Ganado Exploration Agreement

EXPLORATION AGREEMENT


This Agreement is made and entered into this 1st day of November, 1997, by and between PARALLEL PETROLEUM CORPORATION ("Parallel"), SUE-ANN PRODUCTION COMPANY ("Sue-Ann"), TAC RESOURCES, INC.("TAC"), ALLEGRO INVESTMENTS, INC. ("Allegro"), (said Parties being sometimes hereinafter collectively referred to as "Parallel/Sue-Ann"), BETA OIL & GAS, INC. ("Beta"), PEASE OIL & GAS COMPANY ("Pease"), MEYER FINANCIAL SERVICES, INC. ("Meyer"), and FOUR-WAY TEXAS, L.L.C. ("Four-Way") (said parties being sometimes hereinafter collectively referred to as "Beta/Pease");
WITNESSETH:
WHEREAS, Parallel/Sue-Ann have identified the lands outlined on the map attached as Exhibit "A" hereto, except the lands and depths covered by the Leases described on Exhibit "B" hereto (the "Excluded Lands") , as an area that they desire to jointly explore for the production of oil and gas;
WHEREAS, Parallel/Sue-Ann have acquired the Leases and Seismic Options (as those terms are defined below) described in Exhibits "C-1" and "C-2" hereto (such Leases and Options being collectively referred to as the "Existing Leases and Options") covering the interests in the lands described in such agreements;
WHEREAS, Parallel/Sue-Ann desire to conduct 3-D Seismic Operations across most of the Contract Lands; and
WHEREAS, Beta, Pease, Meyer and Four-Way desire to acquire the undivided interests in the Existing Leases and Options and participate in the 3-D Seismic Operations to be conducted by Parallel/Sue-Ann, all as described below;
NOW, THEREFORE, in consideration of the premises, the mutual covenants, agreements and obligations set forth herein, and the mutual benefits to be received hereunder, the Parties hereto agree as follows:


ARTICLE 1. DEFINITIONS
For the purposes of this Agreement, the following terms shall have the meanings designated below:


1.1 "3-D Seismic Operations" means all operations which are necessary to produce a three-dimensional seismic data grid over the portion of the Contract Lands on which the Parties conduct such operations, including the processing and interpretation of such data.
1.2 "Contract Lands" shall mean the lands lying within the area outlined by the bold, solid line on Exhibit "A" hereto, except the Excluded Lands; provided, however, the "Contract Lands" may be enlarged or contracted to the same extent that all of the Parties agree to expand or contract the 3-D Seismic Operations to be conducted pursuant to Section 4.2 hereof.
1.3 "Existing Leases and Options" means those Leases and Seismic Options (as such terms are defined below) which are described in Exhibits "C-1" and "C-2" hereto, including any such Leases and Options which are renewed or extended pursuant to Article 2.3 hereof.
1.4 "Initial Interest" means a Party's initial interest hereunder as
set forth in Article 3.1 hereof. 1.5 "Jointly-Owned Lease" means a
Lease (as defined below) in which two or more of the Parties own an
interest pursuant to the terms of this Agreement.
1.6 "Lease" means oil and gas lease, oil, gas and mineral lease, unleased mineral interest, or sublease thereof, operating rights or other rights or partial interest therein, which authorize the owner thereof to explore any portion of the Contract Lands for (and/or produce) oil and/or gas therefrom, and the right to acquire any of the foregoing. This term also includes top leases, farmout agreements or any other type of agreement under which the right to explore and/or develop a portion of the Contract Lands can be earned including Seismic Options (as defined below).
1.7 "Lease Burden" means any production sale contract, lien, encumbrance, royalty, overriding royalty interest, net profits interest, production payment, carried interest, reversionary working interest or other charge upon a leasehold interest or the production therefrom.
1.8 "Net Mineral Acres" are calculated by multiplying the undivided interest in the minerals covered by a Lease or Seismic Option times the number of gross acres covered by such Lease or Seismic Option times a Party's undivided interest in such Lease or Seismic Option.
1.9 "Party" means either Parallel, Sue-Ann, TAC, Allegro, Beta, Pease, Meyer or Four-Way or any other person or entity which hereafter becomes a party hereto or is otherwise subject to the terms hereof.


1.10 "Proportionate share", except as otherwise provided for hereinbelow, shall be calculated by dividing a Party's Initial Interest percentage by the aggregate of the Initial Interests of all of the Parties who are to share an interest or an obligation pursuant to the terms hereof. In circumstances where one or more Parties do not participate in a project or acquisition, "proportionate share" shall be determined with reference to the Parties who participate in such project or acquisition.
1.11 "Prospect" means an area, designated as a Prospect pursuant to Article 5.1 hereof, within which there is expected to occur, based upon the 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.
1.12 "Seismic Option" or "Option" means an agreement which entitles a Party to conduct 3-D Seismic Operations on a portion of the Contract Lands with an option to acquire a Lease covering all or a portion of such lands.
1.13 "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.
1.14 Other terms are defined elsewhere in this Agreement.


