Form of Drilling Agreement

EX-10.4 4 h45119exv10w4.htm FORM OF DRILLING AGREEMENT exv10w4

Exhibit 10.4

THIS CONTRACT CONTAINS PROVISIONS RELATING TO INDEMNITY,

RELEASE OF LIABILITY, AND ALLOCATION OF RISK

SEE PARAGRAPHS 4.9, 6.3 (c), 10, 12, AND 14

This Contract is made and entered into on the date hereinafter set forth by and between the parties herein designated as “Operator” and Contractor.”


OPERATOR:		COG Operating LLC.

		Attn: Joe Wright

Address:		Fasken Center II, 550 W. Texas Ave., Suite 1300, Midland, TX 79701

CONTRACTOR:		Silver Oak Drilling LLC.

		Attn: Johnny Knorr

Address:		PO Box 1370, Artesia, NM 88211-1370

IN CONSIDERATION of the mutual promises, conditions and agreements herein contained and the specifications and special provisions set forth in Exhibit “A” and Exhibit “B” attached hereto and made a part hereof (the “Contract”), Operator engages Contractor as an independent contractor to drill the hereinafter designated well or wells in search of oil or gas on a Daywork Basis.

For purposes hereof, the term “Daywork” or “Daywork Basis” means Contractor shall furnish equipment, labor, and perform services as herein provided, for a specified sum per day under the direction, supervision and control of Operator (inclusive of any employee, agent, consultant or subcontractor engaged by Operator to direct drilling operations). When operating on a Daywork Basis, Contractor shall perform in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practices and shall be fully paid at the applicable rates of payment and assumes only the obligations and liabilities stated herein. Except for such obligations and liabilities specifically assumed by Contractor, Operator shall be solely responsible and assumes liability for all consequences of operations by both parties while on a Daywork Basis, including results and all other risks or liabilities incurred in or incident to such operations.

1.		LOCATION OF WELLS:

		Well Name and Number: To be specified by Operator. This is a term contract for utilization of Silver Oak Drilling Rig # 1 for the drilling of multiple wells, as designated by Operator, within New Mexico; provided, that Contractor, with Operator’s written approval, may from time to time substitute another of Contractor’s rigs acceptable to Operator for Rig #1 hereunder.

		Well location and land description: To be specified by Operator.

		1.1 Additional Well Locations or Areas: To be named

		Locations described above are for well and Contract identification only and Contractor assumes no liability whatsoever for a proper survey or location stake on Operator’s lease.

2.		COMMENCEMENT DATE: Commencement date is the date when the rig is ready to spud the first well. The commencement date for the first rig shall be by the 1st day of August, 2006.

3.		DEPTH:

		3.1 Well Depth: The well (s) shall be drilled to a various depths, but the Contractor shall not be required hereunder to drill any well(s) below a maximum depth of ___feet, unless Contractor and Operator mutually agree to drill to a greater depth.

4.		DAYWORK RATES: Contractor shall be paid at the following rates for the work performed hereunder

		4.1 Mobilization: Operator shall pay Contractor a mobilization fee of ACTUAL THIRD PARTY COSTS plus a mobililzation fee of $12,000 per day, without duplication of other amounts paid hereunder. This sum shall be due and payable in full at the time the rig is rigged up or positioned at the well site ready to spud. Mobilization shall include: MIRU AND RIG TIME UNTIL 1^ST COLLAR IS PICKED UP TO GO INTO THE HOLE.

		4.2 Omitted

		4.3 Moving Rate: During the time the rig is in transit to or from a drill site, or between drill sites, commencing AFTER RIG RELEASE, Operator shall pay Contractor a sum of $12,000.00 per twenty-four (24) hour day plus actual, third party moving costs incurred by Contractor, without duplication of other amounts paid hereunder.

4.4 Operating Day Rate: For work performed per twenty-four (24) hour day with FOUR (4) man crew The operating day rate shall commence at the time the 1^st collar is picked up to go into the hole and be:

Depth Intervals


From	To	Without Drill Pipe	With Drill Pipe
0	TD	$14,500.00 per day	$14,500.00 per day

The rate will begin when the drilling unit is rigged up at the drilling location, and ready to commence operations; and will cease when the rig is ready to be moved off location.

If under the above column “With Drill Pipe” no rates are specified, the rate per twenty-dour hour day when drill pipe is in use shall be the applicable rate specified in the column “Without Drill Pipe” plus compensation for any drill pipe actually used at the rates specified below, computed on the basis of the maximum drill pipe in use at any time during each twenty-four hour day.

