PAID UP OIL AND GAS LEASE NO.

Transcription

1 PAID UP OIL AND GAS LEASE NO. STATE OF COUNTY OF This OIL AND GAS LEASE (this "Agreement") is made effective as of this day of, (the "effective date"), by and between the THE UNIVERSITY OF TEXAS SYSTEM BOARD OF REGENTS ( Fund name) ("Lessor ) and ("Lessee"). WITNESSETH THAT: 1. Grant. a. Lessor, for and in consideration of a bonus of per net mineral acre and annual rentals paid in advance for the Primary Term hereof, in hand paid by Lessee, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the royalties herein provided to be paid and the covenants, agreements, and obligations of Lessee herein contained, and upon the conditions and with the limitations hereinafter set forth and contained, hereby grants, leases, and lets exclusively unto Lessee, its successors and assigns, for the purpose of investigating, exploring, prospecting, drilling, mining and operating for and producing oil and gas, Lessor's interest in and to the oil and natural gas in, on, and under those certain lands in County, Texas, to-wit: and containing a total gross acreage of lands being a net mineral acreage of acres. Lessor's mineral interest in such acres, more or less. b. The term "oil and gas" for the purposes of this Agreement shall be deemed to include oil, gas, casinghead gas and by-products thereof, other hydrocarbons, sulfur, and other substances as are produced with, and incidental to, the production of oil or gas from wells on the Leased Premises or on land pooled therewith. Form UTM-07 April 2007

2 c. This Agreement is made subject to the rights of all other persons or entities owning or holding an interest in the Leased Premises as of the effective date of this Agreement, and all future easements, rights-of-way, and other conveyances affecting the Leased Premises to the extent such conveyed interests do not unduly and unreasonably interfere with the rights of Lessee under this Agreement. d. The term "Leased Premises" for purposes of this Agreement shall mean such of the above-described lands as are from time to time subject to this Agreement. e. It is expressly agreed between the parties hereto that no warranty of title to the land covered hereby or to the oil or gas therein or produced therefrom is made by Lessor, nor shall any guarantee of title be created by or arise from this lease; provided, however, that if Lessor owns more or less than the mineral interest stated above, the royalties provided for in this lease may be adjusted to reflect the actual net mineral acreage owned by Lessor. 2. Term. Subject to the other provisions herein contained, this Agreement shall be for a term of years (the "Primary Term") commencing on the effective date and for so long thereafter as oil or gas is produced in paying quantities from the Leased Premises, with royalties being timely and properly paid, or operations are being conducted as hereinafter provided. For purposes of this Agreement, the term paying quantities shall mean production accruing to Lessee s interest under this Agreement during any 3-month period, the value of which exceeds Lessee s operating expenses, including overhead and depreciation properly allocable to the producing well. The parties agree that a producing well that produces less than an average of one (1) barrel of oil equivalent per day in any 3- month period shall be deemed to not be capable of producing in paying quantities. A barrel of oil equivalent means one 42-gallon barrel of crude oil, or 6,000 cubic feet of natural gas or a volume of gas with a minimum heating value of 6,000,000 British thermal units (6,000 Mbtu), whichever is greater. 3. Royalty. The royalties to be paid by Lessee to Lessor on production from wells on the Leased Premises or on lands pooled therewith shall be paid as provided in paragraph 26 below, and are as provided herein. The "Royalty Share" as used herein is twenty-five ( 25% ) percent. a. On all oil, including distillate or condensate and other liquid hydrocarbons, produced and saved from the Leased Premises, the Royalty Share of that produced from the Leased Premises, to be delivered to Lessor's credit into any pipeline to which the well or wells, or any of Lessee's tanks may be connected, all free of any cost or deductions for production, handling, transportation (including trucking charges), and delivery. Lessee will purchase or cause the purchase of all Lessor's royalty oil in Lessee's possession at fair market value on the date of production, provided however that in no event shall royalty be paid based on an amount less than the gross price or value received 2

3 by Lessee for sale of its oil. Lessor shall never be required or obligated in any manner to take Lessor's royalty portion in kind. b. The royalty on all gas, including casinghead gas or other gaseous substances produced from the Leased Premises, shall be as set out below. Unless and until Lessor elects to take its Royalty Share in kind, Lessee shall, at Lessee's expense, market Lessor's Royalty Share of the gas so long as any part of Lessee's portion of gas is being sold or marketed. In no event shall Lessee sell or market Lessor's Royalty Share for an amount or at a price less than the gross price being received by Lessee for Lessee's share of the production. Lessor shall never be required or obligated in any manner to take Lessor's royalty portion in kind. Upon written request by Lessor, Lessee shall furnish Lessor complete copies of all gas purchase contracts or agreements and any amendments thereto entered into by Lessee for the sale or disposition of gas or other products produced under this Agreement. i. On gas sold at the well or sold or used off the Leased Premises (other than for processing at a plant as described in Paragraph 3.b.iii hereof) the Royalty Share shall be the higher of the gross proceeds received by Lessee from an unaffiliated third party or the market value of the gas at the time the gas is produced, such value to be determined upon comparable sales in the general area. ii. On distillate, condensate, and other products separated or extracted from gas by use of oil and gas separators or conventional type or other equipment at least as efficient, Lessor shall receive its Royalty Share as specified in Paragraph 3.a of the distillate, condensate, and other products so separated and extracted, together with a royalty on residue gas in the amount and determined as provided in Paragraph 3.b.i of this Agreement, it being understood and agreed that the gas before being sold or used will be run through separators or other equipment unless (1) the same is processed in an absorption or extraction plant, or (2) the liquid hydrocarbon content of the gas is so small as to make the installation and operation of separators or other comparable equipment unprofitable, or (3) the pressure of the gas is such that running the same through separators or other comparable equipment will so reduce the pressure that Lessee will be unable to sell and deliver the separated gas against existing gathering system or pipeline pressures. iii. Royalty on any gas processed in a gasoline plant or other plant for the recovery of gasoline or other liquid hydrocarbons shall be the royalty share of the residue gas and the liquid hydrocarbons extracted or the market value thereof, at the option of the Lessor. All royalties due herein shall be based on one hundred percent (100%) of the total plant production of residue gas attributable to gas produced from this lease and on fifty percent (50%), or that percent accruing to Lessee, whichever is the greater, of the total plant production of liquid hydrocarbons attributable to the gas produced from this lease; provided that if liquid hydrocarbons are recovered from gas processed in a plant in which Lessee (or its parent, subsidiary, or affiliate) owns an interest, then the percentage applicable to liquid hydrocarbons shall be fifty percent 3

