement are owners of Oil and Gas Leases and/or Oil and Gas lnlorests in the land identified in Exhibit "A~" and the parties hereto have reached an ag:rc:cmont to expl~ and develop these Leases and/or Oil and Gas lntoresls for the production of Oil and Gas lo the extent and as hereinafter provided, NOW. T!-IEREFORE, it is agreed a.• follow<: 10 ARTICl.E I. 11 DEFINITIONS 12 · As u.~ in this agreement, the following words and terms shall have the meanings here ascribed to them: 13 A. The term "AFE" shall mean an Authority for Expenditure prepared by a party to this agreement for the pu11>0so of 14 estimating the costs to be incurred in conducting an operation hereunder. IS B. The term 'Completion' or 'Complete' shall mean a single operation intended to eompletc a well as a producer of Oil 16 anJ Ga.~ in one or more Zones, including. but not limited to. the setting of production casing, perforating, wen stimulation 17 and production testing conduc1ed in such operation. 18 C. The 1erm 'C<>ntract Area" shall moan all of the lands, Oil and G.. I.eases and/or Oil and Gas Interests intended lo be 19 developed and operated for Oil and Gas pull>O'es under this agreemenl Such lands, Oil and Gas Leases and Oil and Gas 20 Interests are described in Exhibit "A." 21 D. Tbe term 'Deepen' shall mean a single operation whcrcl>y a well is drilled to an oqjcctive Zone below the deepest 22 Zone in which the well was previously drilled, or below the Deepest Zone proposed in the a.~sociated AFE, whichever is the 23 lesser. 24 E The terms "Drilling Party" und "Con.ienting Party" shaJI mean a paJ1y who agrees to join in and pay it.-; share of the 2S cost ofany operation conducted under the provisions of this agree1ncnt, 26 I', The tcnn 'Drilling Unit" shall moan the area fixed for the drilling of one well by order or Tiile of any state or federal 27 body having authority. If a Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be the drilling unit as 28 established by the pattern of drilling in the Contract Area unless fixed by e•press agreement of tho Drilling Parties. 29 G. The term "Drillsitc" shall mean the Oil and Oas Lease or Oil and Gas Interest on which a proposed well is to be 30 located. 31 H. The term 'Initial Well" shall mean the well required to ho drilled by the parties hereto as provided in Article VI.A. 32 I, The tcrlQ "Non-Consent We~l" shall 1ncan a well in which Jess than all parties have conducted an operation a.s 33 provided in Arliele Vl.B.2. 34 J. The terms "Non·Drilling Party" and "Non-Consentintt Patty" shall mean a party who clCC1s not to participate in a 35 proposed operation. 36 K. The tenn "Oil und Gas" shall mean oil, gas, cw;inghcad gas, gas condensate. and/or all othr:r liquid or ga.'leOus 37 hydrocarbons and other marketable substances prodLWed therewith. unless an intent to limit the inclusi\lcness of this term is 38 spoeifically stated. 39 L The tcrnt "Oil and Gas Interests" or "Interests" shall mean unleased fee and mineral interests in Oil and Gas in tracts 40 ofland lying within the Contracl Arca which are owned by partie.• to this agreement. 41 M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" .shall 1nean the oil and gas leases or interests therein 42 covering bacts of land lying within the Contract Area which are owned by the parties to this agreement. 43 N. The tenn "Plug Back" shall mean a single oper.ltion whereby a deeper Zone is abandoned in order to attempt e. 44 Completion in a shallower Zone. 4S 0. The term "Recompletion" or "Recompletc" shall mean an operation whereby a Completion in one Zone is abandoned 46 in order to allempt a Completion in o different Zone within the existing well bore. 47 P. The term "Rework" shalt mean an operation conducted in the wellbore of a well after it Is Completed to secure, 48 restore. or improve production in a Zone which is currently open to production in the wcllbore. Such operations include, but 49 are not limited to, well stimulation operations but C'l.clude any routine repair or maintenance work or drilling, Sidetracking, SO Deepening. Completing. Recompleting, or Plugging. Back of a well. SI Q. Tho term "Sidetraek" shall mean the directional corurol and intcnlional deviation of a well from vertical so as to 52 change the bottom hole location unless done lo straighten the hole or drill around junk in the hole to overcome other 53 mechanical diffocultics. 54 R. The tmn "Zone" shall mean a stratum of earth containing or thought to contain a common accumulation of Oil and 55 Gas separately producible from any other common accumulation of Oil and Gas. 56 Unless the context otherwise clearly indicates, words used in the singular include the plural, the word "person" includes 57 natural and artificial persons, the plural includes lhe singular, and any gender includes the masculine, feminine. and neuter. S8 ARTICLE II. 59 EX11181TS 60 The following exhibits, as indicated below and attached hereto. are incorporated in and made a part hereof: 61 _x__ A. Exhibit • A.II shaU include the rollowing information: 62 (I) Dcscrip•ion oflands sucycct to this agrecmcn~ 63 (2) Restrictions, if any, as to depths, formations. or substances. 64 (3) Parties lo agreement with addresses and telephone numbers for notice purposes, 6S (4) Percentages or fraclfonal interesl~ of parties to this agreement. 66 (S) Oil and Ga.• Leases and/or Oil and Gas Interests su)\jecl to this agrcorncnt, 67 (6) Burdens on production. 68 _lL_ B. Exhibit 'B," Form of lease. 69 __x_ C. Exhibit "C," Accounting Procedure. 70 x_ D. Exhibit "D," lnsu,.,,cc. __ 71 x_ E. E11.hibic "E." Oas Balancing Agreement. __ 72 r. &:hihit "F," '>l°en 9iseFi1nineli:en amlCertiAeelieR ef>le1t Sep:itated Fieililim. 73 _x__ G. El!hibit 'G •• Tax Partnership. 74 - - - H. O t h e r : - - - - - - - - - - - - - - - - - - - - - - - - -I . SEC 190221  A.A.P.L. FORM 610- MODEL FORM OPERATING AGREEMENT - 1989 lf any proll'ision of any exhibit, except Exhibits "E," "F" and "G~" is inconsistent with any provision contained in the body of this agreement, the provisions in the body of this agreement shall prevail. 3 ARTICLE Ill. 4 INTERESTS OF PARTIES S A. Oil and Ga1 lntereshl: 6 If any party owns an Oil and Ga< Interest in the Contract Area, that Interest shall be treated for all purposes of this 7 agreement and during the term hereof as if it wc:rc covered by the form of Oil and Gas Lease attached hereto as Exhibit "ll," 8 and the owner thereof shall be deemed to own both royalty interest in such lease and the interest of the lessee thereunder. B. Intere!hl of Parties In Com and Production: IO Unless changed by otht:r provisions. all cost.~ and liabilities incurred in operations under thW agreement shall be borne 11 and paid, and all cquipmmt and materials acquired in operations on the Contract Arca shall be owned, by the parties as their 12 intercots are set forth in Ex.hibit "A. w Jn the Rame manner, the parties sha11 also own al1 production of Oil and Gas from the 13 Contra.ct Area subject. however. to the payment of royalties and other burdens on production as described hereafter. 14 Reganllcas of which party ha• con1ributcd any Oil and Cias 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 pa.id or delivered, a11 burdens on its share of the production from the rontract Arca up to, but not in excess of. 1'7 existing lease burdens and shal I indemnify, defend and hold the other parties free from any liability therefor. 18 E>1 hereto elect.< to defend its title 35 h shall bear all expenses in connection therewith; and 36 (g) If any porty is given credit on Exhibit • /\" to a Lease or Interest which is limited solely to ownership of an 37 interest in the wellbofe of any wcH or wells and the production therefrom. such party's absence of interest in the relJlaindcr 38 of the Connet Arca shall be considered a Failure of Title as to such remaining Contract Arca unless that· absence of interest 39 isrcfloclcd on Exhibit "A.• 40 2. Loss by Non-Payment or Erroneous Payment of Amount Due: If, through mistake or oversight, any rental, shllt-in well 41 paymen~ minimum royalty or royally payment, or otller payment necessary to maintain all or a portion of an Oil and Gas 42 Lease or interest is not paid or is erroneously paid. and as a result a Lease or Interest terminates, there shall be no 1nonetary 43 liability against the party who failed to make such payment. Unless the party who failed to make the required payment 44 secures a new Lease or Interest covering the same interest withiri ninety (90) days from the discovery of the. tailurc to make 45 proper payment, which acqutr unrecovered actual costs previously paid by it (but not for its share of the cost of any dzy hole S2 previously drilled or wells previously abandoned) from so much of the fo11owing as is necessary to effect reimbursement: SJ (a) Proceeds of Oil and Gas produced prior to termination of the Lease or Interest, less operating expcmses and lease 54 burdens chargeable hereunder to the person who failed to make payment, previously accrued to the credit of the lost Lease or SS Interest. on an acreage basis, up to the amount ofunrecovcrcd cosl.r;: 56 (b) Prococds of Oil and Gas. less operating expenses and lease burdens chargeable hereunder to the person who failed S7 to make payment. up to the amount of u~overed costs 111tributable to that portion of Oil and Gas thereafter produced and 58 marketed (excluding production from any wells thereafter drilled) which. in the absence of such Lease of Interest termination, 59 would be attributable to the lost Lease or Interest on an acreage ballis and which as a result of such Lease or Interest 60 termination is credited to other parties, the proceeds of said portion of the Oil and Gas to be contributed by the other parties 61 ill proportion toihoir respective interests reHccted on Exhibit "A"; and, 62 (e) Any monies, up to the amount of unrecovered co.~... thal may be paid by any party who is, or becomes. the ownt!T 63 of the lease or lntcrest lo$t1 for the privilege of participating in the Contract Arca or becoming a party to this agreement. 64 3, Other !.osscs: All losses of Leases or Interests committed to this agreement, other than those set forth in Articles 6S IV.B. I. and IV.B.2. above, shall be joint losses and shall be borne by all parties in proportion to their interests shown on 66 Exhibit 'A.• This shall include but not be limited to the loss of any Lease or Interest through failure to develop or because 67 express or implied covenants have not been performed (other than perfomusnce which requires only the payment of money), 68 and the Joss of any Lease by expiration at the end of its primary term if it is not renewed or c•tended There shall be no 69 readjustment of jntercsts in the remaining portion of the Contract Arca on account of any joint loss. 70 4. Curins Title: In the event of a Failure of Title under Article IV.B.I. Of a loss of title under Article IV.B.2. above, any 71 Lease or Interest acquired by any party hereto (other than the party whose interest has failed or wa.o;. lost) during the ninety 72 (90) day period provided by Article JV.I!. I. and Article IV.B.2. above covering all or a portion of tho interest that has failed 73 or was lost shaJI be offered at cost to the party whose interest bas failed or was lost, and the provisions of Article VJH.B. 74 shall not apply to such acquisition. •3- SEC 190223  A.A.P.L FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 ARTICLEV. 2 OPERATOR 3 A. De•lgnation and ResponolblUtieA orOperator: 4 RAWOil&Gas Inc. shall be the Operator of the Conlnu:t Area, and shall conduct and direct and have 1\111 control of all operations on the Contract Area as permitted and required by, and within the limits or this agreement In its performance of services hereunder for the Non-Operators. Operator shall be an independent (:Ontractor 7 not subject to tho control or direction of tho Non-Operators except as to tho type of operation lo bo undertaken in accordance 8 with the election procedures contained in this agreement. Operator shall not ho deemed, or hold itself out as, the agent of the 9 Non-Opcntors with authority to bind them lo any obligation or liability a.. umed or incum:d by Operator as to any third 10 party. Operator !>hall conduct itq activities under this agreement as a rcase>nablc prudent operator. in a good and workmanlike 11 manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and 12 regulation. but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incuned 13 01pected to be capable of producing 34 Oil and Gas in paying quantities as a result of examination of the electric log or any other Jogs or cores or tests conducted 3S hereunder. 36 8, Cost Estimates: Upon request of any Consenting Party, Operator shall furnish estimates of current and cumulative costs 37 incurred for the joint account at reasonable intervals during the conducl of any operatkm pursu11Dt to this agr<..-cmcnL 38 Opcrator shall not be held liable for errors in such estimates so long as lhe estimates are made in good raith. 39 9. lmurance· At all times while operations arc conducted hereunder, Opcrator shall comply with the workers 40 compensation law of lhc state where the operations arc being conducted: provided, however, that Operator may be a self· 41 insurer for liability under said compensation laws in which event the only charge that shall be made to the joint account shaIJ 42 be as provided in Exhibit "C." Operator shall also carry or provide insurance for the benefit of the joint account of the parties 43 as outlined in Exhibit "D" attached hereto and made a part hereof. Operator sha11 require all contractors engaged in work on 44 or for the Contract Arca 10 comply with the workers compensation law of the state where the operations are being conducled 4S and to maintain such other insurance as Operator may require. 46 ln the event •utomobi1c liability insurance is specified in said Exhibit t1D. or subsequently receives the approval of the H 47 parties. no direct charge shall be made .by Operator for premiums paid for such insurance for Operator's automotive 48 equipment. 49 ARTICLE VI. so DRILLING AND DEVELOPMENT 5I A. Initial Well: 52 On 0< before the _lst_ _ day of_~Ju~n,.e_ _ _ _ _~:!llliL. Operator shsll oommenee the drilling of the Initial 53 Well at the following location: S4 ss Mutually agreed upon location within the Contract Area to be determined at a later date by all the parties to this 56 Agreement S7 S8 S9 60 61 and shall thereafter continue the drilling of the well with due diligence lo penetrate the Fusselman Formation. 62 63 64 6S 66 The drilling of the Initial Well and the participation therein by all parties is obligatory, subject to Article Vl.C.l. as to participation 67 in Completion operations and Anicle VJ.F. as to termination of operations and Article Xl as to occurrence of force majeure. 68 B. Subsequent Operatlons: 69 1. Prooosed Operations· 1f any party hereto should desire to drill any well on the Contract Ar participate in the propcsed Drepe:ning or Sidetracking operation, 24 reimburse the Drilling Parties in accordance with Article Vl.B.4. in the event of a Deepening operation and in accordance 25 with Article Vl.B.S. in the event ofa Sidetracking operation. 26 2. Oncrations by Less Than Ari Partie~r 27 (a) Delennination of Participation. If any party to whom 13uch notice is delivered as provided in Article Vl.B.I. or 28 VJ.C.. I. (Option No. 2) elects nol lo participate in the proposed operation, then, in ord..- to be entitled lo thc benefits of this 29 Article, the party or parties giving 1he notice and such other parties a.posing the operation if such party docs not withdraw itR .SO proposal Faiharc to advise the proposing party within the time required shall be deemed an election under (t). In the event a 51 drilling rig is on location, notice may be gi•en by lolcpbonc, and the time permitted tor such a response shall not exceed a 52 total of forty-.>ght (4S) hours (exclusive of Saturday. Sunday and legal holidays). The proposing party, at its election, may 53 withdraw such proposal if thore is Jess than 100% panicipation and sha!! notify al! parties of such decision within ten (10) S4 days, or within twenty-four (24) hours if a drilling rig is on location, following expiration of the applicable response period. SS If 100% subscriplion to lhe proposed operation is obtained. the proposing party shall promptly notify the Consenting Parties S6 of their proportionate interests in the operation and the party serving as Operator shall commence such operation within the 57 period provided in Article Vl.ll. I .. subject to the same extension right as provided th..-ein. 58 (b) Relinquishment of Interest for Non·Participation. The entire cost and risk of conducting such operations shall be S9 borno by the Consenting Parties in the proportions they have elcelcd to bear same undo.- the terms of the preceding 60 paragraph. Consenting Parties sh.II keep the leasehold estates involved in such operations !ice and clt:ar of all Ji,,.,. and 61 encumbrances of every kind created by or arising from the operations of the Consenting Parties. If such nn operation results 62 in a dry hole, then ..,bjcct lo Articles Vl.B.6. and VJ.E.3., lhc Consenting Parties shall plug and abandon !he well and restore ~63 the surface location al their M>lc cost, risk and expense; provided. however, that those Non·C'.onsenting Parties that 64 participated in the dri1ling, Deepening or Sidetracking of the well shall remain liable for. and shall pay, their proportionate 6S shares of the cost of plugging and abandoning the wcH and restoring the surface location jnsotar only as those costs were not 66 increased by lhe subsequent operations of tho Consenting Parties. If any well drilled. Reworked, Sidetracked. Deepened, 67 Rccomplctod or Plu¥Sed Back under the provisions of lhis Article results in a we!! capable of producing Oil and/or Gas in 68 paying quantities, the Consenting Parties shall Complete and ~uip lhc well to produce at their sole cost and risk, and the 69 well shall th121 be turned over to Opcrator {if the Operstor did nol conduct the operation) and shall be op..-.ted by it al the 70 expense 11nd for the account of the Consenting Parties. Upon commencement of operations for the drilling. Reworking. 71 SidctTacking, R~omplcting. Deepening or Plugging Back of any such well by Consenting Parties in accordance with the 72 provisions of this Article, each Non-Consenting Party shall be deemed to have relinquished to Consenting Parties, and the ?J Consenting Parties: shall own and be entitled to receive. in proPortion to their respective inlercsls, all of such Non~ 74 Consenting Party's interest in the well and share of produ.ction therefrom or. in the case of 11 Reworking. Sidetracking, . 6· SEC 190226  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989 I Deepening, Rc<:0mploting or Plugging Back, or a Completion pursuant to Article Vi.C. I. Option No. 2, all of such Non- 2 Consenting Party's interest in the production obtained from the operation in which the Non-Consenting Party did not elect 3 to participate. Sttefl Hliftft'lishtReRI !!!hell he eR'eeli e HRlil the )JFBeeedtl ef 1\:te sale ef 1n1el:t sRare, eeleultMed at lhrt1 eH, er 4 mailI Fespeel le aueh Hl'et=es' a:i'i1 it re erts), 11hell eej¥el lhe total af~e fella ing: 7 (i) 94 ef eeeh stteh >Jen GensmWtg Pftft) 's sNtFe ef the east ef &ft) Re I) aeEtttifed SU:f'faee eqt1if11Heet 8 h~·eed lhe ellheaEI eeftfteetiens (inehulieg hYi net limif.etl: te sleele tllftlcs, sepltflttef9, k'eater&o pt1mping eEfaiJ'meflt HRil 9 piJ)iftg), p1k16 1009' ef eael swaft ~leF1 'beR!len1iRg PBR) 's sffare ef the e&!it el' epeNtieH er the elJ eeHl!flettelHg itB first 10 pPBdttelien &fld eeRM1u1:iHg 111ntil ea~ 11:1eh >lea ~enseffiing PeA>;'s reliflEtUisked interest shell fe eFI te i~ under ffiftar 11 Pfe"isien!i ef this Artiele. it being agree8 thal eee& ~ 1 en C'eRseRffftg Pe">'s share ef sueh eests end equir111ent ~ill be that 12 inteH&t hieh •Btfld ha e lleen ehafgeehle h1 Mteli )JeR GeRsenliRg ~ft) had it peFlieipeled in the · ell ffefft the heginning 13 efthe 818'lRttieM, and 14 cm ___ er ~' fa) that l'Jal'ti8fl ef the tfBstS anfl twpenses ef SAJliBg, Re effdRg; SidelraeldR& 9eepe:Aiug, 15 Pl~ing Baeh, tealiRg, Gempleting; IM:tl Reee111plWng, after 8e1h1;etiftf; Qfl) eesh eenWihtttien!i susc· d ttRder \rt.isle 1q11,G. 1 16 aflEI ef (h) shat pe.Uen e( the eest ef Re 1) &eftui ed 1111:1ipment in lhe ell Ete atul ifle11:tdiftg the etlhead eenAeetieft6), J7 hieh eultl: ha ebeen ehargeeble le s11ehNen Geneenlift8P~ ifk heEIJ98Fliei11atedtherei11 18 Net·'flhtta&ding en,lhiag te the eefl:h&I) in this "'Miele "1.B., if th 11 tlees net feBeh th& Eleep~l ehjeeti e bene 19 deseffbed iR the aeliao prepesiftg the ell fer reeseRs etftet l:han the etteeHntering ef 31a1 ite er preelieall) ilftJ'eRetrahle 20 1MH11Bnee er eiher eenditien in the hele FUn6et'iftg fwffher epereffeM impMetiee1:11e, Qrief&ter shell gi we netiee thereef le eoeh 21 ~leA CettHtttiRg Pe~ he •lm:ilf.etl er eted far an attema&i e fttESJl&&el tmder *l'tieJe; l/l,B.fi. te drilt tt.e ell ta a 22 shalle· et' ZeM 1hae tfte de Bf est eijeeti e ~eRe JWepesed in the Reliee ander ., hi eh Che .. ell as dtilled, &Ad eaeh sueh >Jen 23 CoHSeeliHg P..., oltall he e !he eptie• le paftioipole i• !he illiliol prepesod Compl~o• ef the ell ~l ~a)illg its ohOfe of lhe 24 east ef tlrilliRg the ell le its aetHat depth, ealeYIMed in dte .tnllftfl:eJ fJFB ided ift Artiele "I.BA. (ft), If Bley sYeh >lsA 2S Censent;ing PaRy deH net eleet te Jl&ftieipele in the fif'5l €8fllpletien prepesed fer seeh uell, eke felinqtlishmeat p!'e·rtsiens 26 eflhio Ariiele •q.Q.;i, (l!J shall "l'l'I) le ••elo l""'l '• illleml. 27 (e~ Re OflfiRg Reee!ReletiAg Bf ?lttg!!!ing Beek An eleetien net te perfieif;1tlfe iH the ti'RlliRg~ SidetraelEing er 28 Qeepening ef a 'Ii ell shall he deeffted an eleetien Bet te peftieipe.te in llR) Rewariting er Ph:ggiRZ Qaeh, eperetien prepesed ifl 29 saek e ell, 8f' pertieR tkereef', te "thieh the initi~ Ren eeasent ele11lit:JA epplitnl thal is ee1 dY:eleEI: at aH) time JJl".ier te ftill 1 JO 1'866 GI') h, lhe CeA6BRliftg PiiRies er thl:!' Naff GsRsSfffiRg Pall) 6 AIS911jl'fMeet a1neWftl. E'mileA,, &fl elee&ien ABl te 31 paFtieiJMle ift tke Gt11ftpletiflg er Reee1t1pleting af a ell &hall he dee1tuul an eleeben net ts pe:PlieiJ'MB in &ft~ Re erltiftg 32 epeftlien psep89ed in s1:1eh a ell, er peffieH theteef, te 'hleh the iHiti&l ABR eenseRl elee8e11 BJIJ!lied ~et is ee1tft11e1eQ 11t 33 BB) time pffer te Nit reee _,,, ~ the eensetnifll: P&fties ef the f'J R CeMenting Pa~'a 1eeSltJ3Menf: Rff'IB1:1Rt "n) 6Meh 34 Re· erlting, Reeefflpleling er Pl'dggiHg Beeh BJHfflaliee eendu:elei:I dtlriAg lhe reeeaptBeRt J!lef'ied shall be deemed palt ef the 35 ee:t Qf ereFalieH ef !lft:id ell and tReie shall he added te the lftlM9 te he reee~~d 'h) the CeMefttiftg Pftffies ' 1• ef 36 diet pElftiett ef 1fte eests ef the Re• eftting; ~eemple•ift& er PIYgging Baell SJUJFatien 1hieh ' elllEI he e heen ehargeehle la 37 1t11eft >JeR Senteftling P~ had it paflieipet.,d thenirh If BU:8h a Re ePl1iRg, lleee1npl9'ing er Pluggieg BBBlt epeFBtieA is 0 38 pirepe!ied tl:HriHg sueloi Peet"tpme:Rl perietl, the J1felisi8flS ef this Ardele VI.Bo shall he 11J!pliee'sle as het eeR sniil GeRsent:ir:g 39 Pefltiee in seid v ell. 40 fd} Reeewement Mattefs. QuPing tfte peried er time Censenllng Pmties ere eftli\led te reeei e J>Je11 Gensenlieg P~ 's 41 share af pFSEluatien, er the p!'eeeeds thereffem, Censeftling Pel'4ieo shall he FB9f'8Hil!!le fer the f16YBtBAt ef ell ad ttleFet'A. 42 prethtelien, se erenee. eneise, galheFing anti ~Rur • nes, aftd all ftl)fth). e ef!'idirig re) 1tl*) 1md elher lnndens applieeble te 43 Me• c...eat!ng Pe"!~'""'" efpree•etien ""' '"'Pt•e hy •ffiele 111.C. 44 ltt the ea:98 er BR) Ru el'ltieg, Si&etraelting, Plegging Beek. ReeefflpletiRg AF QeepeRiRg epe1atien, the Censentiftg 45 Parties shel:I he pemli:ttetl te ~e. i=ee ef eeet, &U SB:sing, tuhing aM. etheF equipment in lhe ell, hul the e rtel6hifl ef all 46 -.tHeh 9E1wifMfHlfll WU Feffl8i11 e111Me11ged, amfl ltf'BH ahtmtleumenl ef a neU after sYSS Re erliing, SideWfteltiag. Pl.ing B~t, 47 ReeenipteEiag er QeepeRiRg, the Ge1tsenliRg Parties sha11. aeeevnt fep- anSti:Bh eqyipment te tJ:e 8"'Ret'9 lhereaf. ~ ith ee:eft 48 p&l1) reeei ingi'8 prepettieRBte part iR kind er in alY:e, le86 eest efal age, 49 Wilhin lliMS, (90) de:ie after the ea111pletie11 ef BB) Bf'Mtien Hft88f IAis }Jtiele. the pe:flY eeR41:tetiftg &he apemtitms 50 fer lhe CJensentffig: Psl'lil!lfl shitll ittfflish eaeh ~Sen Censeftling P~ ith en in erRe:r, ef tl•e ettwip"'c"t irl and eeAHeeted te s1 the .. etl, aRd lift ileR1ii!ed staleMl!IAl er lhe ee&t ef drilliRtt; &ifielfflebiffl, Qee13!ftb:it; PIYgging Baelt, •estiRg; Cempleting, 52 Reeefftpht;ia• Hill e1111iJ'PiRg Q.e ell far predaetien, e•o at He eptien, lite eperMiAg fl•~:; iA liet1 ef 8ft i4effliaied Mteete111 53 ef nel'I eeste ef 8"eratieft. Rtll) submil a tlekliled: slaleffleRl ef' meRth1) hi11ir:ge. &eh men\Jz theFHfteF, du.ring the th ie Use 54 Gemeatiflg Parties are heing reimlntF!ied es pre· ided ah e, 1fte peft) eeadtntliftg tfte epere,iens Mt ile be11:senting Pefties SS shall Rtmish the l11e" Cea9eratl11g Perliee 'i~ eA itemi2ed steten•ent ef ell ee&t{J attd liahilities ineuffed iR the epefftliea ef 56 lhe ell, legetfter ilh a statement ef the quenb~ ef QH aftd Gae predweed Hem it ed the ameum ef pre eee Eis reeli2eel' frem 57 the sale ef the ., ell'a eFlting interest pret:Neftel\ tl1:1Fing the preeetliug 111eftth. IR deteFmining the EptBRtity ef OH and Gas 58 JIRldHB!d dttrieg ee3 1Aefl:th. Gementing PBFlies shell use inEl11!1tf) H&eflted fAelftetis 9tleh as hut net limited te tHeterirtg er 59 peFiedie ell tests. •11~ an1eeet reelii!ed ffrem dte 881e er athw tliripositiM ef equipmettt nenJ,. sttqwHed in eennecitien "~tfl 60 08) ...h eperetiell • hieh eold he· • beeA • Aed b) • NOR C'eMOHliHg Pllfty lied it pariioipllled a1...eift oll8ll be '"'dited 61 agaia!M the letel URNbiFRed eeRI ef tfle eFlE deRe a"d ef ~e 9E111ipmefl:I: riurehasetl Ht determiRiRg hee the intet"est ef s1:1eh 62 :NM SenaeutiAg ,_,, sh9H 1e el't u~ it as aee.e pe i&e4 eJHf if lheie is a esedit: hillBHee, it sheU 'ee paid ~e 5W:IHI fal&FI 63 Ce11se1Hieg PaA)'. 64 If lb el hel'! Ut., Ct1Me1tting PaAie11 reee •er fire111 a NeA CenseatiAg Part) 's relinqw.isfted interest 1he ame"'nts 1!11 e •ided 6S fer eha e, ~e PeliequiMled inteNsle ef weh fafen CeneeAtiRg PaF~ shall eatameliB&IJ~ re eA te it as af 7:QQ a.Al. eR the day 66 felle 'ing lhe M, en hieh sH:eh neewpmeftt 111~.,111~. uAEl, fioem and after sueh re eHieR; 1n1eh Jrlen C"aRsenltng P8":) Bhftll 67 e R dte lMtlfle inteNst i1 euel ell, \he Metefiel a:Firl eftliiptl! eAt it1 er pertaiHiftg tharete 1 and the pFeENetiaR thereffeRI al! 68 seeh >Jen SeR!il!ftling P~ e~d ha e hem e1ttitleS le Rad it partieipeted in the drilling, SidetmelEiAg, Re eriling, 69 f>eepenfftg:, Reeempleting er Plegging Beeb af said: ell, TheRiat\et=, S\ieh >feR CenseHting Paff) sflel1 &e ehuged ilh aa& 70 shall Jl83 its prepflflienete pe1' ef the further ee9'5 ef \he ep8ftltien ef said ell in aeeerdasee ilh lfle let'ftl& ef this 71 agreef'Reftl BBS ERhibit "S" attaelted herete. 12 3. Stand-By Costs· When a well which has been drilled or Deepened has reached its authorized deplh and all to.sis have 73 been completed and the results thereof furnished to Lhc parties. or when operations on lhc well have been otherwise 74 terminated pursuant to Article Vl.F.• stand-by costs incurred pending rospon•c to a party'• notice proposing a Reworking, -7- SEC 190227  A.A.P.L. FORM 610- MODEL FORM OPERATING AGREEMENT- 1989 Sidetracking, Deepening, Recompleting, Plugging Back or Completing operation in such a well (including the period required 2 under Article Vl.B.6. to resolve competing proposals) shall be charged and borne as part of the drilling or Deepening l operation just completed. Stand-by costs subsequent to all parties responding, or expiration o( the response time permitted. 4 whichever first occurs, and prior to agreement as to the participating interests of all Consenting Parties pursuant to the terms of the second grammatical paragraph of Article Vl.B.2. (a), shall be charged to and borne as part of tho proposed operation, 6 b~t if the proposal is subsequently withdrawn because of insufficient participation. such stand·by costs shall be allocated 7 between the Consenting Parties in the proportion each Consenting Party's interest as shown on Exhibit "A" bears to the total interest as shown on Exhibit "A" o( aO Consenting Parties, 9 In the event that notice for a Sidetracking operation is given while the drilling rig to be utilized is on location. any party IO may request and receive up to five (S) additional days after expiration of the forty-eight hour response period specified in 11 Articlo Vl.B.I. within which to respond by paying for all stand-by costs and other costs incurred during such extended 12 response period; Operator may require such party to pay the estimated starnJ..by time in advance as a condition to extending 13 the responae period. If more than one party elects to talco such additional time to respond lo the notice, standby costs shall be 14 allocated between the porti"' taking additional time to respond on a day-to.day basis in tho proportion each electing party's 15 intereslas shown on Exhibit 1tA11 bears to the lotal interest as shown on Exhibit 11 A" of all the electing parties. 16 4. ~ If less than all patties elect to participate in a drilling. Sidetracking, or Deepening operation proposed 17 pu,.uant lo Article Vl.B. I., the intcrc..i relinquished by the Non.Consenting Parties to the Consenting Parties under Article IS Vl.B.2. shall relate only and be limited to the les.ding the provisions of this Article VJ.B.2., it is agrood that no wells shall be proposed to be drilled to or Completed in or produced from a Zone from which a well located elsewhere on the C.ontract 9 Arca is producing, unless such well conforms to the thcn·existing well spacing :pattern iOr S\JCh Zone. JO 8. Paying Wells. No party shall conduct any Reworking. Dccpcning, Plugging Back, Completion, Recompletion, or 11 Sidetracking operation under this agreement with respect to any well then capable of producing in paying quantities except 12 with the consent of all parties that have not relinquished interests in the well at the time ofsuch operation. 13 C. Completion of Wells; Reworking and Plugging Back: 14 I. Cnmclction: Without the consent of all parties, no well shall be drilled, Deepened or Sidetracked, except any well IS drilled, Deepened or Sidetracked pursuant to the provisions of Article Yl.B.2. of this agreement Consent to the drilling. 16 Deepening or Side1racking shall include: 17 e Qeliea )'Je. 1. "11 neeess~ eltf'eH•itwen ffir die drilling, QeefJMiRg 8P Sidetfttehie~ testing. Cempleting and I8 eEfWil'Jling ef~e ' efl. ifleludiAg Reeessaf') ts.AIEege anfller SYf'faee faeilities. 19 0 Ootion No. 2: All necessary expenditures for the drilling, Docpening or Sidetracking 1111d testing . of the well. When 20 such well ha.• reached ir. authorized depth, and all logs, cores and other tests have been completed. and the resuhs 21 thereof IUmishcd lo tho parties, Operator Shall eivo Immediato notice to the Non.Operators having lhe right Jo 22 participate in a Completion attempt whether or not Operator recommends attempting to Complete the well, 23 together with Operator's AFE for Completion costs if not previou.~ly provided. The parties receiving such notice 24 shall have forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) in whicli lo elect by delivery of 25 nnticc to Operator to participate in a recommended Completion attempt or to make a Completion proposal with an 26 accompanying AFE. OpcratOr shall deliver any such Completion proposal, or any Completion proposal conflicting 27 with Operator's proposal. to dlc other partic.c; cntitlo:i to participate in such Completion in accordance with the 28 procedures specified in Article Vl.B.6. Election to participate in a Completion attempt shall include con.•ent to all 29 necessary eXpmditures for lhe Completing and equipping of such well, including necessary tankage and/or surrace 30 facilities but excluding any stimulation operation not contained on the Completion AFE. Failure of any party 31 receiving such notice to reply within the period above fi ..d shall constitute an election by that party !l!l!. to 32 participate In the cost of the Completion attempt; provided, that Article Vl.ll.6. shall control in the case of 33 conflicting Completion proposals. If one or more, but less than all of the parties, elect to attempt a C.01nplclion, the 34 provision of Article Vl.B.2. hereof (the phrase "Reworking. Sidetracking. Deepening, Recompleting or Plugging 35 Back" as contained in Article Vl.B.2. shall be deemed Jo include "Completing") shall apply to the operations 36 thereafter conducted by less than all parties; provided. however, that Article Yl.B.2. shall apply separately to each 37 separate Completion or Rccompletion attempt undertaken hereunder, and an election to become a NonaConsenting 38 Party as to one Completion or Reccmplotion attempt shall not prevent a party &om bcco1ning a C.onscnting Party 39 in subsequent Completion or Recomplction attempts regardless whether the Consenting Parties as to earlier 40 Completions or Rccompletion have recouped their costs pursuant to Article VI.82.; provided further, that any 41 rccoupmont of costs by a Consenting Party shall be made solely fiom lhe produelion attributable to the Zone in 42 which the Completion attempt is made. Election by a previous NonaConsenting party to participate in a subsequent 43 C.omplction. or Recompletion attempt shall require such party to pay its proportfonalc share of !he cosl of salvable 44 materials and equipment installed in the well pumuant to the previous Completion or Recompletion attempt, 4S insofar and only insofiu' as such materials and equipment benefit the Zone in which sucli party participates in a 46 Completion attempt. 47 2. Rew!!!k, Rccomo!ctc or Plus Back: No well shall be Reworked, Recomplcted or Plugged Back exoept a well Reworked, 48 Recomplcted, or Plugged !lack pursuant lo the provisions of Article Vl.B.2. of this agreement. Consent to the Reworking, 49 Recompleting or Plugging Baclc of a well shall include all DCCCSSBJJ' expenditures in conducting such operations and SO Completing and equipping cf said well, including necessary tank.age and/or surfuce facilities. SI D. Other Operations: 52 Operator shall not undertake any single project reasonably estimated to require an expenditure in excess of _ _ _ _ _ __ S3 Twenty-five thousand Dollar.; (S 25 000 00 ) except in connection with the 54 chilling, Sidetracking. Reworking, Deepening, Completing. Reeompleting or Plugging Back of a well that has been previously SS authorized by or pursuant to this agreementi provided. however, lhat, in case of explosion, fU"e, flood or other sudden 56 emergency. whether of the r.ame or different nature, Operator may take such steps and incur such expenses as in its opinion 51 are required to deal wilh the emergency lo safeguard life and property but Operator, as promptly as possible, shall report the SS emergency to the other parties. If Operator prepares an AFE for ii.< own use, Operator shall furnish any Non-Operator so 59 requesting an information copy thereof for any single project costing in excess of Twcnty~five thou.sand Do11ars 60 ($ 2S 000 00 ). Any party who has not relinquished ilS interest in a well shall have the right to propose that 61 Operator perform repair work: or undertake the installation of artificial lift equipment or ancillary production facilities such as 62 salt water disposal wells or to conduct additional work with respect to a wen drilled hereunder or other similar project (but 63 not including the ins1allation of gathering Jines or other transportation -or marketing facilities, the installation of which shall 64 be governed by separate agreement between the parties) reasonably e.~timate.d to require an expenditure in excess of the 65 amount first set forth above in this Article Vl.D. (except in connection with an operation required to be proposed under 66 Articles VI.B.J. or VJ.C.J. Option No. 2, which shall be governed exclusively be those Articles). Operator shall deliver such 67 proposal to all panics entitled lo participate therein. If wilhin thirty (30) days thereof Operator secures the written consent 68 ofany party or parties owning al least SO % of the interests of rhe parties entitled k1 participale in such operation, 69 each party having tho right to participate in such project shall be bound by the terms of such proposal and shall be obligated 10 lo pay its proportionate share of the coslS of the proposed project as if it had consented to such project pursuant to the terms 71 of the proposal. 72 E. Abandonment of Wells: 73 I. Abandonment of Dry Holes: E>teept for any well drilled er Dccpenod pu..,..nt to Article VI.B.2., any well which has 74 been drilled or Deepened undeJ the terms of this agreement and is proposed to be completed as a dry hole shall nol be -9- SEC 190229  A.A.P.L. FORM 610-MODELFORM OPERATING AGREEMENT- 1989 plugged and abandoned wilhoul lhe consent of alt parties. Should OperalOr, after diligenl effort, be unable to contact any party, or should any party &ii to reply within forty-eight (48) hours («elusive of Saturday, Sunday and legal holidays) after 3 delivery of notice of lhe proposal lo plug and abandon such well, such party shall be deemed lo have oonsenlcd IO !he 4 proposed abandonmcnL All such wells shall be plugged and abandoned in accordance with applicable regulations and at the cos~ risk and expense of the parties who participated in the cost of drilling or Deepening such well. Any party who objects 10 plugging and abandoning such well by notiee delivered to Operator within forty-eight (48) hour.1 (Hclusive nf Saturday, Sunday and legal holidays) after delivery of notice of the proposed plugging shall take over the well as of the end of such fortY-eight (48) hour notice period and conducl further operations in search of Oil and/or Gas subject IO the provisions of 9 Article Vl.B.; failure of such party to provide proof reasonably satisfactory to Operator of its financial capabilily to conduct I0 such operations or to take over the well within such period or thm:after to conduct operations on such well or plug and 11 abandon such well shall entiUo Operator to retain or take possession of the well and plug and abandon the well. The party 12 taking over the well shall indemnity Operator (if Operator is an abandoning party) and the other abandoning parties against 13 liabilily for any further operations conducted on such well except for the costs of plugging and abandoning the well and I4 restoring the surface, for which the abandoning parties shall remain proportionately liable. IS 2. Abandonment of Wells That Have Produced: Except fur any well in which a Non-Consent operation has been J6 conducted hereunder for which the Consenting Parties have not been fully reimbursed as herein provided~ any weU which has 17 been cornpleled as a producer shall not be plugged and abandoned without the consent of all parties. If all psrties consent to 18 such abandonment, the well shall be plugged and abandoned in accordance with applicable regulations and at the cos~ risk I9 and expense of all the parties hereto. Failure of a party to reply within sixly (60) days of delivery of notice of proposed 20 abandonment shall be deemed an election to consent to the proposal. lf, within sixty (60) days after delivery of notice of the 21 proposed abandoruncnt of any well, all parties do not agree to the abandonment of such well, those wishing to continue its 22 operation from the Zone then open to production shall be obligated to take over the well as of tho expiration of the 23 applicable notice period and shall indemnity Operator (if Operator is an abandoning party) and the other abandoning parties 24 ageinst liahilily fur any further operations on the weJJ conducted by such panics. Failure of such party or parties to provide 25 proof reasonably satisfactory to Operator of their financial capability to conduct such operations or to take over the well 26 within the required period or thereafter to cond"9t operations on such wetJ shall cntiUc operator to retain or take possession 27 of such well and plug and abandon tho well. 28 Parties taking over a well as provided herein shall tender to each of the other parties its proportionate share of the value of 29 lhe welJ's solvable material and equipment, determined in accordance with the provisions of Eithibit nc, 11 less the c5timated cost 30 of salvaging and the estimated cost of plugging and abandoning and restoring the surface; provid~ however, that in the event 31 the estimated plugging and abandoning and 5Urface restoration costs and 1he estimated cost of salvaging are higher than the 32 value of the well's salvablo material and equipment, each of the abandoning parties shall tender lo the parties continuing 33 operations the~ proponionstc shares of the estimated execs• cos~ Each abandoning psrty shall assign to the non-abandoning 34 panics, without warranty, express or impJied. as to title or as lo quantity, or fitness for use of the equipment and material, an JS of its interest in the wellbore of the well and related equipment, together with its interest in the Leasehold insofar and only 36 insofar as such Leasehold covers the right to obtain production from that wellbore in the Zone then open to production. If the 37 interest of the abandoning party is or includes and Oil and Gas Interest, such party shall CJtecutc and deliver to the non· 38 abandoning porly or parties an oil ond gas lease, limited to tho wcllbore and the Zone then open to production. for a tenn of 39 one (I) year and so long thereafter as Oil and/or Gas is produced from the Zone covered thereby. such lease to be on the forro 40 attached a< Exhibit "B." The assignments or leases so limited shall encompass the Drilling Unit upon which the well is located. 41 The payments by, and the assignments or leases lo. the assignees shall be in a ratio based upon the relationship of their 42 respective percentage of participation in the Contract Arca to the aggregate of the percentages of participation in the Contract 43 Area ofall assignees. There shall be no readjustment of interests in the remaining por1ionsofthe C'..ontract Area. 44 Thereafter, abandoning parties shall have no further responsibility, llabilhy. or inlerest in the operation of or production 4S from the well in the Zone then open other than the royalties retained in any lease made under the terms of this Article. Upon 46 request~ Operator shall continue to operate the assigned well for the account of the non-abandoning parties at the rates and 47 charges contemplated by this agreement, plus any additional cost and charges which may arise as the result of the separate 48 ownership or the assigned well. Upon proposed abandonment of the producing Zone assigned or leased, the assignor or lessor 49 shall then have the option IO repurchase its prior interest in the well (using tho same valuation formula) and participate in SO further operations therein subject to the provisions hereof. SI 3. Abandonment of Non.Consent Operations: The provisions of Article Vl.E.l. or Vl.E.2. above shall be applicable as S2 between Consenting Parties in the event of lhe proposed abandoruucnt of 11ny well excepted ftom said Articles~ provided. 53 however, no well shall be pennanently plugged and abandoned unless and until all parties having lhe right to conduct filrther 54 operations therein have been notified of the proposed abandomm:nt and afforded the opportunity to elect to take over the well SS in accordance with the provisions of this Article VI. E.; and provided further. that Non-Consenting Parties who own an inlcrest S6 ln a portion of the welt shall pay their proportionate shares of abandonment and surface restoration cost for such well as 51 provided in Article Vl.B.2.(b). 58 F. Termination ofOperadons: 59 Upon the. commencement of an operation for the drilling, Reworking, Sidetracking, Plugging Back. Deepening. testing. 