DRILL PIPE RATE PER 24-HOUR DAY

Straight Hole

Size

Grade

Directional or

Size

Grade

Uncontrollable Deviated Hole

per ft.

per ft

per ft.

per ft

per ft.

per ft

Directional or uncontrolled deviated hole will be deemed to exist when deviation exceeds degrees or when the change of angle exceeds

degrees per hundred feet.

4.5 Repair Time: In the event it is necessary to shut down Contractor’s rig for repairs, excluding routine rig servicing, Contractor shall be allowed compensation at the applicable rate for such shut down time up to a maximum of 4 hours for any one rig repair job but not to exceed 12 hours of such compensation during the drilling of EACH WELL OR THIRTY (30) DAY PERIOD, WHICHEVER IS LESS. Thereafter, Contractor shall be compensated at a rate of $0.00 per twenty-four (24) hour day. Routine rig servicing shall include, but not be limited to, cutting and slipping drilling line, changing pump or swivel expendables, testing BOP equipment, lubricating rig, and .

4.6 Standby Time Rate: $14,500.00 per twenty-four (24) day. Standby time shall be defined to include time when the rig is shut down although in readiness to begin or resume operations but Contractor is waiting on orders of Operator or on materials, services or other items to be furnished by Operator.

4.7 Drilling Fluid Rates: When drilling fluids of a type and characteristic that increases Contractor’s cost of performance hereunder, including, but not limited to, oil-based mud or potassium chloride, are in use, Operator shall pay Contractor in addition to the operating rate specified above:

	(a)		$ N/A per man per day for Contractor’s rig-site personnel.

	(b)		$ N/A per day additional operating rate; and

	(c)		Cost of all labor, material and services plus N/A hours operating rate to clean rig and related equipment.

4.8 Force Majeure Rate: $12,000.00 per twenty-four (24) hour day for any continuous period that normal operations are suspended or cannot be carried on due to conditions of Force Majeure as defined in Paragraph 17 hereof. It is, however, understood that subject to Subparagraph 6.3 below, Operator can release the rig in accordance with Operator’s right to direct stoppage of the work, effective when conditions will permit the rig to be moved from the location.

4.9 Reimbursable Costs: Operator shall reimburse Contractor for the costs of material or equipment which are to be furnished by Operator as provided for herein but which for convenience are actually furnished by Contractor at Operator’s request, plus 0% percent for such cost of handling. When, at Operator’s request and with Contractor’s agreement, the Contractor furnishes or subcontracts for certain items or services which Operator is required herein to provide, for purposes of the indemnity and release provisions of this Contract, said items or services shall be deemed to be Operator furnished items or services. Any subcontractors so hired shall be deemed to be Operator’s contractor, and Operator shall not be relieved of any of its liabilities in connection therewith.

4.10 Revision in Rates:The rates and/or payments herein set forth due to Contractor from Operator shall be revised to reflect the change in costs if the costs of any of the items hereinafter listed shall vary by more than 5% percent from the costs thereof on the date of this Contract or by the same percent after the date of any revision pursuant to this Subparagraph:

	(a)		Labor costs, including all benefits, of Contractor’s field level personnel;

	(b)		Contractor’s cost of insurance premiums;

	(c)		Contractor’s cost of fuel, including all taxes and fees;

	(d)		If Operator requires Contractor to increase or decrease the number of Contractor’s personnel;

5.		TIME OF PAYMENT

		Payment is due by Operator to Contractor as follows:

		5.1 Payment for mobilization, drilling and other work performed at applicable rates, and all other applicable charges shall be due, upon presentation of invoice therefore, upon completion of mobilization and rig release or at the end of the month in which such work was performed or other charges are incurred, whichever shall first occur. All invoices may be mailed to Operator at the address hereinabove shown.

		5.2 Disputed Invoices and Late Payment: Operator shall pay all invoices within 30 days after receipt except that if Operator disputes an invoice or any part thereof, Operator shall, within thirty (30) days after receipt of the invoice, notify Contractor of the item disputed, specifying the reason there for, and payment of the disputed item may be withheld until settlement of the dispute, but timely payment shall be made of any undisputed portion. Any sums (including amounts ultimately paid with respect to a disputed invoice) not paid within the above specified days shall bear interest at the rate of 0.75 percent per month or the maximum legal rate, whichever is less, per month from the due date until paid. If Operator does not pay undisputed items within the above stated time, Contractor may suspend operations or terminate this Contract as specified under Subparagraph 6.3.