4 (50%) or the highest percent accruing to a third party processing gas through such plant under a processing agreement negotiated at arm s length (or if there is no such third party, the highest percent then being specified in processing agreements or contracts in the general area), whichever is greater. The respective royalties on residue gas and on liquid hydrocarbons shall be determined by 1) the highest market price paid or offered for comparable sales of gas (or liquid hydrocarbons) in the general area, or 2) the gross price paid or offered for such residue gas (or the weighted average gross selling price for the respective grades of liquid hydrocarbons), whichever is the greater. In no event, however, shall the royalties payable under this paragraph be less than the royalties which would have been due had the gas not been processed. No royalties shall be paid on gas volumes used or consumed as plant fuel or attributable to shrinkage during the processing cycle. c. On all other minerals produced and saved from the Leased Premises as royalty the Royalty Share shall be the higher of the gross proceeds received by Lessee or the fair market value of the minerals. d. Lessor shall share in "take or pay" payments. If any gas purchase contracts, agreements, or any amendments thereto entered into by Lessee for the sale or disposition of gas or other products under this Agreement should contain a "take or pay" clause requiring a purchaser of gas to take, or upon failing to take, to pay for the minimum annual contract volume of gas which a producer-seller has available for delivery, then any payments made by the purchaser of gas under such provision, whether or not gas is actually delivered, shall be subject to the payment of royalty to the Lessor as herein provided. However, it is expressly understood that no royalty shall be payable to Lessor on make-up volumes taken by the purchaser in recoupment of said take or pay payments except to the extent of any price differential applicable to such make-up volumes, as provided for in the applicable gas purchase contract. Additionally, Lessee shall pay to the Lessor royalty at the applicable royalty rate on any monetary settlement received by Lessee from any breach of contract by Lessee s purchaser relating to the marketing, pricing or taking of oil or gas production from the premises. e. Lessor's royalty shall never bear or be chargeable with, either directly or indirectly, any part of the costs or expenses of production, gathering, dehydration, compression, transportation, manufacturing, processing (except as provided in Paragraph 3.b.iii hereof), treating, or marketing, depreciation of any plant or other facility or facilities or equipment for processing or treating of the oil or gas produced from the Leased Premises or lands pooled therewith, or any other costs of a similar nature. If Lessee (or purchaser contracted by Lessee to purchase the production) fails to comply with the terms of this paragraph and does, in fact, deduct costs or expenses from the value of Lessor's production, Lessee shall reimburse Lessor as follows: (i) the full amount of such deductions made from the date first deducted, and (ii) interest and penalty as provided in Section 4 below. All payments due under this paragraph shall be due immediately upon receipt of an invoice from Lessor. 4

5 f. Lessee further acknowledges that Lessor is an agency of the State of Texas and Lessor s royalty interest is not subject to severance or ad valorem taxes. The amount of royalties due and owing to Lessor under this Agreement shall not in any event be reduced by severance or ad valorem taxes. This sub paragraph 3f shall only be applicable if the property described in this lease is located within the State of Texas g. Lessee has a duty to exercise due diligence and use all reasonable efforts in marketing any and all production from oil and gas wells on the Leased Premises to obtain the best prices reasonably available for the oil and gas. h. Lessee shall pay Lessor interest and late fees on unpaid royalty as provided in Paragraph 4. i. Notwithstanding anything contained herein to the contrary, Lessor may, at any time and from time to time, upon not less than sixty (60) days notice to Lessee, require that payment of any royalties accruing to Lessor under this Agreement be made in kind and Lessor shall take its Royalty Share in kind at the appropriate place delivered into tanks or other receptacles provided by Lessor at Lessor's sole risk and expense. Lessee shall provide to Lessor or Lessor's agent, on a continuing basis, if necessary, any relevant information concerning wells or production which is necessary for Lessor to market its royalty taken in kind. j. Lessee shall use all reasonable efforts to prevent the underground or above ground waste of oil or gas, including the flaring or venting of gas, and Lessee shall pay Lessor a royalty as provided herein on oil or gas so wasted. Flared or vented gas must be metered to the largest extent practicable. k. Lessee shall pay to Lessor royalty on initial oil or gas production on or before the date which is 120 days after the end of the calendar month of first production from the Leased Premises. Lessee shall pay to Lessor royalty on subsequent production on or before the date which is 60 days after the end of the calendar month in which such production is sold. Notwithstanding anything to the contrary herein, Lessee may remit royalty payments to Lessor for the aggregate of up to 12 months' accumulation of proceeds, if the total amount owed is $ or less. If payment has not been received by Lessor for any reason within the time specified, then interest and late fees shall be due as provided herein. l. One year after the expiration of the primary term and for each year thereafter during the term of this lease, Lessee shall pay to Lessor as minimum royalty, an amount equal to the positive difference, if any, between an amount equal to multiplied by the total number of net mineral acres subject to this Agreement and royalties from this lease actually paid and received in the immediately previous lease year. Such amount shall be due and payable within sixty (60) days after each anniversary date of this lease. No minimum royalty is due if royalties from this lease 5

