THE JOINT OPERATING AGREEMENT THE BASICS (REVISED OCTOBER 2012)

THE JOINT OPERATING AGREEMENT THE BASICS (REVISED OCTOBER 2012) ALLEN D. CUMMINGS, San Antonio Law Office of Allen D. Cummings State Bar of Texas OIL, GAS AND ENERGY RESOURCES 101 October 17, 2012 Houston CHAPTER 4

Allen D. Cummings is a solo practitioner with offices in Houston and San Antonio, Texas. He received his J.D. degree from the Dedman School of Law, Southern Methodist University in Dallas, Texas (1974) and is a member of the Order of the Coif. He concentrates his practice in oil and gas title examination, oil and gas transactions and oil and gas litigation, arbitration and mediation. He has practiced law in the energy area, in both corporate legal departments and in private practice since 1975 and is Board Certified in Oil, Gas & Mineral Law by the Texas Board of Legal Specialization. He was selected as a Texas Super Lawyer in oil and gas law in 2004 through 2012, he was among the Top 100 Texas Lawyers Houston Region in 2006 and was listed in Best Lawyers in America Energy for 2005 through 2012. Mr. Cummings has presented numerous papers on oil and gas matters at annual and special institutes and continuing education seminars sponsored by the Rocky Mountain Mineral Law Foundation, the Oil, Gas and Energy Resources Law Section of the State Bar of Texas, the University of Texas, the American and Houston Associations of Professional Landmen, and similar organizations. He is a past Chair of the Oil, Gas and Energy Resources Law Section of the State Bar of Texas and the Oil, Gas and Mineral Law Section of the Houston Bar Association. He is a member of the State Bar of Texas.

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 TABLE OF CONTENTS I. INTRODUCTION.... 1 II. EXHIBITS.... 3 III. INTERESTS OF PARTIES... 6 IV. TITLES... 7 V. OPERATOR... 7 VI. DRILLING AND DEVELOPMENT... 10 VII. EXPENDITURES AND LIABILITY OF PARTIES... 14 VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST... 15 IX. THINKING ABOUT HORIZONTAL WELLS.... 16 X. CONCLUSION.... 16 ATTACHMENT 1 - Sample AAPL Form 610-1989... 19 ATTACHMENT 2 EXHIBIT H Model Form Recording Supplement to Operating Agreement and Financing Statement... 45 ATTACHMENT 3 Authority for Expenditure Cost Estimate... 51 i

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 THE JOINT OPERATING AGREEMENT THE BASICS (REVISED OCTOBER 2012) I. INTRODUCTION. A. A Joint Operating Agreement Solves the Cotenant Problem. One or more concurrent owners or cotenants commonly own the fee oil and gas estate in undivided fractional shares. Each of these owners may execute oil and gas leases to different lessees, who then own the oil and gas leasehold estate in fractional undivided shares. Even if a single lessee owns oil and gas leases from all of the oil and gas fee co-owners, that lessee will usually spread the cost and risk of exploration, drilling and development by assigning undivided fractional shares in its oil and gas leases to third parties. In Texas, any of the co-owners or cotenants may drill for and produce oil and gas on jointly owned lands without the consent of the other co-owners. However, this operating cotenant assumes the risk of a dry hole and must account to the other non-operating cotenants for their share of production, after the operating cotenant has recovered out of production the cost of drilling for, producing and operating the jointly owned property. 1 Because the operating cotenant assumes dry hole risk, drilling as an operating cotenant does not spread the cost and risk of drilling. Also, this common law principle does not provide detailed guidelines about the costs that the operating cotenant can recover out of production, before it must account to the non-operating cotenants for their share of production. Therefore, an operating agreement signed by all of the co-owners of the oil and gas leasehold estate solves the cotenant problem. B. A Short History of the Operating Agreement. This paper is limited to the onshore form of joint operating agreement. The most recent standard printed form of the most commonly used joint operating agreement is A.A.P.L. Form 610 1989, Model Form Operating Agreement and the discussion in this paper is based on this form. Digital versions of this form (and other A.A.P.L forms) can be found at www.formsonadisk.com and printed versions can be ordered at www.kraftbilt.com. However, there have been several versions of the commonly used printed form operating agreement. The first commonly used printed form operating agreement was the Form 610-1956 Model Form Operating Agreement, which was revised and updated by committees of landmen and attorneys and published as A.A.P.L. Form 610-1977, A.A.P.L. Form 610-1982 and A.A.P.L. Form 610-1989. There are important differences between the 1 Cox v. Davidson, 397 S.W.2d 200 (Tex. 1965) 1 various versions of the Form 610 Model Form Operating Agreement and there are still oil and gas properties being operated under the Form 610-1956 Model Form Operating Agreement. In addition, many joint operating agreements contain additional typewritten provisions added by the parties, which vary or add to the standard printed terms. Therefore, it is important to carefully read the exact operating agreement covering a particular property in order to understand the rights and obligations of the parties. For example, what is known as the exculpatory provisions in the printed form joint operating agreement have changed between Form 610-1956 and Form 610-1989. C. Scope of Paper. The Model Form Joint Operating Agreement, hereafter called JOA, is an exceeding broad topic, involving many diverse issues that have been the subject of numerous cases and articles. 2 Therefore, the best this paper can do is to acquaint you with what the form attempts to accomplish, how to complete the form and the more common issues you will encounter in using an applying the JOA to circumstances that arise in the exploration for and production of oil and gas. Different state courts have reached different results when applying the operating agreement to similar facts. Therefore, this paper will focus on Texas law, but will point out areas where the may be differences from state to state. The key for analyzing any JOA problem is to first become familiar with the JOA by reading it and becoming familiar with its structure. D. Nature of the JOA. The JOA is an agreement between co-owners of the rights to explore for and develop the oil and gas in a certain described lands, called the Contract Area. While the co-owners usually own undivided fractional oil and gas leasehold interests, the JOA can also cover owners of the fee oil and gas estate who would rather participate in the cost and risk of exploration and development than execute an oil and gas lease and participate only as a royalty owner. The JOA serves several roles. It identifies the property interests of the parties in identified leases and lands. The JOA commits the parties to participate in operations on the Contract Area and provides a procedure for dealing with disagreements among the parties about what operations will be conducted. In the JOA the co-owners designate one of the co-owners, (most often the co-owner with the largest fractional interest or with the most operating expertise) as the Operator to... conduct and direct and have full 2 See John R. Reeves & J Matthew Thompson, Significant Cases Governing the Onshore Operating Agreement, 49 S.W. LEGAL FOUND. INST. ON OIL & GAS L & TAX N 2-1(1998) for a listing of important cases and Gary B. Conine, Property Provisions of the Operating Agreement Interpretation, Validity, and Enforceability, 10 TEX. TECH L. REV NO. 4 (1988) at footnote 3 for a listing of articles on the Operating Agreement.

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 control of all operations on the Contract Area as permitted and required within the limits of this agreement; and sets forth the duties of the Operator. The JOA sets forth the sharing of expenses for and the allocation of liability with respect to joint operations. It provides remedies for a party s failure to pay its share of expenses. The JOA provides for limits on a party s rights with respect to transfer and acquisition of interests in the oil and gas leases in the Contract Area. It sets forth the rights of the parties in production from the Contract Area. Form 610-1989 is a 17-page document with detailed provisions for the drilling, operation and production of oil and gas wells. And yet, because of the complex nature of the activities covered by an operating agreement, an operating agreement cannot cover in detail every aspect of drilling, operation and production. Nor can an operating agreement executed in 1975 (or in 1991, for that matter), and still in effect today, anticipate all of the changes in technology and the changes in how the oil and gas industry conducts its business. Non-industry parties and trial lawyers often express frustration about the lack of detail, clarity and specificity about the rights and obligations of the parties. However, what they may fail to appreciate is that the JOA is intended as an outline of rights and obligations for sophisticated industry participants seeking to cooperate in complicated business of exploring for and producing oil and gas. When disagreement among parties to the JOA results in litigation, the document will be found open to various interpretations. E. Overview of the JOA. A sample of the A.A.P.L. Form 610-1989 JOA is attached as Appendix A. The stripped down Table of Contents provides an overview of the matters covered by the JOA. This paper will address some of these Articles in detail, but will here provide a brief overview of each of the Articles. 1. Definitions. While this Article heading is selfexplanatory, it is important to point out that some of the defined terms may have different meanings in common oil and gas industry usage. Therefore, it is important to refer to the definition used in the JOA when applying the JOA to circumstances on the ground. This paper will address each of the definitions as they occur in the body of the JOA. 2. Exhibits. This Article heading is also selfexplanatory and this paper will discuss each of the Exhibits listed. However, what is often overlooked 2 here is the phrase, found on the top of Page 2 of the JOA: If any provision of any exhibit, except Exhibits "E," "F" and "G," is inconsistent with any provision contained in the body of this agreement, the provisions in the body of this agreement shall prevail. Therefore, it is important to look carefully at the typewritten provision added under Article XVI and determine whether any these provisions change how the Exhibit is to be applied, particularly Exhibit C the Accounting procedure. 3. Interests of the Parties. This Article contains provisions relating to: Treatment of the owners of unleased fee and mineral interests, called Oil and Gas Interests in the Contract Area; By referring to Exhibit A, how the parties will bear and pay costs and own production; Treatment of burdens payable out of production created after the date of the JOA or not listed in Exhibit A, called Subsequently Created Burdens. 4. Titles. This Article contains provisions relating to: Responsibility of the Operator and Non-Operators for title examination and title curative; and Allocation of loss of title among the parties as either individual loss or joint loss. 5. Operator. This Article contains provisions relating to: Designation of the Operator and a statement of Operator s status, authority and liability for operations on the Contract Area; Removal of Operator, selection of a successor Operator and the effect of Operator s bankruptcy; and The rights and duties of the Operator. 6. Drilling and Development. This Article contains provisions relating to: Identification and drilling of an Initial Well on the Contract Area; Proposals for drilling of subsequent wells or for subsequent operations on the Contract Area; The effect of an election not to participate, i.e. go non-consent, in a subsequent operation, including relinquishment of interests by non-participating parties, assessment of non-consent risk penalties