6.		TERM:

		6.1 Duration of the Contract: This Contract shall remain in full force and effect until drilling operations are completed on the well or wells specified in Paragraph 1 above, or for a term of 1 year, for commencing on the date specified in Paragraph 2 above. Should any well commenced during the term of this Contract be drilling at the expiration of the one (1) year primary term of this Contract, drilling shall continue under the terms of this Contract until drilling operations for that well have been completed.

		6.2 Extension of Term: Operator may extend the term of this Contract for NA well(s) or for a period of N /A by giving notice to Contractor at least N/A days prior to completion of the well then being drilled or by N/A .

		6.3 Early Termination:

	(a)		By Either Party: Upon giving of written notice, either party may terminate this Contract without further liability when total loss or destruction of the rig, or a major breakdown with indefinite repair time necessitates stopping operations hereunder.

	(b)		By Operator: Notwithstanding the provisions of Paragraph 3 with respect to the depth to be drilled, Operator shall have the right to direct the stoppage of the work to be performed by Contractor hereunder on any well at any time prior to reaching the specified depth, and even though Contractor has made no default hereunder.

	(c)		By Either Party: Notwithstanding the provisions of Paragraph 3 with respect to the depth to be drilled, in the event a party hereto shall become insolvent, or be adjudicated a bankrupt, or file, by way of petition or answer, a debtor’s petition or other pleading seeking adjustment of it’s debts, under any bankruptcy or debtor’s relief laws now or hereafter prevailing, or if any such be filed against it, or in case a receiver be appointed of that party or that party’s property, or any part thereof, or that party’s affairs be placed in the hands of a Creditor’s Committee, or, following fifteen (15) business days prior written notice to Operator if Operator does not pay Contractor within the time specified in Subparagraph 5.2 all undisputed items due and owing, the other party may, at its option, (1) elect to terminate further performance of any work under this Contract and the terminating party’s right to compensation shall be as set forth herein or (2) Contractor may suspend operations until payment is made by Operator in which event the standby time rate contained in Subparagraph 4.6 shall apply until payment is made by Operator and operations are resumed. In addition to Contractor’s rights to suspend operations or terminate performance under this clause (c), Operator hereby expressly agrees to protect, defend and indemnify Contractor from and against any claims, demands and causes of action, including all costs of defense, in favor of Operator, Operator’s co-venturers, co-lessees and joint owners, or any other parties arising out of any drilling commitments or obligations contained in any lease, farmout agreement or other agreement, which may be affected by such suspension of operations or termination of performance hereunder.

7.		CASING PROGRAM

		Operator shall have the right to designate the points at which casing will be set and the manner of setting, cementing and testing. Operator may modify the casing program, however, any such modification which materially increases Contractor’s hazards or costs can only be made by mutual consent of Operator and Contractor and upon agreement as to the additional compensation to be paid Contractor as a result thereof.

8.		DRILLING METHODS AND PRACTICES:

8.1 Contractor shall maintain well control equipment in good condition at all times and shall use all reasonable means to prevent and control fires and blowouts and to protect the hole.

8.2 Subject to the terms hereof, and at Operator’s cost, at all times during the drilling of the well, Operator shall have the right to control the mud program, and the drilling fluid must be of a type and have characteristics and be maintained by Contractor in accordance with the specifications shown in Exhibit “A”.

8.3 Each party hereto agrees to comply with all laws, rules, and regulations of any federal, state or local governmental authority which are now or may become applicable to that party’s operations covered by or arising out of the performance of this Contract. When required by law, the terms of Exhibit “B” shall apply to this Contract. In the event any provision of this Contract is inconsistent with or contrary to any applicable federal, state or local law, rule or regulation, said provision shall be deemed to be modified to the extent required to comply with said law, rule or regulation, and as so modified said provision and this Contract shall continue in full force and effect. Provided, if there is a change in applicable legislation or regulations as materially increases the costs and/or other burdens of a party hereto, or otherwise causes this Contract to be uneconomic, said party may terminate this Contract.

8.4 Contractor shall keep and furnish to Operator an accurate record of the work performed and formations drilled on the IADC-API Daily Drilling Report Form or other form acceptable to Operator. A legible copy of said form signed by Contractor’s representative shall be furnished by Contractor to Operator.

8.5 If requested by Operator, Contractor shall furnish Operator with a copy of delivery tickets covering any material or supplies provided by Operator and received by Contractor.