60 Completion or plugging or a well, including but not limited to the Initial Well, such operation shall not be terminated without 61 consCJJt of parties bearing 50.0% of the coses of such operation; provided. however. that in the event granite or other 62 practically impenelrable substance or condition in the hole is encountered which renders further operation." impractical, 63 Operator may discontinue operations and give notice of such condition in 1he manner provided_ in Article Vl.B.I, and the 64 provisions of Article Vl.B. or VI.E. shall thereafter apply to such operation, as appropriate. 65 G. Taking Production In Kind: 6li D Option No. l: Gas Bllandng Agreement Attached 67 Each party shall take in kind or separately dispose of its proportionate share of all Oil and Gas produced from the 68 Contract Area. exclusive of production which may be used in development and producing operations and in preparing and 69 treating Oil and Gas for marketing purposes and produclion unavoidably lost. Any extra expenditure incurred in the taking 70 in kind or SCJ'laratc disposition by any party of its proportionate share of the production shall be borne by such party. Any 71 party taking its share of production in kind shall be required to pay for only its proportionate share of such part of 72 Operator's surface facilities which it uses, 73 ·Each party shall execute such division orders and contracts as may be necessary for the sale or its interest in 74 production from the Contract Area, and, except as provided in Article VIJ.B., shall be entitled to receive payment - 10" SEC 190230  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - J989 directly from tho purchaser thereof for its share of all production. If any party fails to make the arrangements necessary to take in kind or separately dispose of its proportionate share of the O~ produced from tho Contract Area, Operaror shall have the right, su!iject to the revocation at will by the party owning i~ but not the obligation, to pW'Chase such Oil or sell it 1o others at any lime and from time to time. for the account of the non-taking party. Any such pun:hasc or sale by Operator may be terminated by Operator upon at least ten (IO) days written notice to the owner of said production and shall be suliject always to lhc right of the owner of the production upon at least ton ( t 0) days written notice to Operator to exercise al any time its right lo take in kind, or separately dispose of, its share of all Oil not previously delivered to a pun:haser. Any purchase or sale by Operator of any other party's share of Oil shall be only for such reasonable periods of lime 10 as are con.ctistcnt with the mini.mum needs of the industry under the particular circumstances, but in na event for a II pcriodinexcessofone(l)year. 12 Any such sale by Operator shall be in a manner commercially reasonable under the circumstances but Operator 13 shall have no duty to share any existing marl EKhibit "E" or is a 26 separate agreement. Operator shall give notice 1o all parties of the first sales of Gas frotn any well under this •gJeement. 27 B 9ellan Na 11 Pia Gas Balaneing 'gree111enll 28 l;&eh f'&R'J shall tahe in ltind 9f' separatel; dispese ef its PfUl'e'f(ieRBle shaFe tlf all Oil aAli Gas J"'adYeed iem 29 the Centraet " se, e1:elwsj e ef J'Fedu:etiee hieh. ll'llt!t be wed in d" "leJlmetlt Bftd pFa8Yeit1g SJ'etAtiens and iR 30 preparing aM treating Qil and Gas fer mafltetiRg pYfJ'BSes Mtd 1'•0d1i1etieR \Uut"eidahl; lesl. • ; tt1tft1 9peruliQires 31 inet1ffeEI in: the IBIEiAg in hincl er 8Sflde Eligpesitieft 1') .,., f'BR) ef its prflpeFf:ienete shltfe er the preduelien sbell 32 Be \Jeme ..,, sueh pol4). >•'fl) feftY lftiEing its share ef J!Fedu:etien in hiREl shall he re1tt1irefl te pay fer enl; its 33 Jl"'peftieH&te share ef Heit pen eFQpentlEI 111 sttrMe11 iheiilitiH hit!!h i1f t19lil81 34 Ee.eh JI""' shall l!JieSYte SYeh di• i&ieR effiBFS ee8 BBftlF88\9 89 R'Nl) he Reee998~ fep the sale ef its ittlereet iR 3S pretktelien fun the Gaalreet •rea. Mti, euept 11s pre ided in '.Jflie1e Vll.B .• shelJ be eBliUed ta reeei e pe,fReftt 36 tlB eel~ iem the pwFeRaser ~efeef far illl Ahare efall Pfed1i1etien. 37 If BR) pan, Mils le mahe the &l'ftutgemeflls Aeeessa1; le telf:e ift hind er sew:iM'Btel) dief)ese ef ikl prapariie~ 38 stuue af the Qil an41er Gas pl'6Eltieed fi:em the CentF&et "'ree. Of'sPBler sllell ha e lfle right, eH&jeM te the 39 re eeMien et oill "' 1he ~ e• eing ft, \nil net 1he ehligelie11, te p~rehase M:te~ Oil enti'ur Gas a sell ii te etfters 40 at Bft) liffle aftll haa1 ffme te time, f.sr BIEi seeetnrt af the R6A lalfi"'I p&ft}. •"'ff) SYell JHf~Bf er .lBle &} Qreretar 41 ffl&) he tenninaled i:J) OpeR1leF wpen al leaHt 1n1 (10) da)B Fitteft fleliee te the e Ber ef seiB predttetiea and shell 42 be suhjeet al &)8 ta the rig'ht ef tlle enfteF ef lhe preduelien tfl'BH at 1ettst len (19) tle)s 'fitteA netiee le Opereter 43 le e11:enise iie Fight te t:eli.e iR kind. aF 11er;tal'atel) .Ji:9pese ef, its share ef all Qil &Rd 'er Ges flet pr~ ieYsl) Eleli ereEi 44 te a pttrehaser, pre1ided, heae er, Uutl the etleeti e date er 811) 'ttel:l re eeatieR ma, &e defef'f'ed at Oper&ter's 45 eleetien fer a purieEl net h3 tmeeed niftet~ (941) da)s if Qpet'Bter ba9 eemmitted sueh pedeelieft le a purehaee 46 eehlmet ha ing e lel'ffl effhwtiliflg Be) BREI suehten (19) tllt) petied . ."8' J'luehe:se er sale hy Opereter efaft) etJ:er 47 ,,a'*' '6 sl111n.r ef QH en6'9r c~ Wll he eftiy far SYeh f1S&sena9le perieds ef time RS Me eeAsieteRt itfl the 48 mitUR1Yfft Reeds ef the iR4w&-., YHde1 lhe paffieular eiFSumsklnees, t.wl ii s e e eftl fer a peried in e•eess ef erte (1) 49 io- .50 • "} 51:1eh sale h; Qperete1 shall '3e i11 a m1111Her ee"'"'""eiall~ reaseftahle Wfltler ~e eireYHISUtftHtit but Opereter SI 11ha" M e ft9 Ml•) te sM.e BR)' e11is4:iRg meRlet er li=111spertatiee &RUft8eml!lflt er te eBteifl a lffiet er "8RSr.nJttali98 S2 fee Bl(lilll le lMl reeei eel Btt8et &A) enisting merli.et er h'anspertatieft &ffBngeffleRt. The sale er deli ~ \Jy 53 QpeF&ter ef a ftBR mlEirig J1&l1)'s sha1e ef preduetien wnder lhe tefffls ef EHt} e.rlisting eenliaet er Qt'efBter shall net 54 gi· e d\e Reft tabiAg J91~ ltft) interest in er ft'lahe the ftBR leltirtg "~ 8 paft) te seid eeftlNet. >le J'lNfehB98 er Oil SS aRd {ias M4 t\e 5ele ef Gas shall he 11:ede h) 9f1el'Mer ~heHl first gi i:ng the REUi '8ldng part) leR u,.e 1 'fitteA 56 netiae ef S\teh iatetui~ pwPehase er sale end the pRee te ~e pai~ er lJ:ne iuteing hasi~ te b~ wsed. 0,,emter shall gi e 57 ftetiee le all )!lllRiee efthe Mt sele afQas ffem &R) el] llftderthis •greemeAt. 58 AH piefffes sMJJ gi e ti111el) "Mrftitf:Bft RA~ies is O,,eR1&8P ef their GS5' FABFIEelieg ePM111gemeAls lar the faUe"'iitg S9 mentl-. l!1el1:1Eli"g priee, ati:d shall eettt) QpR:ter imm:ediatel; itt the e eftl ef e: ehaage iR: &Yeh &fftfflgemeHts. 60 Ofleratet' shall maintaift reeerds ef all m&Fhe1i11g &fl'BftgemenU1, and er "'e1umee eet\tell) seld er lftlfleperted 1 hieft 61 reeer6s ihe:U he tuade a eilHle le >Jen OpetB:ters HJ'8ftFeasenal9le flolqt:teab 62 ARTICLE VII. 63 EXPENDITURES AND LIABILITY OF PARTIES 64 A. Llablllty of Parties: 65 The liability of lhe parties shall be severa~ not joint or colleclive. Each party shall be responsible only for its obligations. 66 and shall be liable only for its proportionate share of tho costs of developing and operating the Contract Area. Accordingly. the 67 liens granted among the parties in Article Vll.B. are given to secure only the debts of each severally. and no party shall have 68 any liability to third parties h""'und,.. to satisfy the default of any othor party in 1he payment of any e•pense or obligation 69 hereunder. It is m>t the intention of the parties to create, nor sha11 this agreement be construed as creating. a mining or other 70 partnership, joint venture, agency relationship or association, or to rcndi:r the parties liable as partners, co•venturcrs, Cl1' 71 principals. In their relations with each other under this agreement, the parties shall not be consldered fiduciaries or to have 72 established a confidential relationship but rather shall he free to ae\ on an ann's.length basis in accordan~ with their own 73 respective self~interest 1 subject, however, to the obligation of the parties to act jn good fuilh in their dealingS with each other 74 with respect to activities hereunder. ·II- SEC 190231  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 B. Liens and Security Interests: Each party grants to the other parties hereto a lien upon any interest it now owns or hereafter acquires in O;J and Gas 3 Leases and Oil and Gas Intcrests in the Contract Arca~ itnd a security interest and/or purchase money r.ecurity interest in any 4 intero.1t it now owns or hereafter acquires in the personal property and fixtures on or used or obtained for use in conneotion therewith, to secure perfonnance of all of its obligations under this agreement including but not limited to payment of expense, interest and fees, the proper disbursement of all moni~ paid hereunder, the assignment or relinquishment of interest in Oil and Gas Leases as required hereunder. and the proper performance of operations hereunder. Such lien and security interest granted by each party hereto sha II include such party's leasehold interests, worly Non-Operators for lliilu~ to make 60 timely payments of any shut-in well pcymcnt shall be borne jointly by the pcrties hereto under the provisions of Article 61 IV.8.3. 62 F. Tues: 63 Beginning with the first ca1endar year alter the effec:tivc date hereof. Operator shaU render for ad val01em taxation all 64 property subject to this agreement which by law should be rendered for such tax.cs, and it shall pay all such taxes assessed 65 thereon before they become delinquent. Prior to the rendition date, each Non-Operator shall furnish Operator information as 66 to burdens (to include, but not be limited to, royalties, overriding royalties and production payments) on Leases and Oil and 67 Gas Interests contributed by such Non.Operator. If the assessed valuation of any Lease is reduced by reason of its being 68 subject to outstanding excess royalties, ovcniding royalties or production payments, the reduction in ad valorcm taxes 69 resulting therefrom shaU inure to the benefit of the owner or owners of such Lease, and Operator shall adjust the charge to 70 such owner or ownets so as lo reflect the benefit of such reduction. lf the ad valorem taxes arc based in whole or in part 71 upon separate valuatjons of each party's working interest, then notwithstanding anything to the contrary herein, charges to 72 the joint accoum shaJl be made and paid by the parties hereto in accordance with the We value generated by each pan}'~<; 73 working interc5t. Operator sha.11 bill the other parti~ for their proportionate shares of all tax payment.<; in 1he manner 74 provided in Edribit 11 c.• - !3. SEC 190233  A.A.P.L. FORM 610-MODELFORM OPERATING AGREEMENT-1989 lf Operator considers any ta.\': assessment improper, Operator may, at its discretion, protest within the time and manner prescribed by Jaw, and prosecute the protest to a final determination, unless all parties agree to abandon the protest prior to final 3 determination. During the pcndency of administrative or judicial proceedings. Opera.tor may elect to pay, under prote$l, an such taKcs 4 and any interest and penally. When any such protested a!jeot to the terms and p1ovisions of this 38 agreement but shall be deemed subject to an Operating Agreement in the fonn of this agreement. 39 B. Renewal or Extensloa of Leases: 40 If any party secures a renewal or replacomcnt of an Oil and Gas Lease or Interest subject to this agreeinent. then all olher parties 41 shaU be notified promptly upon such acquisition or, in the case of a replacement Lease taken before expiration of an existing Lease, 42 promptly upon eApiration of the existing Lease. The parties notified shall have the right for a period of thirty (30) days following 43 delivery or wch notice in which to elect to participate in the ownership of the renewal or reJ'lacement t...ease, insoiar as such Lease 44 affects lands within the Contract Area, by paying to the party who acquired it their proportionate shares of the acquisition cost 4S allocated to that part of such Lease within the Contract Arca, which •hall be in proportion to the interest held al that time by the 46 parties in the Contrad. Area. Ea.ch party who participates in the purchase of a renewal or replacement Lease shall be given an 47 assignment of its proportionate interest therein by the acquiring party, 48 If some, but less than all, of the parties elect to participate in the purchase of a renewal or replacement Lease, it shall be owned 49 by the parties who elect to participate therein, jn a ratio based upon the relationship of their respective percentage of participation in SO the Contract Area to the aggregate of the percentages of participation in the Contract Arca of all partic.." participating in the SI purchase of such renewal or replacement Lease. The acquisition of a rcrwwal or repla<;cmcnl Lease by any or all of the parties hereto 52 shall not cause a readjustment of the interests of the parties stated in Exhibit nA," but any renewal or replac<:menl Lease in which S3 less lhan all parties elect to participate shall not be subject to this agreement but shall be deemed subject to a separate Operating 54 Agreement in the form of this agreement. SS If the interests of the parties in the Contract Area vary according lo depth, then their right to participate proportionately in 56 renewal or replacement Leases and their right to receive an assignment of interest shall also reflect such depth variances. 57 The pmvisions of this Article shall apply to renewal or replacement Leases whether they arc for the entire interest covered by 58 the eitpiring Lease or cover only a portion of its area or an interest therein. Any renewal or replacement Lease taken before the 59 expiration of its predecessor Lease, or taken or conlracted for or becoming cffe<;tive within six (6) months after the expiration of the 60 existing Lease. ~haU be subject to this provision so long as this agreement is in effect at the time of such acquisition or al the lime 6t the renewal or replacement Lease becomes effective; but any Lease taken or contracted fur more than six (6) months allcr the 62 expiration of an existing Lease shall not be dccmcd a renewal er replacement Lease and shalJ not be subject to the provjsions of tbjs 63 agreement. 64 The provisions in this Article shall also be applicable lo extensions of0i1 and Gas Leases. 6S C. Acremae or C11h Contributions: 66 While this agreement is in force, if any party contracts for a contribution of cash towards the drilling or a well or any other 67 operation on the Contract Area, such contribution shall be paid lo the parly who conducted the drilling or other operation and shall 68 be applied by it against the cost of such drilling or other operation. If the contribution be in the fonn of acreage, the party to whom 69 the contribution is made shall promptly tender an assignment of the acreage, without warranty of title, to the Drilling Parties in the 70 proportions said Drilling Parties shared the cost of drilling the well. Such acreage shall become a separate Contract Arca and, to the 71 extent possible. be governed by provisions identical to this agreement Each party shall promptly notify all other parties cf any 72 acreage or cash contn"butions it may obtain in support of any wen or any other opr..-ration on the Contract Arca. The above 73 provisions shall also be applicabJe to optional rights to cam acreage out.side the Contract Arca which are in support of well drilled 74 inside Contract Arca. Conb'ibutions under the paragraph do not include proceeds from the actual sale of working interest in a wen or lease -14. SEC 190234  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 hereunder. 2 lf any party contracts for any consideration relating to disposition of such party's share of substance.~ produced hereunder, 3 such consideration shall not be deemed a contribution as contemplated in this Article Vlll.C. D. A55ignment; Maintenance of Uniform lntere.i: f.er *"1e f:JY~eH ef wiRteiRiag uRifeFIAi~ ef e Aetahip in the Centfeet ,1\fea ift the Oil end Cns t.eases, Oil and Gas lnteFeets, ., ells, e~1:1:ipment &Rd predwetien ee eseel h) UHs agi eemeM B6 JBfl) shell sen, eneum'hef, lfllesfer er FRalte e01er dispesilien ef if!s iRteFesl in lhe Oil aed Gm l::N:Ses and Oil anEI G1t:• letefests emMaeed ithin th!: Cenlfaet Ana er in wells, efitt:ipMeRC Mid ,,,eduetien Kniess s~eh dispeeifisn ee•et'S Wther. 9 1. lhe entire iN:eresl eftfle p&ft) iR all Qil and Gas be&!ies, Oil &Rd Gas Interests, ells, e14tiipme&t RAEi predi:teheA, er JO 2. an i!ftBlll t:1Rdi.ided pereertt ef the ra'4:)'s pFeseM iRterest in all Oil ftA:d ges bees"s, Oil aRd Gas lelel'ests, Blls, 11 eEl'diplflettt fl:REI predttefien ia the CetVaet "Pea. 12 Every sale. encumbrance, transfer or other disposition made by any party shall be made expressly subject lo this agreement 13 and shall he made without prejudice to the right of the other parties, and any tnmsferee of an ownership intCl'cst in any on and 14 Gas Lease or Interest shall be doemed a party to this agreement as to the interest conveyed from and aflcr the offcctive date of 15 the transfer or ownership; provided, however, that Che other parties shall not he required to recogni7.e any such sale, 16 encumbrance, transfer or other disposition for any purpose hereunder until thirty (30) days after they have received a copy of the I7 instrument or transfer or other satisfactory evidence thereof in writing from the transferor or transferee. No assignment or other 18 disposition of interest by a party shall relieve such party of obligations previously incum:d by such party hereunder with respect 19 to the interest transferred. including without limitation the obligation of a party to pay all costs attributable to an operation 20 conducted hereunder in which such party has agreed to participate prior to making such assignment, and the lien and security 21 interest granted by Article VH.B. shall continue to burden the interest transferred t.o secure payment of any such obligations. 22 u: at any time the interest of any party is divided among and owned by four or more co-owners. Operator, at its discretion. 23 may require such co-owners to ap)X>int a single trustee or agent with fUll authority to receive notices, approve expenditures, 24 receive billings for and approve and pay such party's share of the joint expenses, and to deal generally with, and with power to 25 bind, the co--owners of such party's interest within the scope of 1he operations embraced in thjs agreement; however, all such co- 26 owners shaU have the right to enter into and execute all contracL~ or agreements for the disposition of their respective shares of 27 tho Oil and Gas produced from the Contract Area and they shall have the tight to receive, separately. paymo:nt of the sale 28 proceeds thereof. 29 E. Wal•er ol Rights to Partition: 30 If permitted by the laws of the state or states in which the property covered hereby is located, each party hereto owning an 31 undivided interest in the Contract Area waives any and all rights it may have 10 partition and have set aside to it in severalty its 32 undivided interest therein. 33 I'. Prelereoli•I Righi I• ""••hose1 34 e EQp1ioMI, Ghoek ihpplieobl~.) 35 Shet1ld IH'I) peft) desife kl sell ell er an) part ef its inter~l6 under this agreemaftt, eT its 1ightti tttttl intt\!Peti~ iH lhe CeHlNet 36 Vee, ft shBll prttmj91l) gP e · ritten netiee te "'1e ether paFties, itft NII iR"ieFffWltieH eeAee11RiHg its pPBJ'esetl dtspesitien, 1ltieh 37 shall iRel\l:de lhe nBffltl anti 1uhhess ef dte rirespeeti e trensferetS ( he n tl9t he Pe&el). illiHg aetl a81e te pW"ehase), the f'kl!Bha:le 38 priee. a legal 8e&ePt,,tieR suf.fieieAt te identify the J'f9pa1t;,, BREI ell ether teFFAs ef the after. The ether J!~es ehaU tfteh ha a Oft 39 eptieHal gn=iar Pighl; Mr a rniriul er tee (19) 00,s after the Heliee is deli1ered, te purehese fer ll:e .itated eensidet=etieft eft the 40 8fttfte tenns anti een&HieM lhe iAleresl .. IUeh Ike ether paft:, prepeses te sell; mul, if this eplienal right is e:nereiled. the 41 J!Yrehesing parties shall share tfte pu•eftttse8 interest in the prftfJBF~ieRs that the iftl:erest ef eaeh 8e&f9 le d=te tetel interest ef ell 42 J'ttNhlsing; paffies. UH e1 er, there shall be fte pi'eferefl\iul Rgflt le pufehase ie \hese elH!tlS heFe BA) pa.Fl) isheis \e mel'tgage 43 ils interesl-s, er te tfensfer title le it11 iitttRsts 1e it.a met=tgegee iR 1ieY er er JNrH&At te fo..eeleswe ef e mer~e ef Us in*eJe9l9, 44 er ta disp9Ae ef ils ifile1'88h1 h) mer=ger>, reeFgefliii!olltiee1 eenselidatien, er b) 98:1e ef ttll ar Auhe&eftliall) all ef ils QiJ an& Gae assets 4S le aa) patt). er Is) treuefer ef its iMererats te a suhsiclitw) er p&ftml eempaw; ef te a 81:1'3sidift'I') ef a J!l&Fe8t ettlftPflft), er ts en) 46 estHJMllS i11 "RieR .11ueh ,,.m, el\ ns a mej&Fit) eflhe staWt. 47 ARTICLE IX. 48 INTERNAL REVENUE CODE ELECTION 49 IC, for fcdenal income tax purposes, this agreement and the operations hereunder are regarded as a partnership, and if the SO parties have not otherWisc agreed to Conn a tax partnership pursuant to Exhibit 11G" or other agreement between them, each 51 party thereby affected elects to be excluded from the application of all of the provisions of Subchapter "K." Chapter l, Subtitle 52 •A." of the Internal Revenue Code of 1986, as amended ("Cnde"). a.< pcnnitwd and authorized by Section 76 I of the Code and 53 the regulations promulgated thereunder. Operator is authori:ted and directed to e•ecute on behalf of each party hereby affected 54 such evidence of this election as may be required by the Secretary of the Trtasury of the United States or the federal Internal SS Revenue Service, including specifically. but not by way of limitation, all of the returns, statements, and the data required by 56 Treasury Regulation §t.761. Should there be any requirement that each party hereby affected give further evidence of this 51 cJ04;tion. each such party shall execute such documents and furnish su<:h other evidence as may be required by the Federal Internal S8 Revenue Service or ac; may be necessary to evidence tlti:;; election, No such party shaJI give any notices or take any other action 59 incon.'iistcnt with the election made hereby. 1f any present or tuturc income tax laws of the state or states in which the Contract 60 Arca is located or any future income taJC laws of the United States contain provisions similar 10 those in Subchapter "K," Chapter 61 1. Subtitle "A." of the Code, under which an election similar to Iha! provided by Section 761 of the Code is permitted, each party 62 hereby affected sha11 make such election as may be permitted or required by such laws. In making the foregoing election, each 63 such party states that the income derived by such party from operations hereunder can be adequately determined without the 64 computation of partnership t..able income. 6S ARTICLll X. 66 CLAIMS AND LAWSUITS 67 Opcs-ator may settle any single unimurcd third party damage claim or suit arising from operations hereunder if the expenditure 68 docs not oxoccd five thousand Dollara ($ S,000.00 ) and if tho payment is in complete settlement 69 of such claim or suit. If the amount required for seUlemc:nt exceeds the above amount, the parties hereto shaJI assume and take over 70 the further handling of the claim or :i;uit, unless su<:h authorily is delegated to Operator. AU costs and expenses of handling settling, 71 or otherwise dificharging such claim or suit shall be a the joint expense of the parties participating in the operation from which the n claim or suit arises. Ir a claim is made against any party or if' any party is sued on account of any matter arising from operations 73 hereunder over which such individual has no control because of the rights given Operator by this agreement, such party shall 74 immediately notify all other parties, and the claim or suit shall be treated as any other claim or suit involving operations hereunder. -14- SEC 190235  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 ARTICLE XI. FORCE M AJEURE If any party is rcnd<:red unable, wholly or in part, by force majcure lo carry ou1 iis obligations under this agreemcnl, other than the obligation fO indemnify or make money payments or furnish seourity, that party shall give to all other parties prompt wriUen nolk:e of the force majeurc with reasonably full partK:ulars concerning it: thereupon. the obligations of the party giving the notice, so rar as they are affected by the force majeure, shall be suspended during, but no longer than, the continuance of the force majeure. The tenn •rorce majeurc," as here employed. shall mean an act of God, strike, lockout. or 8 other industrial disturi>ancc, act of the public enemy, wnr, blockllde, public riot, lightening, fire, storm, flood or other act of 9 nature, explosion. governmental action, governmental delay, ~1raint or inaction, unavailability of equipment, and any other 10 cause, whothcr of the kind •peoilicaliy enumerated above or otherwise, which i• not reasonably within the control of the party 11 claiming suspension. 12 The afT~ed party shall use all reasonable diligence to remove the force majeure situation as quickly as practicable. The 13 niquirement that any fOrce majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes, 14 lookouts, or other labor difficulty by the party involved, contrary lo its wishes; how all such difficulties shall be handled shall IS be entirely within the discretion of the party concerned. 16 ARTICl,EXll. 17 NOTICES 18 AU notices authorized or required between the parties by any of the provmons of this agreement., unless otherwise 19 specifically provided, shall be in writing and delivered in pmon or by United States mail, courier service, telegram, telex, 20 telccopicr or any other form of facsimile, postage or charges prepaid, and addressed to such parties at the addresses listed on 21 Exhibit •A." All telephone or oral notices permitted by this agreement shall be confinnod inunediately thereafter by written 22 notice. The originating notice given under any provision hereof shall be deemed delivered only when received by the party to 23 whom such notice is directed, and the time for such party lo deliver any notice in response thereto shall run from the date 24 the origirmling notice is received "Receipt" for purposes of this agreement with respect to written notice delivered hereunder 25 shall be actual delivery of the notice to the address of the party to be notified specified in accordance with this agreement, or 26 \o the 1elecopy, facsimile or telex machine of such party. The second or an)' rcspon.i;ive notice shall be deemed delivered when 27 deposited in 1he United States mail or at the office of the courier or telegraph service, or upon tra~mittal by tele", telecopy 28 or facsimile, or when personally delivered to the party to be notified, provided, that when response is required within 24 or 29 48 hours, such response ·shall be given orally or by telephone, telex, tclecopy or other facsimile wilhin such period. Each party 30 shall have tho right to change its addres.• at any time, and from time to time, by giving written notice thereof to all other 31 parties. [f a party is not available to receive notice orally or by telephone when a party attempts to deliver a notice required 32 to be delivered within 24 or 48 hours, the notice may be delivered in wr~ing by any other method specified herein and shall 33 be deemed delivered in the same manner provided above for any responsive notice. 34 ARTICLE XUI. 35 TERM OF AGREEMENT 36 This agreement shall remain in full foroc and effect as fO the Oil and Gas Leases and/or Oil and Gas lntercsts subject 37 hereto for the period of time sclccicd below; provided, howevct. no party hereto shall ever be construed as having any righl, title 38 or intoresl in or lo any Lease or Oil and Ga.• lntcrost contributed by any other party beyond the term of this agrectnent. 39 0 Option No. J• So Jong as any of the Oil and Gas Leases subject to this agreement remain or are continued in 40 force as to any part of the Contract Arca, whether by production, extension, renewal or o1herwise. 41 a Qstien )le. 2: In the e ent the ell de9efli&ed ie I'm.ale "I.A.• er Bit) !lt1!seq11eAt ell dFiUN tiRde!' BR) l'f'B isieR 42 ef this agreemeelo festtl'6 ht '8e C&hlJllelien ef e •ell as a ell eapehle ef preEkietieR ef Oil and/er GaR ifl JIB)ing 43 quantities, dtie apeement ehe:Jl ee'AttnHe le feree se Ieng &1 BA) weh ell is eapa81e ef f)t=BEIHtie1h &ftd feF BR 44 addi\iefl&I peried ef de) s thereafter, pre ided, he e er, if, prier te lhe enpimtieft er 9Hf1h 4S additienal pefte&. eae er ftHM'e af tke pat=Hes heMtu an eRgez;ed 91 tlf:illi"Rg, Re 'eR~lnitt Pe~ening; SitlelNeMRg, 46 ~t1ggifig B1elE, lesfiffg eF &He"'f'liag le Cemrle1e er Re eemf'lete e 1 Etll eF rells herelHldef, ifils agAIHftBftt shall 47 eeetinue iR feree t1ntil Stieh epemtiens he e beSA een'lpleletl and if f"nEhu:1tien res1:1lts therelfem. this agreement 48 shall emt1itwe i11 feree as pre ided herein. IR lhe 11 eet the ell deseflhed iH a\t'tiele VI.•., eP &fl) subseq1:1eA:t ell 49 c.lfilled hreaMer, resalts ifl a dr) hale, and ne ether ell i11 t1apahle ef predweiAg Qtl anB"er Qais frem the 50 CMt\faet •ftle, thi1 agiieen ent tihttll tef'fftitlie'e unlene dri11int; Qeepefling. Sidet.meking, Cs1trpleling, Re 51 eet11plettng. PluggiRg Baelt BF Re 'EN"lei11g epefflliens &Fe BBffHHBRSed wilhiA ~ #Fem the S2 date ef HaRd8Rfflel'R ef said ell. " 4 \9ande1un8ftt'1 re. 9lleh '"'"PBH eAall ll\e&ft either Ei) 8 deeisiee e~ all pefties 53 ttet le eendviet IHI) Atfth:er &))ef8tiens en the 1ell er (H) the elapse ef 180 de)s #fem the eeHdwet ef BA) S4 flf'er&tiens ea the 1ell, ohieh~ er fif&t eeetlf8!. 55 The termination of this agreement shall not relieve any party hereto from any e:\pense, liability or other obligation or any 56 remody thcref« which has accruW or attached prior to the date of such termination. S7 Upon termination of this agreement and the r.atisfactiQn of al1 obligations hereunder. in the event a memorandum of this 58 Operating Agreement has been filed of record, Operator is authori1.ed to file of record in all necessary recording offices a 59 notice of tenninalion. and each party hereto agrees to execute :;uch a notice of termination as 10 Op~ator's interest, upon 60 request of Operator. if Operator has satisfied all its financial obHgalions. 61 ARTICLE XIV. 62 COMPLIANCE WITH LAWS AND REGULATIONS 63 t\. Laws, Regulallom alld Orders: 64 This agrceinent shall be subjoo to the applicable Jaws of the state in whfoh the Contra<:t Area is located, to lhe valid rules, 65 regulations, and orders of any duly constituted regulatory body of said state: and lo all other applicable federal, state, 66 and local laws, ordinaoccs. rules.• regulations and orders. 67 B. Covernillg Law: 68 Thls agreement and all matter5 pertaining he~eto, including but not limited to matters or performance, non· 69 performance, breach, remediei;, procedures1 rights, duties, and interpretation or construction, shall be governed and 70 determined by the law of the state In which th.C Contract Area Is located. Jr the Contract Area js in two or rnore slates, 71 Che law of the state of_... T... cx.,a,.s_ _ _ _ _ _ shaJI govern. 72 C. Regulatory Agenda; 73 Nothing herein contained 5haJ1 grant, or be construed to grant, Operator lhe right or authority lo waive or release any 74 rights. privileges, or obligalfons which Non-Operators may have under fedt..nl or slate laws or under rules. regulations or -16. SEC 190236  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 orders promulgated under such laws in reference tn oil. gas and mineral operations. including the location, operation, or productjon ofweJJs, on tracts offsetting or adjacent to the Contract Arca. With respect to the operations hereunder, Non-Operators agree to release Operator from any and all losses, damages, injuriu, claims and causes of action arising out of, incident to or resulting directly or indirectly from Operator's interpretation or application of rules, rulings, regulations or orders of tho Department of Energy or federal Energy R"8Ulatoiy Commission or predecessor or successor agencies to the extent such interpretation or application was made in good faith and docs not constitute gross negligence. Each Non-Operator further agrees to reimburse Operator for such Non-Operators share of production or any refund. fine, levy or other governmental sanction that Operator may be required to pay as a result or sui;:h an incorrect interpretation or application, together with interest and penalties thereon owing by Opmtor as a result of such JO incom:ct intezpre1alion or application. II ARTICLE XV. 12 MISCELLANEOUS 13 A. Execution: 14 This agreement shall be binding upon each Non-Operator when this agreement or a counterpart thereof has been IS executed by such Non-Operator and Operator notwithslanding that this agreement is not then or thereafter exeeulL-d by all of 16 the parties to which it Is tendered or which arc listed on EJthibit "A" as owning an interest in the Contract Arca or which 17 own, in facl, an interest in the Contract Area. Operator may, however, by written notice to all Non-Operators who have 18 become bound by this ajlrceincnt as aforesaid, given at any time prior 10 the actual spud dale of tho Initial Well but in no 19 event later than five days prior to the dale specitied in Article VI.A, for commencement ('lf the Initial Welti terminate this 20 agreement if Operator in its sole discretion determines that there is insufficient participation to jui..1ify commencement of 21 drilling opcrationa. In the event of such a tenninalion by Operator, all further obligatioos of the parties heroumler shall cease 22 as or such tennination. In the event any Non-Operator has adv11JJced or prepaid any share of drilling or other costs 23 hereunder, all sums so advanced shall be returned to such Non-Operator without interest. In the event Operator procoeCCl to all costs incurred for the 26 lnitial Well which would have been charged to such pcrn>n wider this agreement if such person had executed the same and 27 Operator shall receive all revenues which would have been received by such person under this agrec1ncnt if such person had 28 executed lhe same, 29 B. Successors and A11igm: 30 This agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, 31 devisees, legal representatives, successors and assigns, and l~ terms hereof shall be deemed to nm with the Leases or 32 Interests included within the Contract Area. 33 C. Counterparts: 34 This instrument may be executed in any nu1nber of counterparts, each of which shall he considered an original for all JS purposes. 36 D, Severabllity: 37 For the purposes cf a.~suming or rejecting thi$ agreement as an cxcculory contract pursuant to federal bankruptcy laws, 38 this agreement shal1 not be severable. but rather must be assumed or rejccled in its entirety. and the failure of any party lo 39 this agreement to comply with all of its financial obligations provided herein shall he a material default. 40 ARTICLE XVI. 41 OTHER PROVISIONS 42 43 This Joinl Operating Agreement i.'i subject to the additional ter1ns and provisjons which are contained in Article XVI attached hereto. 44 4S 46 47 48 49 so SI S2 SJ S4 SS S6 51 58 59 60 61 62 63 64 6S 66 67 68 69 70 71 n 73 74 - l7- SEC 190237  AA.P.L. FORM 6!U - MODEL FORM OPERATING AGREEMENT- 1989 IN WffNESS WHEREOF, this agreement shall beclTcclive as oftbe 2st day ofJanuary, 2010. OFERATOR RAW OIL & GAS, INC. 4 Joe D. Hardin Type or print name TiUe President Tax ID or S.S. N o . - - - - - - - - - - - - - 9 NON-OFERATORS IO RAWENERGY,LC 11 By 12 Joe D. Hardin Type or print name 13 Title Manager 14 Date IS Tax lD or S.S. No. 16 17 SMn'H ENERGY COMFANY 18 By 19 Lester Smilh Type or print name 20 Title PrOliident 21 Date 22 Tax ID or S.S. No. 23 MARK r. HARDWICK 24 By 25 Date 26 Tax ID or S.S. No. 27 28 STEVE BLAYWCK 29 By -----------------~ Date _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ 30 31 Tax ID or S.S. N o . - - - - - - - - - - - - - 32 ELGER EXPLORATION INC. 33 34 Jerry El2cr Type or print name 3S Title President 36 37 Tax ID or S.S. N o . - - - - - - - - - - - - - -20- SEC 190238  A.A.P.L. FORM 6i 0 - MODEL FORM OPERATING AGREEMENT - 1989 ACKNOWLEDGMENTS 2 Note: The following forms of acknowledgment are the short forms approved by the Uniform Law on Notarial Acts. The validity and effect of these forms in &llJI state will depend upon the statutco of that state. Acknowledgment in representative capacity: State of Texas SS. County of Lubbock This insllumcnt was acknowledged before me on this _ _ day o f - - - - - - - - - - - • 2010, by Joe D. Hardin as President ofRAW OIL & GAS, INC. 9 (Seal, if any) 10 TiUe(and Rank) _ _ _ _ _ _ _ _ _ _ _ _ __ II My commis.tiion e x p i r e s : - - - - - - - - - - - - - 12 13 State ofTexas 14 s•. County of Lubbock IS This instrument was acknowledged before me on this _ _ day of _ _ _ _ _ _ _ _ _ _ _~ 2010, by Joe D. Hardin as 16 Manager ofRAW ENERGY, LC. 17 (Seal, if any) Title(andRank) _ _ _ _ _ _ _ _ _ _ _ _ _ __ 18 19 My commission e x p i r e s : - - - - - - - - - - - - - 20 State ofTexas 21 SS. County o f - - - - - 22 This insirumcnt was acknowledged before me on this _ _ day of _ _ _ _ _ _ _ _ _ _ _ _., 2010, by Lester Smith as 23 Prc!;ident ofSMITll ENERGY COMrANY. 24 (Seal, if any) 25 Title(andRank) - - - - - - - - - - - - - - - 26 My commission e x p i r e s : - - - - - - - - - - - - - 27 28 lndividwd acknowledgment: 29 State ofTexas ) SS. 30 County of Midland ) 31 This instrument was acknowledged before me on this _ _ day of _ _ _ _ _ _ _ _ _ _ _,, 2010, by MARK r. HARDWICK. (Seal, if any) TiUe(andRank) _ _ _ _ _ _ _ _ _ _ _ _ _ __ My commission e x p i r e s : - - - - - - - - - - - - - 35 36 37 -20- SEC 190239  A.A.P.L. FORM 61U - MODEL FORM OPERATING AGREEMENT - 1989 Individual acknowledgment; State ofTexas County of Midland ) ) "· This instrument was acknowledged before me on this _ _ day of----------~ 2010, by STEVE BLAYLOCK. (Seal. if any) TiUe(andRank) _ _ _ _ _ _ _ _ _ _ _ _ __ My commission e x p i r e s : - - - - - - - - - - - - 10 State ofTe•u 11 County of _ _ __ ... 12 This instrument was acknowledged before me on Ibis _ _ day o f - - - - - - - - - - - • 2010, by Jerry Elger as President of ELGER EXPLORATION INC. 13 (Seal, if any) 14 Title(andRank) _ _ _ _ _ _ _ _ _ _ _ _ __ IS My tommission e x p i r e s : - - - - - - - - - - - - 16 17 18 19 20 21 22 23 24 2S 26 27 28 29 30 31 32 33 34 JS 36 37 -20- SEC 190240  JOINT OPERATING PROVISIONS ARTICLE XVI To be attached to and made a part of that certain Joint Operating Agreement dated January 2, 2010, between Raw Oil & Gas, Inc. as Operator and Smith Energy Company, eta!, as Non-Operator A. !£iyalties. Overriding Rovalties and Other Pavments: I. As used herein, the term "Existing Burdens" shall apply separately to each Lease and means all royalties and overriding royalties and other payments carved out of the Leasehold estate with which each Lease covered by this Operating Agreement is burdened as of the effective date hereof. 2. Each party shall pay or deliver, or cause to be paid or delivered, its proportionate part of all Existing Burdens and shall hold the other parties free from any liability therefor. B. Rentals Shut-in Well Pavments and Minimum Royalties: I. All rentals, shut-in well payments and minimum royalties which may be required under the terms of any Lease shall be administered and paid by Operator and charged to the Joint Account except where otherwise expressly provided to the contrary in this Operating Agreement. Any party may request and shall be entitled to receive proper evidence of all such payments. 2. Operator shall diligently attempt to make or cause to be made proper payment of any rentals and/or shut-in well payments and/or minimum royalties under the foregoing provisions, but Operator shall not be held liable to the other parties in damages fur the Joss of any Lease or interest therein it; through mistake or oversight, any rental and/or shut-in well payment and/or minimum royalty is not paid or is erroneously paid. The loss of any Lease or interest therein which results from Operator's failure to pay or an erroneous payment of rental and/or a shut-in well pay.ment and/or a minimum royalty shall be borne jointly by the parties hereto under the provisions of Article IV.B.3. 