6 actually paid and received during the previous lease year were greater than the minimum royalty. 4. Interest and Late Fees. On any past-due amounts or reimbursements owed by Lessee to Lessor hereunder, Lessee shall pay interest on such amount at an annual percentage rate equal to the maximum contract rate allowed by law, or twelve percent (12%), whichever is lesser, compounded monthly. Late fees shall be due thirty (30) days after receipt of an invoice from Lessor. 5. Annual Rental. Annual rentals for the Primary Term of this Agreement have been paid. 6. Shut-In Royalty. If at any time there is located on the Leased Premises or on land pooled therewith a well or wells proven capable, by actual tests, of producing oil or gas in paying quantities and such well is shut in because of lack of market or marketing facilities, and this Agreement is not being otherwise maintained as herein provided, then Lessee may maintain this Agreement in force and effect by paying or tendering to Lessor annually the sum of per net mineral acre of the Leased Premises multiplied by the number of wells capable of production; the first such payment to be made on or before the date which is (90) days after the date on which the well is shut in and subsequent payments to be made on or before the anniversary date of shutting in the well. So long as such annual payments are timely tendered, the Leased Premises, subject to Paragraph 9 below, shall be considered as producing in paying quantities, provided, however, that Lessee shall be entitled to maintain this Agreement after the expiration of the Primary Term by such annual payments for a cumulative total of only two (2) years. If at any time during which such well(s) are shut-in oil or gas should be produced, sold, and delivered in paying quantities from a well situated within such distance that Lessor reasonably determines that drainage might be occurring, or in any case where drainage is occurring, the right to further extend this Agreement by shut-in royalty payments shall cease. If Lessee fails to pay any shut-in royalty as herein provided, and this Agreement is not otherwise being maintained in force and effect, this Agreement shall automatically terminate. 7. Cessation of Production. If, after the primary term, production of oil and gas in paying quantities on the Leased Premises or land pooled therewith should cease for any reason and this Agreement is not being continued by any other means, this Agreement shall nevertheless continue in force and effect (as to that portion of the Leased Premises held by Lessee pursuant to Paragraph 9) if Lessee commences drilling or reworking operations in or on an existing wellbore on the Leased Premises capable of producing in paying quantities or actual drilling operations for a new well within sixty (60) days after cessation of production. This Agreement shall then continue in force so long as such drilling or reworking operations are diligently prosecuted in good faith and in a workmanlike manner without interruptions totaling more than sixty (60) days cumulatively, and, if such operations result in the production of oil or gas in paying quantities, so long thereafter as oil or gas is produced in paying quantities. If 6

7 such operations do not result in the production of oil or gas in paying quantities, this Agreement shall continue in force so long as Lessee undertakes continuous drilling operations thereafter. 8. Drainage Protection. If a well or wells producing oil or gas in paying quantities should be completed on adjacent land within such distance that Lessor reasonably determines that drainage might be occurring, or in any case where drainage is occurring, Lessee shall drill on the Leased Premises such offset well(s) as a reasonably prudent operator would drill under the same or similar circumstances, or release the affected acreage, as provided in this Agreement, and the burden of establishing reasonableness shall be on Lessee in any litigation resulting from same. 9. Partial Termination. The term "continuous drilling operations" shall mean that not more than sixty (60) days shall expire between the completion as a producer or the abandonment as a dry hole of a preceding well and the commencement of actual drilling operations for the next well. Lessee shall complete each well as a producer or abandon the well as a dry hole not later than thirty (30) days after reaching total depth. If Lessee fails to conduct continuous drilling operations on the Leased Premises or on land pooled therewith after the expiration of the Primary Term, then this Agreement shall thereupon terminate as to all of the Leased Premises, except as follows: a. If Lessee has completed a well (or wells) on the Leased Premises or on land pooled therewith that is producing or capable of producing oil or gas in paying quantities and is included within a pooled unit (or units), then this Agreement shall continue in effect as to the land covered hereby that is within the bounds of the unit(s), but only to the depths specified herein; b. If Lessee has completed an oil well (or wells) on the Leased Premises that is producing or capable of producing oil in paying quantities and there is no pooled unit designated of record around same, then this Agreement shall continue in effect as to a tract of 40 acres around each well or such greater acreage as may be included in a proration or spacing unit assigned to the well by the regulatory agency with jurisdiction, but only as to the depths specified herein; c. If Lessee has completed a gas well (or wells) on the Leased Premises that is producing or capable of producing gas in paying quantities and there is no pooled unit designated of record around same, then this Agreement shall continue in force and effect as to a tract of 160 acres around each well or such greater acreage as may be included in a proration or spacing unit assigned to the well by the regulatory agency with jurisdiction, but only as to the depths specified herein; d. The acreage around a producing oil or gas well held in accordance with Paragraphs 9.a., 9.b. and 9.c. will continue to be subject to this Agreement only for depths from the surface to a depth 100 feet below the stratigraphic equivalent of the deepest formation in which the well is then completed and capable of producing oil and/or 7