INGRESS, EGRESS, AND LOCATION:

Operator hereby assigns to Contractor all necessary rights of ingress and egress with respect to the tract on which_, the well is to be located for the performance by Contractor of all work contemplated by this Contract. Should Contractor be denied free access to the location for any reason not reasonably within Contractor’s control, any time lost by Contractor as a result of such denial shall be paid for at the standby time rate. Operator agrees at all times to maintain the road and location in such a condition that will allow free access and movement to and from the drilling site in an ordinarily equipped highway type vehicle. If Contractor is required to use bulldozers, tractors, four-wheel drive vehicles, or any other specialized transportation equipment for the movement of necessary personnel, machinery, or equipment over access roads or on the drilling location, Operator shall furnish the same at its expense and without cost to Contractor. The actual cost of repairs to any transportation equipment furnished by Contractor or its personnel damaged as a result of improperly maintained access roads or location will be charged to Operator. Operator shall reimburse Contractor for all amounts reasonably expended by Contractor for repairs and/or reinforcement of roads, bridges and related or similar facilities (public and private) required as a direct result of a rig move pursuant to performance hereunder. Operator shall be responsible for any costs associated with leveling the rig because of location settling.

10.

SOUND LOCATION:

Operator shall prepare a sound location adequate in size and capable of properly supporting the drilling rig, and shall be responsible for a casing and cementing program adequate to prevent soil and subsoil wash out. In the event subsurface conditions cause a cratering or shifting of the location surface, and loss or damage to the rig or its associated equipment results therefrom, Operator shall, without regard to other provisions of this Contract, including Subparagraph 14.1 hereof, reimburse Contractor for all such loss or damage including removal of debris and payment of Standby Time Rate during repair and/or demobilization if applicable.

11.

EQUIPMENT CAPACITY

Operations shall not be attempted under any conditions which exceed the capacity of the equipment specified to be used hereunder or where canal or water depths are in excess of NA feet. Without prejudice to the provisions of Paragraph 14 hereunder, Contractor shall have the right to make the final decision as to when an operation or attempted operation would exceed the capacity of specified equipment.

12.

TERMINATION OF LOCATION LIABILITY:

When Contractor has left a well location after rig release, Operator shall thereafter be liable for damage to property, personal injury or death of any person which occurs as a result of conditions of the location and Contractor shall be relieved of such liability; provided, however, if Contractor shall subsequently reenter upon the location for any reason, including removal of the rig, any term of the Contract relating to such reentry activity shall become applicable during such period.

13.

INSURANCE

To support the indemnification provisions and during the life of this Contract, but as a separate and independent obligation, each party shall at each party’s own expense maintain, with an insurance company or companies authorized to do business in the state where the work is to be performed or through a self-insurance program, insurance coverages of the kind and in the minimum amounts set forth in Exhibit “A”, insuring the liabilities specifically assumed by the parties in Paragraph 14 of this Contract. Each party shall provide the other with certificates of insurance which contain 30-day notice of Cancellation, Material Change or Intent to Non-Renew clauses in favor of the recipient.

By written contract, all required insurance shall be maintained in full force and effect during the term of this Contract, and shall not be canceled, altered, or amended without thirty (30) days prior written notice to Operator. Operator and Contractor shall cause their respective underwriters to name the other additional insured (except Worker’s Compensation or any Physical Damage (Property) coverage) but only to the extent of the mutual indemnification obligations assumed herein. Contractor agrees to have its insurance carrier furnish Operator a certificate or certificates evidencing insurance coverage in accordance with the above requirements, and all such insurance shall be primary to any insurance of Operator that may apply to any occurrence, accident, or claim.

For liabilities assumed hereunder by Contractor, its insurance shall be endorsed to provide that the underwriters waive their right of subrogation against Operator. Operator will, as well, cause its insurer to waive subrogation against Contractor for liability it assumes and shall maintain, at Operator’s expense, or shall self

insure, insurance coverage as set forth in Exhibit “A” of the same kind and in the same amount as is required of Contractor, insuring the liabilities specifically assumed by Operator in Paragraph 14 of this Contract. Operator shall procure from the company or companies writing said insurance a certificate or certificates that said insurance is in full force and effect and that the same shall not be canceled or materially changed without thirty (30) days prior written notice to Contractor. Operator and Contractor shall cause their respective underwriters to name the other additionally insured but only to the extent of the indemnification obligations assumed herein.

14.

RESPONSIBILITY FOR LOSS OR DAMAGE, INDEMNITY, RELEASE OF LIABILITY AND ALLOCATION OF RISK:

14.1 Contractor’s Surface Equipment: Contractor shall assume liability at all times, for damage to or destruction of Contractor’s surface equipment for use above the surface, regardless of when or how such damage and destruction occurs, and Contractor shall release and protect, defend and indemnify Operator from any liability for any such loss, except loss or damage under the provisions of Paragraph 10 or Subparagraph 14.3.