3. Each party hereto shall be obligated to bear its proportionate part of any and all rentals necessary to continue in force and effect the Oil and Gas Leases covered by this Agreement unless and until it timely gives the notice provided for in the next sentence hereof. If any party does not wish to bear its proportionate part of any rental necessary to continue in force any Lease covered by this Agreement, such party may give Operator and a\1 other parties hereto written notice of such election, and the party giving such written notice sha\1 be released of obligation to bear its proportionate part of any rentals which accrue under the terms of the Leases specified in such written notice at any time after thirty (30) days after the date Operator receives such party's aforesaid written notice. Unless mutually agreed, otherwise, the proportionate part of the rental attributable to any such Lease which would have been borne by the party giving the aforesaid written notice shall be borne by the parties hereto who do not exercise the aforesaid election, in the proportion that the interest of each bears to the total of their Interests, and the party giving the aforesaid written notice of election not to pay its part of such rental shall assign, without express or implied warranty of title, all of its interest in the Lease or Leases specified in said written notice to the aforesaid parties in the respective proportions that they bear the rental on any such Lease or Leases. C. Removal of Operator-Vote of all Parties. Operator may at any time be removed with or without cause by the affirmative vote of the owners of the majority interest in the Contract Area based upon ownership as shown in Exhibit "A". D. Transition. Upon the selection of the successor operator, the Operator who has been removed or has resigned shall promptly deliver to the successor operator all original records relating to operations on the Contract Area, including current accounting information with regard to the status of the joint account, information concerning all invoices not yet paid by the operator who has resigned or been removed, all logs, maps and all other information concerning operations. Duplicating expenses required by virtue of the change of operators shall be charged to the joint account. E. Financing Statement. The security interest granted to each Operator and Non-Operator under Paragraph VII.B. of this agreement which secures pa}Illent of each party's share of costs and expenses of operations shall extend to each such party's share of all Oil and Gas, equipment, fixtures, personal property, accounts, inventory and general intangibles and proceeds or products thereof relating or pertaining to the Leases and lands included in the Contract Area as described in Exhibit "A" attached hereto. For purposes of compliance with TEXAS BUSINESS AND COMMERCE CODE, Sec. 9.302, each party agrees that this instrument shall serve and may be filed as a financing statement to perfect the security interest mutually granted herein. In that regard, each party hereto agrees that its signature below shall be its signature as debtor of an appropriate fmancing statement, and that fur purposes of compliance with the requirements of Sec. 9.402 of the TEXAS BUSINESS AND COMMERCE CODE each SEC 190241  secured party and debtor's names and addresses are as follows: The names and addresses The names and address of secured parties are: of debtors are: SEE EXIDBIT "A" SEE EXlllBIT "A" The collateral to which the security Interests apply are all of each debtor's interest in Oil and Gas, equipment, fixtures, personal property, accounts, inventory and gen~ral intangibles ~d proc~s or products therwf relating or pertaining to the Oil and Gas Leases covered by this agreement and mcluded m the Contract Area as described in Exhibit "A". F. Deemed Non-Consent for Defaulting Payment. If the lien conferred in Article VII.B has been enforced, or if any party to this agreement shall fail to pay its share of costs and expenses incurred in operations of the Contract Area for a period of90 days from the date of Operator's invoice therefor, Operator may notify the affected party of its default by certified mail, return receipt requested, and if such party fails to cure the default within 10 days from the date of receipt of Operator's notice, by payment in full of all invoices for operating costs which have been due for more than 30 days, the affected party shall be deemed in non-consent status and fur so Jong as the affected party remains in defirnlt it shall have no · further access to the Contract Area or information obtained in connection with operations hereunder and shall not be entitled to vote on any matter hereunder. As to any proposed operation in which ii otherwise would have the right to participate, such party shall have the right to be a Consenting Party therein only if it pays the amount it is in default before the operation is commenced; otherwise it automatically shall be deemed a Non-Consenting Party to that operation. Nothing herein shall affect each party's right to protest any item charged to the joint account by Operator under the provisions of Article I.5. of Exhibit "C" attached hereto. G. Trustee's Sale fur Defuulting Payment. If Operator should elect to proceed to fbreclose the lien of Operator as against the interest of a Non- Operator having an interest in the Contract Area, this operating agreement does hereby include provisions for non- judicial sale under the laws of the State of Texas and David Cotton is hereby appointed as Trustee for such purpose. Upon such defuult, said Trustee or Operator shall at least 21 days preceding the date of nonjudicial sale serve written notice of the proposed sale by certified mail to Non-Operator according to records of Operator. Service of such notice shall be deemed completed upon deposit of a notice enclosed in a post-paid wrapper properly addressed to the Non-Operator and each other party obligated to pay such obligations at the most recent address or addresses as shown on the records of Operator in a post office or other official depository under the care and custody of the United States Postal Service. The affidavit of any person having knowledge of the facts to the effect that such service was completed shall be prima facie evidence of the fact of service. After such notice, said Trustee shall proceed to sell all of the Interests ofNon·Operator in the Contract Area at public auction to the highest bidder for cash after having given notice of the time and place of sale and in the manner and after the advertisement of such sale as now required by the statutes of the State of Texas in making sales ofreal estate under deeds of trust. Sale of a part of the realty would not exhaust the power of sale and sales may be made from time to time until all of the property is sold or the obligations paid in full. Said Trustee shall have authority to appoint an attorney in fact to act as Trustee in conducting the foreciosure sale and executing a deed to the purchasers; and it is further agreed that said Trustee or his successor may sell said property together or in lots and/or parcels as to him shall deem expedient and after such sale as aforesaid shall make, execute and deliver to the purchaser or purchasers thereof good and sufficient deeds, assignrnenta or other lawful conveyances to vest in said purchaser or purchasers title to the Non-Operator's interest in the Contract Area in fee simple together with all personal property used or obtained in connection therewith and together with all of the proceeds of production attributable thereto including proceeds of production held by any party fur the payment to Non-Operator. From the proceeds of said sale said Trustee shall first pay all charges, costs and expenses in executing these provisions and secondly pay any sums due by the Trustee for taxes in the preservation of the security and thereafter pay all of the remaining sums to Operator fur the satisfaction of the debts ofNon-Operator hereunder and the balance, if any, shall be paid to Non-Operator. It is agreed that such sale shall be a perpetual bar against Non-Operator and its heirs, successors and assigns and legal representatives and all other persons claiming under him, them or any of them. It is further agreed that said Trustee or any holder or holders of said obligation of Operator shall have the right to become the purchaser or purchasers at such sale if they are the highest bidder or bidders in which event the bid or bids may be credited upon said indebtedness of Non-Operator. It is stipulated and agreed that in case ofany sale hereunder by Trustee or his successor all prerequisites of said sale shall be presumed to have been performed and any conveyance given hereunder, all statements of fuel or 'recitals therein made as to the non-payment of money secured or as to anyderault under the terms hereof or as to the request of the Trustee to enforce this trust or as to the proper and due appointment of any successor or substitute Trustee or as to the advertisement of sale or the time, place and terms of sale or as to any other preliminary act or thing shall be taken in all courts oflaw and equity as prima facie evidence that the facts so stated are true. Operator may appoint a substitute or successor Trustee in the event the Trustee above named is unable for any reason to serve. H. Drill or Out Notwithstanding any nrovisions to the contrary contained in Article VI.B. should any party hereto. after receiving notice from Operator of a pr0P083l lo drill a well on the Contract Area. other !ban the well provided fur SEC 190242  in Article VI.A fail to timely notify Operator of its election to participate in such proposal or should a party elect not to participate in the drHling proposal. it is hereby agreed that such party shall relinquish and assign to the participating parties all of its Leasehold interest in and to the well and the p~oration unit allocated to such we!~. Additionally. in such event. such non-participating party shall release. relinquish and surrender and forever forf~1t proportionately to the participating parties. all of the non-participating partY's interest in and to all proration umts which are adjoining and/or contiguous to the proration unit allocated to such proposed well except for any thereof on which a well is situated and in which well the nonparticipating partv participated in the drilling. By way of illustration. in the event a 40 acre proration unit in the form of a square is allocated to a proposed well, then a non-participating partv shall forfeit. release and relinquish all interest in such 40 acre proration unit together with the eight immediately surrounding and adjoining 40 acre proration units with the exception indicated. Notwithstanding any provision to the contrary contained in Article VL. Non-Operator upon receiving Ooerator's recommendation With respect to an attempted Completion shall within the time period set forth herein. notify Operator of its election to participate in a proposed Completion attempt. Failure to so notify Operator shall be deemed an election by Non-Operator not to participate. In the event that any Non-Operator elects not to participate in the Completion attempt. the Non-Consenting Party shall relinquish and assign to the participating parties all of its Leasehold interest in and to the well and the proration unit allocated to such well. only insofar as to the interval or formation which is subject to the Completion attempt. Additionally. in such event. such non-participating party shall relinquish and surrender and forever forfeit proportionately to the participating parties all of the non- participating partv's interest in and to all proration units which are adjoining and/or contiguous to the proration unit allocated to such well. only insofar as to the interval or fonnation which is subject to the Completion attempt. With regard to Deepening OPerations. any Non-Consenting Party shall forfeit proportionately to the participating parties all of the non-participating party's interest in depths greater than the depth drilled in an operation for which such non-participating partv had previously consented. The interest of any party in such relinquished and forfeited Leasehold rights shall be assigned proportionately to the participating parties bv the non-participating party without warranty of title excep! as to claims, by. through or under Assignor. and shall be free of burdens except those created prior to the time the non-participating party acquired his interest in the Leasehold estate so forfeited. I. Sales Necessitating Senarate Measurements. In the event of transfer, sale, encumbrance or other disposition of interest within the Contract Area which neces.~itates separate measurement of production, the party creating the necessity for such measurement shall alone bear the cost of purchase, installation and operation of such facilities. J. Internal Revenue Code Election. This Operating Agreement shall not create any mining partnership, commercial partnership or other partnership relation or joint venture, and the liabilities of each of the parties hereto shall be several and not joint. However, solely for Federal and State income tax purposes, the parties elect to be taxed as a partnership in accordance with the Tax Partnership Agreement attached as Exhibit "G" hereto, but such relationship shall not be a partnership to any other extent or for any other purpose. Notwithstanding anything lo the contrary herein, the parties hereto agree that, with respect to all operations conducted hereunder, each party hereto agrees to elect to be excluded from the application of Subchapter K of Chapter I of Subtitle A of the Code, and each party agrees to join in the execution of such additional documents and elections as may be required by the Internal Revenue Service in order to effectuate the foregoing. In addition, if the income tax laws of any state in which the parties conduct operations pursuant to the terms of this Agreement contain provisions similar lo those contained in Subchapter K of Chapter I of Subtitle A of the Code, the parties hereby agree to elect to be excluded from the application of such provisions. K. Memorandum of Qperating Agreement. Within ten (10) days from the execution of this operating Agreement, each party agrees to execute a "Memorandum of Joint Operating Agreement" to be filed of record in Lynn and Terry Counties, Texas, imparting constructive notice that the Contract Area is subject to all of the terms, conditions and provisions contained in this agreement. L. Power of Attorney. Each Non-Operator designates Operator as its respective attorney-in-met for the purpose of executing on behalf of such Non-Operator all instruments of release; all oil purchase agreements, gas purchase agreements and amendments !hereto; all amendments to existing Leases in the Contract Area deemed necessary by Operator and all filings required by regulatory agencies relating to operations on the Contract Area including without limitation all NGPA filings, filings required by the Federal Energy Regulatory Commission and !he Railroad Commission of the State of Texas. This Power-of:.Attorney may be revoked only by revocation signed and acknowledged by the revoking non-operator, and filed fur record in Lynn and Terry Counties, Texas, a copy of which shall be forwarded to operator. M. Area of Mutual Interest. SEC 190243  (1) The parties hereto hereby create an Area of Mutual Interest (the "AMI") comprising all of the Contract Area covered by this Operating Agreement. (2) During the term of the AMI, if any party hereto ("the Acquiring Party") acquires any Oi.l and Gas Lease, or any interest therein, any unleased mineral interest or any farmout, sublease or other contract with respect thereto which covers or affects any lands or minerals lying within the AMI ("the offered Mineral Interest"), the Acquiring Party shall promptly notify each of the other parties hereto ("Offeree") of such acqu~sition. In su~h event, such Offeree shall have the right to acquire his or its proportionate interest in the offered Mineral Interest m accordance with the other provisions of this Article XVI I. (3) Promptly upon acquiring the offered Mineral Interest, the Acquiring Party shall, in writing, advise each Offeree of such acquisition. The notice shall include complete xerox copies of the instruments of acquisition including, by way of example but not of limitation, such copies of the Leases, assignments, subleases, farmouts .or other contracts acquired by the Acquiring Party creating or affecting the offered Mineral Interest, together with such copies of paid drafts, plats depicting the exact location of the acreage covered or affected thereby, Lease brokers' reports and any other title data relating thereto. The Acquiring Party shall also enclose an itemized statement of the actual costs and expenses incurred by the Acquiring party in acquiring the offered Mineral Interest ("Acquiring Costs"). Each Offeree shall have a period of fifteen (15) days after receipt of the notice within which to furnish the Acquiring party written notice of his or it.~ election to acquire his or its proportionate interest in the offered Mineral Interest. If, however, a well in search of oil or gas is being drilled on lands situated within the AMI or on lands situated outside the AMI of which the result could be expected to materially affect the value of the offered Mineral Interest, each Offeree shall have a period of forty-eight (48) hours after receipt of the notice (exclusive of Saturdays, Sundays and legal holidays) within which to elect to acquire his or its proportionate interest in the offered Mineral Interest. It is provided, however, that the forty-eight (48) hour election period shall not apply unless the Acquiring Party shall give written notice to each Offeree within two (2) days after the date on which the Acquiring party acquired the offered Mineral Interest exclusive of Saturdays, Sundays and legal holidays. In addition thereto, the Acquiring Party shall also: (i) furnish each Offeree with the approximate location of the well then being drilled and the name of the operator or drilling contractor drilling the well; and (ii) specifically advise each Offeree that each Offeree shall have a period of forty-eight (48) hours (inclusive of Saturdays, Sundays 1111d legal holidays) within which to elect to acquire his or its proportionate interest in the offered Mineral Interest. The above infurmation shall be in addition to the information and copies of instruments to be furnished in connection with the acquisition of the offered Mineral Interest as provided hereinabove. If the Acquiring Party does not receive written notice of election from any Offeree to acquire his or its proportionate interest within the fifteen (15) day or forty-eight (48) hour period, as the case may be, such failure shall constitute an election by such Olferee not to acquire his or its interest in the offi:red Mineral Interest. Written notice from the Acquiring Party to each Offeree and written notice of election from each Offeree to the Acquiring Party shall be deemed given when delivered if delivered in person, one day after deposit with an overnight carrier such as Federal Express for delivery on the next calendar day and the day of transmission by telecopy (if confirmed by notice sent by Federal Express or a similar overnight carrier for receipt the next day). Each Offerce accepting the offered Mineral Interest shall be entitled to participate in the offered Mineral Interest in the proportion to which his or its ownership interest as set forth in Exhibit "A" bears to the total ownership Interests as set forth in Exhibit "A" of the Acquiring Party and all other Offerees who have elected to acquire their proportionate interest in the olfered Mineral Interest. Promptly after the period for the election has expired, the Acquiring Party shall invoice each Offi:ree electing to acquire his or its Interests in the offered Mineral Interest for his or its proportionate part of the Acquisition Costs. In the event an Offeree elects not to acquire his or its proportionate interest therein, then the Acquiring Party and each of the other Offerees who elect to participate in the offered Mineral Interest shall bear the Acquisition Costs atbibutable to such non-acquiring Offeree's interest in the proportion to which such participating party's expense bearing interest in the AMI at such time bears to the aggregate expense-bearing interest in the AMI at such time of the Acquiring Party and such other Offerees who so elect to participate. Each Offeree shall immediately reimburse the Acquiring Party for his or its share of the Acquisition Costs as reflected by the invoice. Upon receipt of such reimbursement or, in the case of a farmout or similar agreement at the time the acquiring party receives its assignment or other instrument. the Acquiring Party shall execute and deliver an appropriate, recordable assignment to each participating Offeree. If the Acquiring Party does not receive the amount due from a participating Olfercc within five (5) days after receipt by such Offeree of the invoice fur its share of the Acquisition Costs, the Acquiring Party may, at his or its election and without prejudice to other existing remedies, give written notice to such delinquent party that the failure of the Acquiring Party to receive the amount due within furty-eight (48) hours (exclusive of Saturdays, Sundays and legal holidays) after receipt of such notice by the delinquent Offeree shall constitute a withdrawal by the delinquent Offeree of its furmer election to acquire the interest and such Offeree shall no longer have the right to acquire 1111 interest in the offered Mineral Interest. In the event the Acquiring Party does not receive the amount due within· such furty-eight (48) hour period, the delinquent Offeree shall be deemed to have elected not to participate and the Acquiring Party shall succeed to and own the entirety of the interest in the offered Mineral Interest which the delinquent Offeree would have owned and the Acquiring party shall bear the delinquent Offeree's proportionate share of the Acquisition Costs. (4) In the event less than all of the Offerees elect to acquire their proportionate interest in the offered Mineral Interest, then the portion of the lands covered by the offered Mineral Interest shall be automatically deleted from the AMI and the Contract Area covered hereby without the necessity of Operator or any Non-Operator executing a document amending the AMI and this Operating Agreement to reduce the AMJ and the Contract Area SEC 190244  to exclude such lands therefrom. The Acquiring Party and the Offerees electing to acquire the Interests in the offered Mineral Interest shall be deemed to have agreed to operate the offered Mineral Interest in accordance with the terms and provisions of this Operating Agreement, except that the offered Mineral Interest shall constitute the Contract Area covered thereby. Exhibit "A" shall list the names and addresses of the parties owning the offered Mineral Interest and the Interests in which they own the same, and Operator shall be named Operator therein unless Operator did not participate in acquiring his interest in the offered Mineral Interest, in which event the parties agreeing to participate in the offered Mineral Interest shall select an Operator from among themselves, which Operator shall be elected by the affirmative vote of two or more such parties owning a majority interest based on their ownership of the offered Mineral Interest, and not on the number of parties electing to participate. The Acquiring Party and the Offerees electing to acquire their Interests in the offered Mineral Interest shall enter into an Operating Agreement reflecting the same immediately after agreeing to own jointly the offered Mineral Interest, but the railure to enter immediately into such an Operating Agreement shall not prevent the owners of the offered Mineral Interest from operating, developing and maintaining the same in accordance with the terms hereof, unless Operator elects not to participate and such parties are unable to agree on the election of an operator. (5) Any assignment made by the Acquiring Party shall be made free and clear of any burdens placed thereon by the Acquiring Party but otherwise without warranty of title, except as to acts by, through and nnder the Acquiring Party, but not otherwise. The assignment shall be expressly made subject to and each assignee shall expressly asswne his or its portion of all of the obligations imposed by the instrument creating or affecting the offered Mineral Interest. (6) If the interest of any party hereto in the AMI should vest in three or more parties, those parties shall designate one of them to whom a!l notices provided for in this AMI are to be given and shall promptly furnish the other parties hereto the name and address of the designated party. If the Acquiring Party has not received the name and address of the designated party, the notice of the acquisition shall be directed to all of the parties having an interest in the AMI according to the Exhibit "A" which is then a part of this Operating Agreement. (7) If the instrument creating or affecting the offered Mineral Interest covers lands situated both within and outside the AMI, the Acquiring Party may, at his or its option, offer either all of the offered Mineral Interest or only that portion of the offered Mineral Interest covering lands situated within the AMI. Ifless than the entirety is offered, the Acquisition Costs shall be prorated between the acreage covered by the offered Mineral Interest situated within the AMI and the acreage situated outside the AMI and the Acquiring Party shall bear all of the Acquisition Costs attributable to such outside acreage and the Acquiring Party and the Offcrees who elect to participate shall bear their proportionate share of the Acquisition Costs attributable to the acreage within the AMI. If the entirety of the premises covered by the Mineral Interest is offered and each party hereto acquires it proportionate interest therein, the lands lying outside the AMI shall become a part of the Contract Area covered hereby and the AMI shall thereby be automatically enlarged without the necessity of operator or any Non-Operator executing a document amending the AMI and this Operating Agreement to enlarge the AMI to include such lands lying outside the AMI. (8) If two or more of the offi:red Mineral Interests are included in the same notice, each Offeree shall have the separate right of election as to each offered Mineral Interest. (9) The provisions of the AMI shall not apply to acquisitions resulting from a merger, consolidation, reorganization or an acquisition from a parent, subsidiary or affiliated corporation, or, as to individuals, from ascendants or descendants or trusts of which such parties are beneficiaries. The provisions hereof shall also not apply to sales and acquisitions between partners in a partnership which is a party hereto, or ventures in a joint venture which is a party hereto, nor to the acquisition by any party hereto of all or any part of the interest of another party hereto. (10) Each party hereto stipulates and represents to the other parties hereto that he or it is not now and shall not become hereafter a party to any other area of mutual interest agreement involving all or any portion of the land comprising the AMI. N. Participation Agreement The parties to this Operating Agreement hereby acknowledge that their interest in the Contract Area described in Exhibit "A" hereto is owned subject to the terms of that certain On Point Prospect Lynn & Terry Counties, Texas Participation Agreement by and among the Parties hereto dated December I 0, 2009 and pursuant to paragraph 8 (c) thereof, the Parties granted to each other a Right ofFirst Refusal as to any proposed Transfer of any interest in the Contract Area to any person other than a Permitted Assignee (as such terms are defined in the Participation Agreement). The Parties hereby incorporate by reference the provisions of paragraph 8 (c) of the Participation Agreement into this Agreement as is set out in full in this Agreement. 0. Successor Onerations to RAW Oil & Gas, Inc. Article V.B.1. is hereby amended to provide that in the event: (i) RAW Oil & Gas, Inc. is no longer under the management control (including day-to-day management of all operations conducted by RAW under this Operating Agreement) of Joe D. Hardin; (ii) Joe D. Hardin is no longer the majority owner of RAW Oil & Gas, Inc.; (iii) Joe D. Hardin is deceased; or (iv) Joe D. Hardin is determined to be non-compos mentis or incapacitated in a manner that will prevent him from directing the activities of RAW under this Agreement in the opinion of three licensed medical doctors located in the Lubbock, Texas area, then RAW may be removed as Operator by the affirmative vote of non-operators owning a majority in interest based on ownership as shown on Exhibit A. Any Party to this SEC 190245 Agreement owning an interest offive (5%) percent or more shall have the right by delivering a written request to all non-operators to initiate the process to cause the three physicians to assess the competency of Joe D. Hardin. The physicians shall be selected by a majority in interest of the non-operators joining in the request for the examination. The cost of the physicians' fees shall be billed to the Joint Account for all Parties to the extent such costs are not covered by insurance. SEC 190246  EXHIBIT"A" Attached to and made a part of Operating Agreement dated January 2, 2010, between RAW Oil & Gas Inc. as Operator and Smith Energy Company, etal, as Non-Operators PART I: CONTRACT & AMI AREA TO BE DETERMINED AT A LATER DATE PART II: PARTIES, INTEREST AND ADDRESSES FOR NOTICE PURPOSES Befure Casing Point After Casing Point of the Names and Addresses of the First Well First Well And all Subseauent Qperations Raw Oil & Gas, Inc. -0%- 1.00% 12312 Slide Road Lubbock, Texas 79424 Raw Energy, L.C. -0%- 5.25% 12312 Slide Road Lubbock, Texas 79424 Smith Energy Company 100.0% 75.0% Lester Smith, President P.O. Box 52890 Houston, Texas 77052 Mark P. Hardwick -0%- 6.25% P.O. Box 213 Midland, Texas 79702 Steve Blaylock -0%- 6.25% 214 W. Texas, Suite 306 Midland Texas 7970 I Elger Exploration Inc. -0%- 6.25% P.O. Box 2623 Midland, Texas 79702 SEC 190247  EXHIBIT"B" Attached to and made a part of Operating Agreement dated January 2, 201 O, between RAW Oil & Gas Inc., as Operator and Smith Energy Company, etal, as Non-Operators. ProduiotnH(1~9)MIUp ..ntll.'40MaPoolin&~ OIL, GAS AND MINERAL LEASE TillS AGREEMENT made !his betweon Lessor (whether one or more), whose address is - - - - - - - - - - - J a n d _ _ _ _ _ _ _ _ _ _ _ _~Lcssi:c, WITNESSETH: I. Lessor, in consideration of Ten Dollan and olher valuable consideration (SI0.00 and OVC}. receipt of which is hereby acknowledged, and of th• covenants and agreements of lessee hereinafter contained, does hereby grant, lease and lei unto lessee the land covered hereby for th• purposes and with the exclusive right of exploring, drilling, mining and operating for, producing and owning oi~ gas, sulphur and all other minerals (whether or not similar to those mentioned), together with the right to make surveys on said land, lay pipe lines, establish and utilize facilities for surface or subsurface disposal of salt waler, constnJct roads and bridges, dig canals, build tanks, power stations, telephone lines, employee houses and other structures on said land, necessary or useful in lessee's operations in exploring, drilling for, JlCoducing, treating, storing and transporting minerals produ""d from the land covered hereby or any land adjacent thereto. The land covered hereby, herein called "said land", is located in the Counties of State of Texas, and is described as follows: This lease also covers and includes, In addition to that above described, all land, if any, contiguous or acljacent to or adjoining the land above described and (a) owned or claimed by lessor by limitation, prescription, pos!lcssion, reversion or unrecorded instrument or (b) as to which lessor has a preference right of acquisition. Lessor agrank provided for above on or before the last dale for payment. Nothin8 herein shall impair lessoe's right to release as provided in paragraph 5 hcreot In the event of assignment of this lease in whole or in part, liability for payment hereunder shall rest exclusively on the then owner or owners of this lease, severally as to acreage owned by each. 4. Lessee is hereby granted the right, at its option, to pool or unitize any land covered by this lease wilh any other land covered by this lease, and/or with any other land, lease, or le=s, as to any or all minerals or horizons, :so as to establish units containing not more tbilll 80 surface acres, plus 10% acreage tolerance; provided, however, uni&s may be established as to any one or more horizons. or existing units may be enlarged as 10 any one or more horlwns, so as to oontain not more than 640 surface acres plus IO"A. acreage tolerance, if limited to one or more of the following: (I) gas, other than casinghead gas, (2) liquid hydrocarbons (conclensale) which arc: not liquids in the subsurface reservoir, (3) minerals produced from wells classified as gas ..w:lls by the conservation agency havingjurisdiclion. If larger units than any of those herein permitted, either at the time established, or after enlargement. are required under any governmental rule or order, for the drilling or operation of a well at a regular location, or for obtaining maximum allowable from any well to be drilled, drilling, or already drilled, any such unit may be established or enlarged to conrann to the size required by such governmental order or rule. Lessee shall ..ercise said option as to each desired untt by executing an instrument identif)'ing such unit and filing it for record in the public office in which this lease is recorded. Each of!he said options may be e.crcised by the lessee ar any time and fi'om time to time while this tease is in force, and whether before or after production has been established either on said land, or on the portion of said land included in the unit, or on other land unitized therewith. A unit established hereunder shall be valid and effective for all purposes of this lease even though there may be mineral, royalty, or leasehold interests in lands within the unit which are not effectively pooled or unitized. Any operations conducted on any part of such unitized land shall be ocnsldered, for all purposes, except the payment of royalty, operations conducted upon said land under this lease. There shall be allocated to the land covered by this lease within each such unit (or to each separate tract within the unit if the lease covers separate tracts within the unit) that proponion of the total produc1ion of uniti7.ed minerals from the uni1, after deducting any used in lease or unit operations. which the number of surface acres in such land (or in each such separate tract) covered by this lease within the unit bears to the total number of surface acres in the unit, and the production so allocated shall be considered for all purposes, Including payment or delivery of royalty, overriding royalty and any other payments out of production, to be the entire production of unitized minerals from the land 10 which allocated in the same manner as though produced therefrom under the terms of this lease. The owner of the revorsionary estate of any term royalty or mineral estate agrees that the accrual of royalties pursuant to this paragraph or of shut-in royalties from a well on the unit shall satisfy any limitation of term requiring production of oil or gas. The formation of any unit hereunder which includes land not covered by this lease shall not have the effect of exchanging or trans£erring any interest under this loose (including, without limitation any shut-in royally which may become payable under this lease) between parties owning interests in land covered by this lease and parties owning interests in land not coven::d by this lease. Neither shall it impair the right of the lessee to release as provided in paragraph' hereof, except that lessee may not so release as to lands within a unit while there arc operations thereon for unitized minerals unless all pooled leases are released u to lands within the unit. At any time while this lease is in force lessee may dissolve any unit established hereunder by filing for record in the public office where this lease is recorded a declaration to that effect, if at that time no operations arc being conducted thenron for uniti~d minerals. Subject to the provisions of this paragraph 4, a unit once established hereunder shall remain in force so long as any lease subj"t thereto shall remain in force. If this lease now or hereafter covers separate tracts, no pooling or unitization of royalty interests as between any such separate tracts is intended or shall be implied or result merely from the inclusion of such separate 1111cts within this lease but lessee shall nevertheless have the right to pool or unitize as provided in this paragraph 4 with consequent allocation of production as herein provided. AJ used in this paragraph 4, the words "separute tract" mean any tract with royalty ownership differing, now or hereafter, either as to parties or amounts. fi'om that as to any other part of the leased premises. $. Lessee may at any time and from tlme 10 time execute and deliver to Jcssor or tile for record a release or releases of this lease EIS to any part or all of said land or of any mineral er horizon thereunder, and thereby be 111lieved of all obligations, as to the released acreage or interest. SEC 190248  6. Whenever used in this lease the word "operations" shall mean operations for and any of the following: drilling, testing, completing, reworking, recompleting, deepening, plugging back or repairing of a well in soarch for or in an endeavor to obtain production of oil, gas, sulphur or other minerals, excavaling a mine, production of oil, gas, sulphur or other mineral, whether or not in paying quanti1ies. 7. Lessee shall have the use, free from royalty, of water, other than from lessor's water wells, and of oil and gas produced from said land in all operations hereunder. Lessee shall have the right at any time to rcmeve all machinery and fixtures placed on said land, including the right to draw and remove casing. No well shall be drilled nearer than 200 feet to lhc house or barn now on said land without the consent of the lessor. Lessee shall pay for damages caused by its operations to growing crops and timber on said land. 8. The rights and estate of any party hereto may be assigned from time to time in whole or in part as to any mineral or horizon. All of the covenants, obligations, and considerations of this lease shall extend to and be binding upon the parties hereto, their heirs, successors, assigns, and successive assigns. No change or division in the owne,.hip of said land, royalties, or other moneys, or any part thereof, howsoever effected, shall increase the obligations or diminish lhe rights of lessee, including, but not limited to, the location and drilling of wells and the measurement of production. Notwithstanding any other actual or constructive knowledge or notice thereof of or to lessee, its successors or assigns, no change or division in the ownership of said land or of the royalties, or other moneys, or the right to receive the same, howsoever effected, shall be binding upon lhe then reoord owner of this lease until thirty (30) days after there has been furnished to such record owner at his or its principal place of business by lessor or lessor's heirs, successors, or assigns, notice of such change or division, supported by either originals or duly ceitified copies of the instruments which have been prope~y flied for record and which evidence such change or division, and of such coult records and proceedings, transcripts, or other documents as shall be necessary in the opinion of such record owner to establish the validity of such change or division. If any such change in ownership occurs by reason of the death of the owner, lessee may, nevertheless pay or tender such royalties, or olher moneys, or part thereof, to the credit of the decedent in a depository bank provided for above. 9. In the event lessor considers thBI lessee has not complied with all its obligalions hercunder, both express and implied, lessor shall notify lessee in writing, setting out specifically in whBI respects lessee has breached this contract. Lessee shall then have sixty (60) days alter receipt of said notiec within which to meet or commence to meet all or any part of the breaches alleged by lessor. The service of said notice shall be precedent to the bringing of any action by lessor on said lease for any cause, and no such action shall be brought until the lapse of sixty (60) days after service of such notice on lessee. Neither the service of said notice nor the doing of any acts by lessee aimed to meet all or any of the alleged breaches shall be deemed an admission or presumption Iha! lessee has failed to perform all its obligations hereunder, If this lease is canceled for any cause, tt shall nevertheless remain in force and effect as to (I) sufficient acreage around each well as to which !here are operalions to constitute a drilling or maximum allowable unit under applicable governmental regulations, (but in no event less than forty acres), such acreage to be designated by lessee as nearly as praclicable in the form of a square centered a! the well, or in such shape as lhen cxisling spacing rules require; and (2) any part of said land Included in a pooled unit on which there arc operations. Lessee shall also have such casements on said land as are necessary to operations on the acreage so retained. 10. Lessor hereby warrants and agrees 10 defend liUe to said land against the claims of all poisons whomsoever. Lessor's rights and interests hereunder shall be charged primarily with any moltgages, taxes or other liens, or interest and other charges on said land, but lessor agrees thal lessee shalt have the right at any time to pay or reduce s11me for lessor, either bef~ or after maturity, and be subrogated to the rights ofthe holder thereof and to deduct amounts so paid from royalties or other payments payable or which may become payable to lessor and/or assigns under this lease. lfthis lease covers a less interest in the oil, gas, sulphur, or other minerals In all or any part of said l1111d than the entire and undivided fee simple "tale (whether lessor's interest is herein specified or nor), or no interest therein, then the royalties and other moneys accruins from any part as to which this lease covers loss than such full interest, shall be paid only in the proportion which the interest therein, if any, covered by this tease, bears to the whole and undivided fee simple estate therein. All royalty interest covered by this lease (whether or not owned by lessor) shall be paid out of the royalty herein provided. This lease shall be binding upon each party who executes it without regard to whether It is executed by all those named herein as lessor. 11. If while this lease is in force, at, or after the expiration of the primary lern> hereat it is not being continued in force by reason of the shut-in well provisions of paragraph 3 hereof, and lessee is not conducting operations on said land by reason of (l) any law, order, rule or regulation, (whether or not subsequenijy determined 10 be invalid) or (2) any other cause, wh:ther similar or dissimilar, (except fmancial) beyond the ieasonable control of Jessee, the primary tenn hereof shall be extended until the first annive"8ry date hereof occurring ninety (90) or more days following the removal of such delaying cause, and this tease may be extended thereafter by operations as if such delayed had not occurred. IN WITNESS WHEREOF, this instrument is executed on the date first above written. LESSOR: By: Printed Name: Title: Tax ID No.: ACKNOWLEDGEMENT CORPORATE Before me, the undersigned NOlary Public, pe,.onally appeared _ _ __ , , . , . . - - - - - . , . - - - - - - - - - - - - - - - - - - - known to me to be the person whose name is subscribed to the foregoing inslrument and knOW?l to me 10 be of - - - - - - - - a corporation, and acknowledged to me that he or she executed the same as the act of said corporation for 1he purposes therein set forth. Given under my hand and seal of office this ____ day of _ _ _ _ _ _ _ _ _ _ _~20IO. Notary Public in and for the State of _ _ _ _ __ My commission e x p i r e s : - - - - - - - - - SEC 190249  i'AS 1984 ONSHORE Recommended by the Council of Petroleum Accountanll . - - - - - - - - - - - s _ o c t • t l e _ •--CO~A~ E> r of professional consultant services 50 and conttaet services of tcchnieal personnel cithet temporarily or permanently assigned 'o and directly empl~d in SI the operation of tho Joint Propony: 52 53 ( ) shall be covered by the overhead raleS, or 54 ( X ) shall not be covered by the ovemead rates. 55 56 A. Ovemeod • Fixed Rate Bosis 57 58 (1) Operator shall charge the Joint Account at the following rates per well per month: 59 60 Drilling Well Rato s._ _.7...5,.0"'0"'00"----------- 61 (Prorated for less than a roll month) 62 63 Producing Well Rate $._ _,_7..,50"90""-------- 64 65 (2) Application or Overhead· Fixed Rate Bosis shall be as follows: 66 67 (a) Drilli"J! Well Rate 68 69 (I) Chargeo ll>r drilling wens sholl begin on the date the well is spudded and terminate on the date 70 the drilling rig, completion rig, or other units used in completion of the well is relea9ed, whichever -4- SEC 190253  ..•.PAS 1984 ONSHORE Recommended by111e CouncH of Petroleum Aa:ountanta --~0PAS 1 . - - - - - - - - - - - - -... is later, except that no charge shall be made during suspension of drilling or completion operations (or fifteen (IS) or more consecutive calendar days. 4 (2) Charges for wells undergoing any type of workover or recompletion for a period of five (5) 5 consecutive work days or more shall be made at the drilling well rate. Such charges shall be applied for the period from date workover operations, with rig or other units used in workover, commenc< through date of rig or other unit release, exoept that no charge shall be made during suspension of operations for fifteen (IS) or more consecutive clllendar days. 10 (b) Producing Well RAtes II 12 ( l) An active well either produced or injCQted into for any portion or the month shall be considered as 13 a one.well charge for 1he entire month. 14 IS (2) Each active completion in. a multi-completed well in which production is not commingled down 16 hole shall be considered as a one--wcU charge providing each completion Is considered a separa.te 17 well by the soveming regulatoiy authority. 18 19 (3) An inactive gas well shut in because of overproduction or failure of purchaser to take the 20 production shall be considered as a one-well charge providing the gas well is directl)' connected to 21 a permanent .sales outlet. 22 23 (4) A one-well charge shall be made for the month in which plugging and abandonment operations 24 aro completed on any well. This one-well charge shall be made whether or not the well has 25 produced ex, or the equivalent COMdian index as 36 published by Statistics Canada, as applicable. The adjusted rates shall be the rates currently in use, plus or 37 minus the eomputed adjustment. 38 39 B. Overhead • Percentage Basis 40 41 (I) Operatorshall charge the Joint Account atthe following rates: 42 43 (a) Development 44 45 _ _ _ _ _ _ _ _ _Percent~---%) of the cost of development of the Joint Property exc)11$ive of costs 46 provided under Paragraph 10 of Section II and all salvage credits. 