Oil, Gas And Coalbed Methane Gas Lease

EXHIBIT 10.6


OIL, GAS AND COALBED METHANE GAS LEASE


This agreement (this "Lease") is made as of the 3rd day of April, 2001 (the "Lease Date") by and among AFC Coal Properties, Inc., an Ohio corporation, whose address is 580 Walnut Street, 9th Floor, Cincinnati, Ohio 45202, and American Premier Underwriters, Inc., a Pennsylvania corporation, whose address is 580 Walnut Street, 9th Floor, Cincinnati, Ohio 45202 (collectively, "Lessor"), and Methane Management, Inc., an Ohio corporation, whose address is 33255 Bainbridge Road, Solon, Ohio 44139, and BPI Industries (USA), Inc., a Nevada corporation whose address is 470 Granville Street, Suite 630, Vancouver, British Columbia, V6C 1V5 CANADA (collectively, "Lessee").


WITNESSETH:


1. GRANTING CLAUSE AND RESERVATION.


(a) Lessor, in consideration of the royalties described below of which,
Two Hundred Seventy-Five Thousand Dollars ($275,000), shall be paid
by Lessee to Lessor concurrent with the signing of this Lease and
the covenants and agreements of Lessee hereinafter contained, does
hereby grant, lease and let exclusively unto Lessee any and all
rights Lessor owns in Williamson, Saline and Franklin Counties, in
the State of Illinois, either now known and described in Exhibit A
or determined in the future, related to oil, gas, coalbed methane
gas, methane gas and other hydrocarbons other than coal ("Covered
Hydrocarbons") below the surface to the base of the Pre-Mt. Simon
sandstone or their stratigraphic equivalents (the "Depth")
underlying the tracts of land described in Exhibit A attached
hereto, and subject to the terms contained herein the surface of any
tracts of land described in Exhibit A hereto which are owned by
Lessor solely for the purpose and with the exclusive right of
exploring, drilling, and operating for producing and owning Covered
Hydrocarbons together with the right to conduct exploration,
geologic and geophysical surveys by seismograph, core test, gravity
and magnetic methods, laying pipelines, building roads, tanks, power
stations, telephone lines, treat, transport and own said products,
and housing its other appurtenant easements and right-of-way Lessor
may hold to the surface. The use of the surface shall be subject to
rules prescribed by Lessor. The land described in Exhibit A attached
hereto, all of which is located in Williamson, Saline and Franklin
Counties in the State of Illinois, is hereinafter referred to as the
"Land".


(b) Lessor excepts from the terms of this Lease and expressly reserves
unto itself, its successors and assigns the following:


(i) Any right to explore for, mine, operate, produce, remove or
market any hard mineral or hard mineral substance including
but not limited to coal, uranium, and oil shale or their
constituent products, or any of them from the Land;


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(ii) Any right to use the Land for the underground storage of oil,
gases, liquid hydrocarbons or associated products; and


(iii) All other rights not specifically granted by the provisions of
this Lease.


(c) Notwithstanding anything to the contrary contained herein, this
Lease shall not be effective until Lessee has delivered to Lessor a
duly executed general release in form and substance satisfactory to
Lessor from Robert S. Wheat, Sr., Clyde House, Mid-Continent
Methane, Inc., Harrison & Moberly, and any of their affiliates
(collectively, the "Mid-Continent Parties").


2. TERM. This Lease shall remain in force as to the Land for a term of five (5) years from the Lease Date (the "Primary Term" of this Lease) and as to a particular tract (as described in Section 6 below) so long thereafter as Covered Hydrocarbons are being produced from such tract providing a royalty payment of not less than One Dollar ($1.00) per acre in such tract per calendar month; provided, however, after the Primary Term, in the event the aggregate royalties do not exceed Forty-Two Thousand Dollars ($42,000.00) in any month, this Lease shall terminate.


3. SHUT-IN ROYALTY. During any period (whether before or after the expiration of the Primary Term hereof) after Covered Hydrocarbons have been produced, when Covered Hydrocarbons are not being sold or used, and the well or wells are shut-in and there is no current production of Covered Hydrocarbons to keep this Lease in force as to such tract, Lessee shall pay or tender a royalty of One Thousand Dollars ($1,000) per well payable within one hundred and eighty (180) days of the date such wells are shut-in, and by the payment, Lessee may extend the term of this Lease as to such tract for a period of one (1) year commencing from the date the well is shut in. When such payment is made it will be considered that oil, gas or coalbed methane gas is being produced within the meaning of this Lease. For the purpose of this Section, no well shall be considered shut-in unless (a) it is completed and tested and thereby shown to be capable of producing Covered Hydrocarbons and (b) the results of such tests have been delivered to Lessor.


4. LESSOR'S ROYALTY.


(a) As consideration of the premises, Lessor hereby reserves, and Lessee
hereby covenants and agrees to pay Lessor, a royalty of fifteen
percent (15%) on, and payable solely out of, gross proceeds from the
sale of Covered Hydrocarbons as measured at the sales meter from all
wells and shall be free and clear of all operating costs and
expenses, provided no royalty shall be due during the first eighteen
(18) months from the Lease Date unless and until the royalty which
otherwise would have been due during such period would have been Two
Hundred Seventy-five Thousand Dollars ($275,000.00). With respect to
Covered Hydrocarbons used as allowed under this Lease under Section
22 or by Lessee in its operations, the royalty shall be based on the
wellhead price at the time of production for the Covered
Hydrocarbons so used.