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 and recoupment of costs out of production by the participating parties; Deepening and Sidetracking operations and order of preference of operations; Completion, Reworking, Recompletion, or Plug Back and other operations; Abandonment of wells or non-consent operations and termination of operations; Taking production in kind and gas balancing. 7. Expenditures and Liabilities of Parties. This Article expressly provides that the liability of the parties shall be several, not joint or collective and expressly disclaims any intention to create a partnership among the parties. It also contains provisions relating to: The creation of mutual liens and security interests among the parties to secure payment and performance; Operator s right to demand advances of costs from Non-Operators; Remedies for default, included suspension of rights, suits for damages and deemed non-consent; and Payment of rentals, shut-in well payments, minimum royalties and ad taxes. 8. Acquisition; Maintenance or Transfer of Interest. This Article contains provisions that: Limit a party s right to release a lease subject to the JOA, without the consent of the other parties; Require a party obtaining a renewal or extension of a lease subject to the JOA, to offer the other parties their proportionate share; Limit a party s right to assign less than its entire or an undivided interest in the leases subject to the JOA; and Offer the parties an option to include a preferential right to purchase in the JOA. 9. Internal Revenue Code Election. This Article is an election under 761 of the Internal Revenue Code by the parties, as co-owners under the JOA, to be excluded from partnership treatment, unless the parties have agreed to form a tax partnership. 10. Claims and Lawsuits. This Article sets forth an upper dollar limit on what the Operator may spend to settle a claim or lawsuit. Otherwise, the parties must either jointly take over handling the claim or lawsuit or delegate specific authority to the Operator. 3 11. Force Majeure. This Article heading is selfexplanatory. 12. Notices. This Article heading is self-explanatory. However, it is worth noting that if you intend to send binding notices by facsimile or e-mail, then the relevant information should be provided in Exhibit A. 13. Term of Agreement. This Article heading is selfexplanatory. 14. Compliance with Laws and Regulations. This Article heading is self- explanatory. 15. Miscellaneous. This Article provides for counterpart execution and that the JOA is binding on each Non-Operator executing a counterpart. This Article also includes successors and assigns and severability provisions. 16. Other Provisions. This Article if for the typewritten provisions often added to the printed form JOA. II. EXHIBITS. The JOA on Page 1 provides for the following exhibits to be attached: 61 A. Exhibit "A," shall include the following information: 62 (1) Description of lands subject to this agreement, 63 (2) Restrictions, if any, as to depths, formations, or substances, 64 (3) Parties to agreement with addresses and telephone numbers for notice purposes, 65 (4) Percentages or fractional interests of parties to this agreement, 66 (5) Oil and Gas Leases and/or Oil and Gas Interests subject to this agreement, 67 (6) Burdens on production. 68 B. Exhibit "B," Form of Lease. 69 C. Exhibit "C," Accounting Procedure. 70 D. Exhibit "D," Insurance. 71 E. Exhibit "E," Gas Balancing Agreement. 72 F. Exhibit "F," Non- Discrimination and Certification of Non- Segregated Facilities. 73 G. Exhibit "G," Tax Partnership. 74 H. Other:

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 A. EXHIBIT A. Exhibit A describes the parties and property interests covered by the JOA. 1. The description of the lands should satisfy the Statute of Frauds (1). An outline on a plat may not be sufficient to satisfy the Statute of Frauds unless the corners can be found on the ground try using XY coordinates for the corners if a plat is to be used. 2. Even though the parties own all depths, there may be a business reason to limit the coverage of the JOA to certain depths or formations (2). 3. Article XII, Notices, refers to the addresses and telephone numbers shown on Exhibit A and if you want to use e-mail for notices, then the appropriate e-mail addresses should be shown on Exhibit A (3). 4. The fractional interests of the parties are how they will share in the costs of operations and the ownership of production. If the Operator has sold fractional interests to the Non- Operators on a promoted basis, then the fractional interests on Exhibit A may be different before casing point (BCP) and after casing point or before payout (BPO) and after payout (APO), which should be shown on Exhibit A (4). 5. The description of the Oil and Gas Leases and/or Oil and Gas Interests should be sufficient so that they can be identified in the real property records of the county where the lands are located. For an Oil and Gas Lease it is recommended that the date, recording data, lessor and lessee be included. If the Oil and Gas Lease covers lands outside the Contract Area, you should specify that INSOFAR and ONLY INSOFAR AS said Lease covers [describe lands inside the Contract Area]. The definitions useful in understanding this subparagraph are: Contract Area" shall mean all of the lands, Oil and Gas Leases and/or Oil and Gas Interests intended to be developed and operated for Oil and Gas purposes under this agreement. Such lands, Oil and Gas Leases and Oil and Gas Interests are described in Exhibit "A." "Oil and Gas Lease," "Lease" and "Leasehold" shall mean the oil and gas leases or interests therein covering tracts of land lying within the Contract Area which are owned by the parties to this agreement. 4 "Oil and Gas Interests" or "Interests" shall mean unleased fee and mineral interests in Oil and Gas in tracts of land lying within the Contract Area which are owned by parties to this agreement. "Oil and Gas" shall mean oil, gas, casinghead gas, gas condensate, and/or all other liquid or gaseous hydrocarbons and other marketable substances produced therewith, unless an intent to limit the inclusiveness of this term is specifically stated. 6. If an existing burden on production is not described here, then it will be treated as a Subsequently Created Interest under Article III.C. (6). B. FORM OF LEASE. This Exhibit is used when there are Oil and Gas Interests subject to the JOA. Article III.A. provides: If any party owns an Oil and Gas Interest in the Contract Area, that Interest shall be treated for all purposes of this agreement and during the term hereof as if it were covered by the form of Oil and Gas Lease attached hereto as Exhibit "B," and the owner thereof shall be deemed to own both royalty interest in such lease and the interest of the lessee thereunder. C. ACCOUNTING PROCEDURE. The Exhibit C, Accounting Procedure, is a printed form promulgated by the Council of Petroleum Accountants Societies, Inc. or COPAS. Their website is www.copas.org. This printed form is a topic in itself and this paper will only address the basic issues needed to prepare a JOA. The most recent model form accounting procedure is COPAS 2005, although many industry participants continue to use the COPAS 1984 form. The COPAS contains provisions covering, among other things: 1. Payment and Interest on Unpaid Invoices. Except as provided below, each Party shall pay its proportionate share of all bills in full within fifteen (15) days of receipt date. If payment is not made within such time, the unpaid balance shall bear interest compounded monthly at the prime rate published by the Wall Street Journal on the first day of each month the payment is delinquent, plus three percent (3%), per annum, or the maximum contract rate permitted by the applicable usury Laws governing the Joint Property, whichever is the lesser, plus attorney's fees, court costs, and other costs in connection with the collection of unpaid amounts. 2. Limitation on Adjustments by Operator. All adjustments initiated by the Operator, except those

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 described in items (I) through (4) of this Section 1.4.B, are limited to the twenty-four (24) month period following the end of the calendar year in which the original charge appeared or should have appeared on the Operator's Joint Account statement or payout statement. 3. Audits of the Operator s Expenditures. A Non- Operator, upon written notice to the Operator and all other Non-Operators, shall have the right to audit the Operator's accounts and records relating to the Joint Account within the twenty-four (24) month period following the end of such calendar year in which such bill was rendered; however, conducting an audit shall not extend the time for the taking of written exception to and the adjustment of accounts as provided for in Section 1.4 (Adjustments). Any Party that is subject to payout accounting under the Agreement shall have the right to audit the accounts and records of the Party responsible for preparing the payout statements, or of the Party furnishing information to the Party responsible for preparing payout statements. Audits of payout accounts may include the volumes of hydrocarbons produced and saved and proceeds received for such hydrocarbons as they pertain to payout accounting required under the Agreement. Unless otherwise provided in the Agreement, audits of a payout account shall be conducted within the twentyfour (24) month period following the end of the calendar year in which the payout statement was rendered. 4. A detailed description in Part II of permissible direct charges to the Joint Account. 5. A description in Part III of functions included in the overhead rates that are not charged to the Joint Account. 6. An election to have overhead charged on a fixed or percentage basis. Overhead for onshore operations is usually charged on a fixed basis, which means a stated dollar amount per well per month as a Drilling Well Rate and a usually a lower per well per month amount as a Producing Well Rate. The Operator customarily sets Drilling and Producing Well Rates, although there may be negotiation about the amount of each rate if one or some of the Non-Operators have sufficient bargaining power. These Rates vary from area to area and often also may vary based upon the depth or type of wells the parties expect to drill under to the JOA. There have been attempts by various industry players to survey characteristic overhead rates, however the participation in those surveys has seldom been broad enough for the results to be reliable indicators. D. INSURANCE. Exhibit D, Insurance, sets forth the types and coverage limits of the insurance the Operator is required to carry for the benefit of the joint account and the parties to the JOA. It is recommended that Operator consult its insurance broker concerning Exhibit D to the JOA. The common types of coverage described on Exhibit D include: Workers Compensation and Employer s Liability, Comprehensive General Liability, Comprehensive Automobile Liability and Property Damage, Umbrella Liability Policy, and Operator s Extra Expense Well Control. The policy limits are usually dictated by the Operator s insurance program, but are sometimes subject to negotiation. Exhibit D will also often provide for a waiver of subrogation by the carriers against the Non-Operators and an endorsement on each of the policies, except for Workers Compensation, that the Non-Operators are an additional insured under the Operator s policies and that Operator s insurance is primary and not contributing to insurance carried by any Non-Operator. E. GAS BALANCING AGREEMENT. Like the COPAS, Exhibit E, the Gas Balancing Agreement, is a separate topic. The Gas Balancing Agreement addresses the circumstance in which one or more parties in a well does not sell its full fractional share of gas produced during any month. This most often occurs where one or more of the parties are selling to different gas purchasers and one of the parties does not have a market for its gas or a purchaser does not take gas equal to a party s full fractional share of the gas produced. The Gas Balancing Agreement creates, in effect, a credit account for the party who did not sell its gas (the underproduced party ) and a debit account for the party that sold more than its fractional share of gas during a particular month (the overproduced party ). The agreement provides for the underproduced party to take a larger share of gas produced in subsequent months and the overproduced party to take a smaller share of the gas produced in subsequent months to balance the accounts in kind. If, at depletion of the well, the gas taken by the parties remains out of balance, then the overproduced parties are obligated to make a cash payment to the underproduced parties to balance the accounts called cash balancing. It is becoming more common to find parties amending the JOA to provide for cash balancing when a party transfers all or some of its interest under the JOA. This is because many years may elapse between creation of imbalances and depletion. After a property has passed through several operators, at depletion there is often incomplete information about the amount imbalances and the prices for which the gas giving rise to the imbalance was sold. 5