47 48 (b) Operating 49 50 - - - - - - - - - Penxmt (_%)oft~ cost of opcratina the Joint Property exclusive of costs provided 51 under Panagraphs 2. and I 0 of' Section ll, all salvege credits, the value of injected substances purchased S2 for secondary recovery and all wees and assessments which arc levied, assessed and paid upon the S3 mineral interest in and Co the Joint Property. 54 SS (2) Application of Overhead - Percentage Basio shall be as follows: 56 S7 For the purpo$e of determining charges on a percentage basis under Paragraph JB of chis Section m, SB development shall include all costs in connection with drilling, redrilling. deepening, or any remedial 59 operations on any or all wells involving the use or drilling rig and crew capable of drilling to the producing 60 interval on the JWnt PrOpel1)'i also, pro.Jimjnary expenditures nccessat)' in preparation for drilling and 61 expcnditureS' incurred in abandoning when the Well ts not completed as a producer, and original cos1 of 62 construction or installation of fixed assets. the expansion of fixed aascts and any other project clearly 63 discernible BS a f"ixed asset. except Major Construction as defined in Paragraph 2 of this Section AJl other m. 64 costs shill be considered as operating. 65 66 2. Ovcrhtad • Major Construdlon 61 68 To compensa1e Operator for overhead c:osts incurred in the construction and installation of fixed assets. the expansion or 69 fixed assets, and any 01hcr project clearly discernible as a fixed asset required for the dcvelopmctit and operation of the 70 Joint Property, Operator shaJt etcher negotiate a rate prior to rhe beginning or construction, or shall c/Jarge the Joinr -5- SEC 190254  _,,PAS 19S4 ONSHORE Recommended by the Council of Petroleum Accountants r - - - - - - - - - - S o c l - • l i e _ •--COPA~ Account for overhead based on lhe following rates for any Major Consttuction project in excess of$_ _ _ _ _ _ _ _ _ _ __ A. _ _ 1 _ % offintSI00,000 or total costifless, pl\lO s B. __3_ _ %ofcosts in excess of SI 00,000 but less than SI,000,000, plus 6 C. _ _2_ _ %ofcosts inexcessofSl,000,000, Total cost shall mean the gross cost of any one project. For the purpose of this paragraph, the component pans of a single 10 project shall not be treated separately and the cost of drilling and workover welJs and artificial lift equipment shall be II excluded. 12 13 3. Catastrophe Overhead 14 IS To compensate Operator for oYerhead costs incurred in the event of expenditures resulting from a single occumnce due 16 to oil spill, blowout, explosion. flre, Stc>fmt hurricane, or other catastrophes as agreed to by the Parties, which are 17 necessary to restore the Joint Property 10 the equivalent condition that existed prior to the event causing the 18 expenditures. Operator shall either negotiate o rate prior to charging the Joint Acx:ount or shall chargo the Joint Account 19 for omhead based on the following rates: 20 21 A. _ 1 . - % of total costs through $100,000: plus 22 23 B. _...L.... %oftotalcosts in excess ofSl00,000 but less than $1,000,000: plu• 24 25 C. __L_ % of total costs in excess ofSl ,000,000. 26 27 Expenditures s1.1bject to the overheads above will nol bo reduced by insurance recoveries, and no other overhead 28 provisions of this Section Ill shall apply. 29 30 4. Amendment of Rates 31 32 The overhead rates provided for in this Section lll may be amended from time to time only by mutual agreement 33 between the Parties hereto if, in practi~. the rates are round to be insufficient or excessive. 34 35 36 IV. PRICING OF JOINT ACCOUNT MATERIAL PVRCHASES, TRANSFERS AND DISPOSITIONS 37 38 Operator is responsible for Joint Account Material and shall make proper and timelY charges and credits for all Material 39 movements nffeciing the Joint Property. Operator shall provide all Material for use on the Joint Property~ however, at 40 Operator's option, such Material may be supplied by the Non-Operator. Operator shall make timely disposition of idle and/or 41 surplus Material, such dispo5al being made either through sale to Operator or Non-Operator, division in kind, or sale to 42 oUl$iders. Operator may purchase, but shall be under no obligation to purcha$c, interest of Non-Operators in surplus condition 43 A or B M11erial. The disposal of surplus Cont'.:~:::::!'.:.:'.::::::===---­ Title: ---Jll-.J~~~~~===---- ELGER EXPLORATION, INC. sy:~8~~ Title:"¥,i~ Name: ~. · \..- SMITH ENERGY COMP ANY By: Lester H. Smith, President 13 CJM 192243v.6 SEC 188334  EXECUTED to be effective as of the Effective Date. RAW OIL & GAS, INC. JDH RAW ENERGY, L.C. ELGER EXPLORATION, INC. SMITH ENERGY COMP ANY By: ~~\JµA:t\;:fr- Lester H. Smith, PreSkieilt' 13 CJM 192243v.6 SEC 188335  Exhibit "C" to the Muy Caliente Participation Agreement Dated January 15, 2010 A.A.P.L. FORM 610 - 1989 MODEL FORM OPERATING AGREEMENT MUE CALIENTE PROSPECT OPERATING AGREEMENT DATED January 15 2010 ,,., OPERATOR RAW Oil & Gas, Inc. CONTRACT AREA _S~e~e~E=xh--'--'"ib~i~t-"~A-"~~~~~~~~~~~~~~~~~~~- COUNTY OR PARISH OF LYNN, TERRY, BORDEN , STATE OF TEXAS AND HOCKLEY COPYRIGHT 1989 - ALL RIGHTS RESERVED AMERICAN ASSOCIATION OF l'ErROLEUM LANDMEN, 4100 FOSSIL CREEK BLVD. FORT WORTH, TEXAS, 76137, APPROVED FORM. A.A.P.L. NO. 610 - l989 SEC 188336 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT-1989 TABLE OF CONTENTS Article Tille ~ I. DEFINITIONS .......................................................................................................................................... I II. EXHffiITS ................................................................................................................................................ l III. INTERESTS OF PARTIES ...................................................................................................................... 2 A. OIL AND GAS INTERESTS: .............................................................................................................. 2 B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION: .............................................................. 2 C. SUBSEQUENTLY CREATED INTERESTS: ...................................................................................... 2 IV. TITLES ..................................................................................................................................................... 2 A. TITLE EXAMINATION: ...................................................................................................................... 2 B. LOSS OR FAILURE OF TITLE: ........................................................................................................... 3 I. Failure ofTitle ............................................................................................................................... 3 2. Loss by Non-Payment or Erroneous Payment of Amount Due ........................................................ 3 3. Other Losses .................................................................................................................................. 3 4. Curing Title ................................................................................................................................... 3 V. OPERATOR ............................................................................................................................................. 4 A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR: ........................................................... .4 B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR: ................. .4 I. Resignation or Removal of Operator .............................................................................................. 4 2. Selection of Successor Operator ..................................................................................................... 4 3. Effect of Bankruptcy ..................................................................................................................... 4 C. EMPLOYEES AND CONTRACTORS: ............................................................................................... 4 D. RIGHTS AND DUTIES OF OPERATOR: ........................................................................................... 4 I. Competitive Rates and Use of Affiliates ......................................................................................... 4 2. Discharge of Joint Account Obligations ......................................................................................... 4 3. Protection from Liens .................................................................................................................... 4 4. CustodyofFunds........................................................................................................................... 5 5. Access to Contract Area and Records ............................................................................................. 5 6. Filing and Furnishing Governmental Reports ................................................................................. 5 7. Drilling and Testing Operations ..................................................................................................... 5 8. Cost Estimates ............................................................................................................................... 5 9. lnsurance ....................................................................................................................................... 5 VI. DRILLING AND DEVELOPMENT ........................................................................................................ 5 A. INITIAL WELL: ................................................................................................................................... 5 B. SUBSEQUENT OPERATIONS: .......................................................................................................... 5 I. Proposed Operations ...................................................................................................................... 5 2. Operations by Less Than All Parties .............................................................................................. 6 3. Stand-By Costs .............................................................................................................................. 7 4. Deepening ..................................................................................................................................... 8 5. Sidetracking .................................................................................................................................. 8 6. Order of Preference ofOperations .................................................................................................. 8 7. Conformity to Spacing Pattern ....................................................................................................... 9 8. Paying Wells ................................................................................................................................. 9 C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK: .............................................. 9 1. Completion.................................................................................................................................... 9 2. Rework, Recomplete or Plug Back ................................................................................................. 9 D. OTHEROPERATIONS: ....................................................................................................................... 9 E. ABANDONMENT OF WELLS: ............................................................. ~ ............................................ 9 1. Abandonment of Dry Holes ........................................................................................................... 9 2. Abandonment ofWells That Have Produced ................................................................................ 10 3. Abandonment ofNon-Consent Operations ................................................................................... IO F. TERMINATION OF OPERATIONS: .................................................................................................. 10 G. TAKING PRODUCTION IN KIND: ................................................................................................... 10 (Option 1) Gas Balancing Agreement ............................................................................................... 10 (Option 2) No Gas Balancing Agreement. ......................................................................................... l I VII. EXPENDITURES AND LIABILITY OF PARTIES ............................................................................. 11 A. LIABILITY OF PARTIES: ................................................................................................................ 11 B. LIENS AND SECURIJY INTERESTS: .............................................................................................. 12 C. ADVANCES: ...................................................................................................................................... 12 D. DEFAULTS AND REMEDIES: .......................................................................................................... 12 I. Suspension of Rights ................................................................................................................... 13 2. Suit for Damages ......................................................................................................................... 13 3. Deemed Non-Consent .................................................................................................................. 13 4. Advance Payment ........................................................................................................................ 13 5. Costs and Attorneys' Fees ............................................................................................................ 13 E. RENTALS, SHUf-IN WELL PAYMENTS AND MINIMUM ROYALTIES: ..................................... 13 F. TAXES: ............................................................................................................................................... 13 vm. ACQUISITION. MAINTENANCE OR TRANSFER OF INTEREST .................................................. 14 A. SURRENDER OF LEASES: ............................................................................................................... 14 B. RENEWALOREXTENSIONOFLEASES: ....................................................................................... 14 C. ACREAGE OR CASH CONTRIBU110NS: ........................................................................................ 14 SEC 188337 A.A.P .L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 TABLE OF CONTENTS D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST: .................................................. 15 E. WAIVER OF RIGHTS TO PARTITION: ...................................................................................... 15 F. PREFERffi'ITIAL RIGHT +o PURCHP,SE: .................................................................................. 15 IX. INTERNAL REVENUE CODE ELECTION .................................................................................. 15 X. CLAIMS AND LAWSUITS ............................................................................................................. 15 XI. FORCEMAJEURE .......................................................................................................................... 16 XII. NOTICES .......................................................................................................................................... 16 XIIL TERM OF AGREEMENT ............................................................................................................... 16 XIV. COMPLIANCE WITH LAWS AND REGULATIONS ................................................................... 16 A. LAWS, REGULATIONS AND ORDERS: .................................................................................... 16 B. GOVERNING LAW: .................................................................................................................... 16 C. REGULATORY AGENCIES: ...................................................................................................... 16 XV. MISCELLANEOUS ......................................................................................................................... 17 A. EXECUTION: ............................................................................................................................... 17 B. SUCCESSORS AND ASSIGNS: ................................................................................................... 17 C. COUNTERPARTS: ....................................................................................................................... 17 D. SEVERABILITY .......................................................................................................................... 17 XVL OTHER PROVISIONS ..................................................................................................................... 17 ii SEC 188338  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - l 989 OPERATING AGREEMENT THIS AGREEMENT,entored into by and hetwoen _,,R"'A"W,_O>=i\_,,&"-G"'as,,.._,,ln"'c.~---------------· hereinafter desjgnated and refmcd to as "Operator," and the signatory party or parties other tkan Operator, sometimes 4 hereinafter referred to individually as "Non.Operator," and collectively as "Non..Opcrators." S WITNESSETH: 6 WHEREAS, the parlies to this agreement are owners of Oil and Gas Leases and/or Oil and Gas Interests in the land identified in Exhibit "A9" and the par1i~s hereto have reached an agreement to explore and develop these L<:ases and/or Oi1 and Gas Interests for the production of Oil and Gas to the extent and as hercinatler provided. NOW, THBREFORE, it isagiocdas follows: 10 ARTICLE I. 11 DEFINITIONS 12 As used in this agreement, the following words and terms shall have the meanings here ascribed to them: 13 A. The term "APE" shall mean an Authority for Expenditure prepared by a party lo this agreement for the pUlJ>Ose of 14 estimating the costs to be incuned in conducting an operation her-eUnder. 15 B. The term ..Completion" or "Complete" shall mean a single operation intended to complete a well as a producer of Oil 16 and Gu in one or more Zon5, including, but oot limited to9 the setting of production casing, perforating. well stimulation 17 and production testing conducted in such operation. 18 C. The tenn "Contract Area" shall mean all of the lands, Oil and Gas Leases and/or Oil and Gas Interests intended to be 19 developed and operated for Oil and Gas purposes under this agreement Such lands, Oil and Gas Leases and Oil and Gas 20 lnterests are described in Exhibit "A." 21 D. The tcnn "Deepen" shall mean a single operation whereby a well is drilled to an objective Zone below the deepest 22 Zone in which the well was previou1tl)' drilled, or below the Deepest Zone proposed in lhe associated APE, whichever is the 23 lesser. 24 E. The terms "Drilling Party" and "Consenting Party' shall moan a party who agrocs to join in and pay its share of the 25 cost of any oporalion conducted under the provisions of lhis agreement 26 F. The term "Drilling Unit" shall mean the area fixed for the drilling of one well by order or rule of any state or federal 27 body having authority. lf a Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be the drilling unit as 28 established by the pattern ofdrilling in the Contract Area unless fixed by express agreement of the Drilling Parties. 29 G. The term "Drillsite" shall mr:an the Oil and Gas Lease or Oil and Gas Interest on which a proposed welt is to be 30 locsted. 31 H. The term "Initial Well" shall mean the well required lo bo drilled by the parties hereto as provided in Article VI.A. 32 1. The term "Non-Consent Well" shall mean a well in which less than all parties have conducted an operation as 33 provided in Article Vl.B2. 34 J, The terms "Won-Drilling Party" and "Non.Consenting Party" shall mean .a party who elects not to participate in a 35 proposed operation. 36 K The term "Oil and Gas" shall mean oil, gas, casinghend gas, gas condensate, ancYor all other liquid or gaseous 37 hydrocarbons and other marketable substances produced therewith, unless an intent to limit the inclusiveaess of this term is 38 specifically stated. 39 L. The tenn "Oil and Gas lnter~ts" or "Interests'' i:ihall mean unleased fee and mineral interests in Oil and Gas in tracts 40 of land lying within the Contra.ct Arca which are owned by parties to th ls agreemenL 4J M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean the oil and gas leases or interests therein 42 covering tracts of land lying within the Contract Arca which arc owned by the parties to this agreement. 43 N. The term "Plug Back" shall mean a single operation whereby a docpcr Zone is abandoned in order to attempt a 44 Completion in a shallower Zone. 45 0. The term "Recompletion" or "Recomplete" shall mean an operation whereby a Completion in one Zone is abandoned 46 in order to attempt a Completion in a different Zone withjn the existing wcllborc. 47 P. The term "Rework" shall mean an operation conducted in the wcllborc of a well after it is Completed to secure, 48 restore. or improve production in a Zone which is currently open to production in the weilbore. Such operations include, but 49 arc not limited to, well stimulation operations but ex.elude any routine repair or maintenance work or dril1ing, Sidetracking, SO Deepening, Completing, Recnmpleting, or Plugging Back of a well. sl Q. The term "Sidetrack" shall mean the djrectional control and intentional deviation of a well from vertical so as to 52 change the bottom bole location unless done to straighten the hole or drill arowid junk in the hole to overcome 0th.er 53 mechanical difficultie."'. 54 R. The term 61 Zone" shall mean a stratum of eanh containing or thought to contain a contmon accumulation of Oil and SS Gas separately producible from any other ootnmon accumulation of Oil and Gas. 56 Unless the context otherwise clearly indicates, words used in the singular include the plural. the word "person" includes 51 natural and artificial persons, the plural includes the singular, and any gender includes the masculine, feminine, and neuter. 58 ARTICLE IL $9 EXHIBITS 60 The following exhibits, as indicated below and attached hereto, are incorporated in and made a part hereof: 61 _x __ A. Exhibit "A,"shall include the following information: 62 (1) Description of lands su~ect to this agiocment, 63 (2) Reilriclions, if any, as lo depths, formations, or aubstanoos. 64 (3) Parties to agreement with addresses and telephone numbers for notice pulJXlSes. 65 (4) Pcrcontagcs or fractional interests ofpartios to thisagreement, 66 (S) 011 and Gas Leases and/or Oil and Gas lntorests subject to this agreement, 67 (6) Burdens on production. 68 _x __ B. Exhibit •a; Form of Lease. 69 _x__ C. Exhibit "Ci'' Accounting Procedure. 70 x_ D. Exhibit "D," Insurance. __ 71 x_ E. __ Exhibit "E," Gas Balancing Agreement. 72 - - - F. E11hihit "F," nen DisefimiHBtien anciCertifieatieH e!Nen Segreget:ed Feeililies. 73 _x __ G. Exhibit 'G,' Tax Partnership. 74 H. O t h e r ' - - - - - - - - - - - - - - - - - - - - - - - - - -I - SEC 188339  A.A.P.L. FORM 610-MODELFORM OPERATING AGREEMENT- 1989 If any provision or any cx.hibit. except Exhibits "E," "F 11 and "G," is inconsistent with any provision contained in the body of this agreement~ the provisions in the body of this agreement shall prevail. ARTICLE Ill. 4 INTERESTS OF PARTIES A. OiJ and Gas 1nterests: 6 If any party owns an Oil and Gas Interest in the Contract Ar.,., thal Interest shall be treated for all purposes of this agreement and during the term hCt"COf as if it were coveted by the form of Oil and Gas Lease attached hereto as Exhibit "B," and the owner thereof shall be deemed to own both royalty interest in such lease and the interest of tho lessee thereunder. 9 R. Interests of Parties: in Costs and Production: l0 Unless changed by other provisions, all costs and liabilities incurred in operations under this agreement shall be home 11 and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by the parties as their 12 intcn:sls are sel forth in Exhibit "A." In the same manner, the parties shall also own all production of Oil and Gas from the 13 Contract kea subject, howeva, to the payment ofroyalties and other burdens on production as described hereafter. 14 Reganiloss of which party has contributed any Oil and Gas Lease or Oil and Gas Interest on which royalty or other IS 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 produclion from the Contract Area up to, but not in excess of, t7 existing lease burdens and shall indemnify. dcfond and hold the other parties ftee from any liability therefor. (8 Except as othcnvjsc expressly prov-idcd in this agreement, if any party has contributed hereto any Lease or Interest which i.s 19 burdened wilh any royalty, overriding royalty, production payment or other burdal on production in excess Of the amounts 20 stipulated above, such party so burdened shall assume and alone bear all such excoss obligations and shall indemnify, defend 2l and hold the other parties hereto hannless from any and all claims attributable to such excess burdetL However, so long as 22 the Drilling Unit for the productive Zon<(s) is identical with the Cootract Area, each party shall pay or deli•«, or cause to 23 be paid or delivered, all burdens on production from the Contract Area due ond..- the terms of the Oil and Gas Lease(s) 24 which such party has contributed to this agreement, and shall indemnify, defend and hold the other parties free from any 2S liability therefor. 26 No party shall ever be responsible, on a price basis higher than the price received by such party. to any other party's 27 lessor or royalty owner, and if mJCh other party's lessor or royalty owner should demand and receive settlement on a higher 28 price basis, the party contributing the affected Lease shall bear the additional royalty burden attributable to such higher price. 29 Not.bing contained in this Article Ul.B. shall be deemed. an assignment or cros.ci.-.assigrunent of ioterests covered hereby, 30 and in the event two or more partles contribute to this agreement jointly owned Leases, the parties' undivided interests in 31 said Leaseholds •hall be deemed separate leasehold interests for the purposes ofthis agreement. n C. Subsequently Created Interests: 33 lf any party has contributed hereto a Lease or Interest that is burdened with an assignment of production given as security 34 for the payment of money, or if, after the dale of thjs agreement, any party creates an overriding royalty, production 35 payment. net profits interest, assignment of production or other burden payable out of production attributable 1o ilci. working 36 interest hereuoder, such burden sball be deemed a 'Subsequently Created Interest• Furthe<, if any party has contributed 37 hereto a Lease or Interest burdened with an overriding royalty, production payment, net profits interests, or other burden 38 payable out of production created prior to the date of this agreement, and such burden is not shown on Exhibit "A, 11 such 39 burden also shall be deemed a Subsequently Created lntaest to the extent such burden causes the burdens on such party's 40 Lease or Interest to exceed the amount stipulated in Article ULB. above. 41 The party whose interest is burdened wffh the Subsequently Created Interest (the 'Burdened Party') shall assume and 42 alone bear, pay and diocharge the Subscqueotly Created lnC:ralions llereunder. This shall not prevent any party from appearing on its own behalf at such hearings. 72 Costs incurred by Operator, including fees paid lo outside attorneys. which are associated with hearings before governmental 73 agencies, and which co.~ts are necessary and proper for the activitie<; contemplated under this agreement, shall be direct 74 charges lo the joint account and shall not be covered by the administrative overhead charges as provided in Exhlbit •c." -2- SEC 188340  A.A.P.L. FORM 610 ·MODEL FORM OPERATING AGREEMENT. 1989 Operator shall make no charge for services rendered by its staff attorneys or other personnel in th<: performance of the above 2 functions. 3 No well shall be drilled on the Contract Arca until after (1) the title to the Drillsite or Drilling Unit, if appropriate, has 4 been examined as above provided, aDd (2) the title has been apJrOved by the examining attorney or title has been accepted by all ofihe Drilling Parties in such well. B. Lo11 or Failure of Title: 7 I. Failure of Title: Should any Oil and Gas Interest or Oil and Gas Lease be lost through 'failure of title. which results in a 8 reduction of interest from that shown on Exhibit "A," the party credited with contributing the affected Lease or Interest 9 (including, if applicable, a successor in interest tc such party) shall have ninety (90) days from final determination of title 10 failure 1o acquire a new lease or other instrument curing the entirety of the title failure, which acquisition will not be subject 11 to Article Vlll.B., and failing to do so, thi~ ag1eement, nevertheless, shall continue in force as to all remaining Oil and Gas 12 Leases and Interests; Ellld. 13 (a) The party credited with contributing lbe Oil and Gas Lease or Interest afl1 of the other parties hereto in any producing well previously drilled on the Contract 22 Area is increased by reason of the title .failure, the party wh<> bore the costs incurred in connection with such welt attributable 23 to the lease or Interest which has failed shall receive the proceeds attributable to the increase in such interest (less costs and 24 burdens attributable thereto) until it has been reimbursed for unrecovered costs paid by it in connection with such well 2S attn'butable to such failed Lease or lntC1cst; 26 (d) Should any person not a party to this agreement, who is determined to be the owner of any loose or Interest 27 which has failed.. pay in any manner any part of the cost of operation, development, or equipmcnt 1 such amount "hall be paid 28 to the party or parties who bore the co!i1s which are so refun~ 29 (c) Any liability tc account to a person not a party to this aJP"cement for prior production of Oil and Gas which arises JO by reason of title lililure shall be borne severally by each party (including a predecessor to a current party) who rccei~ 31 production for which such accounting is required based on the amount of such production received, and each such party shall 32 severa11y indemnify, defend and hold harmless all other parties hereto for any such liability to accoWJt; 33 (0 No charge shall be made to the joint account for legal expenses, fees or salaries in COMection with the defense of 34 the Lease or Interest claimed lo have failed, but if the party contributing such Lca.se or Interest hereto elects to defend its title 35 it shall bear all expenses in coMeetion therewith; and 36 (g) If any party is given credit on Exhibit 'A' to a Lease or Interest which is limited solely to ownership of an 37 interest in the wellbore of any well or wells and the production therefi'om. such party's absence of interest in the remainder 38 of lhc Contract Area shall be considered a Failure of Title as to such remaining Contract Area unless that absence of interest 39 is reflected on Exhibit "A." 40 2. Loss by Non..Payment or Erroneous Payment of Amount pue: Jf, through mistake or oversight, any rental, shut.. in well 41 payment, minimum royalty or royalty payment, or other payment necessary to maintain all or a portion of an Oil and Gas 42 Lease or interest is not paid or is erroneously paid, and as a resull a Lease or Interest terminates, there shall be no monetary 43 liability against the party who failed to mlike such payment. Unless the party who wled tc make the required payment 44 secum; a new Lease er lnterest covering the same interest within ninety (90) days from the discovery of the failure to make 45 proper payment. which acquisition will not be subject to Article Vlll.B., lhe interests of lhe parties reflected on Exhibit 19 A" 46 shall be revised on an acreage basis, effective a.~ of the date of termination of the Lease or Interest involved, and the party 47 who failed to make proper payment will no longer be credited with an interest in the Contract A.Im on account of ownership 48 of tho Lease or lnterost which has terminated. If the party who failed to make the required payment shall not have been fully 49 reimbursed, at the time of the loss, from tbc proceeds of the sale of Oil and Gas attributable to the lost Lease or Interest, SO calculated on an acreage basis, for the development and operating costs previously paid on account of such. Lease or Interest. SI it shall be reimbursed for unrecovcrcd actual costs previously paid by it (but not for its share of the cost of any dry hole 52 ~iously drilled or wells previously abandoned) from so much of the following as is necessary to effect reimbwscment:. 53 (a) Proceeds of Oil and On.o; produced prior to termination of the Lease or Interest, less operating expenses and lease 54 burdens chargeable hereunder tc tho person who railed to make payment, previously accrued tc the credit of the lost Lease or SS ln~ on an acreage basis, up to the amount ofunrecovcrcd costs; 56 (b) Proceeds of Oil and Gas, less operating expenses and lease burdens chargeable hereunder to the person who failed 51 to make payment, up to the amount of unrccovcrcd costs attributable to that portion of Oil and Gas thcrcattCI' produced and 58 marketed (excluding production from any wells thereafter drilled) which, in the absence of such Lease or Interest termination. S9 would be attributable to the lost Lease or Jnterest on an acreage basis and which as a result of such Lease or Interest 60 termination is credited tc other parties, the proceeds of said portion of the Oil and Gas to be contributed by the other parties 6t in proportion to their respective interests reflected on Exhibit 11 A"; a.ad, 62 (c) Any monies, up to the amount of uncccovcrcd c;osts, that may be paid by any party who ls, or becomes, the owner 63 of the Lease or Interest lost, for the privilege of participating in the Contract Area or becoming a party to this agreemcnL 64 3. Other Losses: All losses of Leases or Interests committed tc this agreement, other than those sot forth in Articles 65 IV.B.I. and lV.B.2. above, shall be joint losses and shall be borne by all parties in proportion to their interests shown on 66 Exhibit "A.' This shall include but not be limited to the loss of any Lease or Interest through failure tc develop or because 67 ·ex.press or implied covenants have not been performed (other than pcrfommnce which requires only the payment of money)~ 68 and the loss of any Lease by expiration at the end of its primary term if it is not renewed or extended There shall he no 69 readjustment of interests in the remaining portion of the Contract Area on account of any joint loss. 70 4. Curins Title: In the event of a failure of Title under Article JV.B.1. or a loss of title under Article IV.B.2. above, any 71 Lease or Interest acquired by any party hereto (other than il1e party whose interest bas fuiled or was lo•O during the ninety 72 (90) day period provided by Article IV.B.1. and Article IV.B.2. above covering all or a portion of the interest that bas tailed 73 O£ was lost shall be offered at cost lo the party whose interest has failed or was lost; and the provisions of Article Vlll.B. 74 shall not apply to such acquisition. .3. SEC 188341  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989 ARTICLEV. 2 OPERATOR A. Desigaation and Responsibilities of Operator: 4 _ _,AA=W~O~i~I&=G~a~s~ln~c~._ _ _ _ _ _ _ _ _ _ _ _ shall be the Operator or the Contract Area. and shall conduct s and direct and have full control of all operations on the Contract Arca as permitted and required by1 and within the limits of 6 lhis agreement. In its performance of services hereunder for the Non·Operators., Operator shall be an independent contractor not subject to the control or direction of the Non-Operators except as to the type of operation to be undertaken in accordance 8 with the cloction procedures contained in this agreement Operator shall not be deemed, or hold itself out as. the agent of the 9 Non-Operators with authorily to bind them to any obligation or liability assumed or incurred by Operator as to any third 10 party. Operator shall conduct its activities under this agreement as a reasonable prudent operator. in & good and workman1ilce II manner~ with due diligence and dispatch. in accorda[l(:e with good oilfield practice, and in compliance with applicable law and 12 regulation, but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred 13 except such as may result from gross negligence or willful misconduct. 14 8.. Rcdgnation or Removal of Oper•tor and Selection of Successor: IS I. Resignatjon or Remove) of Operator: Operator may resign at any time by giving written notite thereof to Non-Operators. 16 (f Operator terminates its legal ex istencc.. no longi.r owns an interest hereunder in the Contract Area, or is no longer capable of 17 serving as Operator, Operator shall be deemed to have resigned without any action by Non.Opcr.dors, except the selection of a 18 successor. Qpendar ~ lte retRe ed enJ) far gaatt ea~e ii) •fte aiimtali e ete ef ~Jen QrieutleF& e RiRg a Rlajeri~ interest 19 Nsed en e •ereftip etB lihe n en &hihit "A" remaining aftl!ll' tt•eh:ttliRg the eting iRtereeJ~ ef Opereler:; suel!: eta shell Bet be 20 deemed elfeeti• e UHl:il a 1¥FiM"eA Aetiee ha6 1:9een Beli ered te Qie gpater h) & Jl.l8fl Q,R,er detaiHRg 4he &Hegetl deliulll aaB 21 OpeNteF - failed le ""'" the tlefMllt hftin lhir') f!Q~ Ga)s iem: it& reeeil!J1 er the aetiu Sf. if f.ke defttrtlt ee&elilll'ftS aft 22 epemaea .S.ee Being eeAElweted, 'ithill f-, eight ~43) hellfS ef il9 reeaijii sf d:te Mliee. lleF J*l:Ff3SSes het"eet:, "geed eawse" shell 23 &UBR eel enl3 lfSH eeglige11n er illNI miseeedw.el httt else lhll! Ht&teFial \m1eeh ef er inabllit) te It eel the 9&eRBar1:ls ef 24 epeetieR eenltliBetl in >rtiele ''. '\, er mateFiel fit:iittre e!' Hte:hi:iil:) le JlerfeFm ils ehligatieRS tm:tler t:ltis apeemem.. 25 Sulije<:t lo Article Vll.D.l., such ""'ignalion or removal shall not become el'feetivc until 7:00 o'clock A.M. on the lirst 26 day of the calendar monlh following lhe e)(piration of ninety (90) days after the giving of notice of resignation by Operator 27 or action by the Non·Operators to remove Operator. unless a successor Operator has been selected. and assumes the duties of 28 Operator at an earlier date. Operator, after effective date of resignation or removal. shall be bound by the tenns hereof a.co a 29 Non-Operator. A change of a corporate name or stnJciure of Operator or transfer of Operator's interest to any single 30 subsidiary. parent or succmsor corpo13tion shall not be the basis for removaJ of Operator. 31 2. Sclcction of Successor Operator Upoo the resignation or removal of Operator under any provisioo of this agreement. a 32 successor Operator shall be selected by the parties. The successor Operator shall be selected from the parties owning an 33 interest in the Contract Arca at the time such successor Operator is selected. The successor Operator shall be selected by the 34 affirmative vote or two (2) or more parties owning a. majority interest based on ownership as shown on Exhibit "A"; 35 provided. however. if an Operator which has been. removed or is deemed to have resigned fails to vote or votes only to 36 succeed itself, 1he successor Opetator shall be selected by the affumative vote of the party or parties owning a majority 37 intc:rcst based oa ownership as shown on Exhibit "A" remaining after excluding the voting interest of the Operator that was 38 removed or resigned. The former Operator shall promptly deliver to the successor Operator all records and data relating to 39 the operations condu.cted by the former Operator to the extent such records and data arc not already in the possession of the 40 successor opcratoc. Any cost of obtaining or copying the fonner Operator's records and data shall be charged to the joint 41 account 42 3. Effect of Bankruptcy: Jf Operator becomes insolvent, bankrupt or is placed in receivership, it shall be deemed to have 43 resigned with~ut any action by Non.Operators, except the selection of a successor. If a petition for relief under the federal 44 bankruptcy laws is filed by or against Operator, and the removal of Operator is prevent and such funds shall remain the funds of the Non-Operators on whose account they are advanced or paid until 6 used for their intended purpose or otherwise delivered to the Non~Opcrators or applied toward the payment of debts as 7 provided in Article VII.B. Nothing in this paragraph shall be construed to establish a fiducialy relationship between Operator and Non-Operators for any purpose other than lo account for Non-Operator funds as herein specifically provided. Nothing in 9 this paragraph shall require the maintenance by Operator of separate accounts for the funds of Non-Operators unless dtc I0 panies otheiwise specifically agree. 11 5. Access to Contract Area and Records: Operator shall, except as otherwise provided herein, permit each Non-Operator 12 or its duly authorized repn:scnlativc, at the Non-Operator's sole risk and cost, full and &ee access at all reasonable times to 13 all operations of every kind and character being conducted for the joint account on the Contract Area and to the records of 14 operations conducted thereon or production therefrom. including Operator's books and records relating thereto. Such access 15 rights shall not be exercised in a manner interfering with Operator's conduct of an operation hereunder and shall not obligate 16 Operator lo !Umish any geologic or geophysical data of an interpretive nature unless the cost of preparation of such l7 interpretive data was charged to the joint account. Operator will furnish to each Non-Operator upon request copies of any l8 and all reports and infonnation obtained by Operator in connection with production and related items, including. with.out 19 limitation, meter and chart reports, production purchaser s&atements, run tickets and monthly gauge reports, but excluding 20 purchase contracts and pricing information to the extent not applicable to the production of the Non-Operator seeking the 21 infonnation. Any audit of Operator's records relating to amounts expended and the appropriateness of such cx:penditures 22 shall be conducted in accordance with the audit protocol specified in Exhibit "C." 23 6. Filing and furnishing Governmental Reports: Operator will file, and upon wrinen request promptly furnish copies to 24 each requesting Non-Operator not in dctault of its payment obligations, oil operational notices, reports or applications 25 requin:d to be filed by local, Slate, Federal or Indian agencies or authorities having jurisdiction over operations hereunder. 26 Each Non-Operator shall provide to Operator on a timely basis all information necessary to Operator to mike such filings. 27 7, Drillins and Testing Operations: The following provisions ~hall apply to each well drilled hereunder, including but not 28 limited to the Initial Well: 29 (a) Operator will promptly advise Non-Operalora of the date on which the well is spudded, or the date on which 30 drilling operations are commenced 31 (b) Operator will send to Non-Operators such reports, test results and notices regarding the progn:Bs of operations on the well 32 as the Non-Operators shall reasonably request, including. but not limited to, daily drilling repons, completion reports, and well logs. 33 (c) Operator shall adequately test all Zones cncounW.ed which may reasonably be expected to be capable of producing 34 Oil and Gae; in paying quantities as a result of examination of the electric Jog or any other Jogs or cores or tests conducted 3S hereunder. 