14.2 Contractor’s In-Hole Equipment: Operator shall assume liability at all times for damage to or destruction of Contractor’s in-hole equipment, including, but not limited to, drill pipe, drill collars, and tool joints, and Operator shall reimburse Contractor for the value of any such loss or damage; the value to be determined by agreement between Contractor and Operator as current repair costs or the fair market value of such equipment as of the date of the loss delivered to the well site.

14.3 Contractor’s Equipment — Environmental Loss or Damage: Notwithstanding the provisions of Subparagraph 14.1 above, Operator shall assume liability at all times for damage to or destruction of Contractor’s equipment resulting from the presence of H₂S, CO₂ or other cor^rosive elements that enter the drilling fluids from subsurface formations or the use of corrosive, destructive or abrasive additives in the drilling fluids.

14.4 Operator’s Equipment: Operator shall assume liability at all times for damage to or destruction of Operator’s or its co-venturers’, co-lessees’ or joint owners’ equipment, including, but not limited to, casing, tubing, well head equipment, and platform if applicable, regardless of when or how such damage or destruction occurs, and Operator shall release Contractor/ of any liability for any such loss or damage

14.5 The Hole: In the event the hole should be lost or damaged, Operator shall be solely responsible for such damage to or loss of the hole, including the casing therein. Operator shall release Contractor / and its suppliers, contractors and subcontractors of any tier of any liability for damage to or loss of the hole, and shall protect, defend and indemnify Contractor and its suppliers, contractors and subcontractors of any tier from and against any and all claims, liability, and expense relating to such damage to or loss of the hole,

14.6 Underground Damage: Operator shall release Contractor / and its suppliers, contractors and subcontractors of any tier of any liability for, and shall protect, defend and indemnify Contractor and its suppliers, contractors and subcontractors of any tier from and against any and all claims, liability, and expense resulting from operations under this Contract on account of injury to, destruction of, or loss or impairment of any property right in or to oil, gas, or other mineral substance or water, if at the time of the act or omission causing such injury, destruction, loss, or impairment said substance had not been reduced to physical possession above the surface of the earth, and for any loss or damage to any formation, strata, or reservoir beneath the surface of the earth.

14.7 Inspection of Materials Furnished by Operator: Contractor agrees to visually inspect all materials furnished by Operator before using same and to notify Operator of any apparent defects therein. Contractor shall not be liable for any loss or damage resulting from such defects in material furnished by Operator, and Operator shall release Contractor from, and shall protect, defend and indemnify Contractor from and against, any such liability.

14.8 Contractor’s Indemnification of Operator: Contractor shall release Operator and Operator’s employees or Operator’s subcontractors of any tier (inclusive of any agent or consultant engaged by Operator) or their employees, or Operator’s invitees of any liability for, and shall protect, defend and indemnify Operator from and against all claims, demands, and causes of action of every kind and character, without limit and without regard to the cause or causes thereof or the negligence of any party or parties, arising in connection herewith in favor of Contractor’s employees or Contractor’s subcontractors of any tier (inclusive of any agent or consultant engaged by Contractor) or their employees, or Contractor’s invitees, on account of bodily injury, death or damage to property. Contractor’s indemnity under this Paragraph shall be without regard to and without any right to contribution from any insurance maintained by Operator pursuant to Paragraph 13. If it is judicially determined that the monetary limits of insurance required hereunder or of the indemnities voluntarily assumed under Subparagraph 14.8 (which Contractor and Operator hereby agree will be supported by available liability insurance, under which the insurer has no right of subrogation against the indemnities) exceed the maximum limits permitted under applicable law, it is agreed that said insurance requirements or indemnities shall automatically be amended to conform to the maximum monetary limits permitted under such law.

14.9 Operator’s Indemnification of Contractor: Operator shall release Contractor and Contractor’s employees or Contractor’s subcontractors of any tier (inclusive of any agent or consultant engaged by Contractor) or their employees, or Contractor’s invitees of any liability for, and shall protect, defend and indemnify Contractor from and against all claims, demands, and causes of action of every kind and character, without limit and without regard to the cause or causes thereof or the negligence of any party or parties, arising in connection herewith in favor of Operator’s employees or Operator’s contractors of any tier (inclusive of any agent, consultant or subcontractor engaged by Operator) or their employees, or Operator’s invitees, other than those parties identified in Subparagraph 14.8 on account of bodily injury, death or damage to property. Operator’s indemnity under this Paragraph shall be without regard to and without any right to contribution from any insurance maintained by Contractor pursuant to Paragraph 13. If it is judicially determined that the monetary limits of insurance required hereunder or of the indemnities voluntarily assumed under Subparagraph 14.9 (which Contractor and Operator hereby agree will be supported by available liability insurance, under which the insurer has no right of subrogation against the indemnities, in part or whole) exceed the maximum limits permitted under applicable law, it is agreed that said insurance requirements or indemnities shall automatically be amended to conform to the maximum monetary limits permitted under such law.