8 gas in paying quantities. This Agreement shall terminate as to all other depths. Upon the termination of this Agreement pursuant to this paragraph as to a part, but not all of the Leased Premises, Lessee shall have a continuing non-exclusive easement across the surface of the Leased Premises for access to that portion of the Leased Premises with respect to which this Agreement is not terminated and Lessor shall have, and expressly reserves, an easement over, across and through the retained Leased Premises, including all of the retained depths and formations, to enable exploration for, and production and development of, oil, gas and/or minerals from any depths and lands which are not thereafter subject to this Agreement. Lessor, its agent or assignee, shall not have the right to use any wellbores drilled by Lessee or any equipment installed by Lessee in connection with any drilling or production operations without the written consent of Lessee. The easement reserved herein by Lessor shall be fully assignable by Lessor to any party, including any oil, gas and mineral lessee of depths or lands no longer subject to this lease, and if Lessor assigns the easement to any third party, Lessee shall look only to such third party, and not to Lessor, for any claims, costs, expenses, or damages occasioned by such third party s use of the easement herein reserved, specifically including, but not limited to, any claims that such third party s activities interfered with or damaged Lessee s well(s), reserves, equipment, operations, or other rights hereunder. e. Lessee shall designate and file for record in the County Clerk's office the area to be held in accordance with Paragraphs 9.b. and 9.c. within sixty (60) days after the expiration of continuous drilling operations. Lessee shall describe the area by metes and bounds or another recognized and sufficient legal description. The area held by each producing well shall be in the form of a square or rectangle, the producing well shall in no event, unless otherwise agreed in writing by Lessor, be less than 330 feet from any boundary of the area to be held, and it must comply in every way with applicable rules and regulations of any governmental agency having jurisdiction. If Lessee fails to designate the area to be held within the time specified, Lessor may designate same, prepare the property description, and file an appropriate release of record, all at Lessee s expense. Lessee shall pay any such expenses incurred by Lessor on demand. f. Upon the cessation of continuous drilling operations by Lessee upon the Leased Premises pursuant to this Paragraph 9, each such area containing a well producing or capable of producing oil or gas in paying quantities shall be treated as subject to a separate Agreement, on all the terms and conditions contained herein, and neither production from nor operations on any such area shall maintain this Agreement in force as to any other area. 10. Development. This Agreement contemplates the full prospecting and developing for oil and gas of the lands hereby leased, including the drilling of as many well(s) as the facts justify. Neither bonus, rentals, nor royalties paid or to be paid hereunder shall relieve Lessee from the obligations herein expressed. If the obligation for development should require the drilling of a well or wells, Lessee shall have sixty (60) days after ascertaining that such obligation exists within which to begin the drilling of a well. The penalty for failure to do so shall be the termination of this Agreement as to all of the 8

9 Leased Premises, SAVE AND EXCEPT as to lands held by production pursuant to paragraph 9 above. 11. Drilling Operations Defined. Whenever used in this Agreement, the words "drilling operations" or "operations" shall mean operations for any of the following: actual pad construction, drilling, testing, completing, reworking, recompleting, deepening, sidetracking, plugging back or repairing of a well in search for or in an endeavor to obtain production of oil or gas. The words "actual drilling operations" shall mean having the bit in the ground and rotating same. 12. Force Majeure: Lessee shall not be liable for delays or defaults in its performance of any agreement or covenant in this Lease due to force majeure. The term force majeure shall mean: any act of God including storms, floods, washouts, landslides, and lightening; wars, blockades, insurrection or riots; exhaustion or unavailability of any product, labor, service or material. If Lessee by force majeure is prevented from conducting drilling operations, reworking operations, or producing operations, then until such time as such force majeure is terminated and for a period of sixty (60) days after such termination each and every provision of this Lease that might operate to terminate it or the estate conveyed by it shall be suspended and inoperative and this Lease shall continue in full force. The benefits and rights of this force majeure clause shall be available only when the cause claimed is the proximate cause of a delay or failure to perform, and only so long as Lessee is using its best efforts, exercised in good faith, to remedy or eliminate the force majeure. In no case will the existence of a condition of force majeure excuse the performance of any act or duty of Lessee for a period of more than one (1) year. As a condition of Lessee's utilizing the rights granted under this force majeure clause, Lessee shall, within fifteen (15) days of the occurrence of such force majeure event, provide Lessor written notice of the claim, outlining the reasonably full particulars of the basis of the force majeure claim. Notwithstanding the provisions of this force majeure clause, this provision shall not apply to or excuse any delay or discontinuation of operations resulting from exhaustion or unavailability of any product, labor, service or material for periods of time in excess of 90 days. 13. Pooling. Lessee is hereby granted the right to pool or unitize the Leased Premises or any part thereof, with any other land, lease, leases, mineral estates or parts thereof for the production of oil and gas, or either of them, from vertically or horizontally drilled wells, when in Lessee's judgment it is necessary or advisable to do so in order to properly develop and operate the Leased Premises or to promote the conservation of oil and gas under and that may be produced therefrom; provided however that the unitization or pooling must be done in good faith for the express purpose of exploring, developing, and producing oil and gas, or either of them, to the fullest extent possible from the Leased Premises, and with the express written concurrence of Lessor. Pooling may include all oil and gas or may be limited to either and may extend to all such production or may be limited to one or more zones or formations. Units pooled hereunder shall not exceed 160 9