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(b) Production royalties shall be paid monthly to Lessor's address set
forth in Section 19 within forty-five (45) days after oil, gas or
coalbed methane is measured for sale or delivery to a third party.
Pursuant to pre-arranged division orders, royalties may be paid by
the pipeline company or end users; provided, however, Lessee shall
remain principally responsible for the timely payment of all
royalties. If Lessee shall not timely pay Lessor any sum of money
payable under the provisions of this Lease and such non-payment
shall continue for a period of thirty (30) days, Lessee shall, in
addition to such payment, pay Lessor interest on the delinquent
amount, at the prime rate floating as disclosed from time to time in
The Wall Street Journal plus five percent (5%), calculated from the
time of such default. This provision shall in no way constitute a
waiver of the requirement to pay on time and shall be cumulative and
in addition to Lessor's rights either in law or in equity.


5. DRILLING, DEVELOPMENT AND OPERATIONS.


(a) Prior to drilling any well, Lessee shall provide Lessor with written
notice of the location and such other information requested by
Lessor. Lessee shall promptly commence and continuously prosecute
production testing, drilling or reworking operations as a reasonable
and prudent operator would and in a good and workmanlike manner. If
a well is drilled which is capable of producing Covered Hydrocarbons
in quantities that are economically feasible, Lessee shall
diligently develop the well and market production therefrom as soon
as possible.


(b) All operations conducted by Lessee under this Lease shall be
conducted at Lessee's sole cost and risk, and subject to the
indemnity provisions of Section 16 below. Lessor shall have no
responsibility for and no right to control or direct Lessee's
performance under this Lease, except to advise Lessee of its failure
to comply with the terms of this Lease. Subject to Section 18 below
and without limiting of the generality of the immediately preceding
sentence, Lessor and Lessee acknowledge that Lessor has no right or
power to participate in the selection of a drilling contractor, to
propose the drilling of a well, to determine the timing or sequence
of drilling operations, to commence or shut down production, to take
over operations, or to share in any operating decision whatsoever.
Lessor and Lessee hereby expressly negate any intent to create (and
this Lease shall never be construed as creating) a mining or other
partnership or joint venture. No party shall have the authority to
bind the other party for any obligation or otherwise act as an
employee or agent of the other party for any purpose whatsoever.


(c) Lessee shall use its best efforts, in accordance with all Laws and
good industry practice, to complete the wells as producers of
coalbed methane in paying quantities. Lessee shall conduct such
coring, logging, testing, fracing and acidizing operations as a
prudent operator would conduct under the same or similar
circumstances. If a well cannot reasonably be completed as a
producer of Covered Hydrocarbons within the Depth, Lessee shall
promptly plug the well and perform all necessary surface restoration
work. Lessee shall not engage in the so-


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called underground gassification method of producing gas or coalbed
methane; provided, however, Lessee may use nitrogen for fracing
purposes and may use other stimulation processes subject to Lessor's
prior written approval. Lessee shall have the right to flare coalbed
methane during testing and prior to installation in accordance with
all Laws (as defined below). Lessee shall utilize only those methods
or practices which avoid creating a roof or coal structure that
would adversely affect existing or potential mining operations in
the Springfield No. 5 or Herrin No. 6 coal seams.


6. TERMINATION AS TO NON-PRODUCING ACREAGE AND UNDRILLED FORMATIONS (PUGH CLAUSE). At the expiration of the Primary Term, this Lease shall terminate as to each tract (except as to tracts with shut-in wells as provided in Section 3) which is not producing royalties as required in Section 2(a), and shall terminate as to all the Land as to all depths below one hundred (100) feet below the stratigraphic equivalent of the deepest depth drilled by Lessee on the Land. For the purpose of this Section, a well primarily productive of oil shall hold this Lease only as to the eighty (80) acres upon which it is located with the well located in the center thereof, and a well which is primarily productive or capable of producing gas, coalbed methane gas or methane gas shall hold this Lease only as to the three hundred twenty (320) acres on which it is located with the applicable well located in the center thereof; and further provided that a well drilled into abandoned mineworks shall hold all areas in such mineworks that are drained by such well; provided further, however, if Lessee has exercised its rights under Section 7, the area held by a well shall be increased to the portion of the Land covered in the corresponding unit. At the expiration of the Primary Term, Lessee will deliver to Lessor, in recordable form, such releases as are necessary to evidence the expiration of this Lease as to the tracts which this Lease no longer covers.


