Drilling And Operating Agreement

Exhibit 10.9

DRILLING AND OPERATING AGREEMENT

DATED SEPTEMBER 15, 2004 BY AND BETWEEN

ATLAS AMERICA, INC.

AND

KNOX ENERGY, LLC

TABLE OF CONTENTS PAGE 1. Definitions 1 2. Minimum Well Drilling Schedule; Initial and Subsequent Drilling; Election to Participate; Gathering 3 3. Title; Lease Status; Assignment by Non-Operator; AMI Election 8 4. Drilling and Certain Related Procedures; Abandonment 11 5. Other Operating Responsibilities of the Operator 13 6. Marketing of Natural Gas and Oil 14 7. Superintendence and Maintenance of the Wells; Operator' s Fee and Other Charges 16 8. Costs and Expenses; Plugging Reserve Account 17 9. Additional Operations 19 10. Non-Operator' s Access; Audit 20 11. Term and Termination 20 12. Contract Not Assignable 22 13. Relationship; Internal Revenue Code Election 22 14. Force Majeure 22 15. Notices 23 16. Governing Law 24 17. Successors in Interest 24 18. Integration; Amendment; Interpretation 24 19. Severability 24 20. Waivers 24 21. Further Assurances 25 22. Attorneys' Fees 25 23. Public Statements 25 24. Counterpart; Fax 25


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DEFINITIONS

TERM

DEFINED AT:

Additional Potential Lease(s) a7 3.4

AFE a7 2.5

Affiliate a7 4.3

Agreement Page 1

AMI Second Whereas clause, page 1

Assignment a7 1.1(a)

Casing Point a7 1.1(b)

Completion a7 1.1(c)

COPAS a7 7.3

Drilling Acreage a7 1.1(d)

Drilling Costs a7 2.5

Dry Hole a7 1.1(e)

force majuere a7 14.1

Gas Purchaser a7 1.1(f)

Initial Period a7 2.8

Leases/Lease Second Whereas clause, page 1

Net Revenue a7 1.1(h)

Net Well a7 2.8

Non-Operator Page 1

Operating Expenses a7 1.1(i)

Operating Reserve Account a7 8.1

Operator Page 1

Operator' s Fee a7 7.3


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Option Period a7 2.8

Plugging Funds a7 8.4

Plugging Reserve Account a7 8.4

Proportionate Share a7 1.1(j)

Well Acreage a7 1.1(l)

Wells/Well a7 1.1(k)


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LIST OF EXHIBITS

PRINCIPAL REFERENCE: Exhibit A - AMI Map Second Whereas clause, page 1 Exhibit B -

Leases and Additional Potential Leases, Minimum Wells and Excluded Acreage First Whereas clause, page 1 Exhibit C - AFE' s a7 2.3 Exhibit D - Assignment a7 1.1(a) Exhibit E - Gas Balancing Agreement a7 6.4


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DRILLING AND OPERATING AGREEMENT This Drilling and Operating Agreement (this " Agreement" ) is made and entered into, effective as of the 15th day of September, 2004, by and between ATLAS AMERICA, INC., a Pennsylvania corporation (and not any other entity having the name Atlas America, Inc. or any derivative thereof), whose address is 311 Rouser Road, Moon Township, Coraopolis, PA 15108 (hereinafter referred to as " Operator" ) and KNOX ENERGY, LLC, a Tennessee limited liability company, whose address is 132 Mitchell Road, Oak Ridge, TN 37830 (hereinafter referred to as " Non-Operator" ). WHEREAS, by the agreements described in Exhibit B which is attached hereto and made a part hereof, Non-Operator is vested with the right to drill one or more wells for the purpose of exploring for and producing natural gas and/or oil from the tracts or parcels covered thereby situate in Anderson, Campbell, Morgan, Roane and Scott Counties, Tennessee; and WHEREAS, Operator and Non-Operator desire to drill wells on the property covered by the agreements described in Exhibit B (as well as any other agreements granting Non-Operator, either of the members of Non-Operator and/or any affiliate of any of them the right to drill one or more wells on the property within the area of mutual interest (the " AMI" ) outlined on the map attached hereto as Exhibit A and made a part hereof) for the production of natural gas and/or oil therefrom, and the processing, transportation and marketing of such natural gas and/or oil, on the terms and conditions hereinafter set forth; the agreements described in Exhibit B, as well as any other agreements described in this WHEREAS clause which are deemed Leases as set forth in Section 3.4 hereof, are referred to herein collectively as the " Leases" and individually as a " Lease" .