10 acres for a gas well and 40 acres for an oil well, or such greater acreage included in the proration or spacing unit prescribed by an applicable rule, regulation, or order of a governmental agency for a single producing well. A unit may be formed or reformed to embrace the acreage prescribed by any such rule, regulation, or order. Lessee shall file written unit designations in the county in which the Leased Premises are located, and shall forward to Lessor a copy of the unit designation, as so filed and recorded, together with a plat thereof, including the legal description of the unit and of the portion of the Leased Premises included therein. Units may be designated either before or after the completion of any well or wells. Drilling or reworking operations or production from any part of the pooled acreage shall be treated for all purposes hereof as if the drilling or reworking operations are upon, or such production is from the Leased Premises included within such pooled unit, whether the well or wells are located on the Leased Premises or not. Notwithstanding anything to the contrary herein contained, in the event a portion or portions of the Leased Premises is pooled or unitized with other lands so as to form a pooled unit or units, operations on, completion of a well upon, or production from such unit or units will not maintain this lease in force as to the land not included in such unit or units. The lease may be maintained in force as to any land covered hereby and not included in such unit or units in any manner provided for herein; provided that if it be by rental payments, the rentals shall be reduced in proportion to the number of acres covered hereby and included in such unit or units. In the event of pooling, Lessor shall receive on production from a unit so pooled only such portion of the royalty stipulated herein as the amount of Lessor's acreage placed in the unit or its royalty interest therein on an acreage basis bears to the total acreage so pooled in the particular unit involved. 14. Personal Property. Lessee shall have the right at any time during the term of this Agreement or within ninety (90) days after termination of this Agreement to remove all property and fixtures placed by Lessee on the Leased Premises, including the right to draw and remove all casing (except from a producing well), and all such property or fixtures not so removed within such period shall become the property of the Lessor; provided however that in no event shall Lessee remove casing run for the purpose of protecting fresh water strata. Notwithstanding any other provision in this Agreement to the contrary, upon the termination of this Agreement when there is a shut-in gas well (or wells) on the Leased Premises capable of producing gas in paying quantities, Lessor shall have the option of purchasing the equipment pertaining to the well for its salvage value, the salvage value to be determined on the basis of the highest bona fide offer which is received for the salvage in the ground, or allowing Lessee to plug and abandon the well, and remove the equipment therefrom. 15. Plugging. Lessee shall properly plug any well(s) upon abandonment of same by Lessee or Lessee s successor in interest and, upon Lessee's failure to do so, Lessor may, at Lessor's option, plug any abandoned and unplugged well(s). Lessee shall reimburse Lessor for the entire cost and expense of such plugging. Lessee shall be liable for, and hereby agrees to exonerate, indemnify, defend, and hold harmless Lessor and Lessor's regents, directors, trustees, officers, employees, agents, successors, and assigns, from and against any and all claims, liabilities, losses, damages, actions, costs, 10

11 and expenses in any way related to the failure by Lessee or its successors or assigns to fully comply with the rules, requirements, and regulations of any applicable judicial or regulatory authority concerning the plugging and abandoning of wells. 16. Assignment. The rights of either party may be assigned in whole or in part. The provisions hereof shall extend to the successors and assigns of the parties but no change or division in ownership of the land, or royalties, however accomplished, shall operate to enlarge the obligations or diminish the rights of Lessee. Assignment by Lessee shall not be effective until Lessor is notified in writing of the assignment by furnishing Lessor a copy of the recorded Assignment, together with the name and address of the assignee, in accordance with the rules from time to time promulgated by the Executive Director, University Lands, The University of Texas System (the Executive Director ). 17. Reports, Records and Other Information. a. Lessee will promptly furnish to Lessor copies of all regulatory agency filings and correspondence in connection with the drilling and completion of each well drilled on the Leased Premises or acreage pooled therewith along with drilling reports, copies of any unit designation, or proration units with plats (if any), within thirty (30) days of filing. b. Upon written request of Lessor, Lessee shall furnish to Lessor a copy of all core and test reports, logs, seismic data, electric, radioactive, sonic or other logs obtained during drilling or completion of wells located on the Leased Premises or on lands pooled with the Leased Premises. Any information so furnished by Lessee shall be held confidential to and for the sole use of Lessor for and during the life of this Agreement, except to the extent that the same must be disclosed by law. c. Upon written request of Lessor, Lessee will furnish Lessor a copy of any survey on the Leased Premises made by or for Lessee and will furnish to Lessor all title opinions or any other information or documentation that it has or obtains relating to the Leased Premises, or any part thereof. d. Lessor, acting by or through any agent or representative authorized by Lessor, at Lessor's risk, will have the right at all times to inspect any machinery, equipment, well or operation of Lessee on the Leased Premises. e. Upon written request of Lessor, Lessee shall make available to Lessor or Lessor's authorized representative for inspection and examination the books and accounts, receipts, well records, and all contracts and other records pertaining to the production, transportation, sale, and marketing of the oil and gas produced on the Leased Premises which relate to or have bearing on, in any manner, the royalty to be received by Lessor hereunder. Any inspection or examination shall be done at Lessee's principal place of business during normal working hours. 11