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 III. INTERESTS OF PARTIES A. OIL AND GAS INTERESTS. This topic was discussed above under Exhibit B. B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION. 1. Costs and Liabilities. Unless changed by other provisions, all costs and liabilities incurred in operations under this agreement shall be borne and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by the parties as their interests are set forth in Exhibit "A." 2. Production. The parties shall also own all production of Oil and Gas from the Contract Area subject, however, to the payment of royalties and other burdens on production as described hereafter. 3. Burdens. Burdens can be either the landowner royalty or an overriding royalty created prior to the time an Oil and Gas Lease is contributed to the JOA. The most common model for subjecting Oil and Gas Leases to a JOA is for the Operator to sell (often on a promoted basis) undivided fractional shares of Oil and Gas Leases acquired by the Operator to third parties who it solicits to participate in drilling and development of the Oil and Gas Leases. However, another less common model is for parties who each own Oil and Gas Leases in the same lands to join together and contribute their individual Oil and Gas Leases to a JOA in order to cooperate in drilling and development of those Oil and Gas Leases. When different parties contribute their individual Oil and Gas Leases to the JOA, then there are provisions in the JOA that protect parties with lower lease burdens from bearing higher lease burdens contributed by others in sharing production. Regardless of which party has contributed any Oil and Gas Lease or Oil and Gas Interest on which royalty or other burdens may be payable and except as otherwise expressly provided in this agreement, each party shall payor deliver, or cause to be paid or delivered, all burdens on its share of the production from the Contract Area up to, but not in excess of, [insert fraction] and shall indemnify, defend and hold the other parties free from any liability therefore. However, so long as the Drilling Unit for the productive Zone(s) is identical with the Contract Area, each party shall payor deliver, or cause to be paid or delivered, all burdens on production from the Contract Area due under the terms of the Oil and Gas Lease(s) which such party has contributed to this agreement, and shall indemnify, defend and hold the other parties free from any liability therefor. 6 The fraction in the first selection is an agreed greatest burden on production that all the parties will share. If a party contributes an Oil and Gas Lease with a higher burden or creates a higher burden, then that party s share of production will be reduced by the excess burden. However, note the second selection, which makes an exception to the rule with respect to lease royalty, when then Contract Area and Drilling Unit are co-extensive. 4. Price. Because each party has the right to take its share of production in kind, each party could theoretically sell its share of production at a different price. To prevent one party s lessor from claiming royalty based on a higher price obtained by another party, the JOA contains the following: No party shall ever be responsible, on a price basis higher than the price received by such party, to any other party's lessor or royalty owner, and if such other party's lessor or royalty owner should demand and receive settlement on a higher price basis, the party contributing the affected Lease shall bear the additional royalty burden attributable to such higher price. 5. No Cross-Assignment. In the event two or more parties contribute to this agreement jointly owned Leases, the parties' undivided interests in said Leaseholds shall be deemed separate leasehold interests for the purposes of this agreement. C. SUBSEQUENTLY CREATED INTERESTS. This is another provision that is intended to protect the parties from any burdens on the Oil and Gas Leases subject to the JOA that are created by one of the parties that are in excess of the burdens the parties agreed to jointly share in Article III.B. as discussed above. This provision requires the party responsible for creating the Subsequently Created Interest to alone bear and pay that interest out its share of production. It also provides that: 1. if the party creating the Subsequently Created Interest fails to pay its share of expenses, then the unpaid amount can be recovered out of the production payable to the owner of the Subsequently Created Interest; and 2. if the party creating the Subsequently Created Interest goes non-consent and relinquishes its interest, then the parties who share in the relinquished interest take free and clear of the Subsequently Created Interest, i.e. the owner of the Subsequently Created Interest also relinquishes his interest in production.

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 IV. TITLES A. TITLE EXAMINATION. This paragraph contains detailed provisions concerning the responsibilities of the Operator and the Non-Operators concerning title examination and title curative that are self-explanatory. The most important provision is the following: No well shall be drilled on the Contract Area until after (1) the title to the Drillsite or Drilling Unit, if appropriate, has been examined as above provided, and (2) the title has been approved by the examining attorney or title has been accepted by all of the Drilling Parties in such well. The following definitions apply: "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas Interest on which a proposed well is to be located. "Drilling Unit" shall mean the area fixed for the drilling of one well by order or rule of any state or federal body having authority. If a Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be the drilling unit as established by the pattern of drilling in the Contract Area unless fixed by express agreement of the Drilling Parties. "Drilling Party" and "Consenting Party" shall mean a party who agrees to join in and pay its share of the cost of any operation conducted under the provisions of this agreement. A. LOSS OR FAILURE OF TITLE. Loss of title to an Oil and Gas Lease is either an individual loss or joint loss. If individual parties contribute their separately owned Oil and Gas Leases to the JOA, then the JOA, as printed, provides for individual loss of title. If on the other hand, if the Operator to sold undivided fractional shares of Oil and Gas Leases acquired by the Operator to third parties who it solicited to participate in drilling and development of the Oil and Gas Leases, then the JOA should provide for joint loss of title. The printed form JOA is converted from individual loss to joint loss by deleting Article IV.B.1, Article IV.B.2, and Article IV.B.4, and revising Article IV.B.3, to read as follows: 3. Other Losses: All losses of Leases or Interests committed to this agreement, other than those set forth in Articles V.B.1. and IV.B.2. above, shall be joint losses and shall be borne by all parties in proportion to their interests shown on Exhibit "A." This shall include but not be limited to the loss of any Lease or Interest through failure to develop or because express or implied covenants have not been performed (other than performance which requires only the payment of money), 7 and the loss of any Lease by expiration at the end of its primary term if it is not renewed or extended. There shall be no readjustment of interests in the remaining portion of the Contract Area on account of any joint loss. In the event of an individual loss, if a new lease or instrument is not acquired within ninety (90) days of determination of title failure or loss, then the interests of the parties are revised on an acreage basis and the loss is charged solely against the party contributing the Oil and Gas Lease or Interest that was lost. V. OPERATOR A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR: B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR: 1. Resignation or Removal of Operator 2. Selection of Successor Operator 3. Effect of Bankruptcy C. EMPLOYEES AND CONTRACTORS: D. RIGHTS AND DUTIES OF OPERATOR: 1. Competitive Rates and Use of Affiliates 2. Discharge of Joint Account Obligations 3. Protection from Liens 4. Custody of Funds 5. Access to Contract Area and Records 6. Filing and Furnishing Governmental Reports 7. Drilling and Testing Operations 8. Cost Estimates 9. Insurance A. DESIGNATION AND RESPONSIBILITY OF OPERATOR. This section establishes the relationship between the Operator and the Non-Operators with respect to operations on the Contract Area and the duties specified for the Operator. 1. Full Control. The Operator... shall conduct and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of this agreement. 2. Independent Contractor. In its performance of services hereunder for the Non-Operators, Operator shall be an independent contractor not subject to the control or direction of the Non-Operators except as to the type of operation to be undertaken in accordance with the election procedures contained in this agreement.

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 3. Not Agent. Operator shall nor be deemed, or hold itself out as, the agent of the Non-Operators with authority to bind them to any obligation or liability assumed or incurred by Operator as to any third party. 4. Prudent Operator. Operator shall conduct its activities under this agreement as a reasonable prudent operator, in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and regulation,... 5. Exculpatory Clause.... but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct. The meaning of this clause and the extent to which it protects the Operator from liability to the Non-Operators has been addressed in several cases in the past several years. Abraxas Petroleum Corporation v. Hornburg, 20 S.W.3d 741 (Tex. App. El Paso 2000, no pet.) held that: Exculpatory clause limiting operator s liability is linked directly to duty to act as a reasonable and prudent operator; Non-operators are not obligated to prove gross negligence or willful misconduct on a simple breach of contract. IP Petroleum Company, Inc. v. Wevanco Energy, LLC, et al., 116 S.W.3d 888 (Tex. App. Houston [1st Dist.] 2003, pet. denied) held that the exculpatory clause did apply to operations conducted by the Operator, and that liability was not based on a simple breach of conduct claim. However, in Reeder v. Wood County Energy, LLC, a unanimous Texas Supreme Court held that under the A.A.P.L. Form 610-1989, the exculpatory clause did apply to simple breach of contract of contract claims arising under Form 610-1989. The court focused on the change in the wording at the beginning of the exculpatory clause from operations, which was used in previous versions of the JOA to activities in the Form 610-1989 of JOA. Therefore, you will need to know what form of JOA is being used by the parties to determine the extent of the coverage of the exculpatory clause with respect to a claim against the Operator under the JOA. 6. Operator Not a Fiduciary in Texas. Hamilton v. Texas Oil & Gas Corp., 648 S.W. 2d 316 (Tex. App. 1982, writ ref'd n.r.e.) held that the JOA does not create a joint venture therefore there is not a fiduciary relationship between the Operator and the Non- Operators. However, Atlantic Richfield Co. v. Long 8 Trusts, 860 S.W.2d 439, 445 (Tex. App. Texarkana 1993, writ denied) held that an agency relationship does exist when an Operator is selling gas belonging to a Non-Operator. While the court stops short of finding a fiduciary duty, it finds there when the Operator undertakes to sell a Non-Operator s gas there is sort of agency relations that requires the Operator to account for the monies received for selling the Non-Operator s gas, to avoid conflicts of interests, and not to act as an adverse party in its capacity as the seller. Other states treat the relationship between the Operator and Non- Operators differently, and practitioners should consult the law of the state where the lands are located. B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR. 1. Resignation or Removal. (a) Few Operators actually resign, although an Operator is deemed to have resigned if it (1) terminates its legal existence, (2) no longer owns an interest in the Contract Area, or (3) is no longer capable of serving as Operator. One of the reasons that the JOA should not be used, without modification, for a contract operator is the no longer owns an interest in the Contract Area provision, because a contract operator does not own an interest in the Contract Area. (b) The Operator may be removed, after notice or default and an opportunity to cure, by an affirmative vote of a majority in interest of the Non-Operators based on the interests shown on Exhibit for good cause, which means: not only gross negligence or willful misconduct but also the material breach of or inability to meet the standards of operation contained in Article V.A. or material failure or inability to perform its obligations under this agreement. More often than not, the Operator will oppose removal, therefore the allegations of good cause will have to be proved in court. Until relatively recently, there were not any appellate decisions on removal of the operator. However, several recent decisions illustrate the problems involved with attempts to remove an Operator that opposes renewal. See Purvis Oil Corp. v. Hillin, 890 S.W.2d 931, (Tex.App.-El Paso 1994, no writ); Hill v. Heritage Resources, Inc., 964 S.W.2d 89 (Tex.App.-El Paso 1997, pet. denied); Abraxas Petroleum Corporation v. Hornburg, 20 S.W.3d 741 (Tex. App. El Paso 2000, no pet.); and Tri-Star Petroleum Co. v. Tipperary Corp., 101 S.W.3d 583 (Tex.App.-El Paso 2003, pet. denied). 2. Selection of Successor Operator. A successor Operator must be selected by the vote of two or more

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 parties owning a majority in interest based on the interests shown on Exhibit A. A removed Operator cannot vote to succeed itself, but that does not mean it can t vote on the successor and against the successor. If there are only two parties to the JOA, or the Operator owns a large interest, then it may be impossible to select a successor operator. See, for example, Fasken Land & Minerals, Ltd. v. Occidental Permian Ltd., 225 S.W.3d 577, (Tex.App.-El Paso 2005, pet. denied). Until a successor operator is selected the pursuant to the terms of the JOA, the previous Operator must continue to operate. 3. Effect of Bankruptcy. In the event of the Operator s bankruptcy, the JOA deems the Operator to have resigned. However, this may be a violation of the automatic stay that occurs upon filing of a petition for relief under the federal bankruptcy laws. Therefore, the JOA provides that in the event of the Operator s bankruptcy, that the Operator and Non-Operators will constitute an interim operating committee, until the Operator elects to either accept or reject the JOA. This interim operating committee must approve actions for operation of the Contract Area by an affirmative vote of 2 or more parties owning a majority in interest based on the interests shown on Exhibit A. C. EMPLOYEES AND CONTRACTORS. This provision, together with Article V.A., vests in the Operator the right to conduct operations, without being second guessed by the Non-Operator, to wit: The number of employees or contractors used by Operator in conducting operations hereunder, their selection, and the hours of labor and the compensation for services performed shall be determined by Operator, and all such employees or contractors shall be the employees or contractors of Operator D. RIGHTS AND DUTIES OF OPERATOR. The following subparagraphs set forth specific rights and duties of the Operator, that in most cases are self-explanatory. Rather than repeat all of the details of these rights and duties, this paper will highlight specific provisions that are important in understanding the scope of these rights and obligations. As background, the JOA is not intended to provide the Operator with a profit center, i.e. the concept underlying the JOA is that because the Operator is one of the co-owners, its interests will be aligned with those of the Non- Operator. In other words, what is good for the Operator should also be good for the Non- Operator. However, the following subparagraphs contain provisions that seek to insure that the interests of the Operator and the Non-Operators are aligned. 1. Competitive Rates and Use of Affiliates. All wells drilled on competitive contract basis at rates prevailing in the area. Operator may use its own, or affiliates equipment, but only at prevailing rates in the area agreed upon by the parties in advance in writing upon same terms as customary in the area for independent contractors providing work similar in nature. 2. Discharge of Joint Account Obligations. Promptly pay expenses and charge parties their proportionate share. Keep accurate record of joint account expenses and credits. 3. Protection from Liens. Pay contractor accounts when due (not say when and if paid by Non-Operators) Keep Contract Area free and clear of liens for work, unless amount due is disputed. 4. Custody of Funds. Hold for account of Non-Operators any funds advanced or paid to Operator for operations or from the sale of production, which are funds of Non-Operator until used for intended purpose or paid or returned to Non-Operators. Not intended to make Operator a fiduciary or require Operator to maintain separate accounts for Non-Operator funds. 5. Access to Contract Area and Records. Operator provide access to operations on Contract Area and books and records of operations to Non- Operators at their sole cost and risk at reasonable times, but not to interfere with Operator s conduct of operations. Operator not required to provide its geologic, geophysical or interpretative date, unless cost or preparation was charged to joint account. Upon request of Non-Operator, Operator will furnish copies of reports and information in connection with production. 6. Filing and Furnished Governmental Reports. Upon written request of Non-Operator who is not in default on payment obligations, Operator will furnish copies of all applications, notices, and 9

