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Oil And Gas Purchase Agreement

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Sectors: Energy
Governing Law: Texas, View Texas State Laws
Effective Date: October 01, 1993
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Exhibit 10.5

OIL AND GAS PURCHASE CONTRACT

This Oil and Gas Purchase Contract (the " Contract" ) is made and entered into as of the 1st day of October, 1993, by and between TORCH ENERGY MARKETING, INC., a Delaware corporation (hereinafter referred to as " Buyer" ), and TORCH ROYALTY COMPANY, a Delaware corporation, and VELASCO GAS COMPANY LTD., a Texas limited partnership (hereinafter collectively referred to as " Seller" ).

RECITALS WHEREAS , Seller has a supply of Oil and Gas to be produced from the Subject Interests (as hereinafter defined) which Seller desires to sell; and

WHEREAS , the parties hereto intend to provide for and desire to enter into a contract for the sale by Seller and the purchase by Buyer of Oil and Gas produced from the Subject Interests pursuant to the provisions of this Contract:

NOW THEREFORE , in consideration of the foregoing premises and the mutual promises, agreements and covenants herein set forth, Seller and Buyer agree as follows:

I. DEFINITIONS

The following terms, where used and whether or not capitalized in this Contract, and all recitals, exhibits, and appendices contained in or attached to this Contract have the following meanings:

" Applicable Hub Price" has the meaning set forth in Section 4.06.

" Applicable Hub Price-NYMEX Differential" for each production Month and for each Field during such Month, means (in dollars per MMBtu) (i) the average of the last three days' settlement prices for the corresponding Natural Gas futures contract on the New York Mercantile Exchange first nearby contracts (i.e. settlement prices for the month of June are the settlement prices for the June futures contracts on the last three days in May during which such June futures contracts are traded) minus (ii) the Applicable Hub Price for such Field for such Month.

" Austin Chalk Fields" means the Subject Interests identified as the Austin Chalk Fields in the Conveyances.

" Barrel" means a barrel of Oil equal to 42 U.S. gallons at 60 degrees Fahrenheit.

" Btu" means British thermal unit. As used herein, Btu content of an Mcf of gas will be calculated on a dry basis. MMBtu means 1,000,000 Btu.

" Chalkley Field" means the Subject Interests identified as the Chalkley Field in the Conveyances.

" Contract Year" means the period beginning on January 1 and continuing thereafter for a period of 365 days (or 366 days in the case of a leap year) and each succeeding 365 day (or 366 day as the case may be) period thereafter, except for the first Contract year, which shall commence on October 1, 1993 and end December 31, 1993. " Conveyances" means the Net Overriding Royalty Conveyances to the Royalty Trust dated as of November 22, 1993.

" Cotton Valley Fields" means the Subject Interests identified as the Cotton Valley Fields in the Conveyances.

" Day" means the period of time defined as " day" or " daily" in the effective tariff or other operating rules, policies or procedures of the Receiving Pipeline.

" Deductible Costs" means for each Month for each Field the amount, on a per MMBtu basis, specified on Exhibit A as deductible costs for such Field.

" Existing Burdens" has the meaning assigned to that term in the Conveyances.

" FERC" or " Commission" means Federal Energy Regulatory Commission or any successor thereto, having jurisdiction.

" Fields" means, collectively, the Chalkley Field, the Robinson' s Bend Field, the Cotton Valley Fields and the Austin Chalk Fields. " Field Price" shall have the meaning set forth in Section 4.14. " Field Price-NYMEX Differential" for each production Month during the term of this Contract and for each Field during such Month means (in dollars per Barrel) (i) the average during such Month of the daily settlement prices of the first nearby futures contracts for West Texas Intermediate Crude Oil on the New York Mercantile Exchange minus (ii) the Field Price for such Field for such Month.

" Gas" means any mixture of hydrocarbons or of hydrocarbons and noncombustible gases, in a gaseous state, consisting essentially of methane and including gas produced in association with oil and commonly known as casinghead gas. Gas shall include, but shall not be limited to, methane produced from coal beds. " Gas Gathering Agreement" shall mean the Gas Gathering Agreement, dated June 30, 1990, as amended, between Buyer, as " Shipper," and Bahia Gas Gathering Ltd., a Texas limited partnership, as " Gatherer."