12 18. Title. LESSOR DOES NOT, EXPRESSLY OR IMPLIEDLY, WARRANT TITLE TO THE LEASED PREMISES, OR ANY PART THEREOF. If Lessor owns an interest in the oil and gas in and under any of the Leased Premises less than the entire mineral estate, then the royalties, but not the shut-in gas well royalties, to accrue or to be paid to Lessor hereunder as to the Leased Premises shall be reduced to the proportion thereof which the mineral fee estate of Lessor in the Leased Premises bears to the entire mineral fee estate. The parties acknowledge that the shut-in royalties specified in Paragraph 6 will not be further reduced. Notwithstanding anything to the contrary contained here, should title research confirm that the total net mineral acreage in the Leased Premises owned or held by Lessor is greater than stated in Paragraph 1.a., then Lessee shall (i) promptly pay to Lessor additional bonus and previously paid annual rentals to be calculated by multiplying the additional net mineral acreage by the bonus and annual rental amounts shown in Paragraph 1.a. and (ii) promptly pay royalties based on the adjusted net mineral acreage for any and all production hereunder from and after the effective date of this Agreement. Lessee shall timely pay all future royalties in accordance with the terms of this Agreement based on the adjusted net mineral acreage. Lessee shall pay amounts due under this paragraph within thirty (30) days after written demand from Lessor or the date Lessee discovers that Lessor owns more acreage than stated in this Agreement, whichever is earlier. If such amounts are not timely paid, interest will accrue from the date of demand or the date Lessee discovered the acreage error, whichever is earlier, at the rate of twelve percent (12%) per annum or the maximum rate allowed by law, whichever is lesser, and shall be compounded monthly. Should title research confirm that the total net mineral acreage in the Leased Premises owned by Lessor is less than stated in Paragraph 1.a., then Lessee may, after written notice to Lessor, deduct any overpayments of royalties from future royalty payments due to Lessor. Lessee shall not make any deductions from payments due to Lessor without first providing Lessor the title research based upon which such adjustment is made. Lessee shall not be entitled to reimbursement for or repayment of any bonus or rental paid to Lessor prior to the date of such notice to Lessor. Lessee shall provide to Lessor immediately upon receipt any title research completed or obtained by Lessee that indicates that the net mineral acreage owned by Lessor is other than as stated in Paragraph 1.a. 19. Surrender and Release. Lessee and its successors and assigns shall have the right at any time to surrender this Agreement, in whole or in part, to Lessor, its successors and assigns, by delivering or mailing a release thereof to Lessor, and by placing such release thereof of record in the county in which the land is situated, and thereupon Lessee shall be relieved from all obligations of this Agreement as to acreage so surrendered, except obligations and liabilities theretofore accrued, and on termination, however brought about, Lessee shall furnish Lessor a recordable release. Upon expiration or termination of this Agreement, in whole or in part, for any reason, Lessee shall at its expense promptly prepare, execute, and file in the records of the county where the Leased Premises are located an appropriate release instrument covering such land, and forward a copy of the same as so recorded to Lessor. Lessee and Lessor acknowledge that the damages Lessor may suffer as a result of Lessee s failure to timely record an appropriate release are difficult to measure and Lessee 12

13 agrees to pay to Lessor damages in the amount of $10 per acre not timely released for each 30-day period or part thereof during which an appropriate and effective release has not been recorded. 20. Use of the Surface. Notwithstanding anything contained herein to the contrary: a. Lessee shall build and maintain fences around its slush, sump, and drainage pits and tank batteries, and around the well itself as necessary to protect livestock against loss, damage, or injury. Upon request of Lessor or the surface owner, Lessee will (i) bury all pipelines below ordinary plow depth; (ii) fill and level all pits and mounds, remove all board roads and board road materials, and level and fill all roads as soon as is reasonably practical after completion of each well or wells; and (iii) restore the surface of the ground as nearly as is possible to its original state. No well shall be drilled within three hundred (300) feet of any existing buildings without Lessor's consent. Lessee shall, upon expiration or termination of this Agreement, remove all of Lessee's equipment, fill and level all pits, and restore the surface. b. Lessee shall repair all damages of any kind or character to the Leased Premises and improvements thereon which might be caused by Lessee, its agents, servants, employees, subcontractors, successors or assigns and remediate any condition which might be hazardous to humans or wildlife resulting from Lessee s operations on the Leased Premises. Lessee shall not permit the disposal of trash, used equipment, or other materials on the Leased Premises. Lessee shall pay for all damages resulting from operations under this Agreement to the lands including, but not limited to, trees, fences, crops, pasture, native or cultivated grass, improvements, or to any other structures, or to any employees, or licensees of Lessor. Lessee shall be liable for same, whether or not such agents, employees, or licensees, at the time of occasioning such damage, are acting within the scope of their employment or license. c. Lessee shall undertake its activities on the Leased Premises in a manner consistent with laws, regulations, and public policy relating to the location and preservation of archeological sites and other cultural resources in, on, or under public lands. Lessee shall use the highest degree of care and all reasonable safeguards to prevent the taking, alteration, damage, destruction, salvage, or excavation of cultural resources and/or landmarks on the Leased Premises. Upon discovery of an archeological site or other cultural resource, Lessee shall immediately give written notice of such discovery to Lessor, the surface owner (if other than Lessor), and the appropriate governmental agency. Lessee, its contractors, employees, and invitees, shall have no right, title, or interest in or to any archaeological articles, objects, or artifacts, or other cultural resources located or discovered on the Leased Premises. 21. Indemnity. Lessee hereby releases and discharges Lessor, its regents, officers, employees, and agents of and from all and any actions and causes of action of every nature, or other harm, including environmental harm, for which 13