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 reports required to be filed with applicable governmental authorities. 7. Drilling and Testing Operations. Operator notify Non-Operators of date wells are spudded and drilling operations commence. Operator furnish Non-Operators reports and test results, including daily drilling reports, completion reports and well logs. Operator test all Zones encountered reasonably expected capable of producing hydrocarbons in paying quantities. o "Zone" shall mean a stratum of earth containing or thought to contain a common accumulation of Oil and Gas separately producible from any other common accumulation of Oil and Gas. 8. Cost Estimates. Upon request of Consenting Party, Operator will furnish cumulative and current cost estimates during operations, but Operator not liable for errors in good faith estimate. o 9. Insurance. "Consenting Party" shall mean a party who agrees to join in and pay its share of the cost of any operation conducted under the provisions of this agreement. Operator comply with workers compensation state laws for Contract Area (may self insure) and require contractors to comply. Operator carry Exhibit D insurance VI. DRILLING AND DEVELOPMENT A. INITIAL WELL: B. SUBSEQUENT OPERATIONS: 1. Proposed Operations 2. Operations by Less Than All Parties 3. Stand-By Costs 4. Deepening 5. Sidetracking 6. Order of Preference of Operations 7. Conformity to Spacing Pattern 8. Paying Wells C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK: 1. Completion 2. Rework, Recomplete or Plug Back D. OTHER OPERATIONS: E. ABANDONMENT OF WELLS: 1. Abandonment of Dry Holes 2. Abandonment of Wells That Have Produced 3. Abandonment of Non-Consent Operations F. TERMINATION OF OPERATIONS: G. TAKING PRODUCTION IN KIND (Option 1) Gas Balancing Agreement (Option 2) No Gas Balancing Agreement A. INITIAL WELL. This is the only obligatory well in the printed form, although there may be a casing point election (See VI.C.1) and the parties may terminate operations (See XI), which will be discussed later. Often the information about the Initial Well is contained in a participation agreement between the Operator and the Non-Operators to which the JOA is attached as an exhibit. When completed this provision would look similar to the following: On or before the 26th day of March 2009, Operator shall commence the drilling of the Initial Well at the following location: an approximate surface location Texas State Plane Coordinate System North Central Texas Zone NAD 1983 at coordinates: X: 2,768,879, Y: 575,652, Holder County, Texas and shall thereafter continue the drilling of the well with due diligence to: a true vertical depth of 13,100' or a depth sufficient to drill through and test the Wilcox "Outlaw" Sand as seen between the depths of 12,690' and 12,940' in the Big Oil - McGinty G.V. #3 well (API No. 42-089-30000, whichever is the lesser depth ("Objective Depth"). B. SUBSEQUENT OPERATIONS. After the Initial Well, every operation by the Operator on the Contract Area is either one requiring a proposal for one of the operations listed in Article VI.B.1. or an operation reasonably estimated to cost less than the threshold amount specified in Article VI.D., which the Operator may undertake on its own. The JOA assumes that the threshold in Article VI.D. will be set so that routine repair and maintenance work will be less than the threshold. If an operation does not fall within either class, then the other provisions of Article VI.D. will apply to the operation. 10

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 1. Proposed Operations. Any party to the JOA, not just the Operator, may propose one of the following enumerated operations: (i) drill a well, not the Initial Well, or (ii) Rework, (iii) Sidetrack, (iv) Deepen, (v) Recomplete, (vi) Plug Back, a dry hole or a well no longer capable or producing in paying quantities, provided the proposing party has not previously relinquished its interest in such a well. The definitions of these operations are as follows: "Rework" shall mean an operation conducted in the wellbore of a well after it is Completed to secure, restore, or improve production in a Zone which is currently open to production in the wellbore. Such operations include, but are not limited to, well stimulation operations but exclude any routine repair or maintenance work or drilling, Sidetracking, Deepening, Completing, Recompleting, or Plugging Back of a well. "Sidetrack" shall mean the directional control and intentional deviation of a well from vertical so as to change the bottom hole location unless done to straighten the hole or to drill around junk in the hole to overcome other mechanical difficulties. "Deepen" shall mean a single operation whereby a well is drilled to an objective Zone below the deepest Zone in which the well was previously drilled, or below the Deepest Zone proposed in the associated AFE, whichever is the lesser. "Recompletion" or "Recomplete" shall mean an operation whereby a Completion in one Zone is abandoned in order to attempt a Completion in a different Zone within the existing wellbore. "Plug Back" shall mean a single operation whereby a deeper Zone is abandoned in order to attempt a Completion in a shallower Zone. "Completion" or "Complete" shall mean a single operation intended to complete a well as a producer of Oil and Gas in one or more Zones, including, but not limited to, the setting of production casing, perforating, well stimulation and production testing conducted in such operation. To propose an operation, a party gives written notice of: (1) the proposed operation, (2) the specific work to be performed, (3) the location, (4) the objective Zone, and (5) the estimated cost of the operation. The JOA does not provide any specific format for the notice, although the estimated cost is most often described in an AFE included with the notice. There is no specific form of AFE, and, in fact, the term was used in the JOA, but not even defined in the JOA, until the A.A.P.L. Form 610-1989. A sample AFE is included in Appendix A and the definition is: 11 "AFE" shall mean an Authority for Expenditure prepared by a party to this agreement for the purpose of estimating the costs to be incurred in conducting an operation hereunder. The notice proposed notice of operations and attached AFE are important, because a party receiving the notice is put to an election whether to participate or not in the proposed operation and the costs. A party who fails to respond to the notice within thirty (30) days after receipt (or, 48 hours if a drilling rig is on location), is deemed to have elected not to participate, which triggers the nonconsent provisions of the JOA contained in Article VI.B.2. XTO Energy, Inc. v. Smith Production Inc., 282 S.W.3d 672 (Tex. App. Houston [14th Dist.] 2009) held that a party may having sent its election to the Operator may not thereafter change its election, even if within the thirty (30) days of its receipt of the Operator s notice. A party who elects to participate, usually be signing and returning a copy of the AFE and the notice agrees to pay its share of the necessary costs of the operation (See Article VI.C.1.), even if they exceed the estimate contained in the AFE by a substantial amount. There are a limited number of cases dealing with (i) whether the operations conducted by the Operator are within the scope of the operations described in the notice, and (ii) whether the costs incurred by the Operator were reasonable and necessary. 2. Operations by Less Than All Parties. This subparagraph applies to both operations proposed under Article VI.B.1 and completion operations proposed under Article V1.C.2. (Option 2) when there is a casing point election. (a) Determination of Participation. After expiration of the notice period, the proposing party notifies all parties of the interest approving the proposed operation. At that point the proposing party may withdraw the proposal or recommend to the Consenting Parties that the operation proceed. Each of the Consenting Parties must then elect within 48 hours of receipt of the proposing parties notice whether to (i) limit its participation to its Exhibit A interest, (ii) carry in addition to (i) its proportionate share of the Non- Consenting Parties interests, (iii) carry in addition to (ii) all or part of any Non- Consenting Party s interest not carried by the other Consenting Parties. The proposing

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 party must carry any Non-Consenting Party s interest not carried by the other Consenting Parties or withdraw it proposal. To benefit from the non-consent provisions of Article VI.B.2., the proposed operation must be commenced no later than 90 days after the expiration of the 30-day notice period or as promptly as practicable after the 48-hour notice period. (b) Relinquishment of Interest for Non- Participation. In the printed form JOA, the Non-Consenting Parties are deemed to have relinquished their Exhibit A interest in the well, and all production therefrom, on which the proposed operation is successfully completed, until the Consenting Parties have recovered out of production a percentage risk penalty, to wit: Such relinquishment shall be effective until the proceeds of the sale of such share, calculated at the well, or market value thereof if such share is not sold (after deducting applicable ad valorem, production, severance, and excise taxes, royalty, overriding royalty and other interests not excepted by Article lii.c. payable out of or measured by the production from such well accruing with respect to such interest until it reverts), shall equal the total of the following: (i) 200 % of each such Non-Consenting Party's share of the cost of any newly acquired surface equipment beyond the wellhead connections (including but not limited to stock tanks, separators, treaters, pumping equipment and piping), plus 100% of each such Non- Consenting Party's share of the cost of operation of the well commencing with first production and continuing until each such Non-Consenting Party's relinquished interest shall revert to it under other provisions of this Article, it being agreed that each Non-Consenting Party's share of such costs and equipment will be that interest which would have been chargeable to such Non-Consenting Party had it participated in the well from the beginning of the operations; and (ii) 400% of (a) that portion of the costs and expenses of drilling, Reworking, Sidetracking, Deepening, Plugging Back, testing, Completing, and Recompleting, after deducting any cash contributions received under Article VIII.e., and of (b) that portion of the cost of newly acquired equipment in the well (to and including the wellhead connections), which would have been chargeable to such Non-Consenting Party if it had participated therein. However, many JOAs contain different non-consent provisions in Article XVI. Some provide that a Non- Consenting Party relinquishes all interest in the well and others that a Non-Consenting Party relinquishes all interest in the Contract Area. Such in or out provisions are often the source of controversy about such things as whether the non-consent operation was properly proposed, because of the draconian nature of the risk penalty. (c) Reworking, Recompleting, or Plugging Back. If a party is non-consent in drilling, Sidetracking or Deepening a well, then that party is also non-consent in any Reworking or Plugging Back operation in the well during recoupment of the risk penalty. Similarly, a party that is non-consent in Completing or Recompleting a well is also non-consent in any Reworking of the well during recoupment of the risk penalty. The amounts of such Reworking, Plugging Back or Recompletion operations are added to the amount to be recouped and a stipulated risk penalty (see Page 7, line 35) is applied to the costs incurred by the Consenting Parties in such operations. (d) Recoupment Matters. During the recoupment period the Consenting Parties are responsible for payment for all production taxes and all royalties payable the Non-Consenting Parties share of production. In addition, within 90 days after completion of the non-consent operation, the Operator, or the Consenting Party conducting operations for the Consenting Parties, must furnish the Non- Consenting Parties an inventory of well equipment and an itemized statement or detailed monthly statements of the costs incurred in the non-consent operation. Monthly thereafter the Non-Consenting Parties are to receive a report of (i) the costs and liabilities incurred, (ii) the amount of Oil and Gas produced and (iii) the proceeds realized from the sale of the working interest production during the preceding month. 12