" Mainline Point" means the location specified for each Field on Exhibit A.

" Maximum Volume" shall mean, prior to January 1, 1995, the Btu equivalent of 730 MMcf of Seller' s Gas produced from the Robinson' s Bend Field during any quarter, and thereafter the Btu equivalent of 912.5 MMcf of Seller' s Gas produced from the Robinson' s Bend Field during any Quarter.

" Month" means the period of time defined as " Month" or " Monthly" in the effective tariff or other operating rules, policies or procedures of the Receiving Pipeline.

" Oil" means crude oil and condensate.

" Producer Price Index" shall mean the Producer Price Index published by the Bureau of Labor Statistics of the United States Department of Labor.

" Production Deficiency" means, for any Month, the amount (expressed in MMBtu' s) by which the total production of Seller' s Gas from the Robinson' s Bend Field during such Month is, for any month ending prior to January 1, 1995, less than the Btu equivalent of 243,334 Mcf, and for any month ending thereafter, is less than the Btu equivalent of 304,167 Mcf.


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" Weighted Average Field Price" for each Month during the term of this Contract, means (in dollars per Barrel) the average of the Field Price for each Field, weighted for Oil production from each such Field.

" Weighted Average Hub Price" for each Month during the term of this Contract, means (in dollars per MMBtu) the result of (i) total Seller' s Gas production from each Field multiplied by the Applicable Hub Price for such Field, divided by (ii) total Seller' s Gas production from the Fields during the Month.

" Weighted Average Specified Gas Price" for each Month means (in dollars per MMBtu) the average of the difference between the Specified Price for Gas for such Month minus the Applicable Hub Price-NYMEX Differential for each Field during such Month, weighted for Seller' s Gas production from such Field during such Month.

" Weighted Average Specified Oil Price" for each Month means (in dollars per Barrel) the average of the difference between the Specified Price for Oil for such Month minus the Field Price-NYMEX Differential for the Month for each Field during such Month, weighted for Seller' s Oil production from such Field during such Month.

" Wells" means any well described on Exhibit B, including any infill or replacement wells drilled and completed after the date of this Contract which produce Seller' s Oil or Seller' s Gas from the Fields.

" Working Day" means a calendar day Monday through Friday and excludes Saturday, Sunday and nationally recognized holidays.

II. QUANTITY; COMMITMENT, RESERVATION

2.01 Quantity: Subject to the terms and conditions herein, (i) Seller agrees to sell and deliver to Buyer and Buyer agrees to purchase and accept from Seller all of Seller' s Gas produced from the Wells, subject to applicable operating and Gas balancing agreements covering the Wells; and (ii) Seller agrees to sell and deliver to Buyer and Buyer agrees to purchase and accept from Seller all of Seller' s Oil produced from the Wells, subject to applicable operating agreements covering the Wells.

2.02 Commitment: Seller hereby commits and dedicates to the performance of this Contract all of Seller' s Oil and Seller' s Gas.

2.03 Reservations: Seller specifically reserves and excepts the following quantities of Seller' s Gas from the quantities to be delivered under the terms of this Contract:

a. All Seller' s Gas which Seller may require for fuel for operation and development of the Subject Interests and all free gas which Seller is obligated to furnish under any operating agreements or leases which grant Seller the right to drill for, produce or dispose of Seller' s Gas in, under and from the Subject Interests.

b. All volumes of Seller' s Gas which are contractually committed as of the date hereof for delivery to others under the existing terms of leases or applicable operating agreements, provided that for purposes hereof, Buyer shall be deemed to purchase and Seller shall be deemed to sell all committed Seller' s Gas for the Monthly Gas Price and to immediately resell such Seller' s Gas pursuant to such contractual commitments.

c. Subject to the terms of the Conveyances, the right to operate or manage leases in such manner as Seller, in Seller' s sole discretion, may deem advisable and, acting as a prudent operator or working interest owner, to drill new Wells, repair or rework old Wells, renew or extend, in whole or in