14 recovery of damages is sought, including, but not limited to, all losses and expenses which are caused by the activities of Lessee, its officers, employees, and agents arising out of, incidental to, or resulting from, the operations of or for Lessee on the Leased Premises hereunder, or that may arise out of or be occasioned by Lessee's breach of any of the terms or provisions of this Agreement, or by any other negligent or strictly liable act or omission of Lessee.Further, Lessee hereby agrees to be liable for, exonerate, indemnify, defend, and hold harmless Lessor, its trustees, officers, employees and agents, their successors or assigns, against any and all claims, liabilities, losses, damages, actions, personal injury (including death), costs, and expenses, or other harm for which recovery of damages is sought, including attorneys' fees and other legal expenses, including those related to environmental hazards on the Leased Premises or in any way related to Lessee's failure to comply with any and all environmental laws; those arising from or in any way related to Lessee's operations or any other of Lessee's activities on the Leased Premises; those arising from Lessee's use of the surface of the Leased Premises; and those that may arise out of or be occasioned by Lessee's breach of any of the terms or provisions of this Agreement or any other act or omission of Lessee, its directors, officers, employees, agents, contractors, guests or invitees. Each assignee of this Agreement, or an interest therein, agrees to be liable for, exonerate, indemnify, defend, and hold harmless Lessor, its trustees, officers, employees, and agents in the same manner provided above in connection with the activities of Lessee, its officers, employees, and agents as described above. 22. Environmental Hazards. Lessee shall use the highest degree of care and all reasonable safeguards to prevent contamination or pollution of any environmental medium, including soil, surface waters, groundwater, sediments, and surface or subsurface strata, ambient air or any other environmental medium in, on, or under, the Leased Premises, by any waste, pollutant, or contaminant. Lessee shall not bring or permit to remain on the Leased Premises any asbestos-containing materials, explosives, toxic materials, or substances regulated as hazardous wastes, hazardous materials, hazardous substances, or toxic substances under any federal, state, or local law or regulation ("Hazardous Materials"), except ordinary products commonly used in connection with oil and gas exploration and development operations and stored in the usual manner and quantities. Lessee's violation of the foregoing prohibition shall constitute a material breach and default hereunder and Lessee shall indemnify, hold harmless, and defend Lessor from and against any claims, damages, penalties, liabilities, and costs (including reasonable attorneys' fees and court costs) caused by or resulting from (i) Lessee s violation of the foregoing prohibition or (ii) the presence, release, or disposal of any Hazardous Materials on, under, or about the Leased Premises as a result of Lessee s operations on the Leased Premises. Lessee shall clean up, remove, remedy, and repair any soil or ground water contamination and damage caused by the presence or release of any Hazardous Materials in, on, under, or about the Leased Premises as a result of Lessee s operations on the Leased Premises in conformance with the requirements of applicable law. Lessee shall immediately give Lessor written 14

15 notice of any breach or suspected breach of this paragraph, upon learning of the presence or any release of any Hazardous Materials, or upon receiving a notice from any governmental agency pertaining to Hazardous Materials which may affect the Leased Premises. This indemnification shall include costs in connection with any remedial work made necessary as a result of Lessee s operations hereunder when performed by Lessor or any third party in response to any federal, state, or local government authority, laws, or regulations. Such costs shall be due and payable upon demand therefor by Lessor. The obligations of Lessee hereunder shall survive the expiration or earlier termination, for any reason, of this Agreement. 23. Compliance with Laws. Lessee shall at all times comply with all applicable laws, regulations, ordinances, orders, permits, licenses, and any other directives of each and every governmental agency with jurisdiction over the Leased Premises or Lessee's activities thereon. Lessee shall also comply with all applicable restrictive covenants pertaining to the Leased Premises. 24. Memorandum of Lease. On or after the effective date of this Lease, Lessor shall provide to Lessee a memorandum of this Agreement, properly executed and acknowledged. Lessee shall record such memorandum in the Real Estate Records of the County, or Counties, in which the Leased Premises are located and shall provide a copy of the recorded document, or a file-stamped copy of same, to Lessor as soon as reasonably practical. 25. Forfeiture. a. If a Lessee fails or refuses to perform a material requirement of this subchapter or the lease, the Executive Director may, after notice to the lessee and an opportunity to be heard, declare a forfeiture of the lease or an interest in the lease. Material requirements include but are not limited to: (1) failure or refusal to pay a sum due, including penalty and interest, within 30 days after the sum becomes due; (2) intentional failure or refusal to tender oil or gas for delivery as inkind royalty; (3) making a knowingly false report concerning exploration, production, or royalty; (4) failure or refusal to file an assignment as required by this lease; (5) failure or refusal, within 30 days after demand, to file or make available for inspection and copying a record or document required to be filed or made available for inspection or copying by rules promulgated from time to time by the Executive Director; 15