14.10 Liability for Wild Well: Operator shall be liable for the cost of regaining control of any wild well, as well as for cost of removal of any debris and cost of property remediation and restoration, and Operator shall release, protect, defend and indemnify Contractor and its suppliers, contractors and subcontractors of any tier from and against any liability for such cost,

14.11 Pollution or Contamination: Notwithstanding anything to the contrary contained herein, except the provisions of Paragraphs 10 and 12, it is understood and agreed by and between Contractor and Operator that the responsibility for pollution or contamination shall be as follows:

(a) Contractor shall assume all responsibility for, including control and removal of, and shall protect, defend and indemnify Operator / from and against all claims, demands and causes of action of every kind and character arising from pollution or contamination, which originates above the surface of the land or water from spills of fuels, lubricants, motor oils, pipe dope, paints, solvents, ballast, bilge and garbage, except unavoidable pollution from reserve pits, wholly in Contractor’s possession and control and directly associated with Contractor’s equipment and facilities.

(b) Operator shall assume all responsibility for, including control and removal of, and shall protect, defend and indemnify Contractor and its suppliers, contractors and subcontractors of any tier from and against all claims, demands, and causes of action of every kind and character arising directly or indirectly from all other pollution or contamination which may occur during the conduct of operations hereunder, including, but not limited to, that which may result from fire, blowout, catering, seepage or any other uncontrolled flow of oil, gas, water or other substance, as well as the use or disposition of all drilling fluids, including, but not limited to, oil emulsion, oil base or chemically treated drilling fluids, contaminated cuttings or cavings, lost circulation and fish recovery materials and fluids. Operator shall release Contractor and its suppliers, contractors and subcontractors of any tier of any liability for the foregoing

(c) In the event a third party commits an act or omission which results in pollution or contamination for which either Contractor or Operator, for whom such party is performing work, is held to be legally liable, the responsibility therefor shall be considered, as between Contractor and Operator, to be the same as if the party for whom the work was performed had performed the same and all of the obligations respecting protection, defense, indemnity and limitation of responsibility and liability, as set forth in (a) and (b) above, shall be specifically applied.

14.12 Consequential Damages: Subject to and without affecting the provisions of this Contract regarding the payment rights and obligations of the parties or the risk of loss, release and indemnity rights and obligations of the parties, each party shall at all times be responsible for and hold harmless and indemnify the other party from and against its own special, indirect or consequential damages, and the parties agree that special, indirect or consequential damages shall be deemed to include, without limitation, the following: loss of profit or revenue; costs and expenses resulting from business interruptions; punitive and exemplary damages; loss of or delay in production; loss of or damage to the leasehold; loss of or delay in drilling or operating rights; cost of or loss of use of property, equipment, materials and services, including without limitation those provided by contractors or subcontractors of every tier or by third parties. Operator shall at all times be responsible for and hold harmless and indemnify Contractor and its suppliers, contractors and subcontractors of any tier from and against all claims, demands and causes of action of every kind and character in connection with such special, indirect or consequential damages suffered by Operator’s co-owners, co-venturers, co-lessees, farmors, farmees, partners and joint owners.

14.13 Indemnity Obligation: Except as otherwise expressly limited in this Contract, it is the intent of parties hereto that all releases, indemnity obligations and/or liabilities assumed by such parties under terms of this Contract, including, without limitation, Subparagraphs 4.9 and 6.3(c), Paragraphs 10 and 12, and Subparagraphs 14.1 through 14.12 hereof, be without limit and without regard to the cause or causes thereof, including, but not limited to, pre-existing conditions, defect or ruin of premises or equipment, strict liability, regulatory or statutory liability, products liability, breach of representation or warranty (express or implied), breach of duty (whether statutory, contractual or otherwise) any theory of tort, breach of contract, fault, the negligence of any degree or character (regardless of whether such negligence is sole, joint or concurrent, active or passive) of any party or parties, including the party seeking the benefit of the release, indemnity or assumption of liability, or any other theory of legal liability. Provided, however, notwithstanding anything to the contrary in this Contract, in no event shall either party have any obligation to pay, reimburse, defend or indemnify the other from or for the consequences of the other’s gross negligence or willful misconduct. The indemnities, and releases and assumptions of liability extended by the parties hereto under the provisions of Subparagraphs 4.9 and 6.3 and Paragraphs 10, 12, and 14 shall inure to the benefit of such parties, their co-venturers, co-lessees, joint owners, their parent, holding and affiliated companies and the officers, directors, stockholders, partners, managers, representatives, employees, consultants, agents, servants and insurers of each. Except as otherwise provided herein, such indemnification and assumptions of liability shall not be deemed to create any rights to indemnification in any person or entity not a party to this Contract, either as a third party beneficiary or by reason of any agreement of indemnity between one of the parties hereto and another person or entity not a party to this Contract.