NOW, THEREFORE, WITNESSETH, that for and in consideration of the foregoing premises, and the mutual covenants herein contained, the parties hereto mutually covenant and agree as follows:

1. Definitions

1.1 The following terms used in this Agreement shall have the meanings set forth below:

(a) The term " Assignment" shall mean, with respect to Wells (as defined below), the separate agreement in the form attached hereto and made a part hereof as Exhibit D, whereby Non-Operator will grant, assign and convey, as set forth herein, unto the Operator and/or its successor and assigns, their Proportionate Share (as defined below) of the right, title and interest of Non-Operator in and to a part or portion of the property described in and covered by the Leases. (b) The term " Casing Point" means the time when a Well has been drilled to the depth or the formation or formations hereinafter designated and such tests have been conducted so that a determination can be made as to whether the Well can be further developed to completion.

(c) The term " Completion" means in the case of a natural gas Well or an oil Well the time when all Well equipment has been installed and the Well is capable of

producing natural gas and/or oil without regard to whether all facilities necessary to permit the delivery of natural gas or oil production from the Well to a purchaser have been installed.

(d) The term " Drilling Acreage" shall mean those tracts or parcels of land, or the parts or portions thereof other than the 1.628 acre, more or less, parcel referred to in Section 2.8 hereof, covered by the Leases.

(e) The term " Dry Hole" means a Well that has been drilled to the Casing Point but which is not completed pursuant to the provisions of this Agreement. (f) The term " Gas Purchaser" shall mean that party, whether one or more, designated by the Operator and/or the Non-Operator to purchase gas produced from one or more Wells.

(g) The term " Net Revenue" shall mean the gross receipts of the Wells less all royalties, overriding royalties, the Operator' s Fee (as defined in Section 7.3 hereof) and Operating Expenses (as defined below) and any other item of expense not expressly chargeable to the Operator. (h) The term " Operating Expenses" shall mean the customary expense of operation and maintenance of a Well, if it is producing, the production and marketing of natural gas and/or oil therefrom, and of plugging and abandoning a Well, if unproductive. Such term includes business and occupation, gross receipts, ad valorem and severance taxes and all other taxes payable with respect to the production from the Wells, and all legal fees, all transportation charges (including compression charges), all materials utilized in production, such as, but not limited to, alcohol, soap, solvents, cleaners, electric drops, electricity and other similar items and any other item commonly or ordinarily used in connection with producing a natural gas and/or oil well or designated as an Operating Expense in this Agreement, but shall not include any cost or expense incurred by the Operator in discharging its obligation to superintend and maintain a Well, if producing (for which the Operator is to receive monthly payments as set forth in Section 7.3 hereof) or any other such costs and expenses which the Operator is required by the terms of this Agreement to bear itself. Such term shall also include any amounts payable as damages subsequent to reclamation of all well roads and drill sites in accordance with applicable law to any owner of the surface estate where a Well is drilled or any right of way or easement appurtenant thereto and costs of defending or arbitrating any action or claims asserted with respect thereto. (i) The term " Proportionate Share" shall mean the percentage share of Operator or its successors or assigns and of Non-Operator in the drilling and completion costs, Operating Expenses, Operator' s Fee, working interest, production revenues and ownership of each Well to be drilled pursuant to this Agreement. (j) The term " Well" shall mean a well, and the term " Wells" shall mean all wells, drilled in accordance with the terms of this Agreement.

(k) The term " Well Acreage" shall mean that part or portion of the Drilling Acreage covered by one or more Leases included in a square area of forty (40) acres having as its center the borehole of a Well to the extent such part or portion shall fall within the boundaries of such square area, provided, however, that if a Lease, or any governmental or


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other regulatory authority or agency, provides or requires for a larger area or a different configuration, the Well Acreage shall mean such larger area and/or different configuration.