7. POOLING; UNITIZATION. Lessor grants Lessee the right to form a drilling unit or units to conform to regular or special spacing rules issued by any governmental authority having control of such matters, to conform to conditions imposed upon the issuance of drilling permits, or to promote the conservation of oil or gas or for the storage of gas or for the injection of air, gas, water, brine and other fluids. Lessee shall have the right, at its option to pool, or combine the leased premises or any portion thereof, with other land, lease or leases in the immediate vicinity thereof, at a time before or after drilling whether such land, lease or leases are hold by Lessee or by others. Lessee shall have the right to, re-pool, reform, enlarge and/or reduce or in any other manner modify or change the pooled unit in order to protect the correlative rights of the parties or to promote conservation of oil and gas. Such units shall not substantially exceed one hundred sixty (160) acres with respect to any zone or stratum predominantly oil-bearing, and not substantially exceed six hundred forty (640) acres with the respect to any zone or stratum predominately gas-bearing, or condensate bearing. The entire acreage pooled or unitized shall be treated for the purpose, except for the payment of royalties on production, as if it were included in this Lease. In lieu of the royalties elsewhere herein specified, Lessor shall receive, on the production from any unit so pooled, only such proportion of the royalties stipulated herein as the amount of its acreage placed in the unit bears to the total acreage so pooled in the particular unit involved. Notwithstanding anything to the contrary in this Lease, the commencement of operations for the drilling of a well on any such drilling unit, whether such drilling or other operations are on the Land and regardless of whether such operations were commenced before or after the execution of this Lease or any pooling or


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unitization, shall have the same force and effect in all respects as the commencement of operations for the drilling of a well on the Land hereby; and drilling, reworking or other operations conducted on any such drilling unit or production of oil or gas anywhere from such drilling unit, whether such drilling, reworking or other operations are on, or such production is from the Land and regardless of whether such operations were commenced before or after the execution of this Lease of any pooling or unitization, shall have the same force and effect as drilling, reworking or other operations conducted on or production obtained from the Land as to the continuance and/or extension of the term of this Lease. Lessor agrees to execute any and all documents Lessee reasonably deems necessary, desirable or convenient for any pooling or unitization under the terms of this Lease.


8. AUDITS; INSPECTION; INFORMATION.


(a) Lessee shall keep full and accurate records relating to the
production of oil, gas and coalbed methane, and shall quarterly
deliver to Lessor a written report describing and identifying, in
such detail as Lessor may reasonably request the quantities and
qualities of Covered Hydrocarbons produced and/or sold during the
previous calendar quarter. Lessee and Lessee's buyers or
transporters shall measure all production accurately using standards
established by the American Gas Association (AGA) and/or the
American Petroleum Institute (API) and all measuring devices shall
be tamper proof as nearly as practicable. Lessee, shall provide
promptly to Lessor upon request, copies of written results of all
measurements, tests and sampling (including those performed by
Lessee's buyers or transporters, but only if available to Lessee).
Lessee shall maintain and keep available for Lessor's inspection
upon required notice, copies of all contracts or documents, as well
as all subsequent amendments and other addendums thereto, under
which oil, gas and coalbed methane are marketed, processed,
transported or otherwise disposed of. Lessee shall furnish Lessor
quarterly copies of all purchase or run tickets and other reports
and statements of purchases, gatherers, transporters, or processors
respecting the marketing, gathering, transportation, processing or
other disposition of Covered Hydrocarbons.


(b) Upon three (3) days' written notice to Lessee, Lessor may audit
Lessee's books and records but only as they relate to production,
Covered Hydrocarbons marketed and sold or transferred to surface
owners, or royalty payments. Such audit rights maybe exercised
anytime while royalties are payable and for a period of twenty-four
(24) months thereafter. In the event access to Lessee's books and
records is not provided within three (3) days of the written notice
required in the first sentence, Lessee shall pay Lessor Ten Thousand
Dollars ($10,000,00) for each additional day or portion thereof
access is denied or not provided. In the event an audit determines
an underpayment by Lessee, Lessee shall pay on demand to Lessor all
amounts (plus interest) due and the cost of such audit.


(c) At reasonable times on reasonable notice to Lessee, Lessor shall
have the right, at Lessor's expense, to:


(i) Inspect by all appropriate means Lessee's facilities on the
Land;


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(ii) Test Lessee's meters and other measuring and testing devices;


(iii) Sample, test, measure and gauge production of the wells,
including the right, but not the obligation, to install meters
on lines;


(iv) Observe Lessee in the performance of Lessee's obligations
under this Lease; and


(v) Examine or audit, during the term of this Lease and three (3)
years thereafter, the books, records, supporting documents,
files, and correspondence of Lessee and Lessee's buyers in
connection with the Lease and the production and/or sale of
Covered Hydrocarbons from the Land.


(d) In the event access is not provided, Lessee shall pay Lessor Ten
Thousand Dollars ($10,000.00) for each additional twenty-four (24)
hour period or portion thereof access is denied.


(e) Upon Lessor's written request, to the extent in Lessee's possession,
Lessee shall provide Lessor with a written inventory of all wells
(collectively, the "Prior Wells") drilled on the Land since May 25,
1994, and such other information regarding the Prior Wells as Lessor
may request.


9. TITLE. Lessor makes no covenant to Lessee for quiet enjoyment of the Land. Furthermore, Lessor does not warrant title, either express or implied, to the Land. Lessor shall not have any liability to Lessee with respect to ...