Formosa Grande Exploration Agreement

EXPLORATION AGREEMENT
Formosa Grande Project
Jackson and Calhoun Counties, Texas


This Exploration Agreement (the "Agreement") is entered into as of August 1, 1997, by and between Parallel Petroleum Corporation ("Parallel"), TAC Resources, Inc. ("TAC"), Allegro Investments, Inc. ("Allegro"), Beta Oil & Gas, Inc. ("Beta"), Pease Oil and Gas Company ("Pease"), Four-Way Texas L.L.C. ("Four-Way"), Meyer Financial Services, Inc. ("Meyer") and Wes-Tex Drilling Corp. ("Wes-Tex") all hereinafter collectively referred to as (the "Parties").


WITNESSETH:


WHEREAS, Parallel has acquired, for itself and for the benefit of TAC and Allegro, seismic and lease options, oil and gas leases and seismic permits covering an area of approximately 90,000 acres located in Jackson and Calhoun Counties, Texas, as depicted on the plat attached hereto as Exhibit "A".


WHEREAS, Beta, Pease, Four-Way, Meyer and Wes-Tex propose to acquire undivided interests in and to the rights granted by such agreements, and to participate in conducting a 3-D seismic program upon the lands covered thereby.


NOW, THEREFORE, in consideration of the premises, the mutual agreements and obligations set forth herein, and the mutual benefits to be received hereunder, the Parties agree as follows:


ARTICLE 1. DEFINITIONS


For the purpose of this Agreement, the following terms shall have the meanings designated below:


1.1 Area of Mutual Interest "AMI" means the lands outlined on the plat attached hereto as Exhibit "A".


1.2 "AMI Interests" means any interest in the oil, gas or other minerals in and under the AMI, including leasehold interests under oil and gas leases, oil and gas lease options, interests of the farmee under farmout agreement, and other such interests or rights similar or dissimilar to those mentioned, including, but not limited to, seismic permits. AMI Interest does not, however, include nonpossessory interests in the oil, gas and other minerals in and under the AMI, such as royalty interests, overriding royalty interests, net profits interests, or other such interests whether similar or dissimilar to those mentioned.


1.3 "Existing AMI Interests" means the Seismic and Lease Options, Oil and Gas Leases and Seismic Permits which have been acquired by Parallel as of December 1, 1997.


1.4 "Subsequently Acquired AMI Interests" means all AMI Interests acquired after December 1, 1997.


1.5 "Contract Lands" means lands located within the AMI which are covered by AMI Interests.


1.6 "Initial Interest" means a Party's ownership in Existing AMI Interests, and the amount of interest a party is entitled to acquire in Subsequently Acquired AMI Interests, subject to the provisions hereof.


1.7 "Jointly Owned AMI Interest" means an AMI Interest in which the Parties own an interest pursuant to the terms of this Agreement.


1.8 "Lease Burden" means any royalty, overriding royalty interest, net profits interest, production payment, carried interest, reversionary working interest or other charges upon a leasehold interest or the production therefrom.


1.9 "Losses" means any and all losses, liabilities, claims, demands, penalties, fines, settlements, damages, actions, or suits of whatsoever kind and nature (but expressly excluding consequential damages), whether or not subject to litigation, including without limitation (I) claims or penalties arising from products liability, negligence, statutory liability or violation of any applicable law or in tort (strict, absolute or otherwise) and (ii) loss of or damage to any property, and all reasonable out-of-pocket costs, disbursements and expenses (including, without limitation, legal, accounting, consulting and investigation expenses and litigation costs) imposed on, incurred by or asserted against an indemnified Party in connection therewith.


1.10 "Operator" shall mean Parallel Petroleum Corporation.


1.11 "Party" or "Parties" means Parallel, TAC, Allegro, Beta, Pease, Four-Way, Meyer, Wes-Tex and any other person or entity, singularly or as a group, which hereafter becomes a party hereto or is otherwise subject to the terms hereof.


1.12 "Pre-Existing Data" means such data which includes, but is not limited to: seismic records and related seismic data, electronic and mud logs, cores and core analyses, field studies (less and except any proprietary methodology or process used by any Party in such studies), production tests, engineering, geological, geophysical, paleontological data, interpretive data and maps prepared by any Party in existence as of the date of this Agreement.


1.13 "Proportionate Share" except as otherwise provided for herein, shall be calculated by dividing a Party's Initial Interest by the aggregate of the Initial Interests of all Parties who are to share an interest or an obligation pursuant to the terms hereof.


1.14 "Prospect" means an area within the AMI which is designated as a Prospect pursuant to Article 6.3 hereof and within which there is expected to occur, based on information developed as a result of 3-D Seismic Operations, a commercial accumulation of oil and/or gas in a specific structural or stratigraphic trap.


1.15 "Subsequently Created Burden" means a lease burden which is created by a party subsequent to its acquisition of the interest which is subject to the burden.


1.16 "Costs Prior to Leasehold Acquisition" means all costs of any type whatsoever which pertain to this project, covering lands located within or outside the AMI, including, but not limited to costs of seismic permits, seismic and lease options, oil and gas leases, and renewals and/or extensions thereof, land brokerage, legal costs, surface damages, surveying, seismic acquisition, processing and interpretation, etc., which are incurred prior to Leasehold Acquisition conducted under the provisions of Article 4 hereof.