2. Minimum Well Drilling Schedule; Initial and Subsequent Drilling; Election to Participate; Gathering 2.1 The Leases identified in Exhibit B provide that a minimum number of wells are to be drilled before certain dates as set forth on Exhibit B as a condition to the drilling of additional wells on the property subject to such Leases.

2.2 It is understood and agreed by the parties that Operator is presently unable to perform the duties and obligations of Operator hereunder with respect to (i) permitting and titling of Wells, (ii) drilling and completing Wells, (iii) accounting for the costs of drilling and completing Wells, (iv) tending Wells, (v) marketing production from the Wells or (vi) accounting for, and distributing, Net Revenues and royalties and overriding royalties relating to production from the Wells. The parties agree that Non-Operator will initially perform such duties and obligations and shall be entitled to receive payment from Operator of Operator' s Proportionate Share of the Drilling Costs, Operating Expenses and Operator' s Fee relating thereto. The parties will fully cooperate with each other and use all reasonable efforts to have Operator perform such duties and obligations relating to each of the foregoing numbered activities as soon as reasonably practicable (giving due consideration to effecting a smooth transition as to each of the foregoing numbered activities when Operator has adequate personnel in place to perform such duties and obligations with respect to such activities), provided, however, that Operator shall perform all such duties and obligations no later than when fifty (50) Wells have been drilled hereunder.

For example and without limiting the foregoing, until such time as Operator obtains any and all required governmental and other approvals and permissions to drill, complete and operate Wells on the property subject to a Lease identified in Exhibit B and has adequate personnel in place to conduct such activities, Non-Operator shall perform such activities, and shall have all of the rights, of Operator hereunder with respect to such activities. Operator shall promptly and diligently pursue all reasonable actions to obtain such approvals and permissions and have such adequate personnel in place. Upon obtaining such approvals and permissions and having such personnel in place, Operator shall thereafter perform all such activities, and shall have all of the rights, of Operator hereunder with respect to such activities and Non-Operator shall promptly transfer to Operator all permits and other authorizations to drill, complete and operate Wells on the property subject to the Leases identified in Exhibit B.

2.3 Non-Operator has obtained all governmental and other approvals and permits to drill, complete and operate wells on the property subject to the Leases identified in Exhibit B as set forth on Exhibit B under the heading Presently Permitted Minimum Wells. Until Operator obtains any and all required governmental and other approvals and permissions to drill, complete and operate Wells on the property subject to a Lease identified in Exhibit B, Non-Operator shall promptly and diligently pursue all reasonable action to obtain such approvals and permissions to drill, complete and operate, and shall drill, the minimum number of Wells set forth on Exhibit B with respect to such Lease. After obtaining any and all required approvals and permissions to drill, complete and operate Wells on the property subject to a Lease identified in Exhibit B, Operator shall promptly and diligently drill the minimum number of wells set forth on Exhibit B with respect to such Lease (less the number previously drilled) during the periods Operator has the right to drill wells under this Agreement.


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With respect to each of the first ten (10) Wells identified in Exhibit B under the heading Presently Permitted Minimum Wells, Operator shall pay to Non-Operator, upon execution of this Agreement, Operator' s Proportionate Share of the Drilling Costs (as defined in Section 2.5 hereof) as estimated in the AFE (as defined in Section 2.5 hereof) for such Well attached hereto as Exhibit C and made a part hereof, and after Non-Operator determines the final third-party costs of drilling and completing such Well, Operator shall pay to Non-Operator, as set forth in Section 2.5 hereof, Operator' s Proportionate Share of such final costs in excess of the amounts set forth in the AFE for such Well, subject to the refund or credit set forth in such Section. With respect to any other Well which is drilled and completed by Non-Operator, not later than five (5) days prior to such drilling, Operator shall pay to Non-Operator the Operator' s Proportionate Share of the Drilling Costs as estimated in the AFE for such Well, and after Non-Operator determines the final third-party costs of drilling and completing such Well, Operator shall pay to Non-Operator, as set forth in Section 2.5 hereof, Operator' s Proportionate Share of such final costs in excess of the amounts set forth in the AFE for such Well, subject to the refund or credit set forth in such Section.