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 The relinquished interest automatically reverts to the Non-Consenting Parties at 7:00 a.m. on the day following the date on which recoupment occurs. 3. Standby Costs. This subparagraph contains provisions on the allocation of rig standby costs in different circumstances, i.e. (i) waiting for response to a notice, (ii) after response to a notice, and (iii) during a requested extended response period upon notice of a Sidetracking operation with a drilling rig on location. 4. Deepening. This subparagraph limits an Deepening operation to the objective depth specified in the notice ( Initial Objective ) and provides that proposals for Deepening to a greater depth must be given to all parties, who then have the ability to become Consenting Parties as to the Deepening operation below the Initial Objective. This subparagraph sets forth how the costs of Deepening to the Initial Objective will be allocated to Non- Consenting Parties as to the Initial Objective, who elect to become Consenting Parties to deeper objective depth. 5. Sidetracking. This subparagraph contains provisions for reimbursement of the parties owning a wellbore by a party who owns no interest in the wellbore, but has a right to and elects to participate in a Sidetracking operation in the wellbore. 6. Order of Preference of Operations. This subparagraph permits parties to present proposals for operations that conflict with a proposal already made within 15 days after delivery of the initial proposal, or, if a drilling rig is on location within 24 hours after delivery of the initial proposal. Each party may elect to participate in one of the competing proposals if there is not any response a party is deemed to have not voted. The proposal receiving the vote of parties owning the largest aggregate interest shall have priority and in the event of a tie, the initial proposal shall have priority. 7. Conformity to Spacing Pattern. No wells shall be proposed to be drilled or completed in a Zone from which another well is producing, unless it conforms to the then existing spacing pattern for the Zone. 8. Paying Wells. No party shall conduct any Reworking, Deepening, Plugging Back, Completion, Recompletion, or Sidetracking operation under this agreement with respect to any well then capable of producing in paying quantities except with the consent of all parties that have not relinquished interests in the well at the time of such operation. C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK. There are two options with respect to Completion Operations. If the parties select OPTION NO. 1, then consent to drilling, Deepening or Sidetracking of a well is also consent to Completion operations on the well, including necessary tankage and/or surface facilities. OPTION NO. 2 provides what is called a casing point election, which is described in the JOA as follows: When such well has reached its authorized depth, and all logs, cores and other tests have been completed, and the results thereof furnished to the parties, Operator shall give immediate notice to the Non-Operators having the right to participate in a Completion attempt whether or not Operator recommends attempting to Complete the well, together with Operator's AFE for Completion costs if not previously provided. The parties receiving such notice shall have fortyeight (48) hours (exclusive of Saturday, Sunday and legal holidays) in which to elect by delivery of notice to Operator to participate in a recommended Completion attempt or to make a Completion proposal with an accompanying AFE. Operator shall deliver any such Completion proposal, or any Completion proposal conflicting with Operator's proposal, to the other parties entitled to participate in such Completion in accordance with the procedures specified in Article VI.B.6. Election to participate in a Completion attempt shall include consent to all necessary expenditures for the Completing and equipping of such well, including necessary tankage and/or surface facilities but excluding any stimulation operation not contained on the Completion AFE. D. OTHER OPERATIONS. As discussed above, this subparagraph establishes a dollar threshold. If a single project is reasonably estimated to require an expenditure in excess of that threshold, then the Operator must obtain consent of the Non-Operators, unless the project has been authorized as provided by Article VI.B.1. above. It is expected that most routine repair and maintenance projects can be accomplished with expenditures below the threshold amount. Other projects not included in Articles VI.B.1 and VI.C.1. Option 2 may be proposed and the JOA contains a fillin [ ] % in which the parties can specify what percentage of the parties in interest must approve for the Operator to conduct such a project. The JOA, however, expressly excludes from other such operations the installation of gathering lines or other transportation or marketing facilities, which must be governed by a separate agreement. 13

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 E. ABANDONMENT OF WELLS. This topic will not be covered in this paper. F. TERMINATION OF OPERATIONS. This subparagraph contains a fill-in [ ] % in which the parties can specify what percentage of the parties bearing the cost of an operation can elect to terminate the operation. This subparagraph also provides that the Operator may terminate operations if it encounters impenetrable substances or conditions that render further operations impracticable. G. TAKING PRODUCTION IN KIND. This paper will not cover gas balancing, with or without a Gas Balancing Agreement, which is Exhibit E to the JOA. There is an A.A.P.L. promulgated printed form Exhibit E. The key points with respect to taking production is kind in this subparagraph are: Each party shall take in kind or separately dispose of its proportionate share of Oil and Gas produced from the Contract Area; Any extra expenditure incurred to take in kind or to separately dispose of its production shall be borne by the party; Each party shall execute division orders and contracts necessary for sale of its share of production and be entitled to receive payment directly from the purchaser; and If a party fails to make arrangements necessary to take in kind or separately dispose of its share of production, then Operator shall have a revocable right, but not the obligation, to purchase or sell that party s share of production. VII. EXPENDITURES AND LIABILITY OF PARTIES A. LIABILITY OF PARTIES: B. LIENS AND SECURITY INTERESTS: C. ADVANCES: D. DEFAULTS AND REMEDIES: 1. Suspension of Rights 2. Suit for Damages 3. Deemed Non-Consent 4. Advance Payment 5. Costs and Attorneys' Fees E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES F. TAXES A. LIABILITY OF PARTIES. This subparagraph affirms the cotenant status of the parties, i.e. that the liability of the parties is not joint or collective, but several, with each party only responsible for its share of the costs. It also expressly provides that no party shall have any liability to third parties to satisfy the debts of any other party. Finally, this subparagraph expressly provides: It is not the intention of the parties to create, nor shall this agreement be construed as creating a mining or other partnership, joint venture, agency relationship or association, or to render the parties liable as partners, co-venturers, or principals. In their relations with each other under this agreement, the parties shall not be considered fiduciaries or to have established a confidential relationship but rather shall be free to act on an arm's-length basis in accordance with their own respective selfinterest, subject, however, to the obligation of the parties to act in good faith in their with respect to activities hereunder. B. LIENS AND SECURITY INTERESTS. In this subparagraph the each of the parties grants to each of the other parties a lien on its Oil and Gas Interests and a security interest in the equipment, Oil and Gas when extracted and accounts and contract rights arising therefrom. These liens and security interests are perfected by execution, acknowledgement and recording of the AAPL Form 610RS-1989 Model Form Recording Supplement to Operating Agreement and Financing Statement. If any party fails to pay its share of cost within 120 days after a statement is rendered, then the Operator may request that the non-defaulting parties each pay their pro rata share of the unpaid amount, and is secured by the its liens and security interests to the extent of such payment. This is provision is included so that the Operator is not required to act as a banker for the Non-Operators. Each party is authorized to proceed independently to exercise its rights as a secured party under the Uniform Commercial Code to the extent of its security interests and to utilize the lien laws in the state where the Contract Area is located to recover any sum due from a defaulting party. One of the most important provisions is the following: [U]pon default by any party in the payment of its share of expenses, interests or fees,..., the other parties shall have the right, without prejudice to other rights or remedies, to collect from the purchaser the proceeds from the sale of such defaulting party's share of Oil and Gas until the amount owed by such party, plus interest as provided in "Exhibit C," has been received, and shall have the right to offset the amount owed against the proceeds from the sale of such defaulting party's share of Oil and Gas. All purchasers of production may rely on a notification of default from the non-defaulting party or 14

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 parties stating the amount due as a result of the default, and all parties waive any recourse available against purchasers for releasing production proceeds as provided in this paragraph. C. ADVANCES. Once again to that the Operator is not required to act as a banker for the Non-Operators, the Operator may demand that the parties advance their respective shares of estimated amounts of expense to be incurred during the next succeeding month. This demand for advance is treated in the same manner as an invoice for expenses paid by the Operator and secured by the Operator s liens and security interests. D. DEFAULTS AND REMEDIES. These remedies are in addition to the remedies provided in Article VI.B. The Operator shall at its option, or at the request of any non-defaulting party, deliver to a defaulting party notices of default and the exercise of any of the following remedies. 1. Suspension of Rights. All of a defaulting party s rights under the JOA may be suspended, including the right to information, the right to elect to participate or to participate in operations and the right to receive the proceeds of production from any well subject to the JOA. Suspending a party s rights, does not, however, prevent the non-defaulting parties from enforcing obligations accrued prior to the suspension. 2. Suit for Damages. This is self-explanatory. 3. Deemed Non-consent. The non-defaulting parties may deliver a written Notice of Non-Consent 30 days after the Notice of Default and the defaulting party shall be deemed to have elected not to participate and be a non-consenting party under VI.B.1 or VI.C.1 to the extent of unpaid costs. However, by proceeding under this provision, the non-defaulting parties cannot elect to sue for any unpaid amounts. Therefore, if the operation results in a dry hole, there will be not right to recover the unpaid costs from the defaulting party. 4. Advance Payment. The defaulting party can be required to make advance payment of the estimated cost of an operation in which the defaulting party has elected to participate and if the defaulting party fails to make such advance payment all of the above remedies are available. 5. Costs and Attorneys Fees. The prevailing party in a suit to enforce a financial obligation is entitled to recover costs and attorneys fees. E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES. This provision is selfexplanatory. F. TAXES. This provision is self-explanatory. VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST A. SURRENDER OF LEASES. B. RENEWAL OR EXTENSION OF LEASES: C. ACREAGE OR CASH CONTRIBUTIONS: D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST: E. WAIVER OF RIGHTS TO PARTITION: F. PREFERENTIAL RIGHT TO PURCHASE: A. SURRENDER OF LEASES. The Oil and Gas Leases subject to the JOA may not be surrendered by a party without the consent of all parties. A party desiring to surrender an Oil and Gas Lease must notify the other parties and assign the Oil and Gas Lease to the parties who do not consent to the surrender. This provision is most relevant when the parties have each contributed Oil and Gas Leases to the JOA, rather than if the Operator has assigned undivided shares in Oil and Gas Leases to the parties. B. RENEWAL OR EXTENSION OF LEASES. If a party to the JOA obtains a renewal or extension of an Oil and Gas Lease subject to the JOA that becomes effective within 6 months of the expiration of an existing Oil and Gas Lease, then the party acquiring such renewal or extension must offer the other parties the JOA the opportunity to participate in their proportionate ownership of such renewal or extension by paying their share of the acquisition costs. C. ACREAGE OR CASH CONTRIBUTIONS. This paper will not cover this provision. D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST. This provision requires that in order to maintain uniform ownership of the Oil and Gas Leases, the equipment and production subject to the JOA that no party shall sell, encumber or transfer any interest in the same unless the disposition covers the party s entire interest in the Contract Area or an undivided interest in the entire Contract Area. This is probably the most violated provision of the JOA. One of the reasons for this provision is to avoid the necessity of setting up separate tanks or measurement for the Contract Area. Another reason is that if there is not uniform ownership in the Contract Area, it is difficult, and perhaps impossible, to apply the removal of Operator and selection of successor Operator provisions. In other words, if there is different or divided ownership in different parts of the Contract Area, what will constitute a majority of interest in the 15