1.17 Other terms are defined elsewhere in this Agreement.


ARTICLE 2. INTERESTS AND SHARE OF COSTS OF THE PARTIES


2.1 Area of Mutual Interest. The Parties hereby establish an Area of Mutual Interest "AMI", same to be comprised of the area outlined on the attached Exhibit "A", and which shall cover AMI Interests located therein. This AMI shall continue for a term of seven (7) years, or the expiration of the last Jointly Owned AMI Interest, whichever is earlier.


2.2 "Interests and Share of Costs of the Parties" The Parties hereby agree to own, as their Initial Interest, and agree to bear the costs set out below, as follows:


Party Initial Interest Share of Costs Share of Costs
Prior to Leasehold for Leasehold
Acquisition Acquisition and
Subsequent Operations Parallel .5312500 .5000000 .5312500


TAC .0625000 .0000000 .0625000


Allegro .0312500 .0000000 .0312500


Beta .2000000 .2666666 .2000000


Pease .1250000 .1666667 .1250000


Four-Way .0200000 .0266667 .0200000


Meyer .0100000 .0133333 .0100000


Wes-Tex .0200000 .0266667 .0200000


Parallel, TAC and Allegro have acquired and presently own the Existing AMI Interests. Beta, Pease, Four-Way, Meyer and Wes-Tex agree that their respective costs in the Existing AMI Interests shall be based on $100.00 per net mineral acre on seismic and lease options, and cost plus 33.33333% on oil and gas leases and seismic permits. The Existing AMI Interests are presently comprised of approximately 73,102.116 net mineral acres covered by seismic and lease option, 522.896 net mineral acres covered by seismic permit where cost was $5,228.96, and 146.890 net mineral acres covered by oil and gas lease where cost was $7,344.50. Based on the foregoing, the current total cost of Existing AMI Interests is Seven million three hundred twenty-two thousand seven hundred eighty-five and 06/100 Dollars ($7,322,785.06). Beta, Pease, Four-Way, Meyer and Wes-Tex agree to pay Parallel their Proportionate Share of such cost, as referenced above, in the Existing AMI Interests upon execution of this Agreement. Beta, Pease, Four-Way, Meyer and Wes-Tex hereby agree that Parallel shall have the exclusive right to acquire AMI Interests through December 1, 1997, and that same shall be treated in all respects as Existing AMI Interests. Beta, Pease, Four-Way, Meyer and Wes-Tex agree that they shall be obligated to accept such interests in the same percentages and pay Parallel for such interests at the same terms stated herein. Payment for such interests shall be due within fifteen (15) days after receipt of written notice as set out in Article 2.4. Interests available to Parallel which costs exceed those stated above shall be offered to the other Parties as per the procedure set forth in Article 2.4 below.


2.3 Recording. Parallel agrees to file for record in the office of the Jackson County Clerk, all Memorandums of Seismic and Lease Options covering the Existing AMI Interests within fifteen (15) days of the date this Agreement is executed by all Parties.


2.4 Subsequently Acquired AMI Interests. Any Party acquiring a Subsequently Acquired AMI Interest, directly or indirectly, shall notify the other Parties hereto. Such notice shall set forth (i) a description of the interest acquired, (ii) the total cost of the interest, including all land and legal costs associated with the acquisition thereof, (iii) the Proportionate Share of the notified Party and its cost therein, and (iv) any other pertinent terms of such acquisition, including, but not limited to, copies of the instruments of conveyance, copies of leases, assignments, subleases, farmout and other contracts affecting the AMI Interests, copies of paid drafts or checks, itemized invoices of actual costs incurred by the acquiring Party. Parties shall have fifteen (15) days from the receipt of this notice to acquire their Proportionate Share of the Subsequently Acquired AMI Interest. A Party's election to acquire shall be given in writing and accompanied by Party's payment of its total cost for such interest. If a Party's election and payment are not received within such fifteen (15) day period, it shall be conclusively presumed that such Party has elected not to acquire its Proportionate Share of the Subsequently Acquired AMI Interest and has forfeited its right thereto. A Party's failure to exercise its option as to any particular notice shall not constitute a waiver or release of its right to acquire any interest described in any subsequent notice delivered hereunder.


2.5 Existing Burdens. Each Party's interest under this agreement in the AMI Interests, and oil and gas leases which may be acquired thereunder, shall be subject to and burdened by its proportionate share of all existing operating agreements, existing and pending pooling and spacing orders and all Lease Burdens other than Subsequently Created Burdens. Parallel, TAC and Allegro represent that they have not burdened the Existing AMI Interests acquired or to be acquired with any liens or Subsequently Created Burdens. Each Party agrees to perform its Proportionate Share of the obligations under the AMI Interests acquired pursuant to this Agreement and the other obligations described in this Article, but only to the extent that such obligations arise after the acquisition of such AMI Interests by such Party.


2.6 Expiring Options. If any lease options covered hereby will expire prior to completion of the Seismic Operations contemplated herein, Operator shall use its best efforts to renew and/or extend such option for a sufficient period of time to complete the proposed 3-D Seismic Operations thereon and exercise the lease option thereunder. Payment for extensions and/or renewals shall be due within fifteen (15) days after receipt of an invoice therefore.


2.7 Assignments. Upon receipt of payment for AMI Interests, Parallel shall assign to the Parties hereto their Initial Interest in such AMI Interests. Such assignmen ...