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part, any lease or unit subject to this contract and abandon any Well or surrender, release or terminate any lease not deemed by Seller capable of producing Gas in commercial quantities.

d. The right to use Seller' s Gas for cycling, repressuring and pressure maintenance on the Subject Interests or Units to which the Subject Interests are or shall be committed; however, Seller' s Gas so used shall be tendered by Seller to Buyer for purchase hereunder when such Gas becomes available for delivery. e. Seller' s Gas reasonably necessary for gas-lifting of oil produced on or attributable to leases; provided, however, if Seller uses substantial volumes of Seller' s Gas for such gas-lifting operations Seller shall deliver such Gas pursuant to the terms hereof at the conclusion of each operation, or as it is produced, at a pressure sufficient to enable such Gas to enter the system of the Receiving Pipeline at the pressure then existing therein.

2.04 Processing: Seller' s Gas will be delivered hereunder before any processing occurs, and the right to process, or cause the processing of, all Seller' s Gas delivered hereunder, for the extraction of ethane, propane, butanes, pentanes and heavier hydrocarbons belongs to Buyer (which bears so much methane as is necessarily removed in the employment of customary processes for the extraction of all such components and such Gas as is required for fuel or is otherwise lost in such extraction process), and all right, title, and interest to all such components extracted belongs to Buyer (which bears all Seller' s Gas used or otherwise lost in such extraction process).

2.05 Verification: Upon written request from Buyer, Seller shall furnish Buyer, as available, all information concerning engineering, tests and basic geological data on all Wells. Such data shall include, but is not limited to, all production data and flow potential data now or hereafter in existence. Seller shall furnish Buyer information concerning production allowables and proration status with respect to each Well connected under this Contract. III. DELIVERY OF OIL AND GAS

3.01 Delivery Point: The delivery point, for Seller' s Gas produced from each Field, shall be the point described as the Delivery Point on Exhibit A or such other point or points as the parties may agree upon in writing from time to time (the " Delivery Point" ). The Delivery Point for Seller' s Oil is the point of transfer to Buyer or its designee from the lease tanks or other base measuring facility located on the Underlying Properties. 3.02 Transportation: Seller shall be responsible for all arrangements necessary to deliver Seller' s Oil and Gas sold hereunder to the Delivery Point and Buyer shall be responsible for all arrangements necessary to receive Seller' s Oil and Gas purchased hereunder at the Delivery Point.

3.03 Delivery Pressure, Quality, and Measurement: Seller' s Gas delivered by Seller shall be of the same quality and heating value for the Gas as specified in the effective tariff or other operating rules, policies or procedures of the Receiving Pipeline at the Mainline Point. Measurement shall be performed by the Receiving Pipeline.

3.04 Title: Title, ownership and risk of loss of Seller' s Oil and Seller' s Gas sold hereunder shall pass from Seller and vest in Buyer upon delivery and acceptance of such Oil and Gas at the Delivery Points.

3.05 Delivery Rate: In connection with deliveries of Seller' s Gas hereunder, both parties shall be obligated to use reasonable efforts to avoid causing pipeline imbalances and to determine the cause of any pipeline imbalances for which a charge or penalty may be imposed. The party responsible for such imbalance


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charge or penalty shall be obligated to pay such imbalance charge or penalty regardless of whether it is the shipper on the subject pipeline. IV. PRICE FOR OIL AND GAS

4.01 Gas Purchase Price: . Subject to Section 4.06 and subject to adjustment as provided in Section 4.02, the Monthly purchase price for Seller' s Gas (" Monthly Gas Price" ) per MMBtu delivered to the Delivery Point and sold by Seller and purchased by Buyer shall be the greater of (i) $1.70 per MMBtu (the " Minimum Price" ) and (ii) the Index Price. The Index Price for any Month shall equal 97% of the result of the following for such Month: (i) the Weighted Average Hub Price multiplied times the Variable Gas Ratio, plus (ii) the Weighted Average Specified Gas Price multiplied times the Specified Gas Ratio. 4.02 Primary Term: For the period commencing October 1, 1993 through December 31, 2001 (" Primary Term" ), the Monthly Gas Price for Seller' s Gas shall be subject to the following:

a. I
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