Operator and Non-Operator agree that no other well will be drilled on the property subject to the Leases closer than one thousand three hundred twenty (1,320) feet to any Well drilled pursuant hereto unless Operator and Non-Operator otherwise agree in writing; provided, however, that after the expiration of the Initial Period or, if applicable, the Option Period, or the termination of this Agreement if such termination occurs prior to the expiration of the Initial Period or the Option Period, Non-Operator shall have the right to drill wells on the property subject to the Leases which are closer than one thousand three hundred twenty (1,320) feet to any Well drilled pursuant hereto so long as no such well produces natural gas or oil from any formation (other than methane gas from coal beds or coal mines) from the surface to one hundred (100) feet below the deepest formation from which natural gas and/or oil is produced from any such Well and so long as the drilling, completion and operation (including the production, compression and transportation of natural gas and/or oil) of all such wells do not unduly interfere with the operation (including the production, compression and transportation of natural gas and/or oil) of any Well and provided, further, that if a Well is plugged and abandoned, the limitations as to formations and interference in the foregoing proviso as to such Well shall not apply. If Non-Operator drills a well which is closer than one thousand three hundred twenty (1,320) feet to any Well which has not been plugged and abandoned, it shall promptly furnish to Operator copies of all drilling reports, logs, completion reports and other data reasonably requested by Operator for the purpose of verifying that such well is not producing, and will not produce, any natural gas or oil from any formation (other than methane gas from coal beds or coal mines) from the surface to one hundred (100) feet below the deepest formation from which natural gas and/or oil is produced from such Well. The agreements set forth above in this paragraph shall be covenants running with the land and shall be set forth by reference to this Agreement in the Assignment in the form attached hereto as Exhibit D and made a part hereof.

2.4 Non-Operator shall have the right to participate, on a well-by-well basis, for up to fifty percent (50%) of the working interests in each Well drilled hereunder.

Except as set forth in Exhibit B under the heading Wells To Be Drilled On Or Before March 31, 2005, Operator shall propose the number and location of the Wells to be drilled pursuant hereto and shall give written notice thereof to Non-Operator. Non-Operator may elect to participate by giving written notice to Operator of such election within thirty (30) days after receipt of Operator' s proposal. Failure of Non-Operator to give notice to Operator of its


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election to participate within the period set forth above shall be deemed, and shall constitute, an election by Non-Operator not to participate.

Non-Operator has elected not to participate in the first ten (10) proposed Wells identified in Exhibit B under the heading Presently Permitted Minimum Wells for any working interest and Operator shall own one hundred percent (100%) of the working interests in such Wells.

2.5 Operator and Non-Operator shall each pay its Proportionate Share of the actual third-party costs of drilling and completing each Well plus an amount to cover general and administrative, and technical supervision, expenses allocated to the drilling and completion of each Well (the " Drilling Costs" ). For each Well for which the drilling is commenced prior to March 31, 2005, the amount allocated for general and administrative, and technical supervision, expenses for the drilling and completion of each such Well shall be Fourteen Thousand Dollars ($14,000). Thereafter, for each annual period beginning April 1 and ending March 31 of the following year, Operator shall determine the amount to be allocated for general and administrative, and technical supervision, expenses allocated to the drilling and completion of a Well for which the drilling is commenced during such period, such amount to be equal to the amount Operator allocates to Wells drilled for any limited partnership or other entity from which Operator receives funds to drill such Wells.