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 Contract Area necessary to remove the Operator and select a successor Operator. This provision also provides that every transfer or encumbrance will be made expressly subject to the JOA, and that any transferee of ownership shall be deemed a party to the JOA as to the interest transferred on the effective date of the transfer. E. WAIVER OF RIGHTS TO PARTITION. In Texas, every cotenant has an absolute right to a partition of its interest, whether in kind or by sale. This provision waives this right to partition. F. PREFERENTIAL RIGHT TO PURCHASE. This is an optional provision, which must be selected by the parties. The intent of this provision is to give the existing owners the opportunity to maintain the ownership of the existing parties to the JOA. If any party desires to sell all or a part of its interest subject to the JOA, the selling party must notify the other working interests owners of the price and other terms and conditions offered by a third party for the selling party s interest, and the other parties to JOA then have the prior optional right to purchase the interest being sold on the same terms and conditions as offered by a the third party. However, the application of the preferential right to purchase in practice is subject to uncertainty and controversy, which is beyond the scope of this paper. IX. THINKING ABOUT HORIZONTAL WELLS. Horizontal Wells are now common, but they were not common when drafting of the Model Form 610-1989 was being considered in the late 1980 s. While the provisions of the JOA may be general enough to sufficiently cover the unique issues that arise in connection with the drilling of horizontal wells, there are some areas that merit considering modifications that will reflect the differences between horizontal wells. It is beyond the scope of this paper to present a detailed analysis of how Form 610-1989 should be changed, but because of the prevalence of horizontal drilling any basic analysis of the JOA should point out some of these issues. 3 A. Article I -Definitions. Deepen consider adding to this definition that in the case of a horizontal well Deepen shall mean an operation in which the horizontal drainhole is drilled to a greater horizontal displacement that proposed. Drilling Unit consider setting forth an agreed number of acres for the horizontal unit. Note, that 3 For a detailed treatment of this topic see: H. Martin Gibson, Modifying Oil & Gas Documents for Horizontal Drilling, The University of Texas School of Law 37th Annual Ernest E. Smith Oil, Gas and Mineral Law Institute, April 2011 16 some operators drill twin wells in the same unit, but that some of the Eagle Ford Shale Field Rules permit the drilling of twin wells and others do not. Drillsite consider adding that in the case of a horizontal well it shall include the Oil and Gas Leases and/or Interest for the surface location and each of the tracts of land penetrated by the horizontal drainhole. This change clarifies that the Operator must examine title to each lease to be penetrated by the horizontal drainhole. Note some of the Eagle Ford Shale Field Rules permit the drilling of twin wells and others do not. Rule 86 consider adding definitions contained in Railroad Commission of Texas Rule 86 for horizontal drainhole, horizontal displacement, horizontal well, penetration point and terminus, among others. Plug Back consider adding that in the case of a horizontal well it shall include an operation reducing the horizontal displacement from the drilled terminus of the horizontal drainhole. Total Depth consider adding that in the case of a horizontal well Total Depth shall mean either the total lateral measured distance from the surface of the ground to the terminus of the horizontal drainhole or the lateral measured distance from the penetration point to the terminus. B. Article VI Drilling and Development Article VI.B.1 Proposed Operations consider adding a provision that in the case of a horizontal well a well proposal shall include, in addition to the work to be performed, the location, proposed depth and objective Zone, the surface location, the intended azimuth of the well, the estimated horizontal displacement in the objective zone, the estimated location of the terminus, and whether the proposal includes multiple lateral and the proposed fracture stimulation program. Article VI.C.1 Completion chose Option No. 1 and consider expressly providing that consent to drilling includes consent to drill of all laterals contained in the proposal and multi-stage fracture stimulation. This is not intended to be a complete list of JOA that may need to be modified to adequately address operational issues arising from the drilling of horizontal wells, but only to encourage caution when using the Model Form 610-1989 JOA for horizontal wells. X. CONCLUSION. The JOA is a complex agreement intended to govern the day-to-day activities of the parties in

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 the exploration for and development of oil and gas. A short introduction can only scratch the surface of the many facets of the JOA and its application to actual circumstances that arise in the exploration and production industry. This paper does not cover all provisions of the JOA, but covers those provisions that most commonly arise in the operation of oil and gas properties. To apply the JOA first understand the facts, then read the JOA, make sure you have all the facts you need, and then read the JOA again. 17

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The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 A...ority For EzpeDdiIare Cost_Ie Lease & Well NO,-::B County and _ --.:-::= 1 County. Texas Field l.ocatioo _r_or.... AFE Desaiplion Dri111D 13,II)(r,_5" c:asingand ~ with fiac -Iti... ~ F grind tiiat tile IlIIlOWIU provided for-ltereia'are-estimates Daly, and approval of this autlwrizatioa sbad ~... 1Ile lacarftd ia--.,.lile.pi "lied, _sotoat. ~ 2.' 031 041 OS] 06 Cement and',scm"" :~~ ~ 30,000 $ lddia'. 25,000... ~\ijei, and bils ~:,... 13,100'""Oi5" $ S I;: 10,000 420,000-420,000 : 1~'-+---:::.19:~ s. $ SO,1lOO 687,000 $ '"'" 741 s $ Prepared by - AFEno. Approved By: Approved fur: Date:_--, 41 20,(01) 2O,1lOO 20,000 ; 30,(01); 250.000. 154 ~~ 1j 153 liner :~::. 10,000 84.000 35,000 11l,000 90,000 15,000 2@: India' 120,UUO 42.1 10 (}7] 14] --w:ooo. b;;="';~;;;;;; :";f===~totaj 51,000 68, 000

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 AAPL - FORM 61 DRS - 1989 EXHIBIT "H" Attached to the dated Prospect Operating Agreement, County, Texas,, between Operator, and Non-Operators MODEL FORM RECORDING SUPPLEMENT TO OPERATING AGREEMENT AND FINANCING STATEMENT T!'liS AGREEMENT, entered into by and between, hereinafter referred to as "Operator," and the signatory party or parties other than Operator, hereinafter referred to individually as "Non-Operator:' and collectively as "Non-Operators." WHEREAS, the parties to this agreement are owners of Oil and Gas Leases and/or Oil and Gas Interests in the land identified in Exhibit "A" (said land, Leases and Interests being hereinafter called the "Contract Area"), and in any instance in which the Leases or Interests of a party are not of record, the record owner and the party hereto that owns the interest or rights therein are reflected on Exhibit 'A : WHEREAS. the parties hereto have executed an Operating Agreement dated (herein the "Operating covering the Contract Area for the purpose of exploring and developing such lands. Leases and Interests for Oil and Gas: and Agreement"). WHEREAS. the parties hereto have executed this agreement for the purpose of imparting notice to all persons of the rights and obligations of the parties under the Operating Agreement and for the further purpose of perfecting those rights capable of perfection. NOW. THEREFORE- in consideration of the mutual rights and obligations or the parties hereto, it is agreed as follows: I. This agreement supplements the Operating Agreement which Agreement in its entirety is incorporated herein by reference, and all terms used herein shall have the meaning ascribed to them in the Operating Agreement. 2. The parties do hereby agree that: A The Oil and Gas Leases and/or Oil and Gas Interests of the parties comprising the Contract Area shall be subject to and burdened with the terms and provisions of this agreement and the Operating Agreement and the parties do hereby commit such Leases and Interests to the performance thereof B. The exploration and development of the Contract Area for Oil and Gas shall be governed by the terms and provisions of the Operating Agreement as supplemented by this agreement. C. All costs and liabilities incurred in operations under this agreement and the Operating Agreement shall be borne and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned. by the parties hereto, as provided in the Operating Agreement. D. Regardless of the record title ownership to the Oil and Gas Leases and/or Oil and Gas Interests identified on Exhibit 'A," all production of Oil and Gas from the Contract Area shall be owned by the parties as provided in the Operating Agreement: provided nothing contained in this agreement shall be deemed an assignment or cross-assignment of interests covered hereby. E. Each party shall payor deliver, or cause to be paid or delivered. all burdens on its share of the production from the Contract Area as provided in the Operating Agreement. F. An overriding royalty, production payment net profits interest or other burden payable out of production hereafter created. assignments of production given as security for the payment of money and those overriding royalties. production payments and other burdens payable out of production heretofore created and defined as Subsequently Created Interests in the Operating Agreement shall be 0) borne solely by the party whose interest is burdened therewith. (Ii) subject to suspension if a party is required to assign or relinquish to another party an interest which is subject to such burden, and (iii) subject to the lien and security interest hereinafter provided if the party subject to such burden fails to pay its share of expenses chargeable hereunder and under the Operating Agreement all upon the terms and provisions and in the times and manner provided by the Operating Agreement. G. The Oil and Gas Leases and/or Oil and Gas Interests which are subject hereto may not be assigned or transferred except in accordance with those terms. provisions and restrictions in the Operating Agreement regulating such transfers. This agreement and the Operating Agreement shall be binding upon and shall inure to the benefit of the parties hereto. and their respective heirs, devisees. legal representatives. and assigns. and the terms hereof shall be deemed to run with the leases or interests included within the lease Contract Area. H. The parties shall have the right to acquire an interest in renewal, extension and replacement leases. leases proposed to be surrendered, wells proposed to be abandoned, and interests to be relinquished as a result of non-participation in subsequent operations. all in accordance with the terms and provisions of the Operating Agreement. oj. L The rights and obligations of the parties and the adjustment of interests among them in the event of a failure or loss of title, each party's right to propose operations. obligations with respect to participation in operations on the Contract Area and the consequences of a failure to participate in operations. the rights and obligations of the parties regarding the marketing of production, and the rights and remedies of the parties for failure to comply with financial obligations shall be as provided in the Operating Agreement..I. Each party's interest under this agreement and under the Operating Agreement shall be subject to relinquishment for its failure to participate in subsequent operations and each party's share of production and costs shall be reallocated on the basis of such relinquishment all upon the terms and provisions provided in the Operating Agreement. K. All other matters with respect to exploration and development of the Contract Area and the ownership and transfer of the Oil and Gas Leases and/or Oil and Gas Interest therein shall be governed by the terms and provisions of the Operating Agreement The parties hereby grant reciprocal liens and security interests as follows: A. Each party grants to the other parties hereto a lien upon any interest it now owns or hereafter acquires in Oil and Gas Leases and Oil and Gas Interests in the Contract Area. and a security interest and/or purchase money security interest in any interest it now owns or hereafter acquires in the personal property and fixtures on or used or obtained for usc in connection therewith. to secure performance of all of its obligations under this agreement and the Operating Agreement including but not limited to payment of expense, interest and fees. the proper disbursement of all monies paid under this agreement and the Operating Agreement the assignment or relinquishment of interest in Oil and Gas Leases as required under this agreement and the Operating Agreement and the proper performance of operations under this agreement and the Operating Agreement. Such lien and security interest granted by each party hereto shall include such party's leasehold interests, working interests. operating rights, and royalty and overriding royalty interests in the Contract Area now owned or hereafter acquired and in lands pooled or unitized therewith or otherwise becoming subject to this agreement and the Operating Agreement, the Oil and Gas when extracted therefrom and equipment situated thereon or used or obtained for use in 42