ARTICLE 2. ACQUISITION OF INTEREST IN EXISTING LEASES AND OPTIONS
2.1 Initial Acquisition. Beta, Pease, Meyer and Four-Way agree to acquire from Parallel the following interest set forth opposite their name in the Existing Leases and Options:
Beta ..................................................20%
Pease ...............................................12.5%
Meyer ..................................................2%
Four-Way ...............................................1% For such interests, Beta, Pease, Meyer and Four-Way agree to pay Parallel the sum of One Hundred Thirty-Three and 33/100 Dollars ($133.33) per Net Mineral Acre covered by the respective undivided interests in the Existing Leases and Options so acquired by such Parties. Parallel has represented to Beta, Pease, Meyer and Four-Way that the Existing Leases and Options described in Exhibits "C-1" and "C-2" hereto cover at least 17,654 Net Mineral Acres. Accordingly, Beta, Pease, Meyer and Four-Way initially shall pay Parallel the sum set forth opposite their name for the interest each acquires under this Article 2.1:
Beta ..........................................$470,773.00
Pease .........................................$294,216.00


Meyer ..........................................$47,077.00
Four-Way .......................................$23,539.00 Beta, Pease, Meyer and Four-Way shall pay Parallel such sums upon the complete execution hereof. Upon receipt of such payment, each such Party will be assigned its respective percentage interest (as set forth above in this Article 2.1) in the Existing Leases and Options. In the event it is determined that the Existing Leases and Options cover less than 17,654 Net Mineral Acres, Parallel shall refund to Beta, Pease, Meyer and Four-Way the amounts that such Parties overpaid for their respective Initial Interests acquired under this Article 2.1. If it is determined that the Existing Leases and Options cover more than 17,654 Net Mineral Acres, Beta, Pease, Meyer and Four-Way shall pay Parallel an additional sum equal to their proportionate share of the number of Net Mineral Acres covered by the Existing Leases and Options in excess of 17,654 Net Mineral Acres.
2.2 Subsequently-Acquired Leases and Options. All of the Parties hereto agree to acquire and pay their proportionate share (as provided hereinbelow) of the cost of any Leases or Seismic Options, including a Lease or an option in renewal of an expiring Lease or Option as provided in Article 2.3 (a "Subsequently-Acquired Lease or Option"), which are acquired by a Party from an unaffiliated third party prior to the conclusion of 3-D Seismic Operations. For the purposes of this Article 2.2, the proportionate shares of the interests and costs of a Subsequently-Acquired Lease or Option of the Parties comprising Parallel/Sue-Ann shall be as follows:
Parallel.................................................79.125%
Sue-Ann..................................................16.875%
TAC.......................................................1.000%
Allegro...................................................3.000%


Beta, Pease, Meyer and Four-Way agree to purchase their proportionate share of such Subsequently-Acquired Leases or Options from Parallel for a price equal to the actual total cost thereof plus one-third (1/3) of such total cost thereof. The Party initially acquiring such interest shall promptly notify the other Parties comprising Parallel/Sue-Ann of the acquisition of such interest. Such notice shall contain the same information as is required in Article 6.3 for an AMI Interest. The other Parties comprising Parallel/Sue-Ann shall promptly reimburse the acquiring Party for their proportionate share of the actual total cost thereof. Upon receipt of a Party's proportionate share of the costs of acquiring such interest, the acquiring party shall promptly assign to such Party its proportionate share of such interest (as set forth above in this Article 2.2). Upon Parallel's acquisition of its proportionate share of a Subsequently-Acquired Lease or Option, it shall notify Beta, Pease, Meyer and Four-Way of such acquisition and invoice them for their proportionate share thereof at a price equal to the total cost of acquiring such Lease or Option plus one-third (1/3) of such total cost. Upon receipt of the purchase price from such Party Parallel shall promptly assign to such Party its proportionate share of such interest.
2.3 Expiring Options. If any Leases or Options covered hereby will expire prior to the completion of the 3-D Seismic Operations contemplated herein and the exercise of the Options to acquire Leases under such Options, the Party originally acquiring such expiring Lease or Option shall use its best efforts to renew such Leases or Options for a sufficient period of time to complete the proposed 3-D Seismic Operations thereon and exercise any such Options thereunder. All such renewals shall be treated in the same manner as set forth in Article 2.2, above, pertaining to Subsequently-Acquired Leases and Options.