Operator shall give Non-Operator thirty (30) days' prior written notice of the anticipated drilling date for a Well in which Non-Operator has elected to participate. No later than five (5) days prior to the drilling by Operator of a Well in which Non-Operator has elected to participate, Non-Operator shall pay to Operator its Proportionate Share of the Drilling Costs of the Well as estimated in an Authority for Expenditure (" AFE" ) to be furnished to Non-Operator by Operator along with the written notice to be provided by Operator to Non-Operator pursuant to Section 2.4 hereof. Within thirty (30) days after Operator determines the final third-party costs of drilling and completing a Well, Operator shall either (i) invoice Non-Operator for its Proportionate Share of the final costs in excess of the amount prepaid by Non-Operator and Non-Operator shall pay such invoice within thirty (30) days after receipt or (ii) at the election of Non-Operator, Operator shall refund to Non-Operator, or credit against Non-Operator' s Proportionate Share of the Drilling Costs for one or more other Wells in which it has elected to participate, the amount prepaid by Non-Operator in excess of the final Drilling Costs for the Well. It is expressly understood and agreed that if the final Drilling Costs for a Well exceed one hundred ten percent (110%) of the Drilling Costs as estimated in the AFE for the Well, Non-Operator shall have no obligation to pay more than its Proportionate Share (based upon its election to participate in the Well pursuant to Section 2.4 hereof) of such excess, provided, however, that if Non-Operator does not pay such Proportionate Share of the excess, its Proportionate Share of the Well shall be reduced to a share equal to the share of the final Drilling Costs of the Well paid by it. 2.6 If Non-Operator elects to participate in a Well for a fifty-percent (50%) working interest, the Well will be burdened with an overriding royalty payable to Non-Operator equal to 1/64 th (1.5625%); if Non-Operator does not elect to participate in a Well for any working interest, the Well will be burdened with an overriding royalty payable to Non-Operator equal to 1/32 nd (3.125%). To the extent that Non-Operator participates in a Well for less than a fifty-percent (50%) working interest, the overriding royalty to Non-Operator shall be determined by subtracting from an overriding royalty of 1/32 nd (3.125%) an amount determined by multiplying 1/64 th (1. 5625%) by a fraction, the numerator of which is the Non-Operator' s working interest and the denominator of which is fifty percent (50%). For example, if Non-Operator elects to


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participate for a thirty-percent (30%) working interest in a Well, the overriding royalty to Non-Operator shall be: 3.125% less (1.5625% x (30% f7 50%)) = 3.125% less .9375% = 2.1875%

2.7 With respect to each of the first ten (10) Wells identified in Exhibit B under the heading Presently Permitted Minimum Wells, Operator shall pay to Non-Operator, upon execution of this Agreement, Operator' s Proportionate Share of a site fee of Four Thousand Dollars ($4,000) and a completion fee of Two Thousand Dollars ($2,000) for each such Well. With respect to each other Well drilled and completed during the Initial Period (as defined in Section 2.8 hereof), Operator shall pay to Non-Operator, not later than five (5) days prior to drilling such Well, Operator' s Proportionate Share of a site fee of Four Thousand Dollars ($4,000) and Operator shall pay to Non-Operator, not later than thirty (30) days after completion of such Well, Operator' s Proportionate Share of a completion fee of Two Thousand Dollars ($2,000). During the Option Period (as defined in Section 2.8 hereof), if applicable, the site fee shall be Five Thousand Dollars ($5,000) and the completion fee shall be Two Thousand Five Hundred Dollars ($2,500).

2.8 During the period ending June 30, 2007 (the " Initial Period" ), Operator shall have the exclusive right to propose and drill three hundred (300) Net Wells (as defined in this Section 2.8) under this Agreement inclusive of Wells identified in Exhibit B under the heading Presently Permitted Minimum Wells and other Wells drilled by Non-Operator under Section 2.3 hereof. If agreed to by Non-Operator in writing no later than December 31, 2006, Operator shall have the exclusive right to propose and drill two hundred (200) additional Net Wells under this Agreement during the period commencing July 1, 2007 and ending June 30, 2009 (the " Option Period" ). For purposes of this Agreement, a Net Well shall mean one or more Wells in which Operator' s (and its successors' and assigns' ) total initial participation equals one hundred percent (100%) of the working interests; for example, if Operator has a working interest of one hundred percent (100%) in each of four (4) Wells, seventy-five percent (75%) in each of four (4) Wells and fifty percent (50%) in each of four (4) Wells, the number of Net Wells shall be four (4), three (3) and two (2), respectively, or a total of nine (9) Net Wells.