15.

AUDIT

If any payment provided for hereunder is made on the basis of Contractor’s costs, Operator shall have the right to audit Contractor’s books and records relating to such costs. Contractor agrees to maintain such books and records for a period of two (2) years from the last day of the year in which the termination or expiration of this contract occurred, and to make such books and records readily available to Operator at any reasonable time or times within the period.

16.

NO WAIVER EXCEPT IN WRITING

It is fully understood and agreed that none of the requirements of this Contract shall be considered as waived by either party unless the same is done in writing, and then only by the persons executing this Contract or other duly authorized agent or representative of the party.

17.

FORCE MAJEURE

Except as provided in this Paragraph 17, and without prejudice to the risk of loss, release and indemnity obligations under this Contract, each party to this Contract shall be excused from complying with the terms of this Contract, except for the payment of monies when due, if and for so long as such compliance is hindered or prevented by a Force Majeure Event. As used in this Contract, “Force Majeure Event” includes: acts of God, action of the elements, wars (declared or undeclared), insurrection, revolution, rebellions or civil strife, piracy, civil war or hostile action, terrorist acts, riots, strikes, differences with workmen, acts of public enemies, federal or state laws, rules, regulations dispositions or orders of any governmental authorities having jurisdiction in the premises or of any other group, organization or informal association (whether or not formally recognized as a government), inability to procure material, equipment, fuel or necessary labor in the open market, acute and unusual labor or material, equipment or fuel shortages, or any other causes (except financial) beyond the control of either party. Neither Operator nor Contractor shall be required against its will to adjust any labor or similar disputes except in accordance with applicable law. In the event that either party hereto is rendered unable, wholly or in part, by any of these causes to carry out its obligation under this Contract, it is agreed that such party shall give notice and details of Force Majeure in writing to the other party as promptly as possible after its occurrence. In such cases, the obligations of the party giving the notice shall be suspended during the continuance of any inability so caused except that Operator shall be obligated to pay to Contractor the Force Majeure Rate provided for in Subparagraph 4.8 above for events of force majeure noticed by Operator and affecting Operator’s ability to carry out its obligations under this Contract, but not otherwise.

18.

GOVERNING LAW:

This Contract shall be construed, governed, interpreted, enforced and litigated, and the relations between the parties determined in accordance with the laws of New Mexico without regard to any conflict of laws provisions or principles, whether statutory or common law, which would have the effect of applying the law of another state or jurisdiction..

19.

INFORMATION CONFIDENTIAL:

Information obtained by Contractor in the conduct of drilling operations under this Contract, including, but not limited to, depth, formations penetrated, the results of coring, testing and surveying, shall be considered confidential and shall not be divulged by Contractor or its employees, to any person, firm, or corporation other than Operator’s designated representatives.

20.

SUBCONTRACTS

Operator may employ other contractors to perform any of the operations or services to be provided or performed by it according to Exhibit ”A”.

21.

ATTORNEY’S FEES

If this Contract is placed in the hands of an attorney for collection of any sums due hereunder, or suit is brought on same, or sums due hereunder are collected through bankruptcy or arbitration proceedings, then the prevailing party shall be entitled to recover reasonable attorney’s fees and costs. Provided, however, that the determination of which party is the prevailing party shall be determined from the totality of the circumstances (including the amount of the claim relative to the amount of any award) and the prevailing party may or may not be the party in whose favor judgment was entered.

22.

CLAIMS AND LIENS

Contractor agrees to pay all valid claims for labor, material, services, and supplies to be furnished by Contractor hereunder, and agrees to allow no lien by such third parties to be fixed upon the lease, the well, or other property of the Operator or the land upon which said well is located.

23.