36 8. Cos! Estimates: Upon request of any Consenting Pany, Operator shall furnish estimates of current and cumulative costs 37 incurred for the joint account et reasonable intervals during the conduct of any operation pursuant to this agreement 38 Operator shall not be held liable forerro,. in such estimates so long as the estimates arc made in good faith. 39 9. ~ At all times while operations are conducted hereunder, Operator shall comply with the wotkcrs 40 compensation law of the state where the operations are being conducted; provided, however, that Operator may be a self- 41 insurer for liability under said compensation Jaws in which event the only charge that shall be made to the joinl account shaU 42 be as provided in Exhibit "C. 11 OpcrcJtor shall also carry or provide insurance for the benefit of the joint account of the partiei:t 43 as outlined in Exhibit •o• attached hereto and made a part hereof. Operator shall require all contrac- engaged in work on 44 or for the Contract Area to comply with the workers compensation Jaw of the state where the operations are being conducted 45 and to maintain such other insurance as Operator may require. 46 ln the event automobile liability insurance is specified in said Exhibit "O," or subsequently receives the approval of the 47 parties, no direct charsc shall he made by Operator for premiums paid for such insurance for Operalor's aulomotive 48 equipment 49 ARTICLE VI. so DRU.LINC AND DEVELOPMENT 51 A- Initial Well: 52 On or before the _Ist _ _ day of September 20 l 0 , Operator shall conunonce the drilling of the Initial 53 Well at the rollowing location: 54 55 Mutually agreed upon location within the Contract Arca to be determined at a later date by all the parties to this 56 Agreement 51 58 59 61) 61 and shall thereafter continue the driJJing of the well with due diligence to penetrate the Fusselman Fonnation. 62 63 64 65 66 The drilling of the Initial Well and the participation therein by all panics is obligatory, subject to Article Vl.C.l. as lo panicipation 67 in Completion operations and Article Vl.F. as to termination of operations and Article XI as to occWTcncc of force majeure. 68 B. Subsequent Operations: 69 l. ProOO!!Cd Operations: Jfany party hereto should desire to drill any well on the Contract Area other than the Initial Well, or 70 if any party should desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or o well no longer capable of 71 producing in paying quantities in which such party has not otherwise relinquished its interest in the proposed objective Zone under n this agreement, the pany desiring to dril~ Rework, Sidetrack, Deepen, Recomptete or Plug Bock such • well shall give written 73 notice of the proposed operation to the parties who have not otherwise relinquished their interest in such objective Zone 74 - s- SEC 188343  A.A.P.L. FORM 610 -MODEL FORM OPERATING AGREEMENT- 1989 under this agreement and to all other parties in the cose of a proposal for Sidetracking or Deepening, specifying the work to be performed. the location. proposed depth, objective Zone and the estimated cost of the operation. The parties to whom such a notice is delivered shall have thirty (30) days after receipt of the notice within which to notil)' the party proposing to do the work whether they e1ect to participate in the cost of the proposed operation. If a drilling rig is on location, notice of a proposal to S Rewori;, Sidetrack, Recomplete, Plug Back or D (exclusive of Saturday, Sunday and legal holidays). Tho proposing party, at its election, may SJ withdraw such proposal if there is less than 100% participation and shall notify all parties of such decision within ten (10) 54 days, or within twenty-four (24) houts if a drilling rig is on location, following expiration of the applicable r"'JJOnse period. SS If 100% >Ubscription to the proposed operation is obtained, the proposing party shall promptly notify the Consenting Parties S6 of their proportionate interests in the operation and the party serving as Operator shall commence such operation within the 57 period provided in Article Vl.B. I., subject to the same extension right"" provided therein. 58 (b) Relinquishment of Interest for Non~Particination. The entire cosl and risk of conducting such operations shalJ be 59 home by the Consenting Parties in the proportions they have elected to bear same under the terms of the preceding 60 paragraph. Consenting Parties shall keep the leasehold estates involved in such opcrotions free and clear of all liens and 61 encumbrances of every kind created by or arising from the operations of the Consenting Parties. If such an operation results 62 in a dry hole, then sul!Jcct to Articles VJ.B.6. and Vl.E.J., the Consenting Parties shall plug and abandon the well and restore 63 the surface location at their sole cost, risk and cx.pen:;:e; provided, however, that those Non-Consenting Parties that 64 participated in the drilling, Deepening or Sidetracking of the well shall remain liable for, and shall pay, their proportionate 65 shares of the cost of plugging and abandoning the well and restoring the surface location insofar only as those costs were not 66 increased by the subsequent operations of the C'.onsenting Parties. If any well drilled, Reworked, Sidetracked, Deepened, 67 Reoomplcted or Plugged Back under the provl'lions of this Article results· in a well capable of producing Oil and/or Gas in 68 paying quantities, the Consenting Panics shall Complete and equip the well to produce at their sole cost and risk, and the 69 well shall then be turned over to Operator (if the Operator did not conduct the opemtion) and shall be operated by it at the 70 expense and for the account of the Consenting Parties, Upon commencement of operations for the drilling, Reworking, 71 Sidetn:acking. Recompleting, Deepening or Plugging Back of any such well by Consenting Parties in accordance with the 72 provisions of this Article, each Non-Consenting Party shall be deemed to have relinquished tn Consenting Parties, and the 73 Consenting Parties shall own and be entitled lo receive. in propclltion to their respective interests, all of suc.h Non- 74 Consenting Party's interest in the well and share of production therefrom or, in the case of a Reworking, Sidetracking, -6- SEC 188344  A.A.P.L. FORM 610-MODELFORM OPERATING AGREEMENT-1989 Deepening, Recomplcling or Plugging Back, or a Completion pursuant to Article Vl.C. l. Option No. 2, all of such Non- 2 Comenting Party's interest in the production obtained from the op:ration in which the Non-Consenting Party did not elect 3 to participate, Sueh relie~ll:islUBelN shell be elreeft e wnlil the PFeeeeds ef the sale ef sueft share, ealeulitteti: at the en, er 4 maAEet slue theresf if saek sAau is net sel~ (after deeJuetiftg a.pplieaBle aB aleF&.m, pNJduetien, se ElftHlee. Bflti eneise tltiit!fl, Fe)al~. e cel'fiding re)alt) aoEl ether iftte1ests net em1epted b) 6..rtiele Jl!.C. J'Et)ahle 61tt ef er me&S\l:Fed h) Sh:e pP6Elueiien iiem Sl:leh , ell eeeNing · ith tes~eet ~e sueh leterest 11ntil i& re 8"8) 1 shall eqt;tal the telal ef lhe ielle , iRg. fi) q' ef eaeh SYell Nen GeRaRing Paff) 's 8heFe er the eesl ef ft1t3 Be. ty &ei}Uited 6lifl8.ee IN\Uipment ~ SflfJ the • ellllee6 eer1neeiiene (iReattiding hut Rel Hmiled te steel£ tanlf&; se,,al'Bleff, lf'eetm, pi~ e~eet and 9 pipie~, plus 100" ef eaeh eueh ~Jee Geftseadng PaR:i 's &Aare er the east ef BJllM'atien af '8.e en eefftftlte1tei:Rg 'idt first 10 preill'letieft and ee8':Ht.iing uatil eeeft saell )lee Cet1sefffieg PIH'l) 's Felin1:1uishetl iRtE!IFe!I! Mell re aft ta it t1Rder elher 11 pre1isiens ef lhis :'Riele, it hei:Ag &g?eed that eeeh Nee Censeeling ~·e shate er saeh eefRs Elftli SEfYipmeat ·,ill he that 12 interesl hieh ' euld Ba e Been ehargeehle le Stleh •fae CaHS,_ing Peff) Ma it paRieipateEI ifl the ell ffem the hegil ling 13 efthe eperetieHs; and 14 (ii) 1' of (al Ille! pofliea of lho ooels Olld 01.!HgBing Boel•, tesling, Go"'l'loling, and Reeemple!iag, oft'"' dodtioling •RY eooh eoR1ribU1ie119 ,.,,.; ed u.e... A,.ielo "111.G., 16 oRlee G911seating Pa~ if it had:paA:leiF'&'ell ihereie, 18 )Jet 'iOtslefldiag &ft)"'IHF1g te tit:1.1 eentfef; ill lhie JAiele VJ.B., if 1h:e • eH Sees net fe&eh lfte deep• &bjeeti1e liene t9 desefihed ie the neiiee pre11eeing the · eH: far reeeeM elfler lhslt the etteet:mlefi"@ ef granite er pRletiealiy impeB:etrahle 20 eHs1te1ee eP elffer eenEiitieR iR the hele feftderiflg fw'her epe111tiens ifftpraetiee\Jle, QpetateF shell gl e aetf:ee thereef le eaeR 21 >left Certseldifll Pmt, he Mlhfflilled er ereel fer BH aket"RMi e J:!Fepe981 UAder "'.d"liele Vl1B.fi. t:e drill the ~ell te e 22 eftalle 191' ileRe than: the deepest e1'jeeti e ~ene pPBJ1661i!& in .i,ei 11aHee Uftder RiEffi the . en BB dfflled,; lftd -.eh 9t:teh Nen 23 Cewat:i&g P~ shaA he e the eptieB: te partieiJtale in Ute iBitial 11repeseS CempletiBR ef ,.e ell 8)· J!&)lng iis share ef lhe 24 east ef driltiPg the , ell le its aeNeJ depllt, ealettlated ie &Re IB8f1Aer pre ii:led ifl 4::.-:tiele \'[,8.4. (a). If l'lft) sueh )'left 2S Ceeseelieg Party Bees Bet eleet te p&ftieipale m lfta Bmt Celfil'\elieft fJfepesed far 9tt:eh ell, &he teliREltfiShment j!IFe'l isiens 26 eflhis "'1iele "l.8:11 (~shall illflf'I) te s.ieh paff) 1s ielefes&, 27 (4) Re eA1:ing. R:eeemeleting er Pl\iHieg Baelf An eleetiAH net te plll'li@ipate Hi tfle drillieg, 8ideReliiAg BF 28 t>eepeniag ef a uH shell he dee111ed al\ eleeH.eft n~ le peffleipfMe in an) Re erMng er PIMggillg BaeiE epere\iee prepesed iR 29 sHM e eU, BF peRieR dtereef:, te hieh the iRittel l!:Bft eeftsept eleetien applied tftat i11 eeeduetell at lft) ti1Re pfteF te NII JO 'fBieQ•~ ~, tfte Qememittg Pttt\ies er tfte l"Ien bensefttieg ~'& fl!IBB¥fHfteBt llfft9Wlt. Similerl), an el~tittn net te 31 paJtieipete HI the GeH1pletiRg er Ree:Bffi19le\iflg af a ell &hall b11 deemed a11 eleetiee eel te partiei-pate iB &Ut) Re~ eriEing 32 epeMdes: 13ret'eeed iB eueh a ell, eF peftlen tftereef, te Bieh the initial aen eensent eleeliea ftl'JJliefl that is eBBdweteEl et 33 &ft) lime prieF te itll reee· et=) hl the CanseAtiAg Panias ef the >lee Cea!IBnting P-est)'s reeettp1118flt 8fft1.n1at. "e, sseh 34 Re'' efking, Reeemplel:ing BF :Plttgging 8aelt epRlieR eef!ihteleil du.Ang the reeBYpffteftl pefled &}tell he deemed p8l't ef the 35 eest ef e19t!f&'cien ef sahl ell &Rd tftere Mia\\ tie added: te *hoe &Yl'Wi te 'ee reeeupet\ h) lfle GePHRliag PaAies l' ef 36 that -perti&.e: ef the easY ef t:ke Re efti:iftg; Reeemf!ieting er Plsgging Se~c epNief! hieh ew.td he e Been eharge&ele le 37 swe-A ~'en G'ellSl:'RliRg Psft3 had it J'&MiaipefeS &hBFeis 1f sueh a Jh sFkiftg, Reeemple!ittg er PJugglng Beelc BJ!'Mlliea is 38 flFepesfMI d\ff'iAg swe)l reeeYpffleRt fl-'ed, Che pl'B isieRs ef this Miele \'I,8. shall he 11pplieahle as het eeR aaid CensBftliBg 39 P-efties itt s11id "ell. 40 ~d) Reee~emMlt Ma!efS. Q\IN\g th~ J9Bl'ie& e{ mtie Censemiftg P'ffties are effiiQell \e reaei. e Wen Gen:ien\i:ng Paft)'s 41 shef9 af preduetiee. er the preeeetls lhereiem. Genseel:ing PaFties shell 11e re913ensihle fer the J!a)ment ef all ad ·alerem. 42 pRJdueliM, s~'8f8Ree, eueise; getfteriRg ed ether tilKee, ed ell re)alt), e elfl'idieg ra~al'> ettd ether lii:tftiens pt;1plieehle te 43 ~Jen CeA&eRting 1'8") 'a share eff'FBElwelien Rat e11eep1ed 8) ... Riele 111.G, 44 Jn the ease er &ft) Re BfliiAft1 SidelfflelEiRg, fl.1¥gglng 8eeh•• ~eeempl8'iRg er f}eepeRiRg er:ieNliea. ate Ceft.ieRtiRg 45 Plftiee sN!H: ee P""'Aued te Ifie, ihe ei' eee\ aY easift!, teiftg e:F16 e\fter e~·l'"'e'FI' in \Ae ~el:l. 1eiat tke e; nef51:1ip ef aP 46 Nali eEJHlffmeRt Ghall remein 1111ehaHged1 and UfleH &handenmeftt ef a ell after st1elt Re eFking; Side\reelliag, PlttggiRg Beek, 47 Reeempleting er f)eepening, lhe Gene1nRiag Pttfties shall aeeetHtl fer an weh 11n:ittip1'R:eftt te the e eers Dtereef, ' ith eeeh 48 p&Ay reeei ·ieg ito prepeftienete pBft ie kind: er ta alue, tees eeat ef sehege, 49 ,.,ithie Rinet) (99) da}s after the ee1HJ'let'ea ef BR)' e~_eraHeR under this Yl:iele1 the p~ eeedtleting: the eperatiem SO fef t\\e CMH1efttit!g Plee CeReentiRg Pe:t1iee 1ith e itemii!ed: Me:\el!l•t sf all essW Yd lie.SiHties inalffFed: ·, 'be e):\eti¥ien ef 56 tl1e en, 1age•her ith a stelement ef tJu 11usntit) ef Qit BREI g8:8 1nedkleed ht it ftftd 1fte 81ftett8t ef f'l'Beeeds reeliee:el hlfl 57 the sale er the etl'1:1 eftting ietereet p1 e8tt:eti.eR Mag the pAteeSieg menlh. le dete iHieg ihe etvElllllt, ef Gil aed Gas 58 pFedw.eed Elurieg an) meatft, Cwenting PaRies slml1 wse iedllB"' Htn~pted metltet-19 saeh as hut net 1i1Hite:el ts meteFing er S9 peFi:eElie ell \eB'9. ".oH!I ameYRl realii.lied i:em the eele sr etftef dispesiliee ef eEfH!ipmt:Rt ee I) ee119i"Fed iA eeRReeden ;ch 60 aft) seeh epemtien hieh ewld lttt e been e eed 9) a ties Ceflf:te11lir!g Pert) :hed it partieipatad lftereift shall 'ee ereEliteB 61 egeiast lfte tetel llRrelum:ed eeslti ef the eRe deFIB BREI er the e151wip1Reftt purehased: iR &elem'lifting ken lhe ieteue• ef &ueh 62 NBH Censmling Pe:A) shell te ere te it B:!I aha e pre1ide~ eed if &here is e eredit 'ealaaee, it shell he ,-id ie stteft l>leH 63 Geeaeniteg Pa"'. 64 If aad hen '8.e Geeseetieg Putiee reee er ffeBi a "tfeft Ceaseeting Peft) •a reliAE1t1ished iflterest &he &fftEHmte l'fB ideEi 65 fer alle e. Ike reliequiohed inleresl8 of e11oll ~lo• GeRBenling Poff! shall autemalioally ,.. efl 10 it .. of 1.QQ "'"" •• the day 66 feIJe,'ieg Che ~ ea 'hieh sweft Fee9YJUHtlfff e~SYFS, aOO, hfii ae:d slier sweB: Fe emieft; sueh ~ 1 BR G9MSJ1fiRg Peft3 shall 67 e 'fl the 98ffl:B in\eri!et ia suell "i!ll, the matiJFi&l mu! ettttipmeRl iR er pertaining thereta, a:nd tfle pmdYetieR 1hereffam as 68 !!Hell tlea CeneeAtiRg Pe.ff) 1¥8Uhl ha e \reeA eatHled te Bed . it reffieif!8ted in the Milling, Sidetfaeldng, RewerlHng, 69 Qeepeffing; Reeempletiftg er Flusgieg Ba.eh ef Hill ell. Thereafter. aw.eh l>lee CeMeAtiFlg P~ sMll he eharged ll itft eeEi 70 she.II pa) ii:e J'l'61'BffieMte pe:rl er the fwth&1 easts ef '81 eperatien ef seid ell ie aeieerSaeee iOt the teFRls ef this 71 >ee11 eel and HA;hi8it "G" etteeheEI lterete. n 3. Stand-By Costs: When a well which has been drilled or Deepened has reached its authorized deplh and all tests have 73 been completed and the results thereof furnished to the parties, or when oper.itions on tlte well have been otherwise 74 terminated puJSUant to Article VJ.F., stand-by costs incurred pending response to a party's notice proposing a Reworking, . 7. SEC 188345  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 Sidetracking, Deepening, Rccomplcting. Plugging Back or Completing operation in such a well (including the period required under Article VLB.6. to resolve competing proposals) shall he charged and borne as part of the drilling or Deepening operation just completed. Stand-by costs subsequent to all parties responding. or expiration of the response time permitted, 4 whichever first occurs, and prior to agreement as to the participating interests of all Consenting Parties pUl'SWU1t to the terms 5 of the second tll'lmn>atical parug;.iph of Article Vl.B.2. (a), shall be charged to and borne as part of the proposed oPO>ation, 6 but if the proposal is subs~uently withdrawn because of insufficient participation, sucli stand·bY costs s:hall be allocated 7 between the Consenting Parties in the proportion each Consenting Party's interest as shown on Exhibit "A" bears to the total interest as shown on Exhibit "A" of all Consenting Parties. 9 In the event that notice for a Sidetracking operation is given while the drilling rig to be utilized is on location. any party 10 may request and receive up to five (5) additional days after e.le. 1: Ill neees_, en~~·ih:IPee far she drilling; Eleepeaifig er Sid:etr&ele:it'lg; tee4:iflg. Gell ple\ilig at!& 18 eEtttippitig efthe ell, ifteklding 11 !!e!IS~ te:nlmge 8ft&leF swFfaee fileililies. 19 0 Ontion No. 2· All necessary ex.pcnditurcs for the dri11ing, Deepening or Sidetracking and testing of the wetL When 20 such well has reached its uuthorizcd depth, and all logs, cores and other tests have been completed, and the results 21 thereof furnished to tho parties, Operator shall give immediate notice to the 'Non-Operators having the right lo 22 participa1e in a Completion attempt whether or not Operator recommends attempting to Complete the well, 23 together with Operator's AFE for Completion costs if not previously provided. The parties receiving such notice 24 shall have forty-equent Completion or Rccompletion attempts reg-.udless whether the Consenting Parties as to earlier 40 Completions or Recompletion have recouped their costs pursuant to Article Vl.B.2.; provided turther, that aey 41 rec:oupment of cos'ls by a Consenting Party shall be made solely from the production attributable to the Zone in 42 which the Completion attempt is made. Election by a previous Non-Consenting party to participate in a subsequent 43 Complcllon or Rccomplction attempt shall require such party to pay its proportionate share of the cost of salvablc 44 materials and equipment installed in the well pun.-uant to the previous. Complc1ion or Rccompletion attempt. 45 insofar and only insofar as such materials and equipment benefit the Zone in which such party participates in a 46 Completion attempt. 47 - 2. Rework Rcoomplcte or Plug Back· No well shall be Reworked, Recompleted or Plugged Back except a well Reworked. 48 Recompleled, or Plugged Baclc. pursuant to the provisions of Article VJ.B.2. of this agreement. Consent to the Reworking, 49 Recomplct.ing or Plugging Back of a well shalt include all necessary expenditures in conducting such opcratiom and SO Completing and equipping of said weU, including necessary tankage and/or surface facilities. S1 D. Otbor Openlions: 52 Operator shall not undertake any single project reasonably estimated to require an expendilure in excess of _ _ _ _ _ __ 53 Twenty-five thousand Dollars (S 25 000.00 > except in connection with the 54 drilling, SidelnlCking, Reworking, Deepening, Completing, Recompteting or Plugging Back of a welt that has been previously SS authorized by or pursuant to this agreement; provided, however, that, in case of explosion, fire, flood or other sudden S6 emergency, wit.ether of the same or different lUlture, Operator may take such steps and incur such expenses as in its opinion 57 are required to deal with the emergency to safeguard life and property but Operator, as promptly as possible, shall report the 58 emergency to the other parties. If Operator prepares an AFE for its own use. Operator shall furnish any Non-Operator so 59 requesting an information copy thereof for any single project costing in excess of Twenty~ftve thousand Dollars 60 (S 25.000.00 ). Any party who ha> not relinquished its interest in a well sholl have the right lo propose that 6l Operator perform repair work or undertake the installation of artificial lifl equipment or encillaty J)Toduction facilities such as 62 salt water disposal wells or to conduct additional work with respect lo a well drilled hereunder or other similar project (but 63 not including lhc installBtioo of gathering lines or other transportation or marketing facilities, the installation of which shall 64 be governed by separate agreement between the parties) reasonably estimated to require an expenditure in excess of the 65 amount ftrst set forth above in this Article Vl.O. (except in connection with an operation required to be proposed under 66 Articles Vl.B.1. or VI.C.I. Option No. 2, which shall be governed exclusively be those Articles). Operator shall deliver such 61 pr<>posal to all parti.. entitled to participate therein. If within thirty (30) days thereof Operator secures the written consent 68 of any party or parties owning at least O % of the interests of the parties entitled to participate in such operation, 69 each party having the right to participate in such project shall be bound by the tenns of such propooal and shall he obligated 70 to pay it> proportionate ohare of the costs of the proposed project as if it had consented to such project J>IU'UMt to the terms 71 of the proposal. 72 E. Abandonment of Wells: 73 I, Abandonment of Dry Holes· Except for any well drilled or Deepened pursuant to Article Vi.B2., any well which has 74 been drilled or Deepened under the terms of this agreement and is proposed to be completed as a dry hole shall not be . 9. SEC 188347  A.A.P .L. FORM 610 - MODEL FORM OPERATlNG AGREEMENT - 1989 plugged and abandoned without the coo>cnt of all parties. Should Operator, al\cr di\igenl effort, be unable to contact any party, or should any party liiil to reply within forty-eight (48) houn; (exclusive of Saturday, Sunday and legal holidays) after delivery of notice of the proposal to plug and abandon such well, suclt party shall re deemed to have consented to the proposed abandonment. All such wells shall be plugged and abandoned in aceordanee with applicable regulations and at the cost, risk and expense of the parties who participated in the cost of drilling or Deepening such well. Any party who objects to plugging and abandoning such well by notice delivered to Operator within forty-eight (48) houn; (exclusive of Saturday, Sunday and legal holidays) after delivery or notice of the proposed plugging shall take over the well as of the end of such forty·cight (48) hour notice period and conduct further operations in search of Oil end/or Gas wqject to the provisions of Article Vl.B.; milure of such party to provide proof rusooably satisfilctory to Operator of its financial capability to conduct 10 such openrtions or to take over the wcU within such period or thereafter to conduct operatlons on such wc::U or plug and ll abandon such well shall cntiUe Operator to retain or take possession of the well and plug and abandon the well. The party 12 lakiJI& over the well shall indemnify Operator (if Operator is an abandoning party} and the oilier abandoning parties against 13 liahiHly for any further o~tions conducted on such well except for the costs of plugging and abandoning the well and 14 restoriog the surfilcc, for which \he abandoniog parties shall rnmin proportiona\cly liable. lS 2. Apmdonment of Well.; That Have Produced: Except for any well in which a Non~Comcnt operation has been 16 conducted hereunder for which lhc Consenting Parties have nol been fully rcimbumed as herein provided. any well which has 17 been completed as a produCCT shall not be plugged and abandoned without the consent of all parties. If all parties consent to 18 such abandomnent, the well shall be plugged and abandoned in accordance with applicable regulations and at the cost, risl; 19 and expense of all the parties hereto. Failure of a party to reply within •ixty (60) days of delivery of notice of proposed 20 abandonment shall be deemed an election to consent to the proposal. If, within sixty (60) days after delivery of notice of the 21 proposed abandorunent of any well, all parties do not agree to the abandomncnt of such well, those wishing to continue its 22 operation fi"om the Zone then open to production :shall be obligated to take over the well as of the expiration of the 23 applicable notice period and shall indemnify Operator (if Operator is an abandoning party) and the other abandoning parties 24 against liability for any iUrthcr operations on the well conducted by such parties. failure of such party or parties to provide 25 proof roasonably satisfactory to Operator of their financial capability lo conduct such operations or to take over the well 26 within the required period oc thereafter to conduct operations on s1!ch well shall entitle operator to retain or take possession 27 of such well and plug and abandon the well. 28 Parties taking 011er a well as provided herein shall tender to each of the other parties its proportionate share of the value of 29 the wcU's salvablc material and c.qulpmcnt, determined in accordance with the provisions of Exhibit "C," less the estimated cost 30 of salvaging and the estimated cost of plugging and abandoning and restoring the surface; provided. however, that in the event 31 the estimated plugging and abandoning and surface restoration oost< and the cstimalod cost of salvaging are higher than the 32 val"" of the well's solvable material and equipment, each of the abandoning parties shall tender to the parties continuing 33 operations their proportionate shar~ or the estimated excess cost. Each abandoning party shall assign to the non-abandoning 34 parties, without warranty, express or implied, as to title or as to quantity, or irtncss for u.~ of the equipment and matetial. all 35 of its interest in the wcllbore of the well and related equipment, together with its interest in the Leasehold insofur and only 36 insofar as such Loasehold covers the right to obtain production fi'om that wellbore in the Zone then open to production. If the 37 interest of the abandoning party is or includes and Oil and Gas Interest, such party shall execute and deliver to 1he non· 38 abandoning party or parties an oil and gas lease, limited to the wc11boru and the Zone then open to production, for a lcmt of 39 one (I} year and so long thereafter as Oil and/or Gas is produced from the Zone covered thereby, suclt tease to be on the fonn 40 attached as Exb.ibit "B." The assignmcnls er leases so limited shaU encompass the Otilling Unit upon which the well is located. 41 The payments by J and the assignments or leases to. the assignees shall be in a ratio based upon the relationship of their 42 respective percentage of participation in the Contract Arc.a to the aggregate of the percentages or participation in the Contract 43 Area of all assignees. There shall be no rca4Justmcnt of interests in the remaining portions of the Contra.ct Arca. 44 Thereafter, abandoning parties shall have no further responsibility, liability, or interest in the operation of or production 45 from the well in the Zone then open other than the royalties retained in any lease made under the terms of thi• Article. Upon 46 request, Operator shall continue to opcraie the assigned well for the account of the non·abandonidg parties at the rates and 47 charges contemp]ated by this agreementJ plus any additional cost and charges which may arise as the rtsult of the separate 4S ownership of the assigned well. Upon propo.'lcd abandonment of the producing Zone &8'igncd or leased, the assignor or lessor 49 shall then have the option lo rcpurchaSe its prior interest in the well (using the same valuation formula) and participate in 50 Ruther operations therein subject to lhe provisions hereof. 51 3. Abandonment of Nnn..Crmst;nt Oooratioru;.: The provisiom of Miele Vl.E.I. vr Vt.E.2, above shall be applicable as S2 bctWCCJJ Consenting Parties in the event of the proposed abandonment of any well excepted from said Articles; providcd1 53 however, no well shall be permanenUy plugged an Hi1 enl) its 33 pHJlleA:ie&&Ce share afsueh flaA efQl"e1alel"'s a•nfaee Meili~iea 11 hieh i$ ~ea. 34 &eh p8f'tl; shall eKeett&e uah di isieR erdeu aHd eenYae~ as ma) \le Heeessar, iaf the sale ef i&i ln~ereeCi ie 35 preENetiea Rem die CefltAlet \•ea, &ftd, et~eept es J!lf8 iiied i1 +Aisle YIJ.B., shall be eMideel ta feeei e pe)1t1eRt 36 di1le pltFeM58 ef Oi1 SS i1tul: Gas at ii ee sale ef Gas siialJ Be made h) OpeNter itfteut first gi iag lite ne11 talr:ieg pe:R) 'lent 8e)s rilten 56 natiee ef well Bended puFlilhRf:le er eele aml die l'fiee le be paid eF UJ:e J!rieing hasis te 'be used. OpeFater shall give S7 netiee te all parties eflhe Mi sale efees &em &It) .en •Ber this A8fee111em. 58 °11 p&f'ties shall gi e km.el) nfittefl eetiee te Operater ef dteir G1111 marltetiHg Elfl9egemeftts faf tfte t:el1e ieg S9 m011tft, 01le1wiling priee, ed shell aeMf:r Qperater imme&iately iR Uui e •ent sf e ehaRge in !illeh 8ff6H@:e1Henls, 60 0J)ereteP sMll R'HtiMain. reeerch ef ell madeeting afftftge111ea&ti, and ef 'eltuMs aehi&tl) sel& er tfafispefted, hieH 61 reeer&s shall lie M&Se a ailahle tfl )le; 013emters YJ'BH Fefl:senahle F~tle&t 62 ARTICLE VII, 63 EXPENPITURES AND LIABILITY OF PARTIES 64 A. Liability of Parties: 6S The liability of the parties shall be several, not joint or collective. Each party :shall be responsible only for its obligations, 66 and shall be liable only for its proportionate share of the costs of developing and operating the Contract Arca Accordingly, the 67 liens granted among the parties in Article Vll.B. are given to &CWre only the deb'ts of each severally. and no party shall have 68 any liabiJity to third parties hereunder to satisfy the default of any other party in the payment of any expense or obligation 69 hereunder. lt is not the intention of the parties to create, nor shall this agreement be construed as creating. a mining or other 70 partnership, joint venture, agency relationship or association, or to render the parties Hable as partners, co-venturers, or 7\ principals. ln tbcir relations with each other under this agreement, the parties shal1 not be considered fiduciaries or to have 72 established a confidential relationship but rather shall be free? tci act OU an ann's·lcngth basis in accordance with their own 73 respective self-interest, subject, however, to the obligation of the parties tc act in good faith in their deaJings with each otha 74 with respect to activities hereunder. • 11 - SEC 188349  A.A.P.L. FORM 610-MODELFORM OPERATING AGREEMENT-1989 I 8. Llens and Security lnter..ts: 2 Each party granls to the other parties hereto a lien upon any interest it now owns or hereafter acquires in Oil and Gas 3 Leases and Oil and Gas lnterests in the Contract. Area. and a. security interest aTidlor purchase money sccurily interest in any 4 interest it now owns or here.after acquires in the · personal property and fixtures en or used or obtained for· use in connection S therewith. to secure performance of all of im obligations under this agreement including but not limited to payment of expense, 6 interest ond fees, the pr0pcr disbursement of all monies p1id hereonder, the assignment or relinquishment of interest in Oil and Gas Leases as required hereunder, and the proper performance of operations hereunder. Such lien and security interest granted by each party hereto shall include such party's leasehold interests, working interests, operating rights, and royalty and overriding royalty interests in the Contract Arca now owned or hereafter acquired and in land.~ pooled or unitized therewith or 10 otherwise becoming subject. to this agreement, the Oil and Gas when cx.tractcd therefrom and equipment situated thereon or Il used or obtained for use in connection thcn:with (iftl;:luding, withcmt limitation, all wells, tools, and tubular goods), and accounts 12 (including, without limitation, accounts ari.~ing from gas imbalances or from the sale of Oil and/or Gas at the wellhead), 13 contract rights, inventOQ and general intangibles relating thci"eto or arising thcrcftom, and all proceeds and product"' or lhe: 14 foregoing. IS To perfect the lien and security agreement provided herein, each party hereto shall execute and acknowledge the recording 16 supplement and/or any financing slatcmcnt prepared and submittcc! by any party hereto in ccajunction herewith or at any lime 17 following execution hereof. and Operator is authorized to file this agreement or tbe recording supplement cx.ecuted herewith as 18 a lien or mortgage in the applicable real estate record.... and as a financing statement with the proper officer under the Uniform 19 Commercial Code in the state in which the Contract Arca is situated and such other states as Operator shall deem appropriate 20 to perfect the security interest granted hereunder. Any pol1y may me this agreement, the recording supplement executed 21 herewith. or such other document.~ as it deems necessary as a lien or mortgage in the applicable real e.~tate record.~ and/or a 22 financing Slatement with the proper officer under the Uniform Commercial Code. 23 Each party represents and warrants to the other parties hereto that the lien and security interest granted by such party to 24 the other parties shall be a first and prior lien, and each party hereby agree.• to maintain the priority of said lien and security 25 interest against all persons acquiring an interest in Oil and Gas Leases and Interests covered by this agreement by, through or 26 under such party. All parties acquiring an interest in Oil and Gas Leases and Oi1 and Oas Interests covered by this B8feement, 27 whathcr by assignment, merger, mortgage, operation of \aw, or otherwise, shall be deemed to have taken subject 28 to the lien and security interest granted by this Article Vll.B. aq to all obligations attributable to such interest hereunder 29 whether or not such obligations arise before or after such interest is acquired. 30 To the extent that parties have a security interest under the Uniform Commercial Code of the state in which the 31 Contract Area is situated, they shall b< entitled to cxaci.se the rights and remedies or a scoured party under the Code. 32 The bringing of a suit and the obtaining of judgment by a party for the secured indebtedness shall not be deemed an 33 election of remedies or otherwise affect the lien rights or security interest as security for the payment thereof. In 34 addition. upon default by any party in the payment of it."i share of expenses, interests or fees. or upon the improper use 35 of funds by the Operator, the other parties shall have the right, without prejudice to other rights or remedi.., to collect 36 from the purchaser the proceeds from the sale of such defaulting part)' 1s share of Oil and Gas until the amount owed by 37 such party, plus interest as provided in "Exhibit C,' has been reoeived, and shall have the right to offset the amount 3S owed against the proceeds from the sale of such defauhing party's share of Oil and Gas. All purchasers of production 39 may rely on a notification of default from the non-defaulting party or parties stating the amoWlt due ~ a result of the 40 default, and all parties waive any recourse available again& purchasers for releasing prod\lction proceeds as provided in 41 this paillgl'aph. 42 (f HH) ~ f&iftt 'e Pft) ifs ehe:re Bf eest 'WitftiR ene kunfked WI eR~) (l~Q) Ele.)8 afte< NttEl:it:ieFI ef a 9Mte1 1e1d thePefer ey 43 OpeF&ter, dte nee tieftutlHng parties, i11ehuliRg Gpmlt:er 1 ~1 Hf'Bft Fey applicable law, each po11y 52 ·hereby grants to the other parties a power of sale as to any property that is subject to the lien and security rights granted S3 hereunder, such power to be excn:iscd in the manner provi4od by applicable Jaw or Clhcrwise in a cDmmcrcially reasonable 54 manner and upon reasonable notice. 55 Each party agecs that the other parties shall be entitled to utilize the provisions of Oil and Gas lien law or other lien 56 law of any state in which the Contract Area is situated to enforce the obligations of each party hereunder. Without limiting S1 the generality of the foregoing, to the ex.tent permitted by applicable law, Non-Operators agree that Opr:rator may invoke or S8 utilize the mechanics' or matcrialmen1s lien law of the state in which the: Contract Arr:a is situated in order to secure the 59 payment to Operator of any sum due hereunder for services performed or materials supplied by Operator. 60 c. Advanc.,: 61 Operator, at its election, shall have the right from time to time to d"mand and receive &om one or more of the other 62 parties payment in advance of their respective shares of the estimated amount of the expense to be incurred in operation!! 63 heroundcr during the next succeeding month, which right may be exen;iscd only by submission to each sueh party of an 64 itemized stat£ment of such estimated ex.pense, together with an \nvolce for its share thereof. Eac;h such statement and invoice 65 for the payment in advance of ostimated expense shall be submitted on or before the 20th day of the next preceding month. 66 Each party shall pay to Operaror its proportionate share of such estimate within 6fu:cn (IS) da)I' al\cr such estimate and 67 invoice is received. ff any party fails to pay its share Of said estimate wjthin said time, the amount due shall bear interest as 68 provided in Exhibit 11C 11 until paid. Proper adju!i.tment shall be made monthly between advances and actual expense to the end 69 that each party shall bear and pay its p1opor1ionatc share of actual expenses incurred, and no more. 70 Jl. JlefaulH and Remedies: 7l If any party falls to discharge any financial obligation under this agreement. including wilhoul limitation the failure to 72 make any adwnce under the preceding Article Vll.C. or any other provision of this agreement, within the period required foe 73 such payment hereunder, lhcn in addition to the remedies provided in Article VJI.B. or elsewhere in this agreement. the 74 remedies specified below shall be applicable. For purpose.< of this Article Vll.D., all notices and elections shall be dclivcn:d - 12- SEC 188350  A.A.P.L. FORM 6l0. MODEL FORM OPERATING AGREEMENT· 1989 onJy by Operator. except that Operator shall deliver any such notice and election requested by a oon-defil.ulting Non-Operator, and wheri Operator is the party i..n default, the applicable notices and elections can be delivered by any Non-Opcrotor. Election of any one or more of the fullowing remedies shall not preclude the subsequent use of any other remedy specified 4 below or otherwise available to a non-defaulting party. S I. Suspension of Rights· Any party may deliver to the party in default a Notice of Dcraul~ which shall specify the defuul~ 6 specify the action to be taken to cure the default, and specify that failure to take such action will result in the exercise of one or more of the remedies provided in this Article. lf the default is not cured withil1 thirty (30) days of the delivery of such Nolioc of Defaul~ all of the rights of the dofuulting party granted by this agreement may upon notice be suspended until the default is cured, without prtjudicc to the right of the non-defaulting party or parties to continue to enforce the obJigations of JO the defauhing party previously accrued or thereafter accruing under this agreement If Operator is the party in default, the 11 Non-Operators shall hove in addition the: right, by vote of Non-Operators owning a majority in interest in the Contract Arca 12 after excluding the voting interest of Operator, to appoint a new Opera.tor effective immediately. The rights of a defaulting 13 party that may be suspended hereunder at tho election of the ncn-hare of any item of expense for which Operator, or Non-Operators. as the ca>e may 39 be, would be entitled to reimbursement under any provision of this agreement, whether or not such expense was the subject of 40 the previous defaull Such right includes, but is not limited tot the right to require advance payment for the estimated costs of 41 drilling a well or Completion of a well as to which an election to participate in drilling or Completion has been made. If the 42 defaulting party &ils to pay the required advance payment, lhe non-defaulting parties may putsue any of the remedies provided 43 in the Article VU.D. or any other default remedy provided elsewhere in this agreement Any excess of fu11ds advanced remaining 44 when the operation is completed and all costs have been paid shall be promptly returned to tho advancing party, 45 S. Costs and Attorneys' Fees: In the event any party is required to bring legal proceedings to enfoo:e any .financial 46 obligation of a party hereunder, the prevailing party in such action shall be entitled to recover all court costs. costs of 47 collection. and a rC11SOnahJc attorney's fee, which the lien provided for herein shall also secure. 48 E. Rentala, Shut-Ill Well Payments and Minimum RoyslHe&: 49 Rentals, shut-in well payments and minimum royalties which may be required under the terms of any lwse shall be pails, then the party assignor or lessor shall pay to the party assignee or lessee tho amount of such deficit. If the 32 assignment or lease is in favor of more than one party. the interest shall be shared by such parties in the proportions that the 33 interest of each bears to the total interest of aU such parties.. {f the interest of the parties to whom the assignment is to be made 34 varies according to depth, then the interest assigned shall similarly reflect such variances. 3S Any assignment, lease or surreodcr made under this provision shall not reduce or change the assignor's, lessor's or sutTCDdcring 36 party1s interest as it was immediately before the as.~igmnent, lease or surrender in the balance of I.he Contract Area; and the acreage 37 as.•igned, leased ment and the operations hereunder m regarded as a partnership, and if the 50 parties have not otherwise agreed to form a taX partnership pursuant to Exhibit "G" or other agreement between them, each 51 party thereby affected clecls to be excluded from the application of all of the provisions of Subchaptcr 'K," Chapter I, Subtitle 52 "A," of the Internal Revenue Code of 1986, as amended ("Code"), as pennitred and authorized by Section 761 of the Code and 53 the regulations promulgated thereunder. Operator is authorized and directed to execute on behalf of each party hereby affected 54 such evidence of this election as may be required by the Secretary of the Treasury of the United States or the Federal Internal SS Revenue Service, including specifically, but not by way of limitation, all of the retums, statements, and the data required by 56 Treasury Regulation §1.761. Should there be any requiremenl that each party hereby affected give further evidence of this 51 election, each such pany shall execute such documcnls and tlunish such other evidence as may be required by the Federal Internal S8 Revenue Service or as may bo necessary lo evidence this election, No such party shall give any notices or take any other action 59 inconsistent with the election made hereby. If any present or f\iture income tax laws of the state or states in which the Contract 60 Area is located or any future income tax laws of the United Stales contain provisions similar to those in Subchapter 11K," Chapter 61 I. Subtklc "A,' of the Code, under which an election similar to thal provided by Section 761 of the Code is permitted. each party 62 hereby affected .shall make sucb,clection as may be pcnnitted or required by such laws. ln making the foregoing election, each 63 such party stales thac the income derived by !iUch party from operations hereunder can be adequately determined without the 64 computation of partnership tax.able income. 65 ARTICLE X. 66 CLAIMS AND LAWSUITS 67 Operator may settle any single uninsured third party damage claim or suit arising from operations hereunder if the expendi1ure 68 docs not cxc:ccd five thousand Dollars($ S.000.00 ) and if the paymenl is in complete settlement 69 of such claim or iruit. Jf the amount required for settlement exceeds the above amollllt, the parties hereto shall assume and tuke over ?0 the further handHng of the claim or suit. unless such authority is delegated to Operator. All costs and expenses of handling setl1ing, 7l or otherwise discharging such claim or suit shall be a the joint expense of the parties participating in the operation from which the 72 claim or suit arises. If a claim is made against any party or if any party is sued on account of any mauer arising from operations 73 hereunder over which such individual has no control because of the rights given Operator by this agreement, such party shall 74 lmme.di.ately notify all other parties. and the claim or suit shall he treated as any other claim or suit involving operations hereunder. • 14 - SEC 188353  A.A.P.L. FORM 6 l 0 - MODEL FORM OPERATING AGREEMENT - 1989 ARTICLE XI. 2 FORCEMAJEURE 3 If any party is rendered unable, wholly or in part, by force majeuce to carry out its obligations under this agreement, other than the obligation to indemnify or make money payments or furnish security, that party shall give to 1111 other parties prompt written notice of the force majcurc with reasonably full particulars concerning it; thereupon, the obligations of the party giving the notice, so fur as they arc affected by the force majeurc, shall be suspended during1 but no longer than, the continuance of the force majc\ll'C. The term "force majcure," as here employed, shall me.mi an act of God, strike, lockout, or other industrial disturllaoce, act of the public enemy, war, blockade, public rio~ lightening. tire. storm, llood or other act of nature. explosion. governmental action, governmental delay. restraint or inaction, unavailability of equipment, and any other 10 causc1 whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the party 11 claiming~. 