Subject to the performance by Non-Operator of its obligations, and the accuracy of its representations and warranties, herein contained (including but not limited to those set forth in Section 2.3 hereof, this Section 2.8 and Section 3.2 hereof) and subject to the provisions of Section 14 hereof, Operator shall drill the minimum number of Wells set forth in the Leases to keep each such Lease in full force and effect during the Initial Period and, if applicable, during the Option Period and, except with respect to the minimum number of Wells to be drilled prior to March 31, 2005 and one (1) Well to be drilled under the Brimstone Lease on or before June 1, 2005 as set forth in Exhibit B, Operator shall commence the drilling of such minimum number of Wells no later than ninety (90) days prior to the dates set forth in each of the Leases to keep each of the Leases in full force and effect during the Initial Period and, if applicable, during the Option Period. Notwithstanding the provisions of the foregoing sentence, (i) if Non-Operator substitutes a new Operator under Section 11.2 hereof, Operator shall have no obligation, nor right, to drill any additional Wells and (ii) if the expiration of the Initial Period or, if applicable, the Option Period, occurs during a period when a Lease provides a minimum number of Wells is to be drilled to keep such Lease in full force and effect, the obligation of Operator to drill the minimum number of Wells to keep such Lease in full force and effect shall be prorated based upon the time of such period prior to, and after, the expiration of the Initial Period and, if applicable, the Option Period; for example, if the period in the Lease during which a minimum


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number of Wells to be drilled is from January 1 of a year to December 31 of such year and the minimum number of Wells to be drilled in such period is ten (10), then in the calendar year 2007, Operator shall have an obligation to drill only five (5) Wells if the Option Period is not applicable.

Failure of the Operator to drill the minimum number of Wells as set forth above in the preceding paragraph shall result in the immediate termination of Operator' s right to thereafter drill any Well and, except as set forth below, Operator' s right or obligation to participate in any Well thereafter drilled, provided, however, that if after such termination, Non-Operator drills, or causes to be drilled, any Wells during the Initial Period or if applicable, the Option Period, to satisfy the minimum number of Wells as set forth in the preceding paragraph to be drilled in such period, Operator shall participate in each such Well drilled no deeper than one hundred (100) feet below the Chattanooga Shale formation (or such deeper formation to which such Well is required to be drilled by a Lease) for such working interests, if any, as Non-Operator shall notify Operator in writing prior to the drilling of such Well and Operator shall be responsible for, and shall pay, its Proportionate Share of the Drilling Costs, Operating Expenses and Operator' s Fee for such Well; the termination of the rights of Operator set forth above and the right of Non-Operator to require Operator to participate in the minimum number of Wells drilled no deeper than one hundred (100) feet below the Chattanooga Shale formation (or such deeper formation to which such Well is required to be drilled by a Lease) shall be the sole and exclusive remedy of Non-Operator with respect to Operator' s failure to drill the minimum number of Wells as set forth above in the preceding paragraph.

Non-Operator represents and warrants, to the best of its knowledge, to and for the benefit of Operator and its successors and assigns that no person, corporation or other entity, other than Non-Operator, has the right to explore for or produce natural gas or oil (including the right to drill, complete and operate Wells for the production, compression, transportation, marketing and sale of natural gas and oil produced therefrom) from the property subject to the Leases identified in Exhibit B other than the 1.628 acre, more or less, portion of the tract covered by the Coal Creek Lease described in Exhibit B under the heading Excluded Acreage. Non-Operator agrees that during the Initial Period, and if applicable, during the Option Period, Non-Operator shall not grant, assign or otherwise transfer to any person, corporation or other entity, except to Operator as set forth herein, the right to explore for and produce natural gas or oil from the property subject to the Leases not including methane gas from coal beds and coal mines.

Notwithstanding anything to the contrary contained in this Agreement, upon the expiration of the Initial Period and, if applicable, the Option Period, Operator shall have no obligation or right to drill any well, and shall have no right to participate in any well drilled thereafter, on the property subject to any Lease.

2.9 Notwithstanding anything to the contrary contained in this Agreement, without the written consent of Non-Operator, no Well drilled under this Agreement shall be drilled or completed to produce any methane gas from coal beds or coal mines, and after the initial drilling and completion of a Well, such Well shall not be deepened without the consent of both Operator and Non-Operator. It is expressly understood and agreed that Operator has no rights of ownership or otherwise in, nor liabilities wi ...