ASSIGNMENT:

Eeither party may assign this Contract, and prompt notice of any such intent to assign shall be given to the other party. In the event of such assignment, the assigning party shall remain liable to the other party as a guarantor of the performance by the assignee of the terms of this Contract. If any assignment is made that materially alters Contractor’s financial burden, Contractor’s compensation shall be adjusted to give effect to any increase or decrease in Contractor’s operating costs. Provided further, with the mutual consent of Operator and Contractor, the rig the subject of this Contract may, during the term of this Contract, be temporarily released from this Contract to be used to drill for third parties, without affecting or extending the term of this Contract. If and to the extent such occurs, Operator shall have no obligations from rig release of the prior well drilled for Operator until the rig arrives at the wellsite for the next well to be drilled for Operator and rig up has begun.

24.

NOTICES AND PLACE OF PAYMENT:

All notices to be given with respect to this Contract unless otherwise provided for shall be given to the Contractor and to the Operator respectively at the address hereinabove shown. All sums payable hereunder to Contractor shall be payable at its address hereinabove shown unless otherwise specified herein.

25.

CONTINUING OBLIGATIONS:

Notwithstanding the termination of this Contract, the parties shall continue to be bound by the provisions of this Contract that reasonably require some action or forbearance after such termination.

26.

ENTIRE AGREEMENT:

This Contract constitutes the full understanding of the parties, and a complete and exclusive statement of the terms of their agreement, and shall exclusively control and govern all work performed hereunder. All representations, offers, and undertakings of the parties made prior to the effective date hereof, whether oral or in writing, are merged herein, and no other contracts, agreements or work orders, executed prior to the execution of this Contract, shall in any way modify, amend, alter or change any of the terms or conditions set out herein.

27.

SPECIAL PROVISIONS:

27.1 Operator agrees to furnish all drillpipe to be used in the lateral and horizontal sections of the hole for wells drilled as horizontal wells.Contractor will furnish all drillpipe to be used in tension and in the vertical section of the hole. At no time will Contractor’s drill pipe be used in compression.

27.2 Notwithstanding anything to the contrary contained herein, it is specifically understood that this shall be a “take or pay” contract wherein Operator shall pay the full Operating Day Rate amount for each day during the contract term. The only reduction in such amount shall be for:

	A)		Repair time in excess of the amount permitted to Contractor or in paragraph 4.5

	B)		Mobilization and Moving Rate paid by Operator as per paragraph 4.1 and 4.3

	C)		Force Majeure Rate paid by Operator as per paragraph 4.7 which shall not exceed a cumulative 30 days combined during the term of this Contract.

Provided, however, Contractor shall have a duty to mitigate damages by reasonably attempting to secure replacement contracts for the subject rig if it is released by Operator or if the Contract is terminated by Contractor prior to the expiration of the term of this Contract, and Operator shall be entitled to 75% credit for any revenues received by Contractor incident thereto. Even if finally released by Operator, Operator, with 20 days notice, may withdraw its release and reactivate this Contract for the remainder of its term to the extent the rig has not been committed to a third party in mitigation of Operator’s damages.

27.3 Contractor shall be responsible to schedule all equipment and services required for rigging down, moving and rigging up. Operator shall be responsible for all mobilization costs to move and rig up the rig and all ancillary equipment on the initial location and for all such moves from location to location during the term of the contract.

27.4 It is anticipated that Operator will utilize the rig for drilling wells in Chavez, Eddy or Lea Counties of New Mexico. Operator may specify that the rig be used in other locations. Should Operator move the rig out of Chavez, Eddy or Lea Counties, New Mexico, all effective Daywork Rates will be increased by an additional $2000.00 per day.

28. ACCEPTANCE OF CONTRACT:

The foregoing Contract, including the provisions relating to indemnity, release of liability and allocation of risk of Subparagraphs 4.9 and 6.3(c), Paragraphs 10 and 12, and Subparagraphs 14.1 through 14.12, is acknowledged, agreed to and accepted by Operator this day of , 2006.


OPERATOR:	COG OPERATING LLC

	By:	/s/ E. Joseph Wright
		E. Joseph Wright, Vice President

The foregoing Contract, including the provisions relating to indemnity, release of liability and allocation of risk of Subparagraphs 4.9, 6.3(c), Paragraphs 10 and 12, and Subparagraphs 14.1 through 14.12, is acknowledged, agreed to and accepted by Contractor this day of , 2006, with the understanding that it will not be binding upon Operator until Operator has noted its acceptance, and with the further understanding that unless said Contract is executed by Operator within days of the above date Contractor shall be in no manner bound by its signature thereto.


CONTRACTOR:	SILVER OAK DRILLING LLC

	By:	/s/ John A. Knorr
		John A. Knorr, President