12 The affected party shall use all reasonable diligence to remove the force majeure situation as quickly as practicabl~ The 13 requirement that any force majeure shall be romc.dicd with all reasonable dbpatch shall not requlre the settlement of strikes. 14 lockouts, or other labor difficulty by the party involved, contrary to its wishes; how all such difficulties shall be handl&l shall IS be entirely within lhe discretion of the party coocemed. 16 ARTICLE XII. 17 NOTICES 18 AU notices authorized or required between the parties by any of the provisions of th.is agreement, unless otherwise IQ specifically provided. shall be in writing and delivered in person or by United States mail. courier service, telegram, telex.. 20 telecopier or any other form of filcsimile, postage or charges prepaid, and addressed to such parties at the addresses listed on 21 Exhibit ~A." AU telephone or oral notices permitted by I.his agreement shall he confirmed immediately thereafter by written 22 notice. 1he originating notice given under any provision hereof shall be deemed delivered only when received by the party to 23 whom such uoticc is directed, and the time for such party to del1vcr any notice in response thereto shall ntn from the date 24 the originating notice is received "Receipt" for purposes of this agreement with respect to written notice delivered hereunder 25 shall be actual cldivery of the notice to the address of the party to be notified specified in acoordance with this agreement, "' 26 to the tclecopy, facsim:ilc or telex machine of such party. The second or any responsive notice shall be deemed delivered when 27 deposited io the United States mail or at the office of the courier or telegraph service;:, or upon transmittal by telex, tclecopy 28 or f.acsimilc. or when personally delivered to the party to be notified, provided, that when response is required within 24 or 29 48 hours, such response shalt be given orally or by telephone, telex, tclccopy or other facsimile within such period Each party 30 shall have !he right 1o change its address at any lime, and from time to time, by giving written notice !hereof to all other 31 parties. If a party is not available to receive notice orally or by telephone when a party attempts to deliver a notice required 32 to be delivered within 24 or 48 hours, the notice may be delivered in writing by any other method specified herein and shall 33 be deemed delivered in the sainc manner provided above for any responsive notice. 34 ARTICLE X Ill. 3S TERM OF AGREEMENT 36 This agroemcnt shall remain in full force and effect as to the Oil and Gas Leases and/or Oil and Ga.< lnterc-'ts subject 37 hereto for the p<:riod of time selected below; provided. however, no party hereto shall ever be construed as having any righ~ title 38 or interest in or1o any Lease or Oil and Gas Interest contributed by any other party beyond the term of this agreement 39 a Ootion No l · So long as any of the Oil and Gas Leases subject to this agreement remain or are continued in 40 farce as t.o auy part of the Contract Arca, whether by production, extension, renewal or O\hcrwisc. 41 6 QetieR )Je. 2: In lfte e eat the lell elesefibeEI in ,• rtiele ''I. a •1 Bl 81' SHhseq\:lleftl nell 8rilled under a~ J3 'sieft 42 ef ~& agteerReM, Fes111'ti in die Cempletiee ef a •ell as e ell eapehle ef pr=e8t:tetiefl ef Qit an&'ar Gas in p&)ing 43 qYenHtiiea, this &gFeet¥1:ent sheU ee:etieue in fas el! se leRg as 11&) .1ueh eH is E!ftf'88le ef pFed11etieR, and f'er ee 44 edditiBRal ~ied ef lhl)s '8eFeeAer. )ff iEleEl, fte e er, if, )!Pier le tfte e11pife:lieu ef Skleh 45 Mdi\ieaal periatl, HJ ar tt1are sf tfle ~afties fles&le ftfe et'gage;d ifl dt't\i111g, lh; etletf:g, Qe~eniei. Silietm:ekift~ 46 Ply,ggiag R•t, testitig Bf &ttetftftting te GBfflJ!lele 6F :Re eemplete a en Bf ens heFetlflEiet'. ti:iis agieeffteflt shell 47 ee&lift.ae Ht fim1e wattil sH:eh Bl\8fl:Uens ha e heea eBftl:J!letetl and if preduetien rewlts lheFeB-em.; this agreement 48 Ha:H eBR&BLte Ht fet ee as pre id:ed i:i ereifl. In U\e 81\ ent the elJ tle!ieRhetl in + Lie le VI. +•• et' BA) &Ubseq,weRt ell 49 drilled henYnde•, resltlls lfl e elr) hele, and Be etfte1 ell is eape:hle ef predt1eiAg Oil aad/ef Qaa f•&Rt lh so GenUaet '\rea~ ihitJ a:grel618eA:t shall tl!AftinM:e tffti:es. dri:lliag, Eleep!lflit g, SiEleffael:tiflg, C&mpletmg, Re SI eB1Rrletin8i Plligging:Baeh et Re aReiag eperMiemllfeeemmeneed ilhiR ~s ifef11tfte S2 dalt ef ~ae:Eleame&t ef Mid 11.dl. "hb&HdeRmenl" fer sweh JHIFpeses shall meae either (i) a deeisiefl h) alJ parties SJ Mt te 1e11d11oet BR) Nflher epe1atiem ett die ell et (ii) the eleJlse ef l8Q ile)S &em the e8flduet ef &1) 54 opeR1iians eft tlM elh hiehe er fitsl eeeHHi. SS The tcmtination of this agreement shall not relieve any party hereto from any expense, liability or other obligation or any .:;6 remedy therefor which has accrued or attached prior to the date of such tcnnination. 57 Upon termination of this agreement and the satisfaction of all obJigations hereunder, in the event a memorandwn of this S8 Opeiating Agreement bas been filed of record, Operutor is authoc.ized 1o me of record in all necessary recording offices a 59 notice of tennination, and each party hereto agrees to execute such a notice of termination as to Operator 1s interest, upon 60 request of Operator, if Operator has satisfied all its financial obligations. 61 ARTICLE XIV. 62 COMPLIANCE wrru LAWS AND REGULATIONS 63 A. Laws, Reglllatlons and Orders: 64 This agreement shall be subject to the applicable Jaws of the state in which the Contract Area is located, to the valid .rules, 6S . regulations, and orders of any dnly constituted regulatory body of said state; and lo all other applicable federal, state, 66 and local laws, ordinances, rule., regulations and orders. 67 B. Governing Law: 6g Tbl1 agreement and all matters penainlng hereto, including but not limited to matters of performance, non- 69 performanc~ breach, remedies, procedures, rights, duties, and Interpretation or constructton, shall be governed. and 70 dctcrmlnr.d by the- law of the state in which the Contract Area ia located. If the Contract Area Js in two or more states, 7I the law of the ttate of Texas shall govern. 72 C. Regulatory Agencies: 73 Nothing herein contained shall grant, or be construed to grant, Operator the right or authority to waive or release any 74 rights, privileges, or obligations which Non-Operators may have under fcdcral or state laws or under rules, regulations or - 16 - SEC 188354  A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 ordet1 promulgated under such laws in reference to oil. gas and mineral operations, including the location, operation, or production of wells, on tracts offsetting or adjacent to the Contract Ar~. 3 With respect to the open1tions hereunder. Non-Operators agree to release Operator from any and all losses, damages, 4 injuries, claims and causes of action arising out of, incident to or resulting directly or indirectly from Operator's interpretation or application of nales, rulings. regulations or orders of the Department of Energy or Federal Energy Regulatory Commission or predecessor or successor agencies to the extent such interpretation or application was made in good faith and docs not constitute gross negligence. Each Non-Operator further agrees to reimburse Operator for such Non.Operator's shure of production or any refund, fme 1 levy or other governmental sanction that Operator may be required to pay as a result of such 9 an incortect interpretation or application, together wilh interest and penalties thereon owing by Operator as a result of such 10 incorrecl interpretation or application II ARTICLE XV. 12 MISCELLANEOUS 13 A. E1ecution: 14 This agreement shall be binding upon each Non-Operator when this ogreement or a counterpart thereof has been 15 executed by such Non-Operator and Operator notwithstanding that this agreement is not then or thereafter executed by all of 16 the parties to which it is tendered or which urc listed on Exhibit "A.. as owning an interest in the Contract Area or which 17 own. in fact. an interest in the Contract Arca. Operator may, however, by written notice to all Non.Operators who have 18 become bound by this agreement as aforesaid, given at any time prior to the actual spud date of the initial Well but in no 19 event later than 6.ve days prior to the date specified in Article VI.A. for commencement of the Initial Wel1 2 lerminate this 20 agreement if Operator in its soJe discretion determines that there is insufficient participation to justify commencement of 21 drilling operations. In the event of such a lamination by Operator, all further obligations of the parties hereunder shall cease 22 as of such termination. In the event any Non-Operator has advanced or prepaid any share of drilling or other costs 23 hereunder, all sums so advanced shall be returned to such Non-Operator without intcrcsl In the event Operator proceeds 24 with drilling operations for tbe Initial Well without the execution hereof by all persons listed on Exhibit "A" as having a 25 cutT011t worlcing interest in such well, Operalor shall indemnify Non-Operators wilh respect lo all costs incWTed for the 26 Initial Well which would have been charged to such person under this agreement if such person bad excculed the same and 27 Operator shall receive all revenues which would have been received by such person under this agreement if such person had 28 e.itecuted the same. 29 8. Sutt of the following: (I) gas, other than casinghcad gas. (2) liquid hydrocarbons (condensate) which are no\ liquids in the subsurface reservoir, (3) minerals produced from wells classified as gas wells by the conservation agency having jurisdiction. If larger units than any of those herein permitted, either at the time cs1ablisbcd, or after eniergcment, are requirod under any govenunental rule 0< order, for the drilling or operation of a well at a regular location. or for obtaining maximum allowable from any well to bo drilled, drilling, or already drilled, any such unit may be established or enlarged to confonn to the size required by such govcmmcntal onlcr or rule. Lc&.ee shall exercise said option as to each desired unit by executing an in:ltrwnent identifying such unit and filing it for reconl in the public office in which this lease is recorded. Each of the said options may bo exercised by the lessee at any time and from time to time while thi• lea.•e is in fon:e. and whether before or after production has boon oslablished either on said land, or on the portion of said land included in the unit, or on other land unitizod therewith. A unit established hereunder shall be valid Bfld effeclive for all p~ of this lease even though there may be minera4 royalty, or leasehold interests in lands within the unit which are not effoctively pooled or uniti1.ed. Any operations conducted on any part of such unitized land shall be considered, for all purposes, except the payment of royalty, operations con dueled upon said land under this lease. There shall bo allocated to the land covered by this lease within each such unit (or to cech separate tract within the unit if the lease covers separate ttaclS within the unit) that proportion (lf the total production of unitizod minerals from the unit, a!le< deducting any usod in lease or unit operations, which the number of sur&cc acres in such land (or in each such separate ttact) covered by this lease within the unit bears to the total number of surface ac:rcs in the unit, and the produclion so allocated shall be considered for all purposes, including payment or delivery of royalty, overriding royalty and any other payments out of production, to bo the attire production of unitized minerals from the land to which allocated in the same manner a& though produced therefrom under the terms of this lease. The owner of the revcrsionary estate of any term royalty or mineral estate agrees that the accrual of royalties pursuant to this paragraph or of shut~in royalties from a well on the unit 'shall satisfy any limitation of term requiring production of oil or gas. The formation of any unit hereunder which includes land not covered by this lease shall not have tho effect of exchanging or transferring any inteRst under this lease (including, without limitation any shut-in royalty which may become payable under this lease) between parties owning interests in land coveml by this lease and parties owning interests in land not covered by this lease. Neither shall it impair the right of the lessee to release as provided in paragraph 5 hereof, excq>t that lessee may not so release os to lands within a unit while there are operations thcrecn for unitizod minerals unless all pooled leases are released as to lands within the uniL At any time while this lease is in foroe lessee may dissolve any unit established hereunder by filing for rocont in the public office where this lease is recorded a declaration ID 1bat effi:c~ if at that time no operations are being conductod ~ for unitized minerals. Subjcet to the provisions of this paragraph 4, a unit once established hereunder shall remain in force so long as any lease subject thereto shall remain in force. lf this lease now or hereafter covers separate traet in OWllel>bip occurs by reason of the death of the owner, lessee may, nevertheless pay or tender such royalties, or other moneys, or part thereo~ to the credit of the docc.cicnt in a depository bank provided for above. 9. In the event lessor coMiders that lessee ha.-, not complied with all its obligations hereunder, both express and implied. lessor shall notify lessee in writing, setting out spcci6cally in what rcspeots lessee has breache-pacing rules r"'luirc; and (2) any part of said land included in a pooleimoevcr. Lessor's rights and interests hereunder shall be charged primarily with any mortgages, taxes or other liens, or internUISUllnt to assessments imposed by governmental authority which an: 58 applicd>le to Openitcr•s costs chnrgcable 10 the Joint AccoYnt under Paragraphs JA and 38 of this Section U. 59 60 D. Personal Expenses of those: employce:s whose salaries and wa~'OS are chargeable co the Joint Account under 61 Parab'l8phs 3A and JB of this Section II. 62 63 4. Employee Benefits 64 65 Operator's · cunent costs or e.saabJished plans for employees' group life insur&nce, hospilaltzation, pension, retiremen1. 66 stoc:k purchase, thrift, bonus, and ether benefit plans of a like nature. applicable to Opcr.uots labor cost chargeable to rhe 67 Joint Account under Paragraphs 3A and 30 of lhii; Section II shall he Opera.tots actuaJ cost not to exceed the percent 68 most recently recommended by the Council of Petroleum Accountants Societies. 69 70 -2- SEC 188369  ~ 1984 ONSHORE ,flmended by the Council of PetrOleum Accountants ~---------Socletl-•s--OO~A~ S. Materi1I Material purchased or furnished by Operator for use on the Joint Property as l)l'Ovided under Section IV. Only such Material shall be purchased for or transferred to the Joint Property as may be required ior immediate use and is reasonably practical and consistent with efficient and economical operations. The accumulation of surplus stocks shall be avoidod.. '· Tnuuporullon 10 Transponation of employees and Material ncce.•ry for the Joint Operations but subject to the following limitations: 11 12 A. If Material is moved to the Joint Propeny from the Operator's warehouse or ~ther properties. no charge shall be ll made to the Joint Account for a distance greater than the distance: from the nearest reliable supply store where like 14 material is normally available or railway receiving point nearest the Joint Propeny unless agreed to by the Panics. IS 16 B. ff surplus Material is moved to Operalor's warehouse or other storage point. no charge shall be made to the Joint 17 Account for a dislancc: grcal.Cr than the distance to the nearest reliable ~pply store where like material i:s nonnaUy 18 available, or railway receiving point nearest the Joint Property unless agreed to by the Parties. No charge shall be 19 made to the Joint Account for moving Material to other properties belonging to Operator, unless agreed to by the 20 Parties. 21 22 C. In the application of subparagraphs A and 8 above, the option to equalize or charge actual trucking cost is 23 available when the actual charge is $400 or less excluding aocessorial charges, The S400 will be adjusted to the 24 amo\Ult most recently recommended by the Council of Petroleum Accountants Societies. 2S 26 7. 27 28 The cost of contract services. equipment and utilities provided by outside sources. except services excluded by Paragraph 29 l 0 of Section U and Paragraph i, ii, and iii, of Section m. The cost of profes.sional consullan1 services and contract 30 r.ervic.cs of technical personnel direclly engaged on the Joint Property if such chari.,rcs arc cxc\uded from the overhead 31 rates. The eos1 of professional consultant services or contract services of technical personnel not directly engaged on the 32 Joint Property shall nor be charged to the Joint Account.if directly engugcd in the operation (nOI administration) of lhc joint property, 33 34 8. Equipment 1nd Facilities FumiJhed Hy Operator 3S 36 A. Operator shall charge the Joint Account for use of Operator owned equipment and facilities at rates commensurate 37 wilh costs of ownership and operation. Such rate!; shall include costs of maintenance, repaif'St other operating 38 expense, insurance, taxes, depreciation, and interest on gross investment lcs accumulated depreciation not to 39 e11:cced eigh1ecn percent~--~---%) per annum. Such rates shall not exceed average commercial 40 ralm cunently prevailing in lhe immediate area of the Joint Property. 41 42 B. In lieu of charges in Paragraph SA above. Operator may elect to use average commercial rates prevailing in the 43 immediate area of the Joint Property Jess 20%. Fur automotive equipment, Operator may elect to use rates 44 published by the Petroleum Motor Transport Association. 45 46 9. D1mages and L011es to Joint Property 47 48 All COSIS or expenses necessary for the repair or replacement of' Joint Propcny made necessary because of darnagc:i or 49 losses ipeurre.d by fire, nood, Slorm, thefi. accident, or other cause. ex.cept those rcsultitll,? from Operator's gm~ 50 negligence or willful misconduct. Operator shall furnish Non-Operator written notice of damages or losses incurred as SI soon as practicable after a report rhercofhas been received by Operator. 52 Sl 10. Legal Expenn~ 54 SS Expense of handling, investigating and settling litigation or claims. dioliCharging of liens, payment or judgments and S6 amounts paid for settlement of claims incurred in or resulling from operations under the agn:cment or necessary to 57 protect or recover the Jofnl Property. except that no charge for services of Operator's legal Slaff or fees or expense of 58 outside attorneys shall be made unless prevlously agreed to by the Parties. All other legal expense Is considered to be 59 covered by the overhead provisions of Sec1io11 m unless otherwise agrefd to by the Parties, except as provided in Section 60 ~ Paragmph 3. 61 62 11. 63 64 All taxes of every kind and nature ~d or levied upon or in connection with the Joint Property, the operation thereof, 65 or tke production therefrom, nnd 'which taxes have been paid by the Operator for the benefit of the Parties. If the ad 66 valorem taxes arc based in whole or in part upon separate valuations of eac:h party's working interest, then 67 notwi1hstandlng anything to the contrary herein, charges 10 the Joint Account shall be made and paid by the Parties 68 hcrelo in accordance with tho tax value generated by each party's working interest. 69 70 - 3- SEC 188370  \S 1984 ONSHORE ,/nmended by the CouncQ of Petroleum Accountants .--------------Socletle_• --CO~A~ 12. Insurance Net premiums paid for insurance required to be canied for lhe Joint Operations for the prolcction of the Parties, Jn the event Joint OperatiarL<; are conducted in a state in which Operator may act as self-insurer for Worker's Compensation and/or Employers Liability under the respective state's laws. Opcmor may, at its election, include the risk under its self- insurance program and in that event, Operator shall include a charge at Opc::ratot's '°5l not and/or the cost of professional consultant 44 services and wntract services of technical pen;onncl dim: Uy employed on the Joint Property: 45 46 ) shall be covered by the ovethead ra1es, or 47 ( X ) shall not be covered by the overhead rates. 48 49 iii. The salaries. wages and Personal Expenses of Technical Employees and/or cosu; of professional consultant services so and contract services of technical personnel either temporarily or pcnnanently assigned to and directly employed in SI the operation of the Joint Propeny. 52 53 ) shall be covered by the overhead mtes, or S4 ( X ) shall not be covered by the overhead rate.~ SS 56 A. Overhead - Fixed Rate Basis 57 58 (l) Operator shall charge lhe Joint Account at the following: rates per well per month: S9 60 Drilling Well Rate s. __7=so~o~o~o__________ 61 (Prorated for less tlusn a full month) 62 63 Producing Well Rate S_ _,_7,oSO~O~O'-------- 64 65 (2) Application of Overllead .. Fixed Rate Basis shall be as fcillows: 66 67 (a) Drilling Well Rate 68 69 (I} Charges for drilling wells shall begin on lhc date the well is spudded and terminate on Che date 70 the drilling rig, completion rig, or other units used in completion or the wen i!I released, whichever -4- SEC 188371  \$ 1984 ONSHORE 1111mended by the Council of Petroleum Accountants . . - - - - - - - - - - - - S o c l e t l _ • ·--CO~A~ is later, except that no charge shall be made during suspension of drilling or completion opcralions for fifteen {t S) or more COn.'ICCutive cahmdar days. 4 (2) Charges for wells undergoing any type of workover or rccompletion for a period of five {5) s consecutive work days or more shall be made al the drilling well rate. Such charges shall be 6 applied for the period from date workover operations, witli rig or other units used in workovcr, commence through date or rig or other unit rctca."lc, except that no charge shalt be made during suspension of operations for fi ftccn (IS) or more consecutive calendar days. 9 JO (b) Producing Well Rates II 12 (I) An active well either produced Dr injected into for any portion of the month shall be considered as 13 a one-wc:ll charge for the entire month. 14 IS (2) Each active completion in a multi-<:onipleted well in which prodt.ie1ion is not commingled down 16 hole shall be coosidercd as a one-well charge providing each completion is considered a separate 17 well by the governing regulatory authority. 18 19 (3) An inacth1c gas well shut in because of ovetproduction or railurc of purchaser lo take the 20 production shall be considered as a ()nc-wcll charge providing the gas well is directly COMe<:ted to 21 a permanent sales outlet. 22 23 (4) A onc-we11 charge shall be made for the month in which plugging and abandonment operations 24 are completed on any well. This one-weJI charge shall be made whether or not the well hes 25 produced except when dri!Jing wcJJ rate .applies, 26 27 (S) All other inactive wells (including but not limited to inactive wells covered by unit allowable, lease 28 allowable, tnmsfem:d allowable, etc.) shall not qualify for an overhead charge. 29 30 (3) The well rates shall be adjusted as of the first day of April each year following the cITectiw date of the 31 agreement to which this Accounting Procedure is altachtd. The adjWitment shall be computed by multiplying 32 the rate currently in use by the per<:entage increase or decrease ln the average weekly earnings of Crude 33 P'etrolcu.m and Gas Production Workers for the last calendar year compared to the calendar year preceding as 34 shClwn by the indc>1. of aYerage weekly earnings of Crude Petroleum and Gas Production Worki.m;: as published 3S by the United States Deputment of Labor, Bureau of Labor Stalistics, or the equivalent Canadian index as 36 published b:Y Statistics Cmlada. as apPlicable. The adjusted rates shall be the rates currently in use, plus or 37 minus the computed adjustment, 38 39 B. Overhead • Percentage Basis 40 41 (I) Opemlor shall charge the Joint Account al the foJJowing rates: 42 43 (a) Development 44 4S _ _ _ _ _ _ _ _ _ _P.erccnt ~----%)of the cost of development of rhe Joint Propcny ex.elusive of cosL~ 46 provided under Paragraph I0 of Section ll and all Sill vage credits. 47 48 (b) 01""'1in& 49 so _ _ _ _ _ _ _ _ _ Percent %) of the cost of Opclllting the Joint Property ex.elusive of costs provided 51 under Paragraphs 2 and I 0 of Seclion II. all salvage credits. the value of injected substances purchased S2 for secondary recovery and all taxes and assessments which arc levied, assessed and paid upon the SJ mineral intCTest in and to the Joint Propt:11y. 54 SS (2) Application of Overhead· Percentage Basis shall be as fallows:: S6 57 for the purpose of determining chart.res on a percentage basis Wtdcr Paragraph 18 of this Section m, 58 development shall include all co.qs in connection with drilling. rcdrillin& deepening, or any remedial 59 operations on any or all wells involving th.e use of drilling rig and crew capabJc of drilling to the producing 60 interval on the Joint Property; also, preliminary expenditures necessary in preparation for drilling mid 61 expenditures incum:d in abandonina: when the well is not completed as a produccr1 and original cost of 62 con!itruction or installation of fixed assets. the expansion of fixed assets and any other project clearly 63 discernible as a fixed asset, except Major Construction as defined in Paragraph 2 of this Section m. All other 64 costs shall be considered as operating. 6S 66 2. Overhea for any Major Construction project in exec$ ofS _ _ _ _ _ _ _ _ _ _ _ _ _. A. __s__ % of first $I 00,000 or total cost if less, plus B. - - - 1 _ % of costs in excess of $100,000 but lC$ than $1,000,000, plus C. _ 2 . _ % of costs in excess of $1,000,000. Total cost !!hall mean the gross co& of any one project. For lhc purpose of this paragraph. the componcnl parts of a single 10 project shall not be treated separately and the cost of drilling and work.over wens and artificial lift equipment shaU be II C:ll:clud.ed. 12 13 3. Catastrophe Overhead 14 IS To compensate Operator for overhead <:osts incurred in the event of expcndilures resulting from a single occurrence due 16 to oil spill, blowout. explosion, fire, storm, hurricane, or other catastrophes as agreed to by the Parties, which are 17 necessary 10 restore the Joint Property to the equivalent condition lhat exis.ed prior to the event causing the IS c1ependilurcs, Operator shall either negotiate a rate prior to charging the Joint Account or shall charge the Joint Account 19 for overhead based on lhe following rares: 20 21 A. _ _s__ % oftotul costs through $100,000; plus 22 23 B. - 1 _ % of total oosts in excess of S100,000 but Jim lhan SI ,000,000; plus 24 2S C. ___l_ % oftolal costs in cxccssof:St,000,000. 26 27 Expenditures s11bjcc1 to the overheads above wiU not he reduced by insurance recoveries. and no other overhead 28 provlsions of1his Section Ill shall apply. 29 30 4. Amendment of Ratc5 31 32 The overhead rates provided for in this Section ill may be amended from time to time only by murual ab'l'Cement 33 between the Parties hereto if, in practice. lhe rates arc found to be insufficient or cxce~ve. 34 35 36 IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSJTIONS 37 38 Operator is rcspom.iblc for Joint Account MateriaJ and shall make proper and timely charges and credits for all Material 39 movements affecting the Joint Property. Operator shall provide all Material for use on the Joint Property; however, at 4() Operator's option, such Material may be supplied by the Non-Operator. Operator shall make 1imely disposition of idle and/or 41 ~rplus Material. such disposal being made either through sale lo Operator or Non-Operator, division in kind, or sale to 42 outsiders. Operator may purchase, but shall be under no obligation to purchase. interest of Non-Operators in surplus condition 43 A or B Material. The dispo.~1 of SUtplus Controllable Material not purchased by the Operator shall be agreed to by the Parties. 44 45 J. Purchases 46 47 Material purcha.c;ed shall be charged al the price paid by Operator atlcr_ deduction of all discounts received. In case of 48 Material found to be defective or returned to vendor for any other reasons, credit shall be passed to the Joint Account 49 when adjUSlmcnt has been received by the Operator. so SI 2. Transfers and Ditpusltlons 52 S3 Materia1 furnished to the Joint Property end Material transferred from the Joint Property ar disposed of by the Operator, 54 un\e&\atherwise ag:rccd to by the Parties,. shall be priced on the following ha.sii; cxc:tusivc of ca."ih disc:ounts: SS S6 A. New Material (Condition A) S1 58 (I) Tubular Goods Other than Linc Pipe 59 (a) Tubular good~ sized 2 318 inches OD and larger, except line pipe, shall be priced at current new price available from area 60 vendors effective as of date of movement plus trampon:ation coot using the 80,000 61 pound carload weight basis to the railway receiving point nearest the Joint Property for which 62 published rail rates for lubular goods exist. If the 80,000 pound rail rate is not offered, the 70,000 pound 63 or 90,000 pound rail rate may be U5Cd. Freight charges for tubing will be calculated from Lorain, Ohio 64 and casing front Youngstown, Ohio. 6S 66 (b) For grades which are special to one mm only, prices shall be computed at the mill base of that mill plus 67 transportation cost from that mill to the railway receiving point nearest the Joint Property as provided 68 above in Paragraph 2.A.(lXa). For transportation cost from points other than Eastern mills, the 30.000 69 70 -6- SEC 188373  Ml 1984 ONSHORE __ ,mmended by the Council of Petroleum Accountants .-----------S-ocleue_• --COPAS pound Oil Field Haulers As.sociation interstate truck rale shall be used. (c} Special end finish tubular goods shall be priced at the lowest published out-of-stock price. f.o.b. Houston, Tens. plus transponation cost, using Oil Field Haulm Association interstate 30,000 pound truck rate, to the railway receiving point nearest the Joint Property. (d) Macaroni tubinG (size less than 2 318 inch OD) shall be priced at the lowest published out-of-stock prices f.<>.h Uie supplier plus transportation cosrs, using the Oil Field Haulers Association intcrs.ate truck rate per weight of tubing transferred, to the railway receiving point nearest the Joint Property. 10 11 (2) Line Pipe 12 13 (a) Line pipe movements (except size 24 inch OD artd larger with walls ~ inch and over) 30,000 pounds er 14 more shall be priced under provisions of lobular goods pricing in Pare.graph A.(lXa) as provided above. 15 Freight charges shall he calculated from Lorain, Ohio. 16 17 (b) Linc Pipe movements (except size 24 inch OD) and larger with walls ~ inch and over) less than 30,000 18 pounds shall be priced at Eastern mill published cadoad bosc prices otTcctlve as of date of shipment, 19 plus 20 percent. plus transportation costs based on freight rates as set forth under provisions of tubular 20 goods pricing in Paragraph A.( I)(a) as provided above. Freight charges shall be calculated from Lorain, 21 Ohio. 22 23 (c) Line pipe 24 inch OD and over and Mi inch wan and larger shall be priced f.o.b. the point of 24 manufacture at current new published prices plus transportation cost to the railway receiving point 25 nearest the Joint Property. 26 27 (d) Linc pipe, including fabricated line pipe. drive pipe and conduit not listed on published price lists shall 28 be priced at quoted pricai plus tfeight ta the railway rccciving paint nearest the Joint Property or at 29 prices agreed to by the J•artics. 30 31 (3) Other Material shall be priced at the current new price, in effect at date of movement, as listed by a reliable 32 supply store nearest the Joint Property, or point of manufacture, plus transportation costs, if ap~icable, to the 33 railway receiving point nearest the Joint Property. 34 35 (4) Unused new Material, except tubular goods, moved from the Joint Property shall be priced a.t the current 36 new price, in effect on date of movement, as listed by a reliable supply store nearest the Joint Property, or 37 point of manufacture, plus transportation costs. if applicable, to the railway receiving point nearest the Joinl 38 Property. Unused new tubulars will be priced as provided above in Paragraph 2.A.(l) and (2). 39 40 8. Good Used Material (Condition B) 41 42 Material in sound and serviceable condition and suitable for reuse without reconditioning: 43 44 (I) MatcrialmovcdtothoJointPropcrty 45 46 At seventy-five percent (75%) of cum:nl new price, as detennined by Paragraph A. 47 48 (2) Material used on and movetment has been received by Operator from the manufacturers or their agents. 54 55 56 V. INVENTORIES 57 58 The Operator shall maintain detailed records of Controllable Material. 59 60 1. Pcriodk Inventories. Notice: and Representation 61 62 At reasonable intervals, inventories shDll be laken by Operator of the Joint Account Controllable Material. Written notice 63 of intcntlon 10 take inventory shall be given by Operator at 1cast thirty (30) days bcfom any invca1ory is to begin so that 64 Non-Opcre.toYS may be reprc:m:ntcd when any inventory Is taken, Failure or Non-Operators to be represented at an 65 inventory shall bind Non.Operators to accept the inventory 1akcn by Operator. 66 67 RcconcUlatlon and Adjustment of lnvemortes 6S 69 Adjustments to the Joint Accoum resulting; from the reconciliation of a physical inventory sha1J be made within six 70 montm following lhe taking of the inventory. lnvem.ory adjustments shall be made by Operator 10 the Joint Acoount for -8- SEC 188375  \S 19a4 ONSHORE inmended by the Council of Petroleum Accountants . - - - - - - - - - - - - - S o e l e t l _ • ·--~OPA~ overages and shortages. bu1, Operator shall be held accountable only for shortages due to lack of rea.sonablc diligence. 3. 4 s Special inventories may be taken whenever there is any sale, change of interest. or change or Operator in the Joint 6 Property. lt shaJI be the duty of the party selling to notify all other Parties as quickly os possible ancr the transfer or interest takes place. In such ca.lilCS., both the seller and the purchaser shall be governed by such inventory. Jn cases involving a change of Operator, all Parties shall be governed by such inventory. 10 4. Expense of Conducting lnventoriCA II 12 A. The expense of conducting periodic inventories shall not be charged to 1be Joint Account unless agreed to by the lJ Parties. 14 IS B. The ci1:pcnsi;: er conducting special inventories shall be charged to the Parties requesting such invmlorics, t:xcept 16 inventories required due to change of OpCTator sh1:1l1 be charged to the Joinl Account. 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 so 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 -9- SEC 188376  EXHIBIT "D" Attached to and made a part of Operating Agreement dated January 15, 2010, between RAW Oil & Gas Inc., as Operator and Smith Energy Company, eta], as Non-Operators. INSURANCE Operator shall carry and maintain at all times the following insurance with respect to all operations under this Agreement: a) Insurance which shall comply with the Workmen's Compensation Laws of the State in which operations hereunder are conducted. b) Employers' Liability Insurance with limits ofnot less than $1,000,000 for each occurrence. c) Comprehensive General Liability Insurance with limits of not less than (i) $1,000,000 for each occurrence for bodily injury, and (ii) $1,000,000 for each occurrence for prOperty damage. Operator shall provide an AFE insurance program with coverage as follows: Premises and operations, sudden and accidental pollution, underground resources, products and completed operations, and blowout, cratering and explosion coverage. d) Automobile Liability Insurance, including owned, hired and non-hired vehicles, with combined single limits of $500,000. e) Coverages in subparagraphs (c) and (d) above shall include Non-Operators as Additional Insured. f) Excess Liability Coverage in excess of the coverage in subparagraphs (a), (b), (c), (d) and (e) above with a combined single limit for Bodily Injury and Property Damage of not less than $1,000,000 for each occurrence. g) All premiums on the above provided for insurance shall be charged to the Joint Account. Except as may be otherwise expressly provided in the Operating Agreement to which this Exhibit is attached, the Joint Account shall be charged with all liabilities and expenditures resulting from any claims, damages, or losses against which Operator is not required to carry insurance. h) Operator shall not be liable to Non-Operators for loss, suffered on account of the insufficiency of insurance carried, or of the insurer with whom carried, nor shall Operator be liable to Non-Operators fur any loss accruing by reason of Operator's inability to provide or maintain the insurance specified above, provided, however, that if at any time Operator is unable to obtain or maintain such insurance, Operator shall promptly notify Non-Operators in writing of such fact and Nao-Operators may obtain and maintain such insurance at their expense. SEC 188377  EXHIBIT"E" Attached to and made a part of Operating Agreement dated January 15, 2010, between RAW Oil & Gas Inc., as Operator and Smith Energy Company, eta!, as Non-Operators. GAS BALANCING AGREEMENT The parties to the Operating Agreement to which this agreement is attached own the working interest in the gas rights underlying the Contract Area covered by such agreement in accordance with the percentages of participation as set forth in Exhibit "A" to the Operating Agreement. Each party has made (or will make) arrangements to sell or utilize its share of the gas well gas produced from the Contract Area. However, the respective gas markets of the parties may be limited from time to time; therefore, to permit the parties as much flexibility as possible in meeting the demands of their respective markets, the parties hereto agree to the following storage arrangement: Section 1. From and after the date of initial delivery of gas well gas from any proration unit within the Contract Area, during any period when the market of a party is not sufficient to take that party's full share of the gas well gas produced, the other parties shall be entitled to produce each month, in addition to their own share of production,. that portion of any other party's share of production which said party is unable to market, or its purchaser does not take, of the allowable gas production assigned to such proration unit by the appropriate regulatory authority having jurisdiction in the premises or at the maximum efficient rate, if no such allowable gas production is so assigned, except, however, that no party shall be entitled to take or deliver to a purchaser gas production in excess of three hundred percent (300%) of its share of allowable gas production or maximum efficient rate unless that party has gas in storage. The parties hereto shall share in and own the lease condensate (liquid hydrocarbons recovered from such gas by lease equipment) in accordance with their respective above specified interests, upon and subject to the terms of the Operating Agreement. Section 2. A party taking less than its full share of the gas well gas produced shall be credited with gas in storage on a BTU basis equal to its full share of the total gas well gas produced, less such party's share of such gas used in lease operations or vented or lost, and less that portion of such gas such party took or delivered to the purchaser. Operator will maintain a running account of the gas balance as between the parties hereto and will furnish each party monthly statements showing the total quantity of gas well gas produced, the portion thereof used in lease operations, vented or lost, the total quantity of gas well gas delivered to market, and the monthly and cumulative total over and under delivery of each party on an MCF and on a BTU basis. Section 3. After notice, any party may at any time begin taking or delivering to a purchaser its full share of the gas well gas produced (less such party's share of such gas used in the lease operations, vented or lost). To allow the recovery of gas in storage and to balance the gas account of the parties in accordance with their respective interests, a party with gas well gas in storage shall be entitled to take or deliver to a purchaser its fuH share of the gas well gas produced (less such party's share of such gas used in lease operations, vented or lost), plus a share of gas not exceeding its gas in storage determined by multiplying (l) twenty-five percent (25%}, by (2} the interest in the proration unit's current production (less such party's share of such gas used in lease operations, vented or lost) of the party or parties without gas in storage, by (3) a fraction, the nwnerator of which is the interest in the proration unit of such party with gas in storage and the denominator of which is the total percentage interest in the proration unit of all parties with gas in storage. Section 4. Nothing herein shall be construed to deny any party the right, from time to time, to produce and take or deliver to its purchaser its full share of the allowable gas production to meet the deliverability tests required by its purchaser. Each party shall at all times use its best efforts to regulate its takes and deliveries from the Contract Area so that wells will not be shut in for over producing the allowable, if any, assigned thereto by the regulatory authority having jurisdiction. Section 5. Each party producing or taking or delivering gas well gas to its purchaser shall pay any and all royalties and production taxes due on such gas. Section 6. SEC 188378 Should production of gas well gas from a proration unit be pennanently discontinued before the gas account is balanced, settlement will be made between the parties for gas which has not been recovered by any party from storage. In making such settlement, if there is any party whose gas has not been recovered from storage, or a party who has sold more than its share of gas well gas, then the amount owed (as hereinafter defined) by each of the latter shall be forwarded to the operator who shall allocate the sum of such amounts and pay the former in proration to the re~pective ownerships in gas not recovered from storage. The amount owed by each party who has sold more than its share of gas well gas shall be the weighted average of the amounts received by such party upon sale of such gas during the period or periods overproduction is accrued by such party, less base lease royalty and taxes paid thereon; provided, however, that as to gas sold in interstate commerce by such party, such amounts shall be based upon that portion of the rate or rates not subject to refund applicable to and collected for the volumes sold during such period or periods by such party under orders of the regulatory body having jurisdiction which are final at the time of such settlement, plus any additional collected amounts which are not ultimately required by said body to be refunded, such additional collected amounts to be accounted for at such time as final determination is made with respect thereto. For the purpose of the preceding sentence, the weighted average of the amounts received by such party shall be determined by weighting the respective amounts received for such gas on the basis of volumes of overproduction that accrue hereunder to the account of such party during the period for which such amount was received. As to any gas which any party hereto may take for its own use or sell to a third party purchaser affiliated with such selling party such sum or amount of money fur the amount of such gas thereof shall be based upon the rate which would have been received by the under produced party as if such gas had been taken during the period or periods of underproduction under its contract with a nonaffiliated third party purchaser, but, if the underproduced party has no such contract, such sum or amount of money shall be based on the average rate received by other parties hereto for their share of gas during the affected period. Section 7. This agreement shall constitute a separate agreement as to each proration unit within the Contract Area and shall become effective in accordance with its terms and shall remain in force and elfuct as long as the Operating Agreement to which it is attached remains in effect, and shall inure to the benefit of and be binding upon tb.e parties, their successors, legal representatives and assigns. Section 8. Nothing herein shall change or affect each party's obligations to pay its proportionate share of all costs and liabilities incurred in lease operations in accordance with and subject to the provisions of the Operating Agreement. SEC 188379  EXHIBIT"G" Attached to and made a part of Operating Agreement dated January 15, 2010, between RAW Oil & Gas Inc., as Operator and Smith Energy Company, eta!, as Non-Operators TAX PARTNERSHIP PROVISIONS 1. RELATIONSffiP OF THE PARTIES. This agreement shall not create any mm1ng partnership, commercial partnership or other partnership relating or joint venture, and the liabilities of each of the parties hereto shall be several and not joint. However, solely for the Unites States federal income tax pwposes, this agreement shall be considered as a partnership, but such relationship shall be considered as a partnership, but such relationship shall not be a partnership to any other extent or for any other pwposes. 