ARTICLE 3. INTERESTS OF THE PARTIES
3.1 Initial Interests of the Parties. The Initial Interests of the Parties hereunder will be as follows:
--------------------------------
Parallel.......................................... 43.625%
Sue-Ann........................................... 16.875%
TAC.............................................. 1.000%
Allegro.......................................... 3.000%
Beta.............................................. 20.000%
Pease............................................. 12.500%
Meyer .......................................... 2.000%
Four-Way ....................................... 1.000%


All Existing Leases and Options will be owned by the Parties in accordance with their respective Initial Interests. All Subsequently-Acquired Seismic Options will be owned in the same proportions as the Parties' Initial Interests, provided that each Party has paid its proportionate share of the cost thereof as provided in Section 2.2. If a Party fails to pay for its proportionate share of a Subsequently-Acquired Seismic Option, such Seismic Option will be owned by the Parties who paid their original proportionate share of the costs thereof. Such Parties will pay their proportionate share of the total cost thereof and such interests shall be owned by such Parties in the proportions that their respective Initial Interests hereunder bear to the aggregate of such Parties' Initial Interests.
3.2 Existing Burdens. Each Party's interest under this Agreement, in the Leases and Seismic Options covered hereby and the Leases acquired and to be acquired pursuant hereto, 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. Each Party hereto hereby assumes and agrees to perform its proportionate share of the obligations under all Leases and Seismic Options and the Leases 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 Leases and Seismic Options by such Party.


ARTICLE 4. SEISMIC OPERATIONS
4.1 Existing Seismic, Geologic and Other Subsurface Data. Except as prohibited by law or by agreements with third parties, upon request, each Party owning existing seismic data pertaining to the Contract Lands shall furnish copies of all of such data to any Party requesting such data, together with any geologic or other subsurface data that could be useful in the interpretation of such seismic data. The Party requesting such data shall bear the expense of copying it. The Party owning any seismic or other data which may not be copied shall, upon request, make such data available to the Party requesting such data during normal business hours.
4.2 3-D Seismic Operations. Parallel shall serve as Operator in conducting all 3-D Seismic Operations. All Parties agree to conduct such operations on all or substantially all of the Contract Lands. The Parties may, by unanimous agreement, reduce the number of sections on which such operations will be conducted (for example, where technical, legal or operational considerations indicate that such reduction is warranted). Beta and Pease desire to participate in such 3-D Seismic Operations. The Parties shall bear the following proportions of the total cost of all 3-D Seismic Operations:
Parallel........................................ 31.79166%
Sue-Ann......................................... 16.87500%
TAC............................................ 1.00000%
Allegro....................................... 3.00000%
Beta............................................ 26.66667%


Pease........................................... 16.66667%
Meyer.......................................... 2.66667%
Four-Way ..................................... 1.33333% Subject to Article 5.1.1, the data that is obtained from such 3-D Seismic Operations shall be owned by the Parties in the proportions of their Initial Interests hereunder. The Parties agree to work together in a spirit of cooperation and in good faith in planning and causing the 3-D Seismic Operations to be conducted as contemplated and provided herein, as well as in sharing the data collected therefrom and the interpretations thereof. Such interpretations shall in no way be deemed a representation that such interpretations are accurate or correct. Such interpretations shall be given merely as a means of sharing such Party's analysis and ideas regarding such data.
4.3 Confidentiality of Seismic Data. Except as provided below, each Party agrees to keep all seismic data obtained pursuant to Article 4.2 confidential for a period of seven (7) years from the date hereof. After the expiration of seven (7) years from the date hereof, any Party may sell the data it acquired pursuant to Article 4.2. Each Party owning an interest in such data shall receive its proportionate share of the proceeds of any such sale. Any data acquired from another Party pursuant to Article 4.1 shall forever be kept confidential by the Parties; provided, however, that the Party who originally contributed such data may share, sell or otherwise dispose of such data that does not pertain to a Prospect to a third party after the expiration of one (1) year from the date hereof, and the other Parties shall have no interest in the proceeds from such sale. Notwithstanding the foregoing, a Party may disclose seismic data to a prospective purchaser or farmee of such Party's interest, provided (i) such disclosure is limited to the Prospect under consideration for sale or farmout, (ii) the prospective purchaser or farmee must review such data in the affected Party's offices and may not copy such data, and (iii) such prospective purchaser or farmee must execute a confidentiality agreement to prevent further disclosure and unauthorized use of such data.
4.4 Review of Seismic Data. The Parties agree to cooperate in good faith in reviewing the seismic data obtained hereunder. Such data should be reviewed by the Parties as soon as practicable ...