16 (6) failure or refusal, after demand, to protect the Leased Premises from drainage; in accordance with paragraph 8 of this lease; or (7) the breach of an obligation under the lease. b. Forfeiture is not the exclusive remedy. The attorney general, at the request of the board of regents, may bring suit for damages or specific performance, or both, or other remedy, at law or in equity. c. The Executive Director, in his sole discretion, may authorize reinstatement of a forfeited lease on such terms as he may determine at the time of the declaration of forfeiture. 26. Payments and Notices. All payments due to Lessor shall be made to the The University of Texas System (BOR) and shall be timely delivered to: The University of Texas System (BOR) P. O. Box 551 Midland, Texas Tax ID Notices or other correspondence given or delivered pursuant to this Agreement shall be deemed delivered three days after deposit into the United States mail, sent certified mail, return receipt requested, in a properly addressed package with adequate postage attached or on the date of hand delivery or delivery by overnight delivery. Notices and other correspondence must be addressed: To Lessor: To Lessee: The University of Texas System (BOR) Trust Minerals P. O. Box 551 Midland, Texas Telephone: (432) Telecopy: (432) , Telephone: Telecopy: 16

17 Lessor may alternatively give notice to the operator of record and any notice given to the operator of record shall be deemed to be notice to each and every party with an interest in this Agreement. Either party may change the address to which notices or correspondence are to be delivered, and Lessor may change the address to which payments are to be delivered, by giving the other party written notice of such change of address as provided in this paragraph. 27. Miscellaneous. a. Time is of the essence with regard to performance of this Agreement. b. Should Lessor prevail in any litigation relating to this Agreement, Lessor will be entitled to reasonable attorneys' fees and prejudgment interest, as provided herein or determined by law, if there be no applicable interest provision herein. c. Reservation: Lessee's right hereunder to prospect for oil and gas from the premises is non-exclusive. The Board of Regents of the University of Texas System expressly retains and reserves the concurrent right to grant third parties seismic, geophysical and geological permits and to enter into other agreements with third parties, which permits or agreements shall allow such third parties to conduct geophysical, geological or seismic surveys on, over, under, through and across the land covered herein during the term of this lease. Such seismic, geophysical or geological surveys shall not unreasonably interfere with Lessee s drilling or production activities on the lease. d. Division and transfer orders signed by the parties shall not be construed to amend this Agreement or modify in any manner Lessee s obligation to pay royalty and other amounts due hereunder. If there are conflicting provisions in this Agreement and any division or transfer order, the provisions of this Agreement shall control. e. The term producing as used in this Agreement shall mean producing in paying quantities. f. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, devisees, legal representatives, successors, and assigns, and shall constitute a covenant running with the lands, leases, and interests covered hereby. g. The terms and provisions of this Agreement represent the results of negotiation between the parties, none of which has acted under duress or compulsion, whether legal, economic, or otherwise. The terms and provisions of this Agreement shall be interpreted and construed in accordance with their usual and customary meanings, 17

18 and the parties hereby expressly waive and disclaim, in connection with the interpretation and construction of this Agreement, any rule of law, principle of interpretation, or procedure requiring otherwise, including, without limitation, any rule of law, or principle of interpretation, to the effect that ambiguous or conflicting terms or provisions contained in this Agreement shall be interpreted or construed against the party whose attorneys prepared this Agreement or any earlier draft hereof. h. This Agreement shall be governed by, and construed under, the laws of the State of Texas. i. This Agreement represents and contains the entire agreement and understanding between and among the Parties hereto relating to the subject matter of this Agreement. This Agreement shall not be altered or varied except by a writing duly signed by all the parties. j. If any clause or provision of this lease is invalid or unenforceable at any time under then current laws, the remainder of this lease shall not be affected thereby, and this lease shall be modified so that in place of each such clause or provision of this there will be added as a part of this lease a legal, valid, and enforceable clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible. k. Captions used herein are for convenience only and shall not be used to interpret or explain any provision of this Agreement. l. The individuals executing this Agreement each represent that they have full power and authority to enter into this Agreement and that upon their execution hereof, this Agreement shall become a valid obligation of the party on whose behalf the individual executed this Agreement. m. By signing this Agreement, each corporate party certifies that it is not currently delinquent in the payment of any Franchise Taxes due under Chapter 171, Texas Tax Code, or that the corporation is exempt from the payment of such taxes, or that the corporation is an out-of-state corporation that is not subject to the Texas Franchise Tax, whichever is applicable. 18

19 IN WITNESS WHEREOF, this Agreement has been executed by the parties to be effective for all purposes as of the date first written above. LESSOR: Approved as to content: THE UNIVERSITY OF TEXAS SYSTEM BOARD OF REGENTS Kenneth A. Polson Senior Landman By: James L. Benson Executive Director Date: LESSEE: By: Name: Title: Date: 19

20 EXHIBIT A Description of the Leased Premises Attached hereto and made a part hereof that certain Paid Up Oil and Gas Lease No by and between THE UNIVERSITY OF TEXAS SYSTEM BOARD OF REGENTS ( Lessor ) and John Doe ( Lessee, effective as of this day of. [If necessary and referred to in Paragraph 1] 20