2. ELECTION TO REMAIN WITHIN SUBCHAPTER K. Notwithstanding anything to the contrary herein or in the Operating Agreement (the "Operating Agreement") to which this is also to be considered an Exhibit, the parties hereto agree with respect to all operations conducted hereunder: Each party, now having or hereinafter acquiring an interest under this agreement, agrees not to elect to be excluded from the application of Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986, as amended (the "Code"), and each party agrees to join in the execution of such additional documents and elections as may be required by the Internal Revenue Service in order to effectuate the foregoing. In addition, if the income tax laws of any state in which the parties conduct operations pursuant to the terms of this Exhibit or the Operating Agreement, contained provisions similar to those contained in Subchapter K of Chapter l of Subtitle A of the Code, !he parties hereby agree not to elect to be excluded from the application of such provisions. 3. INCOME TAX COMPLIANCE AND CAPITAL ACCOUNTS The Operator shall prepare and file all required federal and state partnership income tax returns. In preparing such returns Operator shall use its best efforts and in doing so shall incur no liability to any other party with regard to such returns. Not less than two weeks prior to the due date (including extensions) Operator shall submit to each party a copy of the return as proposed for review. The Operator shall establish and maintain fair market ("FMV'') capital accounts and tax basis capital accounts for each party. Operator shall submit to each party along with the copy of any proposed partnership income tax return an accounting of its respective capital accounts as of the end of the tax return period. Each party agrees to furnish to Operator not later than 30 days before the return due date (including extensions) such information relating to the operations conducted under this agreement as may be required for the proper preparation of such returns and capital accounts. 4. TAX MATTERS PARTNER 4.1 Ooerator is Tax Matters Partner. Operator is designated tax matters partner ("TMP") as defined in Internal Revenue Code (Code) Section 6231(a)(7). In the event of any change in operator, the party serving as TMP for a given taxable year shall continue as TMP with respect to all matters concerning such year. The TMP and other parties shall use their best efforts to comply with responsibilities outlined in this section and in Code Sections 6222 through 6232 and 6050K (including any Treasury Regulations promulgated thereunder) and in doing so shall incur no liability to any other party. Notwithstanding TMP's obligation to use its best efforts in the fulfillment ofits responsibilities, TMP shall not be required to incur any expenses for the preparation for, or pursuance of administrative, or judicial proceedings, unless the parties agree on a method for sharing such expenses. 4.2 Information requested by TMP. The parties shall furnish TMP within two weeks from !he receipt of the request with such information (including information specified in Code Sections 6230(e) and 6050(k) as TMP may reasonably request to permit it to provide the Internal Revenue Service with sufficient information for purposes of Code Sections 6233 and 6050K. 4.3 TMP Agreements with IRS. The TMP shall not agree to any extensions of the statute of limitations for making assessments on behalf of any other party without first obtaining the written consent of that party. The TMP shall not bind any other party to a settlement agreement in tax audits without obtaining the concurrence of any such party. Any other party who enters into a settlement agreement with the Secretary of the Treasury with respect to MKB/EXHG.WPF SEC 188380  any partnership items, as defined by Code Section 623 l{a)(3), shall notify the other parties of such settlement agreement and its terms within 90 days from the date of settlement. 4.4 lnconsistent Treatment of Partnership Item. If any party intends to file a notice of inconsistent treatment under Code Section 6222(b), such party shall, prior to the filing of such notice, notify the TMP of such intent and the manner in which the Party's intended treatment ofa partnership item is (or may be) inconsistent with the treatment of that item by the partnership. Within one week of receipt the TMP shall remit copies of such notification to other parties to the partnership. If any inconsistency notice is filed solely because of the party not having received a Schedule K-1 in time for filing of its income tax return, the TMP need not be notified. 4.5 Request for Administrative Adjustment. No party shall file a request pursuant to Code Section 6227 for an administrative adjustment of partnership items for any partnership taxable year without first notifying all other parties. If all other parties agree with the request adjustment, the TMP shall file the request fur administrative adjustment on behalf of the partnership. If unanimous consent is not obtained within the period required to timely file the request for administrative adjustment, if shorter, any party, including the 1MP, may file a request for administrative adjustment on its own behalf. 4.6 Judicial Proceedings. Any party intending to file a petition under Code Section 6226, 6228 or any other Code Section with respect to any partnership item, or other tax matters involving the partnership, shall notify the other parties ofsuch intention and the nature of the contemplated proceeding. In the case where the TMP is the Party intending to file such petition, such notice shall be given within a reasonable time to allow the other parties to participate in the choosing of the forum in which such petition will be filed. Ifthe parties do not agree on the appropriate forum, then the appropriate forum shall be decided by majority vote. Each party shall have a vote in accordance with its percentage interest in the partnership for the year under audit. If a majority cannot agree, the TMP shall choose the furum. If a party intends to seek review of any court decision rendered as a result of such proceeding such party shall notify the other parties. 4.7 Windfall Profit Tax. The parties agree to take appropriate action under Code Section 6232(c) and any treasury regulations thereunder to assure that items required to compute the Windfall Profit Tax as imposed by Chapter 45 of the code not be treated as partnership items. 5. ELECTIONS 5.1 General Elections. For both income tax return and capital account purposes, the partnership shall elect {a) to deduct currently intangible drilling and development costs ("JDC"), (b) to use minimum allowable acceleration tax method and the shortest permissible tax life for depreciation purposes, (c) to use the accrual method of accounting, (d) to report income on a calendar year basis, and (e) dispositions of depreciable assets shall be accounted for Wlder the General Asset account method to the extent permitted by Code Section l 68(i)(4). 5.2 Depletion. Solely for FMV capital accoWlt purposes, depletion shall be calculated by using simulated percentage depletion within the meaning of Treasury Regulation Section 1. 704-1 (bX2)(iv)(k)(2). 5.3 Other Elections. Any other elections must be approved by the affirmative vote of two (2) or more parties owning a majority interest based on the post payout ownership as shown in Exhibit "A". 6. CAPITAL CONTRIBUTIONS AND FMV CAPITAL ACCOUNTS 6.1 Capital Contributions. The respective capital contributions of each party to the partnership shall be (a) each party's interest in the oil and gas leases committed to this partnership, and all properties associated with the leases, and (b) all amounts paid by each party in connection with acquisition, exploration, development and operation of the leases, and all other costs characterized as contributions or expenses borne by such party under this partnership. The contribution of the leases and any other properties committed to this partnership shall be made by each party's agreement to hold legal title to its interest in such leases or any other properties as nominee for this partnership. 6.2 FMV Capital Accounts. The FMV capital accounts shall be increased and decreased as follows: (a) The FMV capital accounts shall be increased by: (i) the amount of money and the fair market value of any property contributed by each party, respectively, to the partnership (net ofliabilities assumed by the partnership or to which the contributed property is subject); (ii) that party's Sec. 7.1 allocated share of Partnership income and gains, or items thereof; (iii) any basis increases required by Code Sections 48(q) and 1016(a)(22); and (iv) that party's share of Code Section 705(a)(l)(B) and (C) items. (b) The FMV capital accounts shall be decreased by: (i) the amount of money and the fair market value of property distributed to each party (net ofliabilities assumed by such party or to which the MKB/EXHG.WPF SEC 188381  property is subject); (ii) that Partys Sec. 7 .1 allocated share of partnership loss and deductions, or items thereof; (iii) any basis decreases required by Code Sections 48(9) and 10l6(a)(22); and (iv) that parties share of Code Section 705(a)(2)(B) items and Code Section 709 nondeductible and nonamortizable items. "Fair market value" when it applies to property contributed by a party to the partnership shall be assumed to equal the adjusted basis, as defined in Code Section 1011, of that property unless the parties agree otherwise in a separate written agreement. 7. PAR'JNERSHIP ALLOCATIONS 7 .1 FMV Capital Account Allocations. Each item of income, gain, loss or deduction shall be allocated to each party as follows: (a) Actual or deemed income from the sale, exchange distribution or other disposition of production shall be allocated to the party entitled to such production or the proceeds from the sale of such production. ln the event that deemed income arising from the in-kind distribution of production equals that fair market value of the production distributed to a party, the parties recognize that the corresponding adjustments would be net zero adjustment and accordingly, may be omitted form the FMV capital accounts; (b) Exploration cost, IDC, operating and maintenance cost shall be allocated to each party in accordance with its respective contribution to such cost; (c) Depreciation shall be allocated to each party in accordance with its contribution to the FMV capital account adjusted basis to the underlying asset; (d) Simulated depletion shall be allocated to each. party in accordance with. its FMV capital account adjusted basis in each oil and gas property; (e) Loss (or simulated Joss) upon the sale, exchange, distribution, abandonment or the disposition of depreciable or depletable property, shall be allocated to the parties in the ratio of their respective FMV capital account adjusted basis in the depreciable or depletable property; (£) Gain (or simulated gain) upon the sale, exchange, distribution, or other disposition of depreciable or depletable property, shall be allocated to the parties so that the FMV capital account balances of the parties with. respect to such property will most closely reflect their respective percentage or fractional interest under the agreement; (g) Costs or expenses of any other kind shall be allocated to and accounted for by each party in accordance with its respective contribution to such costs or expenses; and, (h) Any other income item shall be allocated to the parties in accordance with the allocation of the realization. 7 .2 Tax Returns and Tax Basis Capital Account Allocations (a) Unless otherwise expressly provided herein the allocations of partnership items of income, gain, loss or deduction for tax return and tax basis capital accounts purposes shall be the same as · those contained in Section 7. l; (b) The parties recognize that under Code Section 613A(C)(7)(D) th.e depletion allowance is to be computed separately by each party. For this purpose, each party's share of the adjusted tax basis of each oil and gas property shall be equal to its contribution to the adjusted tax basis of such property; (c) The parties recognize that under Code Section 613A(C)(7)(D) the computation of gain or loss on the taxable disposition of an oil or gas property is to be computed separately by each party. For this purpose the portion of the total amount realized by the partnership that represents a recovery of simulated adjusted basis in an oil and gas property will be allocated to the parties in the same ratio that simulated depletion is allocated to them under Sec. 7.l(d). Any additional amount realized will be allocated in accordance with the ratio of simulated gain allocation for such property under Sec. 7. l (£); ( d) Depreciation shall be allocated to each party in accordance with its contribution to the adjusted tax basis of the depreciable asset; (e) Any recapture of depreciation, IDC, and other items of deduction or credit shall, to the extent possible, be allocated among the parties in accordance with their sharing of the depreciation, IDC MKB/EXHG.WPF SEC 188382  or other item of deduction or credit which is recaptured; (f) The qualified investment for investment tax crerut (if reinstated) purposes with respect to any property shall be allocated among the parties in accordance with their respective contributions to the qualified investment (as defined in the code) in such property; (g) For partnership property which has a value in the FMV capital accounts which differs from the adjusted tax basis of such property, any tax items relating to such property will be allocated to the parties in a manner which takes into account the variation between the adjusted tax basis of such property and its FMV capital account value under Code Section 704(c); and, (h) The income attributable to take-in-kind production will not be reflected on the tax return. 8. DISTRIBlITION UPON TERMINATION 8. I Termination. Termination shall occur on the earlier of the termination of the partnership under Code Section 708(b)(I) or the date upon which the partnership ceases to be a going concern. Upon termination the business shall be wound-up and concluded, and the assets shall be distributed to the parties as described below by the end of such calendar year (or, if later, within 90 days after the date of such termination). All assets shall be distributed to the parties as provided in Sections 8.2 through 8.4. 8.2 Reversion. First, all money representing unexpended contributions by any party and any property where no interest has been earned in that property under the agreement by any other party shall be returned to the contributor. 8.3 Balancing. Second, the FMV capital accounts of the parties shall be determined under this Section 8.3. The Operator shall take the actions specified under this Section 8.3 in order to cause the ratio of the parties FMV capital accounts to reflect as closely as possible their percentage interests under the agreement. The ratio of a party's FMV capital account is represented by a fraction, the numerator of which is the party's FMV capital account balance and the denominator of which is the sum of all parties FMV capital account balances. Such actions are hereafter referred to as "balancing the FMV capital accounts", and when completed, the FMV capital accounts of the parties shall be referred to as being "balanced". The matter in which the FMV capital accounts of the parties are to be balanced under this Section 8.3 shall be determined as follows: (a) The fair market value of all partnership properties shall be determined and the gain or loss for each property which would have resulted if a sale thereof at such fair market value had occurred shall be allocated in accordance with Section 7 .1 (e) and (f). If thereafter, any party has a negative FMV capital account balance, that is, a balance less than zero, such party shall contribute an amount of money to the partnership sufficient to achieve a zero balance FMV capital account. Any party may contribute an amount of money to the partnership to fucilitate the balancing of the FMV capital accounts. If PMV capital accounts are not balanced, Section 8.3(b) or (c) shall apply; (b) If all the parties consent, any money or an undivided interest in certain selected properties shall be distributed to one or more parties as necessary for the purpose of balancing the FMV capital accounts; (c) Unless (b) above applies, an undivided interest in each and every property shall be distributed to one or more parties in accordance with the ratios of their FMV capital accounts; (d) If a property is to be valued under (a) above or rustributed pursuant to (b) or (c) above, the fair market value of the property shall be agreed to by the parties. In the event aH of the parties do not reach agreement as to the fair market value of property, the Operator shall cause a nationally recognized independent engineering firm to prepare an evaluation of fair market value of such property. 8.4 Final Distribution. Third, after the FMV capital accounts of the parties have been adjusted, pursuant to Section 8.3 above, all other remaining property and interest then held by the partnership shall be distributed to the parties in accordance with their FMV capital account balances. 9. TRANSFERS, SURVIVORSIDP AND CORRESPONDENCE 9.1 Transfers. These partnership provisions shall inure to the benefit of and be binding upon the parties hereto and their successors and assigns. The parties agree that if any one of them makes a sale or assignment of its interest under this agreement, such sale or assignment will be structured, if possible, so as not to cause a termination under Code Section 708(b)(l)(B). 9.2 Survivorship. Any teanination of the agreement shall not effect the continuing application of the Tax MKB/EXHG.WPF SEC 188383  Partnership Provisions as necessary for the tennination and liquidation of the 1'ax Partnership. 9.3 Correspondence. All correspondence relating to the preparation and filing of the partnership's income tax returns and capital accounts shall be forwarded to: RAW Oil & Gas, Inc. 12312 Slide Road Lubbock, Texas 79424 MKB/EXHG.WPF SEC 188384  MEMORANDUM OF OPERATlNG AGREEMENT AND FINANCING STATEMENT 1.0 This Memorandum of Operating Agreement and Financing Statement (hereinafter called "Memorandum") shall be effective when the Operating Agreement referred to in Paragraph 2.0 below becomes effective, that being January 15, 2010. 2.0 The parties hereto have entered into an Operating Agreement, providing for the development and production of crude oil, natural gas and associated substances from the lands described on Exhibit "A" attached hereto (hereinafter called the "Contract Area"), and designating RAW OIL & GAS, INC. as Operator to conduct such operations. 3.0 The Operating Agreement provides for certain liens and/or security interests to secure payment by the parties of their respective share of costs under the Operating Agreement. The Operating Agreement contains an Accounting Procedure along with other provisions which supplement the lien and/or security interest provisions, including non-consent clauses which provide that parties who elect not to participate in certain operations shall be deemed to have relinquished their interest until the consenting parties are able to recover their costs of such operations plus a specified amount. Should any person or firm desire additional information regarding the Operating Agreement or wish to inspect a copy of the Operating Agreement, said person or firm should contact the Operator. 4.0 The purpose of this Memorandum is to more fully describe and implement the liens and/or security interests provided for in the Operating Agreement, and to place third parties on notice thereof. 5.0 In consideration of the mutual rights and obligations of the parties hereunder, the parties hereto agree as follows: 5.1 The Operator shall conduct and direct and have full control of all Operations on the Contract Area as permitted and required by, and within the limits of the Operating Agreement. 5.2 The liability of the parties shall be several, not joint or collective. Each party shall be responsible only for its obligations and shall be liable only for its proportionate share of costs. 5.3 Each Non-Operator grants to Operator a lien upon its oil and gas rights in the Contract Area, and a security interest in its share of oil and or gas when extracted and its interest in all equipment, to secure payment of its share of expense, together with interest thereon at the rate provided in the Accounting Procedure referred to in Paragraph 3.0 above. To the extent that Operator has a security interest under the Uniform Commercial Code of he state, Operator shall be entitled to exercise the rights and remedies of a secured party under the Code. The bringing of a suit and the obtaining of judgment by Operator for the secured indebtedness shall not be deemed an election of remedies or otherwise affect the rights or security interest for the payment thereof. 5.4 The Operator grants to Non-Operators a lien and security interest equivalent to that granted to Operator as described in Paragraph 5.3 above, to secure payment by Operator of its own share of costs when due. 6.0 For purposes of protecting said liens and security interest, the parties hereto agree that this Memorandum shall cover all right, title and interest of the debtor(s) in: 6.1 Property Subject to Security Interests (A) All personal property located upon or used in connection with the Contract Area. (B) All fixtures on the Contract Area. (C) All oil, gas and associated substances of value in, on or under the Contract Area which may be extracted therefrom. (D) All accounts resulting from the sale of the items described in subparagraph (C) at the wellhead of every well located on the Conn-act Area or on lands pooled therewith. (E) All items used, useful, or purchased for the production, treatment, storage, transportation, manuracture, or sale of the items described in subparagraph (C). (F) All accounts, contract rights, rights under any gas balancing agreement, general intangibles, equipment, inventory, filrmout rights, option farmout rights, acreage and or cash contributions, and conversion rights, whether now owned or existing or hereafter acquired or arising, including but not limited to all interest in any partnership, limited partnership, association, joint venture, or other entity or enterprise that holds, owns, or controls any interest in the Contract Area or in any property encumbered by this Memorandum. (G) All severed and extracted oil, gas, and associated substances now or hereafter produced from or attributable to the Contract Area, including without limitation oil, gas and associated substances in tanks or pipelines or otherwise held for treatment, transportation, manufilcture, processing or sale. SEC 188385  (H) All the proceeds and products of the items described in the foregoing paragraphs now existing or hereafter arising, and all substitutions therefur, replacements thereof, or accessions thereto. (I) All personal property and fixtures now and hereafter acquired in furtherance of the purposes of this Operating Agreement. Certain of the above-described items are or are to become fixtures on the Contract Area. (J) The proceeds and products of collateral are also covered. 6.2 Property Subject to Liens (A) All real property within the Contract Area, including all oil, gas and associated substances of value in, on or under the Contract Area which may be extracted therefrom. (B) All fixtures within the Contract Area. (C) All real property and fixtures now and hereafter acquired in furtherance afthe purposes of this Operating Agreement. 7.0 The above items will be financed at the wellhead of the well or wells located on the Contract Area, and this Memorandum is to be filed for record in the real estate record.~ of the county or counties in which the Contract Area is located, and in the Uniform Commercial Code records. All parties who have executed the Operating Agreement and all farmors and option farmors who have granted support within the Contract Area are identified on Exhibit A. 8.0 On default of any covenant or condition of the Operating Agreement, in addition to any other remedy afforded by law or the practice of this state, each party to the agreement and any successor to such party by assignment, operation of law, or otherwise, shall have, and is hereby given and vested with the power and authority to talce possession of and sell any interest which the defaulting party has in the subject lands and to foreclose this lien in the manner provided by law. 9.0 Upon expiration of the subject Operating Agreement and the satisfaction of all debts, the Operator shall file of record a release and termination on behalf of all parties concerned. Upon the filing of such release and termination, all benefits and obligations under this Memorandum shall terminate as to all parties who have executed or ratified this Memorandum. In addition, the Operator shall have the right to file a continuation statement on behalf of all parties who have executed or ratified this Memorandum. 10.0 It is understood and agreed by the parties hereto that if any part, term, or provision of this Memorandum is by the courts held to be illegal or in conflict with any law of the state where made, the validity of the remaining portions or provisions shall not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Memorandum did not contain the particular part, term or provision held to be invalid. 11.0 This Memorandum shall be binding upon and shall inure to the benefit of the parties hereto and to their respective heirs, devisees, legal representatives, successors and assigns. The failure of one or more persons owning an interest in the Contract Area to execute this Memorandum shall not in any manner affect the validity of the Memorandum as to those persons who have executed this Memorandum. 12.0 A party having an interest in the Contract Area can ratify this Memorandum by execution and delivery of an instrument of ratification, adopting and entering into this Memorandum, and such ratification shall have the same effect as if the ratifying party had executed this Memorandum or a counterpart thereof. By execution or ratification of this Memorandum, such party hereby consents to its ratification and adoption by any party who may have or may acquire any interest in the Contract Area. 13.0 This Memorandum may be executed or ratified in one or more counterparts and all of the executed or ratified counterparts shall together constitute one instrument. For purposes of recording, only one copy of this Memorandum with individual signature pages attached thereto needs to be filed of record. Names and addresses: RAW OIL & GAS, INC. RAW ENERGY, L.C. 12312 Slide Road 12312 Slide Road Lubbock, Texas 79424 Lubbock, Texas 79424 By: By: Name: Joe D. Hardin Name: Joe D. Hardin Title: President Title: Manager SEC 188386 SMITH ENERGY COMPANY P.O. Box 52890 Houston, Texas 77052 Attn.: Judy Mills By: Name: Lester Smith Title: President MARK P. HARDWICK STEVE BLAYLOCK P.O. Box213 214 W. Texas, Suite 306 Midland, Texas 79702 Midland, Texas 79701 ELGER EXPLORATION JNC. P.O. Box 2623 Midland, Texas 79702 By: Name: JerrV Elger Title: STATE OF TEXAS § COUNTY OF LUBBOCK § This instrument was acknowledged by me on this _ _ _ day of _ _ _ _ _ _ _ _~ 2010 by Joe D. Hardin as President ofRAWOIL & GAS, INC. Notary Public in and for the State of Texas STA TE OF TEXAS COUNTY OF LUBBOCK This instrument was acknowledged by me on this _ _ _ day of _ _ _ _ _ _ _ _~ 2010 by Joe D. Hardin as Manager of RAW ENERGY, LC. Notary Public in and for the State of Texas STATE OF TEXAS § COUNTY OF _ _ _ _ __ This instrument was acknowledged by me on this day of , 2010 by Lester Smith, as President of SMITH ENERGY COMPANY. - - - -------- Notary Public in and for the State of Texas SEC 188387 STATE OF TEXAS COUNTY OF MIDLAND § This instrument was acknowledged by me on this _ _ _ day o f - - - - - - - - · 2010 by MARK P. HARDWICK. Notary Public in and for the State of Texas STATE OF TEXAS COUNTY OF MIDLAND This instrument was acknowledged by me on this _ _ _ day o f - - - - - - - - ' 2010 by STEVE BLAYLOCK. Notary Public in and for the State ofTexas STATE OF TEXAS COUNTY OF MIDLAND § This instrument was acknowledged by me on this _ _ _ day of _ _ _ _ _ _ _ _, 2010 by Jerry Elger, as ofELGER EXPLORATION. Notary Public in and for the State of Texas SEC 188388  EXHIBIT"A" Attached to and made a part of Memorandum of Operating Agreement and Financing Statement between RAW Oil & Gas, Inc., as Operator and Smith Energy Company, eta!, as Non-Operators dated January 15, 2010 CONTRACT AREA TO BE DETERMINED AT A LATER DATE SEC 188389  TAB I Amended North On Point Extension & O’Donnell GEA (DX 1350) 9   GEOPHYSICAL EXPLQMTION AGREEMENT N. ON POINTEXTENTION & ODONNELL PROGRAM AREA LYNN AND DAWSON COUNTIES, TEXAS This Is anAm'1ndment dated June Jfi', :ZOJJ ofthe Original Agreementfor tht: purpose of rultli11g an additional!>. 75 square miles tr> the S11TVBJ' arn. This additlDn wNI nmke the total ·'"'"eJI area S9. 75 square miles as shown below In the Exlllhit A. nle addition to the sune1 ar1111 wJll also move du! r.:arrltul well number to J.6 wells. This Gaopbyslcal Exploration Agn:ement {the "Aereement") dated and effective as of December 1, 2010 (tlte "Etfeetlve Date"), Is entered into by 1111d between RAW Oil &. Gas, Jno. ("RAW''), JDH RAW Energy, L.C~ fonnerly kuuwn as RAW Energy, L.C. ("RAW LC"), Mark P. Hardwfok ("Hardwick"), Steve Blaylock ("Blaylock"), Blger Ex.ploration,. Inc. ("Elser"), and Smith Energy Company (''Smith"). RAW LC, Hardwick, Blaylock, and Blger 81'6 at times referred to collectively as the "R.A.W Participants" and, together with Smith, the "Participants." The PanicipautS, RAW and RAW LC, arc at time• referred Ill individually B$ a ~rty» and collectively as the "Parties." WHBRBAS, RAW proposes to conduct or puroha&ing 3-D· soismig survey covering approximately 39.75 square milea In Lynn and Dawson Counties, Texas, as depicted on Eshibit A attached hexeto (such lands, as the area may be amended from time lo time as provided herein, llRl referred to herDiD as tbe "Program Area"); and WHEREAS, RAW intends to utilize such 3-D uismlc data and existing geologic:; data to genemte Pro9pecti; within lbe PrograinArea; and WHBRBAS, Partieipa111s desire to plll'liclpate wilh RAW in the 3-D seismic survey and to participate in Prospocts ll'nenrted within lhe 'Program Area; and WHEREAS, this Agreomcmt is to establish the Partios' :respective rights and obligations with regard to pmticipation in the 1h11oting.· processing and intorpretntion of tho 3-D seismic survey, the generation of Prospects, the ·11equ!silio11 of Leases within the Progiam Area, and the exploration, development, 1111d produ(!lion of oil and gas :from Prospcots generated using the 3-D seismic data. . .. · NOW, THEREFORE, in cons!dll.!lltion of the mutual covenants herein and other good au,d valuable consideration, tho receipt and sufficiency of which are hereby 8;Cknowlc:dgod, die Parties hereto agree llS follows: GeophWcll rroKram 1.1 Scone and Supervision or Geophysical Pnlmm. The Parties have agreed that a three-dimensional geophysical program (tbll ''N On Point & 0 Donnell" or the "Geophysical l'rogranl") will be conducted 8Cl'DllS the Program Area. The SQOpe and design of the Geophysical Program will be detmnined by RAW, subject to Smith's final written approval. RAW wiTI conduct or supllfViso third Parties in oonducting the Geophysical Program, ~nclnding ponnitting, data acquisition, processing and intetpretation of the Data Prognun (es defined below). CJM I 92243v.6 DEFENDANT’S TRIAL EXHIBIT 1350 SEC 195503 __________________ CONFIDENTIAL 1.2 Ownenbip and Conllden!l!lltv of Data. (a) All data r111ulting fto01 the Oeophysical Program ("Program Data") shall b11 owned by the Pllrties who pay for tbo eosts of the Ocophysieal Program (the "Program Data Owners"); who will be repmiented in this Agreement by Smith Energy Company as their agent and nominee. Notwithstanding the provisions of Article V, Smith shall have the right to allow third parties to participate in Smi1b's rights and obligations llllder this Agreement so long as such parties ratify Ibis Agrcmncnt and a copy of the ratlfieation is furnished to RAW. All such ratifying Parties shall b11 referred to as tile "Sniith WI Participants." Upon ratification of this Agreement, tho Smith WI Partieipants shall be entitled to and shall bear their proportionate share of Smith's rights and obligations under this Agreement, including rights as Program Data Owners proportionate to their cost bearing inte1·est ill tho 3D Survey Costs. Upon request, an Partiell shall be entitled to receive a copy of tho Program Data, inoluding all tapes and roproduaiblos. Bnch Party shllll have the right to use the Program Data in connection with exploration and development of the Program Area for the benefit of tho Partiea during the Tenn, as defined in Section 2.S below, but no Party other than Smith shall have fue right to sell, trade, license or cxohanp ("I'nnsfer'') the Prosnun Data without the prior written consmrt of Smith. Upon an approved Transfor of any of tho Program Data, all proceeds of such sale shall be payable to and delivered to the Program Data Ownors. Upon 11xplration of th11 Tonn; all copies of the Program Data and {if requested in writing by Smith) all interpretations derived from the Program Data will be returned to Smith on behalf of the Program Data Owners. (b) D11rlng the Term of this Agreemont or so long as any Lease or Joint Operating Agreement within tho Program Area is in force 1111d effect, each oftbe Parties shall maintain th11 confidlllltialit)' of tb11 Progrlllll Dara; provided, however, that with prior written notico to Smith and RAW l_dentifying the proposed recipient of the Data. each Party may furnish a copy of the rolevant portion of the Program Data to {i) tho Parties.' lessors, to the llllrtent required under applicable Leases and/or Pcrmfts covering lands i11 tho Program Area, (ii) such Party's bona tide conaultanlll, Bild (iii) to prospi:ctive third Party purchasers of an interest in a Prospect. AJJY consultant or prospective purchaser to whom acaeS.!l ·IO auy portion of the Program Data is providc:d shall enter into 11 confidDDtiality and non-competition agreement, which shall inure to the benefit of all of the Partioa, pursuant to which such third Party shall agree to maintain th11 confidentiality of the Program Data 1111d to uso the Program Data solely for the purpose of rendering consulting services or evaluating the Prospect, as the case may be. Tho consultant shall immediately return the Progr11m Data upon the completion of the work for whloh the oonsulumt was engaged. The consultant shall not be permitted to rlltaln any copies of the Program Data or any analysis of intwpretations of tho Program Data after completion of the work for which consultant was engaged. Jn conneetion with lhe disclosure of any pol'tion of the Program Data to a potential third-Party purchaser or participant as permitted under this section, the Program Data shall at all times remain in the eontrol of the Party disclosing the Program Data and no third party shall b~ allowed to copy, or to receive copies, of the Progmm Data including tapes and/or reproducibles. Such contidontiality and non-compete agreeine11t shall also Include an agreement at1d obligation that such consultant or prospective purchaser must offer to the Parties at actual cnst any interest that may be acquired by such third party in lands covered by tbe disclosed da~ within a spoclfied period, such period to be no loss than 36 1nonths after disclosure of the data. 1.3 Coats of Geophysical Program. Smith, along with thu Smith WI Participants, will pay one hundred percent (100"/o) of all 3D Survey Costs associated with the conduct of the G«>physical Program (Including any additional seismic c:onduoted within the AMI and any purchased seismic data 1hat has bem authorized in writing by Sn11th) including. but not limited to, the costs associated with three dimonslonal ("3-D") seismic acquisition, seismic permitting ancl damages, processing, interpretation, reproduction and any other costs associated with the Oeophysloal Program. 'F.AW has ostlmated the 3D Survey Costs for the acquisition of now 3D sci51llic data to be $32,000 per square mile, which amount includes, hilt is not limited to (i) costs nnd expenses of acqu.iring all necessary geopltysieal pcmnits from third parties, including landmao and brokers' fees; (ii) costs of shooting the seismic survey, including surface damages payable to third Parties; and (iii) costs and DXpenses usociated with processing Program Data derived from the geophysical operations on the Program Area a11dlor merging such Program Data with other 3-D Data and other geologic data (collectively, "3D Survey Costs"). Smith, on its own bllhalf and along with the Smith WI Participants as to their share, agrees to reimburse RAW for 100"/o oftbe 30 Survey Costs. An invoice for the aotual 3D Survey Coats will be prepared and submitted by RAW to Smith with a eopy to each Program Data Owner monlhly accordiug to COPAS standards as such costs aro incurred. Smith, along with the Smith WI Participants, shall pay directly to RAW th~ amount billed within thirty (30) days after rol)Cipt. 2 CJM 192243v.6 SEC 195504 CONFIDENTIAL Subject to the prior approval of Smith, RAW sh1dl have the right to purchase existing 3D seismic da.111 and tbe acquisition cost shall be included in t11e 3D Survey Costs to ba paid by Smith ond the Smith WI Particip1111ts. The. lands imaged by any purchased lD seismic data shall be conslderell llS inol11ded in the Geophysic1tl Program. 1.4 AcOD!sitlon. of Seismic Permits; Amendment of Program Area.. RAW shall be responsible for acquiring sufficient seismic pennitll nr other rights to conduct the Geophysical Program, and shall notify Participants when it bas eompletad the aoquisitlon of suoh pennlts aad other rights. lf RAW is unable to obla.ln seismic pennits or other rights sufficient to grant it tbe right to conduct the Geophysical Program over ·sufficient acreago within tho Program Arca to proporly image aub6tantially all of the '.Program Area, RAW ma,y, upon written notlco to Smith, amend the Program Area to remove acreage as to which such seismJc ponnits or othor rights have not been obtained. Slich notice shell include e description of the acres.go to be removed, e reasonably detailed description of the efforts made to acquire the permits, RAW's reasons for mnoviog the acreage, PJJd a dCISCl'lption of the anticipated Impact of such removal on the survey end Ille genoration of Prospects. With tho prior written approval of Smith, RAW may substitute contiguous of. m1arby acreage for the ailreage so removed. If RAW desires to substitute acreage, it shall notify Smith and all other ParticipanlB of tb11 proposed 6Ubstitutlon, ·including a description of the acreage to be removad, a description ofthe substitute acreage, and the reasons for such substitution. Smith shall have I0 days after receipt of sucli notico to approvo or disappl'OV(I the substitution. Failure to respond within such 10 day period shall be deemed to be approval of the substitution. 1.5 Contributions of tbe Parties. All Parties will participate with RAW in accomplishing the Geophysical Program as may be niq~d ftom RAW from time 'to time. The primary responsibilities of RAW are as follows; (a) RAW sha11 be Operator of the project to be conducted pursuant to this Agniement. RAW shall' eoordioate all land and geological functions, conduct the Geophysical Program and oporate all wells drilling or drilled 011 each Prospect Area. (b) RAW !Yill provide or supervise the land work on tho Program Area, including nogotlatins add obtaining seismic options, lease options and losses, and settling surface damages for conducting the Goophyslcal Program and for subsequent ei.ploration and produirtion operations. (o) RAW will promptly analyze and inwrpret the Program Data obtained from the Oeophysical Program. (Ii) RA.W will provide the geological subsurlilce expertise to integrate the Prognun Data with all available geologic and well data to evaluate the Program Area including ll1181yzing well logs in tbc area. and providing geological mapping ancl interpretiltion. (e) RAW will provide to Participants copies of all maps and interpretations relating to the 01ophysicsl Program and the Program Arca currontly available and. as developed pursuant to this Agreomont. RAW will not charge a consulting fee but will charge an overhead fee of $7,500 per month while thini·party crews are working ln the field during the Geophysical Program conducted under this Agreement. RAW also will be entitled to the Operator's overhead under each Operating Agreement. . 1.6 Reuor!s; Meetings, RAW shall distribute a written report 011 the status of nil activities within the Program Area to the Parties on 11t least a monthly basis. During the first year of the Term and thereafter upon request by Smith, the Parties shall meet quarterly (unless waived by Smith) at a mutually agreeable time, either in Smith's offices er by teloconference to review the Program's activities ("QuaJ'terly Meeting"). At lrsast five (S) days prior to each Quarterly Meeting, RAW shall fUmish to Participant (l) a written agenda listing any Prospects to bo presented at the meeting and listing other items or business to be discussed ar tho Quarterly Meeting, and {ii} a brief written report summarizing the status of the program's activities, including the lltatlla of seismic acquisition and processing. prospect generation, lease acquisition, drilling operations, end other matters to be discussed at the Quarterly Meeting. · 1.7 Compled!