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 Memorandum of Operating Agreement Prospect Dated AAPL - FORM 61ORS - 1989 connection therewith (including, without limitation, all wells, tools, and tubular goods), and accounts (including, without limitation, accounts arising from the sale of production at the wellhead), contract rights, inventory and general intangibles relating thereto or arising therefrom, and all proceeds and products of the foregoing. 8. Each party represents and warrants to the other parties hereto that the lien and security interest granted by such party to the other parties shall be a first and prior lien, and each party hereby agrees to maintain the priority of said lien and security interest against all persons acquiring an interest in Oil and Gas Leases and Interests covered by this agreement and the Operating Agreement by, through or under such party. All parties acquiring an interest in Oil and Gas Leases and Oil and Gas Interests covered by this agreement and the Operating Agreement. whether by assignment, merger. mortgage, operation of law, or otherwise, shall be deemed to have taken subject to the lien and security interest granted by the Operating Agreement and this instrument as to al1 obligations attributable to such interest under this agreement and the Operating Agreement whether or not such obligations arise before or after such interest is acquired. C. To the extent that the parties have a security interest under the Uniform Commercial Code of the state in which the Contract Area is situated, they shal1 be entitled to exercise the rights and remedies of a secured party under the Code. The bringing of a suit and the obtaining of judgment by a party for the secured indebtedness shall not be deemed an election of remedies or otherwise affect the lien rights or security interest as security for the payment thereof. In addition, upon default by any party in the payment of its share of expenses. interest or fees. or upon the improper usc of funds by the Operator, the other parties shall have the right, without prejudice to other rights or remedies, to collect from the purchaser the proceeds from the sale of such defaulting party's share of Oil and Gas until the amount owed by such party, plus interest. has been received, and shall have the right to offset the amount owed against the proceeds from the sale of such defaulting party's share of Oil and Gas. All purchasers of production may rely on a notification of default from the non-defaulting party or parties stating the amount due as a result of the default, and all parties waive any recourse available against purchasers for releasing production proceeds as provided in this paragraph. D. If any party fails to pay its share of expenses within one hundred-twenty (120) days after rendition of a statement therefor by Operator the non-defaulting parties. including Operator, shall, upon request by Operator. pay the unpaid amount in the proportion that the interest of each such party bears to the interest of all such parties. The amount paid by each party so paying its share of the unpaid amount shall be secured by the liens and security rights described in this paragraph 3 and in the Operating Agreement, and each paying party may independently pursue any remedy available under the Operating Agreement or otherwise. c. If any party does not perform all of its obligations under this agreement or the Operating Agreement. and the failure to perform subjects such party to foreclosure or execution proceedings pursuant to the provisions of this agreement or the Operating Agreement, to the extent allowed by governing law, the defaulting party waives any available right of redernption from and after the date of judgment any required valuation or appraisement of the mortgaged or secured property prior to sale, any available right to stay execution or to require a marshalling of assets and any required bond in the event a receiver is appointed. In addition. to the extent permitted by applicable law, each party hereby grants to the other parties a power of sale as to any property that is subject to the lien and security rights granted hereunder or under the Operating Agreement such power to be exercised in the manner provided by applicable law or otherwise in a commercially reasonable manner and upon reasonable notice. F. The lien and security interest granted in this paragraph 3 supplements identical rights granted under the Operating Agreement. G. To the extent permitted by applicable law, Non-Operators agree that Operator may invoke or utilize the mechanics' or materialmen's lien law of the state in which the Contract Area is situated in order to secure the payment to Operator of any sum due under this agreement and the Operating Agreement for services performed or materials supplied by Operator. H. The above described security wi11 be financed at the wellhead of the well or wells located on the Contract Area and this Recording Supplement may be filed in the land records in the County or Parish in which the Contract Area is located, and as a financing statement in all recording offices required under the Uniform Commercial Code or other applicable state statutes to perfect the above-described security interest and any party hereto may file a continuation statement as necessary under the Uniform Commercial Code, or other state laws. 4. This agreement shall be effective as of the date of the Operating Agreement as above recited. Upon termination of this agreement and the Operating Agreement and the satisfaction of all obligations thereunder, Operator is authorized to file of record in all necessary recording offices a notice of termination, and each party hereto agrees to execute such a notice of termination as to Operator's interest, upon the request of Operator, if Operator has complied with all of its financial obligations. 5. This agreement and the Operating Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, devisees, legal representatives, successors and assigns. No sale, encumbrance, transfer or other disposition shall be made by any party of any interest in the Leases or Interests subject hereto except as expressly permitted under the Operating Agreement and, if permitted, shall be made expressly subject to this agreement and the Operating Agreement and without prejudice to the rights of the other parties. If the transfer is permitted, the assignee of an ownership interest in any Oil and Gas Lease sha11 be deemed a party to this agreement and the Operating Agreement as to the interest assigned from and after the effective date of the transfer of ownership: provided, however, that the other parties shall not be required to recognize any such sale, encumbrance, transfer or other disposition for any purpose hereunder until thirty (30) days after they have received a copy of the instrument of transfer or other satisfactory evidence thereof in writing from the transferor or transferee. No assignment or other disposition of interest by a party shall relieve such party of obligations previously incurred by such party under this agreement or the Operating Agreement with respect to the interest transferred. including without limitation the obligation of a party to pay all costs attributable to an operation conducted under this agreement and the Operating Agreement in which such party has agreed to participate prior to making such assignment and the lien and security interest granted by Article VIl.B. of the Operating Agreement and hereby shall continue to burden the interest transferred to secure payment of any such obligations. 6. In the event of a conflict between the terms and provisions of this agreement and the terms and provisions of the Operating Agreement. then, as between the parties, the terms and provisions of the Operating Agreement shall control. 7. This agreement shall be binding upon each Non-Operator when this agreement or a counterpart thereof has been executed by such NonOperator and Operator notwithstanding that this agreement is not then or thereafter executed by all of the parties to which it is tendered or which are listed on Exhibit "A" as owning an interest in the Contract Area or which own. in fact, an interest in the Contract Area. In the event that any provision herein is illegal or unenforceable, the remaining provisions shall not be affected, and shall be enforced as if the il1egal or unenforceable provision did not appear herein. 8. Other provisions. -2-43

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 AAPL - FORM 61ORS - 1989 EXHIBIT "H" Attached to the Operating Agreement, County, Texas, dated, between, Operator, and s. who has prepared and circulated this form for execution. represents and warrants that the form was printed from and, with the exception(s) listed below, is identical to the AAPL Form 610RS-1989 Model Form Recording Supplement to Operating Agreement and Financing Statement. as published in computerized form by Forms On-A-Disk, Inc. No changes. alterations. or modifications. other than those made by strikethrough and/or insertion and that arc clearly recognizable as changes in Articles.' have been made to the form. IN WITNESS WHEREOF, this agreement shall be effective as ofthe~day of, _--" - OPERATOR ATTEST OR WITNESS By: Title: Date: Address: Type or Print Name ~=-;;-;-=-;c "c_c c;_;;;;_=,,;c;;_7c'""""===-- _ NON-OPERATORS ATTEST OR WITNESS By: Type or Print Name Title: Date: Address: --------------------- ATTEST OR WIT:"JESS By: ~ _ ATTEST OR WITNESS Type or Print Name Title: _ Date: _ Address: -::-_-::-_-:-_-::- --; _ By: Title: Date: Address: Type or Print Name - 3-44

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 ATTACHMENT 2 EXHIBIT H Model Form Recording Supplement to Operating Agreement and Financing Statement 45

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 AAPL - FORM 61DRS - 1989 EXHIBIT "H" Attached to the Prospect Operating Agreement, County, Texas, dated, between Operator, and Non-Operators MODEL FORM RECORDING SUPPLEMENT TO OPERATING AGREEMENT AND FINANCING STATEMENT T!'liS AGREEMENT, entered into by and between, hereinafter referred to as "Operator," and the signatory party or parties other than Operator, hereinafter referred to individually as "Non-Operator:' and collectively as "Non-Operators." WHEREAS, the parties to this agreement are owners of Oil and Gas Leases and/or Oil and Gas Interests in the land identified in Exhibit "A" (said land, Leases and Interests being hereinafter called the "Contract Area"), and in any instance in which the Leases or Interests of a party are not of record, the record owner and the party hereto that owns the interest or rights therein are reflected on Exhibit 'A : WHEREAS. the parties hereto have executed an Operating Agreement dated (herein the "Operating Agreement"). covering the Contract Area for the purpose ofexploring and developing such lands. Leases and Interests for Oil and Gas: and WHEREAS. the parties hereto have executed this agreement for the purpose of imparting notice to all persons of the rights and obligations ofthe parties under the Operating Agreement and for the further purpose of perfecting those rights capable of perfection. NOW. THEREFORE- in consideration ofthe mutual rights and obligations orthe parties hereto, it is agreed as follows: I. This agreement supplements the Operating Agreement which Agreement in its entirety is incorporated herein by reference, and all terms used herein shall have the meaning ascribed to them in the Operating Agreement. 2. The parties do hereby agree that: A The Oil and Gas Leases and/or Oil and Gas Interests of the parties comprising the Contract Area shall be subject to and burdened with the terms and provisions ofthis agreement and the Operating Agreement and the parties do hereby commit such Leases and Interests to the performance thereof B. The exploration and development of the Contract Area for Oil and Gas shall be governed by the terms and provisions of the Operating Agreement as supplemented by this agreement. C. All costs and liabilities incurred in operations under this agreement and the Operating Agreement shall be borne and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned. by the parties hereto, as provided in the Operating Agreement. D. Regardless ofthe record title ownership to the Oil and Gas Leases and/or Oil and Gas Interests identified on Exhibit 'A," all production of Oil and Gas from the Contract Area shall be owned by the parties as provided in the Operating Agreement: provided nothing contained in this agreement shall be deemed an assignment or cross-assignment of interests covered hereby. E. Each party shall payor deliver, or cause to be paid or delivered. all burdens on its share of the production from the Contract Area as provided in the Operating Agreement. F. An overriding royalty, production payment net profits interest or other burden payable out of production hereafter created. assignments of production given as security for the payment of money and those overriding royalties. production payments and other burdens payable out of production heretofore created and defined as Subsequently Created Interests in the Operating Agreement shall be 0) borne solely by the party whose interest is burdened therewith. (Ii) subject to suspension if a party is required to assign or relinquish to another party an interest which is subject to such burden, and (iii) subject to the lien and security interest hereinafter provided if the party subject to such burden fails to pay its share of expenses chargeable hereunder and under the Operating Agreement all upon the terms and provisions and in the times and manner provided by the Operating Agreement. G. The Oil and Gas Leases and/or Oil and Gas Interests which are subject hereto may not be assigned or transferred except in accordance with those terms. provisions and restrictions in the Operating Agreement regulating such transfers. This agreement and the Operating Agreement shall be binding upon and shall inure to the benefit of the parties hereto. and their respective heirs, devisees. legal representatives. and assigns. and the terms hereof shall be deemed to run with the leases or interests included within the lease Contract Area. H. The parties shall have the right to acquire an interest in renewal, extension and replacement leases. leases proposed to be surrendered, wells proposed to be abandoned, and interests to be relinquished as a result of non-participation in subsequent operations. all in accordance with the terms and provisions ofthe Operating Agreement. L.I. The rights and obligations ofthe parties and the adjustment of interests among them in the event ofa failure or loss oftitle, each party's right to propose operations. obligations with respect to participation in operations on the Contract Area and the consequences of a failure to participate in operations. the rights and obligations of the parties regarding the marketing of production, and the rights and remedies ofthe parties for failure to comply with financial obligations shall be as provided in the Operating Agreement. Each party's interest under this agreement and under the Operating Agreement shall be subject to relinquishment for its failure to participate in subsequent operations and each party's share of production and costs shall be reallocated on the basis of such relinquishment all upon the terms and provisions provided in the Operating Agreement. K. All other matters with respect to exploration and development of the Contract Area and the ownership and transfer of the Oil and Gas Leases and/or Oil and Gas Interest therein shall be governed by the terms and provisions ofthe Operating Agreement oj. The parties hereby grant reciprocal liens and security interests as follows: A. Each party grants to the other parties hereto a lien upon any interest it now owns or hereafter acquires in Oil and Gas Leases and Oil and Gas Interests in the Contract Area. and a security interest and/or purchase money security interest in any interest it now owns or hereafter acquires in the personal property and fixtures on or used or obtained for usc in connection therewith. to secure performance of all of its obligations under this agreement and the Operating Agreement including but not limited to payment of expense, interest and fees. the proper disbursement of all monies paid under this agreement and the Operating Agreement the assignment or relinquishment of interest in Oil and Gas Leases as required under this agreement and the Operating Agreement and the proper performance of operations under this agreement and the Operating Agreement. Such lien and security interest granted by each party hereto shall include such party's leasehold interests, working interests. operating rights, and royalty and overriding royalty interests in the Contract Area now owned or hereafter acquired and in lands pooled or unitized therewith or otherwise becoming subject to this agreement and the Operating Agreement, the Oil and Gas when extracted therefrom and equipment situated thereon or used or obtained for use in 47

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 AAPL - FORM 61ORS - 1989 Memorandum of Operating Agreement Prospect Dated connection therewith (including, without limitation, all wells, tools, and tubular goods), and accounts (including, without limitation, accounts arising from the sale of production at the wellhead), contract rights, inventory and general intangibles relating thereto or arising therefrom, and all proceeds and products of the foregoing. 8. Each party represents and warrants to the other parties hereto that the lien and security interest granted by such party to the other parties shall be a first and prior lien, and each party hereby agrees to maintain the priority of said lien and security interest against all persons acquiring an interest in Oil and Gas Leases and Interests covered by this agreement and the Operating Agreement by, through or under such party. All parties acquiring an interest in Oil and Gas Leases and Oil and Gas Interests covered by this agreement and the Operating Agreement. whether by assignment, merger. mortgage, operation of law, or otherwise, shall be deemed to have taken subject to the lien and security interest granted by the Operating Agreement and this instrument as to al1 obligations attributable to such interest under this agreement and the Operating Agreement whether or not such obligations arise before or after such interest is acquired. C. To the extent that the parties have a security interest under the Uniform Commercial Code of the state in which the Contract Area is situated, they shal1 be entitled to exercise the rights and remedies of a secured party under the Code. The bringing of a suit and the obtaining of judgment by a party for the secured indebtedness shall not be deemed an election of remedies or otherwise affect the lien rights or security interest as security for the payment thereof. In addition, upon default by any party in the payment of its share of expenses. interest or fees. or upon the improper usc of funds by the Operator, the other parties shall have the right, without prejudice to other rights or remedies, to collect from the purchaser the proceeds from the sale of such defaulting party's share of Oil and Gas until the amount owed by such party, plus interest. has been received, and shall have the right to offset the amount owed against the proceeds from the sale of such defaulting party's share of Oil and Gas. All purchasers of production may rely on a notification of default from the non-defaulting party or parties stating the amount due as a result of the default, and all parties waive any recourse available against purchasers for releasing production proceeds as provided in this paragraph. D. If any party fails to pay its share of expenses within one hundred-twenty (120) days after rendition of a statement therefor by Operator the non-defaulting parties. including Operator, shall, upon request by Operator. pay the unpaid amount in the proportion that the interest of each such party bears to the interest of all such parties. The amount paid by each party so paying its share of the unpaid amount shall be secured by the liens and security rights described in this paragraph 3 and in the Operating Agreement, and each paying party may independently pursue any remedy available under the Operating Agreement or otherwise. c. If any party does not perform all of its obligations under this agreement or the Operating Agreement. and the failure to perform subjects such party to foreclosure or execution proceedings pursuant to the provisions of this agreement or the Operating Agreement, to the extent allowed by governing law, the defaulting party waives any available right of redernption from and after the date of judgment any required valuation or appraisement of the mortgaged or secured property prior to sale, any available right to stay execution or to require a marshalling of assets and any required bond in the event a receiver is appointed. In addition. to the extent permitted by applicable law, each party hereby grants to the other parties a power of sale as to any property that is subject to the lien and security rights granted hereunder or under the Operating Agreement such power to be exercised in the manner provided by applicable law or otherwise in a commercially reasonable manner and upon reasonable notice. F. The lien and security interest granted in this paragraph 3 supplements identical rights granted under the Operating Agreement. G. To the extent permitted by applicable law, Non-Operators agree that Operator may invoke or utilize the mechanics' or materialmen's lien law of the state in which the Contract Area is situated in order to secure the payment to Operator of any sum due under this agreement and the Operating Agreement for services performed or materials supplied by Operator. H. The above described security wi11 be financed at the wellhead of the well or wells located on the Contract Area and this Recording Supplement may be filed in the land records in the County or Parish in which the Contract Area is located, and as a financing statement in all recording offices required under the Uniform Commercial Code or other applicable state statutes to perfect the above-described security interest and any party hereto may file a continuation statement as necessary under the Uniform Commercial Code, or other state laws. 4. This agreement shall be effective as of the date of the Operating Agreement as above recited. Upon termination of this agreement and the Operating Agreement and the satisfaction of all obligations thereunder, Operator is authorized to file of record in all necessary recording offices a notice of termination, and each party hereto agrees to execute such a notice of termination as to Operator's interest, upon the request of Operator, if Operator has complied with all of its financial obligations. 5. This agreement and the Operating Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, devisees, legal representatives, successors and assigns. No sale, encumbrance, transfer or other disposition shall be made by any party of any interest in the Leases or Interests subject hereto except as expressly permitted under the Operating Agreement and, if permitted, shall be made expressly subject to this agreement and the Operating Agreement and without prejudice to the rights of the other parties. If the transfer is permitted, the assignee of an ownership interest in any Oil and Gas Lease sha11 be deemed a party to this agreement and the Operating Agreement as to the interest assigned from and after the effective date of the transfer of ownership: provided, however, that the other parties shall not be required to recognize any such sale, encumbrance, transfer or other disposition for any purpose hereunder until thirty (30) days after they have received a copy of the instrument of transfer or other satisfactory evidence thereof in writing from the transferor or transferee. No assignment or other disposition of interest by a party shall relieve such party of obligations previously incurred by such party under this agreement or the Operating Agreement with respect to the interest transferred. including without limitation the obligation of a party to pay all costs attributable to an operation conducted under this agreement and the Operating Agreement in which such party has agreed to participate prior to making such assignment and the lien and security interest granted by Article VIl.B. of the Operating Agreement and hereby shall continue to burden the interest transferred to secure payment of any such obligations. 6. In the event of a conflict between the terms and provisions of this agreement and the terms and provisions of the Operating Agreement. then, as between the parties, the terms and provisions of the Operating Agreement shall control. 7. This agreement shall be binding upon each Non-Operator when this agreement or a counterpart thereof has been executed by such Non Operator and Operator notwithstanding that this agreement is not then or thereafter executed by all of the parties to which it is tendered or which are listed on Exhibit "A" as owning an interest in the Contract Area or which own. in fact, an interest in the Contract Area. In the event that any provision herein is illegal or unenforceable, the remaining provisions shall not be affected, and shall be enforced as if the il1egal or unenforceable provision did not appear herein. 8. Other provisions. - 2-48

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 AAPL - FORM 61ORS - 1989 EXHIBIT "H" Attached to the Operating Agreement, County, Texas, dated, between, Operator, and s. who has prepared and circulated this form for execution. represents and warrants that the form was printed from and, with the exception(s) listed below, is identical to the AAPL Form 610RS-1989 Model Form Recording Supplement to Operating Agreement and Financing Statement. as published in computerized form by Forms On-A-Disk, Inc. No changes. alterations. or modifications. other than those made by strikethrough and/or insertion and that arc clearly recognizable as changes in Articles.' have been made to the form. IN WITNESS WHEREOF, this agreement shall be effective as ofthe~day of, _--" - OPERATOR ATTEST OR WITNESS By: Title: Date: Address: Type or Print Name ~=-;;-;-=-;c "c_c c;_;;;;_=,,;c;;_7c'""""===-- _ NON-OPERATORS ATTEST OR WITNESS By: Type or Print Name Title: Date: Address: --------------------- ATTEST OR WIT:"JESS By: ~ _ ATTEST OR WITNESS Type or Print Name Title: _ Date: _ Address: -::-_-::-_-:-_-::- --; _ By: Title: Date: Address: Type or Print Name - 3-49

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 ATTACHMENT 3 Authority for Expenditure Cost Estimate 51

The Joint Operating Agreement The Basics (Revised October 2012) Chapter 4 1 --.:-::= A... ority For EzpeDdiIare Cost_Ie Lease & Well NO,-::B Field County and _ County. Texas l.ocatioo _r_or... AFE Desaiplion Dri111D 13,II)(r,_5" c:asingand ~ with fiac -Iti... ~ F grind tiiat tile IlIIlOWIU provided for-ltereia'are-estimates Daly, and approval of this autlwrizatioa sbad ~... 1Ile lacarftd ia--.,.lile.pi"lied, _sotoat. ~ 031 041 OS] 06 Cement and',scm"" (}7] :~~ ~ ~ \ijei, and bils 14],... lddia' India' 2.' 30,000 --w:ooo b;;="';~;;;;;; :";f===~totaj. 42.1 10. 25,000... $ 120,UUO 84.000 35,000 11l,000 90,000 15,000 2@: ~: :~::. ~~ 10,000 1 j 20,(01) 2O,1lOO 20,000 ; - $ 30,(01); S 250.000 I;: 10,000 153 liner 154 13,100' ""Oi5". 420,000 420,000. - - : 1~'-+---:::. 19: ~ s SO,1lOO 51,000 $ 687,000 $ 68, 000 '"'" 741 s $ Prepared by - AFEno. Approved By: Approved fur: Date:_--,