>ll of the Geop!m!cal Program. The O~physical Program will be completed for purposes of this Agreement wh1:m final processed, migrated seismic sections have boen delivered to Pimicipants by tho third-p8J1iY seismic contractors preparing such data. RAW will use all commercially reason11ble efforts to cornmence the field work relating to th~ Geophysi1:a! Program no later than February IS, 2011, to have the data acquisition portion of the Geopb)•sical Program completed by May 3 CJM I !12243v,6 SEC 195505 CONFIDENTIAL  IS, 201 l 1111d to have all Program Data onaly;r.ed with the initial Prospec:I proposed to tho Parties no latur thanAugust31, 2011. ABUCLEll 'farticluattqn Terms and Area of Mutual Iatenst 2.1 Interests of the ParticlPQiats. (a) RAW wlll acquire pimnits, options and Leasn in its name as nominee on behalf of all Parties. RAW will then assign to oach Party its undivided interest in each Lease in accordam:e with the terms of this Agrcomont. Smith and the Sml:lh Wl Participants shDJI be m1titled to receive a collective 75% of 8/Stbs of all rights and interests acquired wl:lhin tho Program Area, burdened only by tho royalty payable to the Lessor of each Lease 1111d any othor third-party burdens in existJmoo as of the time the 1-e was acquired by RAW, but without any other reduction or burden creatl'd by, through or under RAW or the RAW Participants. Immediately on payment of all 30 Seismic Costs, geological and laud costs for which· Smith is oblisatl'd to RAW in this Agreement, Smith and the Smith WI Participants shall be antitlod to an assignm1111t of their working interest, and related net revenue interest, in each of tho Leases acquired. (b) RAW J..C boroby agrees to assign to each of the thl\le olher RAW Participants 6.25% of 8/Bths of RAW LC's rights and i~ existing under the Leases and RAW LC will nrtain an undivided 6.25% of 8/8ths interost. When assignments of record title to tbe l.eliscs · are made by RAW, oach of tho RAW Participants shall receive an assignment of its proportionate undivldN working interest and attributable net revenue interest In and to ~h Loase in whleh tho P11rtic.1ipants are entitled to receive an interest pamumt to this Partioipa1ion Agl\leinDnl and the Operating Agreement. .. (e) Except as stated in Section 2.l(a) above, tbe interosts a&Bigned to each Participant pursuant to this .Agreement 8J1I hereby expressly assigned subject to thek proportionate part of all of 1he terms, COYD!lants, reve:rsionary interests and other production burdens refemiced in the following: · (i) oacb Loase; (ii) the Operating Agreement refl!Tt!Jleed in Article V below; and (iii) any other third-party burdens in existence as of the time the Lease was acquired by RAW. 4 CJM l92243v.6 SEC 195506 CONFIDENTIAL 2.2 Partic!uation of th• Parties hi tae J'rospect Arp and Subs!!!lneat Wey.. (a) As to each woll on which RAW and the RAW Participants will receive a =ied working inteiellt pursuant to Section 2.2(c) below, RAW will submit an invoice to Smith for a $50,000 geological/geophysical prospect genaratioo fee 1birty (30) days prior to tho proposed spud dato for ths appllcablo well. Smith (on its own behn!f and along with tbe Smith WI Participsnts) will pay the fee on or before ftfteon (15) days from the proposed spud date. If actual driUing operations have not commenced .within IS days after the proposed spud date for any well on which a fee has beeD paid by Smith, RAW shall, upon written request by Smith, immediately refund the imtire fee to Smith for that well. Wh11u actual drilling operations do commence on that well, Smith, along with the Smith WI Participants, shall pay tho SS0,000 fee lo RAW within 1S days after the spud date. The maximum number of wells on which Smith will bl! obligated to pay a pro~ feo Is one and 6/10111 (1.6) t\lgardless of 1ho number of square miles actually imaged with 3D data. pursuant to tho Muy caliente Program. (b) ft is understood and agrood that RAW, as Operator, will use lts commercially reasonable efforts to commencD operations for tho drilling of the initial well on the fust Prc>apect promptly after the :r11!1Want Leases havo been acquired, but, in any event, no later than October l, 2011 lmlDSs otbenviso agreed by Smi1h. Enclosed herewith is RAW's Authorization For Expenditure("AFJ!") which shows the oummt total estimated costs to dril~ oomplete and equip a. well to be drilled to a depth sufficient to test the Fusselman Formation of approximately 11, 100 feel RAW will submit an updatod AFB for the initial woll lllld each subsequent well in accordance with Section 3.1. Jn no event, without the written approval of Smtih, shall a lapse of the AFB seJ'VO to extend the time within which Opmtor is required to commence opDrations for the drilling of a well. (c) RAW and the RAW Participants shall be collectivetY entitled to an undivided 25% working interest earned to the casing point on lho first one and 611011> (1.6) wells drilled widor tl1i1 A,grmnmt. The C81Tled Interest will apply to the fim one and 6110111 (l .6) wells drllled anywhere on thi> Pl'Ogram Area (or in the On 'Point Program Area pursuant to Section 2.2(d) below) evClll if more than one well is drilled within a single ProspDCt Area. All subsequ11nt wells drilled by the Parties anywhere in the Program Area will be on a beads-up basis with each participating Party paying its working Interest share of the costs of subsequent wells or boing subjm to the relinquishment provisions of this Agrewnimt or the non·wnsent provisions in accordance with tbe applicable Operating Agreemont. •· (d) The Parties acknowledge that. they have entered into a Geophysical Exploration Agreement for the "Ou Point Program Area" located in Lynn and Terry Collllties, Texas dated effective January 2, 201D thllt relates to a proposed 3D Seismic Survey Program on approximately 4S square miles (the "On Point Agreement"). The Parties also acknowledge that thoy have entered into a Geophysical Exploratioo Agreement for the "Muy Calieato Program Area" located in Lynn, Terry, Hockloy and Borden Counties, Texas dated effilctive January IS, 2010 that rellllos to a proposed 30 Seismic Survey Program on approximatoly 45 squant miles (the "Muy Caliente Agreement"). (e) As to all wi>lls drilled within the Program Area, the npplfoable Operating Agreemimt will provide that eech well will be subject to a easing point election at which, if any Party elects not to participato in a completion, such Party will relinquish and assign to the participating Parties all of ita or their leasehold interests In and to th11 well and the area speciti11d in the Operating Agreement, as defined for each well prior to commencement of drilling on that Prospect. In the event that any Party elects not 10 panicipate in a completion attempt, the non-consenting Party will be subject to the provisions in the governing Operating Agteement. s CJM l!nZ43v.6 SEC 195507 CONFIDENTIAL  (l) No Party shall bavo the right to reinstatement of an interest in a well or lll)reagc relinquished in accordanco with 1his Section 2.2 or in accordance with the applicable Operating Agreement, whether by payment of a cash. penalty, production penalty, or otherwise. (g) In the event of a. "Default" by any Party, as defined and descn'bed i11 Article VU of the Op11r1rting Agreement, the other Parties shall have the right to eiceroise llllY and all . remedios available to the non-defaulting Parties specified in Article Vll of the Operating Agreement, whioh provisions are im:orparated herein by reference. 2.3 Payment for aud Ownership of Oil and Gas lptmstl!. Until the first one and 6/l0111 (1.6) wells have been drjlled to test the Fussohnan Fonnation pursmmt to Ibis Agroement, Smith, along with the Smith WI Participants, shall pay all of tho costs of acquiring Oil and Gas Interests (Including any loase options or the exercise of any lease option) in the Program Area on the Prosp11ct or Prospects approved by Smith. While Smith is pl3'1ng 100% of the lease or option cost&, no lease or o~on shall be purchased by any Pany without tbe prior approval of Smith. Afuir the first one and 6/1 O' (1.6) wells have been drilled, the costs of acquiring any additional Oil and Oas Interests (lnoluding bonuses, delay rentals, lease extensions or shut in paymcmts relating 10 leasos) in tho Program Azea thoreaftor shall bo borne by 1he Partle5 who own an interest in tho appUcable Prospect Area in the proportions set forth on Exhibit B, Column D, attached horeto. · If a Party does not pay its share of Leuo obligations and costs when due, that Party will relinquish all ofits intcrost in that Loase or Oil and Gas lnterest. All Oil and Gas lotorests shall be owned by the Parties In the percentage interostll sot forth on :&blbit B, Column D, except as such undivided interests may be modified by the operation of Sections 2.4, 2.S, and 3.4 hereof or by non-payment of Lease cost obligations. 2.4 Delny Rentals and Shut-In Roya!des, At any time any d1:1lay reota.\s, Shut-in royalties, Lease extension paylllOllts or other sums (''Rentals'~ necesslllY to perpetuate any 011 and Gas Interests becomes duo and owing (whether or not prior to ono and 6/10111 (1.6) wells having been drilled), RAW shall pay such Rentals and invoice all other Parties for their proportionate share thereof. Each Party agrees to pay its proportlonatc share (as detennlned by Exhibit B, ColllllUl D, or the Pmty's participation percentage in that P~eet, if different) of such Rentals within fifteen (15) days of ~ipt of an invoice therefore. .. RAW shall have no l!abiley to the other Partios hereto for fai111r11 to pay such Rentals when due provided RAW has auted in good faith. 2.5 Area ofMutnal mterest and Tenn. Tho Parties have agreed to and do hereby establish an Area of Mulual Interest ("AMI'? which shall encompass all lands located within tbc Program Area as depicted on the plat attached hereto as Ell:hibit A together with all lands locatld within one-half mile of the exterior boundaries of the Program Area. The AMJ sball remain in foroo fur a period often (IO) years from the date hereof, unlB$S sooner terminated by tho Parties (the "Term"). Upon l'JXJliration of the 10-year term, this Agreement shall 1enninate; provided that the obligation to !'Glum the Data and other information (if . requested) under Section 1.2(a) shall survive termination of this Agreement. Should any Party own on the date hereof, or acquire 111 any time durl11g the Tenn, an Interest in (I) a Jeaso covering lands, any part of which are located within the AMI or (ii) an option or a farm.in covering lands any part of which are within the AMI (an iotorest so owned or acquired Insofar and only iJJSofar as it covets lands within the AMI being horoio called an "Aequired Interest"), such Party (the "Acquiring Party") shall promptly notify the other Panies, in writing. af such acquisition, tho consideration paid or to be paid for the Acquired Interest, any other obligations (including. without limitation, drilling obligations) undertaken or to be undortaken as a part of such acquisition and aoy other terms of such acquisition. Each of the Parties shall, within thirty (30) days after the receipt of such notice, notify thll All<]uiring Party in writing. whother or not it wishes to participa~ in such aoqui5ition; provided that failure of a Party to respond within the timo and in the manner sot forth above aball b1:1 deemed an election l!Q1 to participate in such acquisition. · 2.6 Effect of Election ·to Partic!vate. Should a Party elect to participate in an acquisition of an Acquired lnter11St, such Party sball be assigned its proportionate part (being the pcrceatagc specified for such Party in tho table set forth in Exhibit B) of the Acquired lntesost by tho Acquiring Party, and shall upon receipt~ such assigi1ment, pay, or to the extent not yet due, agree to pay when due) i1s part of the direct costs incurred by the Acquiring Party in making such acquisition and agrees to assume its proportionate part of llllY other obligations which aro undertaken as part of such acquisition. If the costs or obligations relate to the lands outside the AMI as well as to lands inside the AMI, such costs and/or. obligations shall be allocated between such areas on an acroage basis. Lease acquisition costs sholl be paid in accordance with Section 2.3 above. If less than all of the Parties elect to partioipllle in such acquisition, tho proportionate parts for the Parties electing to participate shall, IUlloss the Parties agrlllling to participate agree otherwise, bo the percentage detennlnod by dividing. for each participating Party, tbe proportionate part otherwise applicable (if all Parties bad participated) to spch participating Party by the 6 CJM 192243v,6 SEC 195508 CONFIDENTIAL  totnl proportionate parts for all participating Parties, provided, however, that in no event shall 11. Party electing ID participate be required to participate for a percentage greater than that set forth for such Party on Exhibit B heroto. 2.7 Exercise gf Options. Shttuld any Part.Y propose to eitorcise an option to lease with respoct to some or all of the lands covered ?hereby, it shall notify the other Parties in tho same manner provided for in Section 2.S above with respoct to acquisitions of Acqulred Interests and each such other Party shall elect to participate or to not participate in the exercise of such Option in the same manner as pr1>vided in Section 2.5. The effoctlve elections to participate in such an exercise of an Option and tho payment of costs and the ownership of interosts in.the lease acquired pursuont to S11ch exercise, shall be handled in the same manner provided in SectiDllS 2.3 and 2.4. AR'fICLElI! Prgspect Designation apd Participatjon 3.1 Prospect Designation. Upon completion of the intwpretation of the Program Date., RAW will delineate proposed Prospeots for exploration and doVBlopment within the Program Area and distribute to each Party a list and description of each proposed Prospect. The Parties wm then meet and RAW will m1lke a p.n::sentation on ellCh Prospect, including (I) the proposed· location for tl1e initial well on 1ho Prospect (and the date by which drilling of such initial well is anticipated to be commenced and an ·AFB 110vering lhe estimated oosts of drilling and completing such initial woll), and (ii) the acreage which RAW would include in the Prospect Area. The acn:age proposed to be included in a Prospect shall nllt inolude any acreage included in any other Prospect Area. The Parties will aUenlpt to agree on tho Prospect and the Prospect Area to be included i.sJ each Prospect in accordance with Sections 3~2 and 3.3. Notwithstanding tho above, in the event the Parties do not reach agtecment as to the Prospect Area for any Prospect within 60 de.ya atmr the Initial Prospect proposal, Smith shall have the right to make the final deoislon as to the delineatiDll of the Prospect and the Prospect .Area. The Parties shall document. their participation percentages in writing in Exhibit A to the Q~ting Agreement for that Prospect Area end from that point forward each Prospect Area shall be governed by a separate Operating Agreement in the fonn of Exhibit C in accordance with Article IV. The Parties acknow\edgei that they may acquire Leases or participation rlghl!l by fann·in or otherwise as to lands that are subject to an existing tbird- party opemting agreement fn that event, the Parties will tlllce the actions neceslillry to harmoni:zc 1he operating agreements to the eictent reasonably practical, but tho Operating Agreement contemplated by !his Agreement wm govern as betweon the Parties in the event of conflict. "Prospecf' shall mean the> area included in a geologic structural or stratigraphic trap or onclosuro which based on available data is reasonably belillVed to have tbo potential for llCllUmulations ofhydroearbons in commercial quantities. "Prospeet Area" means all lands within a oontiguous geographical area (not including lands within the Prospect Area for another Prospect previously designated pursuaut to the terms of this Agreement) which are believed by tho proposing Party to contain all of the Prospeot; it being undemood that a Prospect Area shall include all depths witbin the contiguous geograpbioal area so identified. 3.2 Proposf!)a by Parties for Prospects. After the meeting deic:ribed in Section 3, I above (or, if such meeting does not occur within thirty (30) days of the completion of the interpretation of the Program Data, then at any time more than 45 days after the i:ompletion of the ioterpre!Qtion of tho Program Data by RAW) any Party may propose that a portion of the Program Area be designated as a Prospect by giving written notice to the other Parties c:D11taining the 88111111 infonnailon described in Section 3.1. The Prospect and Prospect Area will be detormined in the s&n1e manner specified in Section 3.1. 3.3 Response to a Prosueet Proposal. Eacb Party desiring lo participate In a Prospect proposed undor Section 3.I or Section 3.2 shall notify RAW. in writing, within thirty (30) days after receipt of such proposal of its election regardiug participation in the proposed Prospoct and stating whether or not such Party agre11S with the acreage being proposed for inclusion in the Prospoct by tho proposing Parties. An ·election to participate in ii. Prospect which contains no swemcnt as to wllethor the Party agrees with the acreage proposed for inclusion in the Prospect Area shall be deemed agreement to the acreage proposed fur inclusion in the Prospect Area. A Party who elects nttt to pllrticipate in the Prospect and who disagrees with the acreage proposed to be included in the Prospect Area shall give notice of such disagreement to all Parties within the time 811d in the manner provided above for elections to participate. A Party failing to !'llllpond, within the time and in the manner provided above, to a proposal for a Prospect, or a Party responding and electing to not participate in a Prospect but uialting no statement as to whether it agrees witb the acreage proposed to be included in the Prospect will be deemed to have elected not to participate in the Prospect and to have agreed lo the acreage proposed to be inchidod in the 7 CJMl!l2243v.6 SEC 195509 CONFIDENTIAL Prospect Arca. If no otlier Party eleots to join the proposing Party bt creating a Prospect, tbon the proposing Party may develop the Prospect Arca for such Prospect fur !ts own aecown at its own oxpense aud the terms of this Agreement (other than the tenns relating 10 remctions and owndlip of the Program Data wbioh shall apply) shall not apply to the Prospect Area for that Prospect. 3.4 !,{efinaulshment of Interesl!! l!y Non-Parfklpating Parties· lf a Party agrees, or elects (or is deemed to have elected) not to participate in a particular Prospeet Arca, 1hon sucb. Party shall relinquish all right, title and il!tOrost ln such Prospect Arca without any right of reimbursement for com incurred up to the relinquis.hment dato (including, wlthour limitation, rights under leases, options or fium·ius insofar as they cover the Prospect Area, oveniding royalty interests, i;mled inl=rosts and backin imerests) to the Parties electing to participate in such Prospect Area in proportion to the percentages In which such participating Parties panicipate in such Prospect Area. If the initial well is not commenced on such prospect wlthin \ 80 days after lhe date the Prospect Area is finalized, ll new Prospect proposal shall be required and the non-participating Parties shall onco again have the right to participate in 'that Prcspect in BCQOrdance with the procedures in this Agreemeot ARDCLEIV Oqerat!on9 4.1 prilllng Ooeratiqns. All operatlona on each ProSpllCI Atea, commencing with tho establishment of such Prospect Ana, shall be governed by a separate operating agrcoment (''Operating Agreement") in the form attaobed hereto as Exhibit C (wi11t appropriate jnsertlons and exhibits reflecl:ins the agreements hereunder on the Prospeot Area, participation pereentages and Initial well), and this Agreement shall no longer have any application to suoh Prospect Aroa. except with respect to the owne111hip of Program Data as provided for in Section 1.2 above and except for mattllrs provided for in this Article IV. 4.2 Operator. It is agreed 11Dd llllderslood that RAW shall ba designatod as Operator in the Operating Agreement eucuted for each Prospect Area in which it participates. AB to any 'Prospecrt Area in which RAW has elected not to participate, Smith shall dosignate an oporator of said Prospect Aroa. 4.3 AMI (or Prospect Area. Commencing with the eslablislun1111t of a Prospect Arca, such Prospect Are• shall from thllt time forward no longer be s11bj L1Ct to the AMI provided for in Article ll and shall thereafter bo considered covered instead by a new Prospect Area specifi11 AMI. The new AMI shall (i) be binding on all Parties (whether or not they participated, or had rights to participate in such Prospect Area), (ii) coosist of such Prospeet Area, (lii) remain in effect until the later to occur of the Term of this Asfeement o~ the date the Operating Agreement for such Prospect Area tenninates, and (iv) be govem~d by the same temts sot forth in Seotions 2.3 and 2.4 except that the tmn proportiot\ or proportionate part (as such tenn is used in Section 2.3 or 2.4) shall mean the percentages In which the Parties participate in such Prospeot Area. Any portion of the Propn Area not included in a designmd Prospect Area shall continue to bo subjeot to tho AMI provided for in Article D. 4.4 LlmUgtlon on Number ofAFE's. The Parties agree !hat during the first 12 months of the Tenn no more than three (3) active woU proposals and AFE's shall be outstanding at any one timo under tills Agieement and the On Point Agreemciit, on a oombined basis. 4.S Exptcise ofOptlom In Prospect Area. With .respect to eacl1 Prospect Area, an option to acquire oil and gas lnteresta to the extent it covers such Prospect Area, may be OlCercised by any Party owning an interest therein i11Sofar as such option covers land within a Prospect Area. The leases acquired by such eic:ercise shall be owned and, subject to Se1:tion 2.2 abovco, paid for by Ibo Parties participating in such Prospect Area in the proportions In which they participllled in that Prospect Area. It is recognized that some options may limit the number of times they may bo exercised, and, in sueh event, several Prospect AreM may have to be combined in a single exercise of such an Option (and such exercise may have to be dofcncd until such a consolidaled l!Xlll'Cisc is practical). ARTICJ..EV Restrictions on Transfen and Bi9t or Flnt Refusal S.1 General Restriction on Transfer. Elwopt as othmse provided in Section 1.2 with respect to Smith, no Party, ettltcr directly or through an Affiliate, may transfer or acquire any lease, royalty, overriding royalty or other interest of any 1)tpe in tbe mineral estate or any petroleum exploration or seismic license (individually and collectively an "!!!W:m"), or participate in tho acquisition of any Interest from a third party holding any Interest, which Interest ls located pertilllly or entirely within the Program Area, other than In accordance with tho provisions of this Agrel'!llent and the applicable Operating Agreement, 8 CJM 1!12243v.6 SEC 195510 CONFIDENTIAL  if any. S.2 Pref81'1!odal Right to Purchase. As long as Smith Enargy owns an lnterat In the Progt8lll Area or in a Contract Area under Bil Operating Agreement, th11 Parti111 horoby grant to oach other a prefer1111tial right to pWQ!Jase all or any p11rt of a Party's ln1:etest in 1bis Agreement or in the lands subject to the applieablc Opmting AgreelllDDt which is to be Tr1111sferred to any third party otber than a Permitted Assignee. all as defined below. This preferential right to purchase under this Agreement shall no longer apply to any Party ofter Smith has transferred all of its rigb1s 1111der this ~11111ent and shall no longer apply as to a Contract Area governed by an Opmating Agreement after Smith has transferred or relinquished all of its rights to the lands in the Contract Area governed by that Operating Agreement. (a) If any Party desires to Transfer, as defined below, its Interests, DI' any portion, in this Agreament or tho AMl (a. "Transferor Party(lea)'?, Transferor Party(les) must first provido written notico of such Intent to tho othOf Parties. If the proposed Transfer is to a Permitted Assignee, the non-transferring Parties shall not have a Right of First Refusal as to that Transfor. lf the proposed Transfer is to a person other than a Permitted Assignee, as defined below, the noil-traosferring Parties shall then have the right ("Right or First ReiU.8111"), but not the obligation, to purchase lheir proportionate share of the offered portion of the Intmsats pursuant to tbls panigraph. The mm· Transferor Parties shall have thirty (30) days from receipt of such notice within which to detennine whether it or they elect to purchase the of&red Interests. If the Jll'Oposed Transfer is to 11 Permitted Assignee, the non-Transferor will not have a Rigb1 of First Refusal but tile Permitted Assignee must ratify this Agreement and the applicabl11 Operating Agreement nnd the Transferor shall be jointly and severally liable for all llablllties and obligations of the Permitted Assigneo undDr this Agrooment and 1he Operating Agreement. "Transfer" means any sale, lease, conveyance, gift, transfer, ex\lhange, assignlllOllt, disposition by will or inberitance or other disposition of (or any agreement or ammgement to sell, lease, convoy, gift, transfer, exchango, assip, or. otherwise dispose of) all or llllY portion of the Transferor Pal11es' Interests in 1111)' manner, directly or Indirectly, whether for money, othDr consideration or otherwise. . •,. ''Permitted A11ipee" means: (w) a spouse, descendants or relative of the Transferor Party; (x) the spouse, descendants or relative of the controlling pemon of a Transferor Party or the spouse, descendants or relative cif a llllUlllgeI of a Transferor Party; (y) a legal cmlity including but not limited to any Trust, panncrship, or company controlled by the Transferor Party or by tho spouse, descendants or relatives of the Transferor Party; and (z) any employee, consultant or person under contract to 11 Transferor Party (or any Trust, entity or partnership owned by such person). (b) If the Ttansfer contcmpl11ted by section S.2(a) above results from a bona fide offer to purobasc fi'om a third party, exercise of the non-Tnmsferor Parties' Right of First Rpfusal shall be based on the aame terms and oond!tions as the third party offar. If the Tl'llDsfer contemplated by section S.2(a) above is not tho result of11 bona fidc third party offer, the non-Transfuror and tho Transferor Parties shall attempt to agree upon 11 purehaso price for the T11111sfcrred Interests. Jn the evellt the Parties fail to agree upon a purchase price for the Tnmsfllrred Interests within km (10) days after exercise by the non-Tr1111sferor Parti1111 of their Right of first Refusal, tbDJJ the Transforor Party shall not be allowed to Transter the Trunsferrcd Interestto the third party and the Non-Transferor Party sball not be entitled to purohase the Transferred Jnt111eat. If a bona fide offer to purchase is subsequently received or 11 price is established for thc Transferred interest, 1be provisions of this Section S.2(b) &hall be followed as to the new offer or price. The provisions of Article V shall apply to any future Transfer by the Transferor Party and to any successor to the Transferor Party. 5.3 ~·Any Party shall have the right to arrauge its own financing for any wells or othDr projects to be conducted on one or more Prospoct Areas without any obliglllion to provide, or assist this other in obtaining, similar fm1mclng. No Party shall oncumber the rights and interests of any other Party in a Prospect Area. A Party shall have the right to plcdg-e, mongago or encumber all or any part of its Interest in one or more Prospect Areas without triggming a Right of Fir.It 'Refusal under ArtfcJc V; provided that any pledge, mortgage or encmnbrance will be subject to the followii'lg restrictions and conditioos: (a) the lender or secured party shall acknowledge in writing that the iuto.rest pledged is subject to thia Agreement and the Operating Agreement; (b) t11e document creating th11 pledge or 811Qumbrance must expressly state that upon forecloswo on the pledged interest, the lender or secured party will receive the pledged interest subject to this Agreement and the Operating Agreement; and 9 CJM I!l2243v.6 SEC 195511 CONFIDENTIAL  (~) prior to any subsequent Transfer of the interest by lhe lender or secured party, the lender or secured party must comply with the procrdures set forth In Section 5.2(b) and the other Partias shall have the Right of First Rotil$11l .se! forth in Section S.2(b). 5.4 Tag Along Rigb!J. Jn the event Smith lntmds to sell all of its rights under this AgrCOlllcnt to a third party, Smith shall provide written notice to the othlil' Parties of the lntlindlld sale. When the intended sale tel'lllS are established, Smith shall outline th11 intonded terms to all Parties. Each Party will have 1h11 right and option for fifteen (15) days aft1:11 reoeipt of the intended sale terms to elect to sell its Interest along with the interest of Smith so long as the pUIVhaser of Smith's intmst agrees to purchasu the additional Party's(ies') interest(s). Smith shall have the solo all1hority to negotiate the tenns of the sale and the other Parties will have the election to sell or not to sell on tho samo torms a8 nogotialod by Smith. The tag along rights gnmtlld in Ibis Section shall not apply lo a sale by Smith of all its interest in a Contract Area governed by an Operating Agteem1111t. ARTICLE VI M!mlellaneoos 6.1 E!ecilons. Bat:b Party to thi$ Agreement has the right to make soparate and Independent elections regarding all aspects of tho Agreement, including but not limited to Acquired lntm:sts and well participation. · 6.2 ~. All notices and other' communications required or permitted under this Agreement shall be in writing and unless otherwise speaifiaally provided, shall be delivered personally, or by wail, tolecopy or delivery service to the addresses set forth below the signatunls of the Parties and shall be considered doliveted upon tbo date of receipt. Ellllh PIU'ly may specify as it.s proper addiess, any other post offico address within the continental limits of tho United States by giving notice to the othei' Pertills, In the manner provided in this section, at least ten (10) days prior to 1he effective dato of auch change of address. 6.3 Np PartnerahiD• The liabilities of the Parties hereunder &ball be several, not joint or collective. . :'.. Each Party shall be liable only for its cost bearing share of all liabilities and obligations arising under this Agreemont as set forth OD Exhibit B hereto AND BACH Party's share of 1he liabilities and obligations arising under any eppli~le Operating Agreement as sot forth on ·the .Exhibit A to the applicable -Operating Agreement It is not the intention of the Parties to cicate, nor shall this .Agreo.ment be deemed as creating a mining or other partnership or ass~iation or to render the Parties liable as pu'tners. 6.4 Internal Revenue Code.Election· The pro\llsions of ArtielelXofthe form of Operating Agreement attached beroto shall constitute the agreement between tbe Parties regarding applicable provisions of the Internal Revenue Code. 6.S Eq[oreement. .· Should any Party hereto be forced Ill resort to legal action to enforce tho provisions hereo~ the prevailing l'IU'ly shall be cntitllld to roasonable attorneys' fees and all eourt costs incurred in &nch legal action. The Parties agree that the c11;clusive VClllue for all disputes arising under this Agreement shall be in. Harris County, Texas. 6.6 Jl1!!, No Party warrants title to interests it is contributing to the Progrmn Area except by, through and under itself, aod not o1bmvise. Each Party agrees to furnish to the other Parties any title data in its · possession or available to it. 6,7 Mult!P1j! Co!ll!teiparts. Thi& Agreement may be executed in any number of counterparts, nooe of which nellds to be executed by all Parties, and shall be binding upon each Party executing such a cowite1part as if all Parties had executed the same Instrument. • [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 10 CIM 192243v.6 SEC 195512 CONFIDENTIAL  EXECUI'BD to be effective as of the Bffi:ctive Date, A.a.Amended as of June 1s11t, 201 l :w~~~· ~==!\-~· JDH RAW l!NBRGY, L.C. BLOER EXPLORATION, INC. . ·. 11 CJM 192243v.6 SEC 195513 CONFIDENTIAL  EXBCUTBD to be effective as of the Effective. Dale, As Amended as of J\llle 1511, 2011 RAW OIL & QAS, INC. Br.---------~-­ Name: - - - - - - - - - - - Title:----------- JDH RAW ENERGY, L.C. By=----~-~---~- Name:: _ _ _ _ _ _ _ _ _ __ Titlei - - - - - - - - - - - MARKP.HARDWICK STEVE BLAYLOCK ELOBR BXPLORATION, INC • . •. By:~·-..,.----------- Name: __________ ~ Tfilo: _ _ _ _ _ _ _ _ _ __ SMITH SNERGY COMPANY By:.......,,..--::::~~------- Lester R. Smith, President 11 CJM 192243•.6 SEC 195514 CONFIDENTIAL  EXHIBlTA Attached to Geophysical Exploration Agremnent Dated December 1, 2010, AmDllg RAW, RAW LC, Hardwick, Blaylock, Elger and Smith Outline and Deseription of the N. On Point Extension & O'Donnell Program Atea 4sA.mendedonJune JJih. 2011 O'~e following lgndf are in the N. On Point Extmlon Area> The followJng lands are in Lynn Co11nrn Section 230, EL & RR Ry. Co. Survey (640.0 ac.) SOGtion 229, BL & RR Ry. Co. Survey (640.0 ac.) E/2 of Section 234, Blk. l, L & SVRy. Co. Survciy (320.0 ac.) Section 233, Blk. l, L & SY Ry. Co. Survey (640.0 ac.) Section 227, Blk. l, L &. SV Ry. Co. Survey {640.0 ao.) Section 228, Blk. 1, L & SV Ry. Co. SllMly (640.0 ae.) Section 225, EL & RR Ry. Co. Survey {640.0 ae.) . . Section 226, EL & RR Ry. Co. Survey (640.0 ac.) ' Section 4, EL & RR Ry. Ct>. Survey (640.0 ac.) Section 318, Blk. 3, BS &.PRy. Co. Survey (640.0 ac.) Seetion319,B. S.&P. Ry. Co. Survey{647.S acres) Section 320, A·S2S, B. S. & f. Ry. Co. Survey (640 acres) Bl2 of Sec. 44, Bile. E, A-726 &A-1158, E. L. & R.R. Ry. Co. Sumy (320 acres) Section IS, A-322, T. T. R.R. Co. Suniey (640 acres) NE/4 Section 16, A-689 & A-1080 &A-J(}SJ, T. T. R.R. Co. Survey(160 acres) Section 2, Blk. C·42, A-1062 & A-8S8 & A-1S42, PSL Sutvey (640 acres) Section 1, Biie. C-42, A-1541 &A-1044, PSL Survey (640 acraa) Scction 232, A-960, E. L. & R.R. R;y. Co. Survey (640 ai:rcs) Section 231, A-J38, E. L. &: R.R. Ry. Co. Survey (640 acres) Section 322, A-SSS, B. S. & F. Ry. Co. SUNey (640 acres) Section 14, A-1137 & A-806, H. E. & W. T. Ry. Co. Survey {640 aCl'llS) 12 CJM 192243v.6 SEC 195515 CONFIDENTIAL  fTht following lands qre in th« O'Donnell Area} The fonowing lllllds are In the Dawson & Ll1m Conptiea: Section 65, Blk. 8, Bl & RR Ry. Co. SW'Vey (640.0 ac.) Section 66, Blk. 8, Bl & RR Ry. Co. Survey (640.0 ac.) E/240 ac. Section 68, Blk. 8, El & RR Ry. Co. Survoy (240.0 ao.) Section 67, Blk. 8, El & RR Ry. Co. Swvey (640.0 ac.) The ronowing laDlb are In the Lvnn Countr: Section 54, Rik. 8, El & RR Ry. Co. SUMly (640.0 ac.) Section SS, Blk. 8, El & RR Ry. Co. Survey (640.0 ac.) Section 53, Blk. 8, El & RR Ry. Co. Survey (640.0 ac.) Ef2 of Section 52, Blk. 8, El & RR Ry. Co. Survey (320.0 ac.) Section 35, Blk. 8, Bl & RR Ry. Co. Survey (640.0 ac.) Semon 34, Blk. 8, El & RR Ry. Co. Survoy (640.0 ac.) Section 41, Blk. B, El & RR.Ry. Co. Survey (640.0 ac.) Section 42, Blk. 8, 51 & RR Ry. Co. Survey (640.0 ac.) Section 40, Blk. 8, El & RR Ry. Co. Survey (640.0 ac,) Scotiou 46, Blk. 8, El & RR Ry. Co. Survey (640.0 ac.) Section 48, Blk. 8, El & RR Ry. Co. Survey (640.0 ac.) Section 47, Blk. 8, El & RR Ry. Co. Slll'Vey (640.0 ac.) Section 36, Blk, 8, Bl & RR Ry, Co. SW"Vey (640.0 an.) E/2 of Section 37, Blk. 8, El & RR Ry. Co. Survey (320.0 ac.) The following land!! are lo!l!ted in Dawson ColUlty. Texas: Section 38, Blk. C-41, PSL Survey (640 ac.) Section 39, Blk. C-41, PSL Survey (640 ac.) Section 40, Blk. C-4 l, PSL Survey (640 ac.) Section 17, Bile. 33, TWP 7·N, HE & WT Ry. Co. Survey (640 ac.} 13 CJM 192243y,6 SEC 195516 CONFIDENTIAL  BXHIBITB Atta.abed to Geophysic:al Exploration .Agreem.~nt Daled December I, 2010, as Amended June Is", 2011, Among RAW, RAW LC, Hardwick, Blaylock, Elger and Smith Oil and GM Interests Scheciulc A. B. C. D. bm Geomcal Pr02ram Costs Shan! OU and Gas Interest Wotking lnterC$f After Acquisition Cost CUIDg Polnl on Fhit SbateUnt!l l.2 Wells und In All Pil'lt 1.2 Wells Drilled Subseguont Qpm.tions Smith Energy Compllll)' 100% 100%• 75.00% RAw on & Gas, Joe. 0 JDH.MW'.Bnel'l!Y, L.C. 6.2S% Mark P. Hunlwlck 6.25% Stcvo Blaylod\ 6.25% Elger llxploratlon, lo.c. ~ 100.00% "'Until first one llJld 6/1 Olh (1.6) wells have been drilled to casing point • !'.. 14 CJM 192243v.6 SEC 195517 CONFIDENTIAL  TAB J Bad Billy Agreement (Amended) (PX 85) 10   Mark P. Hardwick P. 0 . Box 213 Oil & Gas Properties (432) 683-3322 Midllllld. TX 79702-0213 E-mail: mark@mplrardwick.com Fax (432) 683-3325 December 17, 2010 Smith Energy Company P.O. Box 52890 Houston, TX 77052 Attn: Mr. Lester Smith Mr. Paul A Hardwick 1025 Martin Houston, TX 77018 Rl:· Terry, Yoakum, Hockley, Lubbock & Lynn Counties Lease Acquisition Program-Bad Billy Project Area Dear Mr. Smith and Mr. Hardwick: The purpose of this Letter Agreement is to change and replace the Letter Agrcmcnt datod November 1, 2010 between Mark P. Hardwick and Smith Energy Company. This letter, when accepted by each of you, will be our agreement ("Agreement") concerning the acquisition of oil and gas leases in Terry, Yoakum. Hockley, Lubbock & Lynn Counties, Texas, within the area known as the "Bad Billy Area" by Smith Energy Company ("Smith") for a period commencing the date of this letter, and ending three (3) years from such date (the"Agn::ement Term"). The Bad Billy Area is depicted on the Exhibit "A" attached to this Agreement, being a Plat of portions of Terry, Yoakum, I fockley, Lubbock & Lynn Counties, Texas, with the outline of the Bad Billy Arca being enclosed in the outlined and shaded area and marked "AMI Outline". The area in yellow on the Exhibit "A" is subject to previous Agreements (N. Mound Lake, Muy Caliente, On Point & N. On Point Extcntion/O'Donnell/S. Faskcn) and excluded from this Letter Agreement. Smith is desirous of acquiring oil and gas leases wilhin the Bad Billy Arca, and has agreed that as consideration for the geologic lead, is willing to compensate Paul A. Hardwick ("Paul") by the assignment of an overriding royalty interest in any such acquired leases, and, in consideration of Mark P. Hardwick ("Mark") overseeing the acquisition of leases, is willing to assign to Mark an overriding royalty interest in all leases acquired within the Bad BHly Arca in accordance with, and subject to the terms and provisions herein. During the Agreement Term, Mark will engage lease brokers, and other necessary field title research and land support persons, and attempt to acquire oil and gas leases within the Bad Billy J\rca, all such leases being owned by Smith, and with Smith paying the bonus considcrd.tion therefore, and Smith shall pay all expenses incurred by Mark in connection with such lease acquisition. plus a day-work brokerage fee. all such expenses and fees to be paid and reimbursed to Mark as incurred, bul in any event within thirty (30) days of the date such expenses, or fees are incurred. PLAINTIFF'S EXHIBIT 25 Hardwick 000214  For any leases acquired by Smith in the Bad Billy Arca within the Agreement Term. Mark and Paul shall be entitled to an assignment of an overriding royalty int1-Tcsl equal to one percent (I%) of cight- eighths (8/8) for Mark. and one and one-half percent (1.5%) of eight-eighths (8/8) for Paul, proportionately reduced. and further reduced to the extent such overrides would cause the combined lease royalty and the overriding royalty interest burdens to exceed twenty-seven and a half percent (27 .5%). Leases will be acquired in the broker's names, on economic terms and parameters as approved by Smith and the brokers shall, upon recording and payment for each such oil and gas lease, deliver to Mark and Paul an assignment of overriding interest in the fonn as attached to this Agreement as Exhibit "B". Simultaneously, lhe Brokers will be instructed to deliver lo Smith an assignment of each such oil and gas lease on the form attached to this Agreement as Exhibit "C". If this letter correctly sets forth the terms of our agreement concerning the subject matter thereof, please so indicate by executing one (1) original oft11is letter and returning it to the undersigned at your earliest convenience. AC'@D TO AND ACCEPTED THIS ___L DAY OF-E>ECEMBER. 'rl IO 2-c l l Hardwick 0002 I 5  Muy calienl/011 Point/ Mound ua/ N. on Point Exttmlon/O'ponnald/ South Faskln·EKtiuded Area  EXlllBIT ~e" Tary. Yoakum, llocklcy, l.ubbock & Lynn Cuuntics l..ca.~c Acquisition Pmgram · Bad II illy Area f.cucr Al!J"'Crncnl Bctwc~'tl Marl< I'. Hardwick & Smith Energy Coinpwiy dated Ol!Celllbcr 17. 20 I0 ASSIGNMENT OF OVERRHHNG ROYAi.TV IN'ffREST ThL• MillJlmcnt ofOvcniding Royalty lnt~1 (thi~ "Assignment"). ~kd a.< of__ _ 2010. is made by IBrukcrJ, whn.CT'C11tlllc ORI created hy this Assignment llS to each of the Leases, shall e:ttcnd to. and burden any alllClldmeiit of !iUCh lea.•=<. as well :is :my n:ncwal lease or extension thcrco[ Any new tease ncquin:d by As..igncc. or any affiliated entity thawr. within om: (I) year of the e:itpimtim or ony of the I .cases. covering the i;;nnc owna-ship intcn:st 11S any of the I.cases. shall be deemed a ··re11awal lcusc". a.~ tlUlt term is used hcrL~n. l1'c OR I assisncd as tu ony of the Leases may be pooled in accordance with, and on the same basis as provided for in such l=scs. without the necessity for writlen cnnscnt by Assign"". Thi.• Assignment ili made subjc.:t to the follow int! mauci,;: ( 1) The terms. provisions and conditions of the l,C3Scs: and (2) /\II maucrs :ilfLocting title to the l .«ise:s aoo l Mds a.• reflected or rcaird in the official public rCCilnls or the ('nunty whac the 1.unds an: siluoted. Assignee hereby assume:; ond sh.111 he responsible for und comply with ~ll duti~..i and obliptiC>ns. e11:prc.'>-~ or implied. 3ri~ing wilh rcspcci to the I.cuso:s. This Assignment shall bind und inure to the benefit of As.i.ignor 11nd A.'>.~igncc and their respective 5UCC<.'li$01'5 and a.<;.'iigns. Assignor wamut~< Li Cle to c:nch Lease, by, thtough and under As.•ignor, hut not otherwise. IN wrrNE'iS WllF.Rl:OF, the und~-r..igncd has CJoll~ (SI0.00) illld other good and valuable c:.in.,iclL."TUlion, the reccipl 1111d sufficiency of which are hereby acknnwlcdgcd, Assignor docs IK:rcby GRANT, BARGAIN, SEU., CONvt:v. ASSIGN, TRANSn:R, SF.T OVER AND 01:-:uv•:a unto Assignee. subj0<."I to the terms hereof. all of A.o;.•ignor·s right., cillc and inlcn.:st in amlto the following (lhc""l.ascs"); All of the Leases dcs"Tibcd in Exhibit" A" atlachcd hcr-cto and made 3 part hcrc.,f, as to all of the land.• cnverec.1 thcn:by (the ~1 ands"). II is lhe intent of Assignor to convey and this Assignment h=hy canvcys lo Assignee.. sul!jcct to the conditions herein contained. all of AS!.ignDT·s right. title. and imcrest. in and 10 the Lc:Jscs. a.• to the I.ands. rcgardlcs~ ohny cmlrs in dcsa'iplion. Wl)I inwm:cl or misspelled namci; or any transcribeU or inl."OTTc~t nxording refCfl'lll:cs. Assisnor agrees to c•u?cutc ~'Ul!h further a.'5urancc:; as may be nco:ssary lo effccl such intent. ·1nis Assignment is made ~11bjoc1 10 the following 1nu1tcrs: (I) 'Inc Icons. provision.< and cnnditioos oflhc I .cases; (2) All maltt!r.; aff~'Cting title lo the Leases and J.amls a.• rcOccted nfrecortl in lhc official public record.<; of the County whm: the l.8nds are situated: end (3) Thal cettlin Assignment ofOv<:niding Roy;ilty lnt.:rc:.'\ dated _ _ _ _ _ _ • by Assignar, in favor nf Mark I'. llardwick and l'aul A. I lardwick. covering the Leases and I.ands. Assignee hereby llS.'umcs and shnll be r~'flllnsihlc for and comply with nil duties and obligalimL• eK~' 11r implied. arisina with respect tn the I.cases. Thl< A1'Sig11ment shall bind and inure lo tllo benefit of Assignor and A.o;.•il7J<.'C ond their respective Sllcccssors and assigns. Assignor wammts title to each l.m.'C. by, through ond under Assignor, but nut othcrwi~. IN WITNESS WI IER EOF. the undersigned ha.< occotcd this in~1rument on the date oflhc aclmuwlcdgmcnl :mn~xt:d hc:rnlo. Assignor !Bmkcr) By:_ _ _ _ __ __ _ _ __ __ _ _ __ _ __ _ Nam~------------------------ Tille:_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ ACKNOWl.t:DGM •:.NT STATEOFHXAS COUNTY OF _ _ _ _ _ __ _ _ _ __ , This instrum011 was acknowledged before me on this _