Exploration Agreement
EXPLORATION AGREEMENT
This Exploration Agreement (the “Agreement”) is entered into on April 8, 2011 (the “Effective Date”) between Longshot Oil, LLC, (“Longshot”) and Union Town Energy Inc. (“Union Town”). Union Town and Longshot may be referred to collectively as the “Parties” or either of them individually as the “Party”.
The Parties are interested in conducting joint exploration operations, including the drilling of exploratory or development wells, for the discovery of and for the production of oil and/or gas in an area in Pondera County, Montana.
In consideration of the premises and the mutual covenants and agreements set out in this Agreement, the Parties agree as follows:
I. Definitions and Exhibits
“Area of Mutual Interest” or “AMI” means the area in Pondera County, Montana, described as follows: Township 28 North, Range 5 West, all of Sections 4 through 9, 16 through 21, 28 through 33;
“Assignment Documents” mean documents for individual assignments for each approximately 80-acre parcels of land within the Leases in the form as set out in the Exhibit “E” to this Agreement attached hereto;
“Contract Properties” means the certain part of the land under the Leases owned by Longshot within the AMI, on which the Parties are currently drilling and assignment of which to Union Town has been executed by Longshot and such assignment was either:
- Completed and Union Town is currently in possession of the Assignment Documents;
or
- The Assignment Documents are being held by the Escrow Agent with the intention to be released to Union Town once terms and conditions of this Agreement and the Escrow Agreement are satisfied;
“Escrow Agent” means Holmes & Company, a law firm with its offices at 1880 – 1066 West Hastings Street, Vancouver British Columbia, Canada;
“Escrow Agreement” means an agreement between Longshot, Union Town and the Escrow Agent;
“Leases” mean the leases owned by Longshot within the AMI, which in more detail are set out in the Exhibit “D” to this Agreement attached hereto;
“Payout” means the point in time when Union Town has received, from the production of hydrocarbons from the applicable well, revenues (less all royalties, production and severance taxes) equal to the costs incurred to drill, complete, equip and operate the well, together with, in the case of the initial test well, the amount of $300,000.00 paid in accordance with the section III.1.
“Test Well” means the first well the drilling of which is commenced during the term of this Agreement at a location on land which, on the date of the commencement of the drilling of the well, constitutes a part of the Contract Properties.
Other Definitions
Any words or expressions define otherwise in this Agreement including the exhibits shall have the meanings respectively assigned to them notwithstanding that such definition does not appear in this section. When used in the Exhibits annexed hereto, terms defined in this Agreement shall have the same meaning unless the Exhibit expressly otherwise define such terms. In case of any other inconsistency between the terms of this Agreement and the Exhibits annexed hereto, the terms of this Agreement shall prevail.
Exhibits
| “A”: | Operating Agreement |
| “B”: | Title memorandum |
| “C”: | Index map of acreage and AMI |
| “D”: | Lease schedule |
| “E”: | Assignment of the first three drill site locations |
| “F”: | Drilling title opinion – to be provided to Union Town by Longshot after the Effective Date but before release of the Drilling Funds to the Operator under section III.4 |
II. Interested Parties
Longshot represents, without warranty of title, that it owns leases within the AMI as set out in Exhibit “D”, the Leases.
| 1. | Subject to the other terms and conditions of this Agreement, Longshot and Union Town shall appoint a third party to be an operator (the “Operator”). The Parties shall enter into an operating agreement (the “Operating Agreement”) as set out in the Exhibit "A" naming the third party as the Operator and Union Town as a non-operator. This Operating Agreement shall apply to any well drilled under the terms of this Agreement on the Contract Properties. |
| 2. | Prior to Longshot expending any funds for drilling operations that has been mutually approved by the Parties; the Operator shall prepare and provide to the Parties an invoice for the funds estimated to be necessary for the drilling operations (the “Invoice”). The amount estimated as of the Effective Date is $800,000.00. The Invoice shall be dealt with as set out in section III.4. |
III. Initial Test Well
On or before May 30, 2011, Subject to paragraph 3 below, Longshot shall coordinate the commencement of the drilling of the Test Well, the New Miami #42-20H, in search of oil and/or gas at the following location/spacing unit:
Township 28 North, Range 5 West
Section 20: S2NE (80 Acre Unit)
The Operator shall drill the well with due diligence to an estimated depth of TVD 2900 feet and a TMD of 5000 feet, or depth sufficient to test the Sun River Dolomite (Madison) formation, subject to the following terms and conditions:
| 1. | Within 5 business days of the execution of this Agreement Union Town will pay into the trust account of the Holmes & Company the sum of $300,000.00 as expense reimbursement in regard to1480 gross and 1362.4 net acres currently leased to Longshot under the Leases. It is agreed by the Parties that these funds shall be dispersed to Longshot forthwith upon receipt by Holmes & Company instructions of Union Town in this regard in the form acceptable to Holmes & Company. | |
| 2. | Longshot will deliver to Union Town a 75% net revenue interest earned on the Contract Properties. | |
| 3. | Union Town will pay 100% of the costs to drill the Test Well and subsequent wells, which will entitle Union Town to 85% working interest before the Payout, and a 70% working interest after the Payout. | |
| 4. | On or before April 15, 2011 the Invoice in the amount of $800,000 shall be paid by Union Town to be applied towards drilling to casing point the Test Well through the terminus of the horizontal leg (the “Drilling Funds”). Payment of the Drilling Funds shall be made by Union Town into trust account of Holmes & Company and it is agreed by the Parties that the whole amount of the Drilling Funds shall be released by Holmes & Company to the Operator upon the following events occurring: | |
| (i) | Longshot shall deliver Exhibit F, Drilling title opinion, to Union Town; | |
| (ii) | Union Town shall provide to Holmes & Company in the form acceptable to Holmes & Company the instructions to release the Drilling Funds to the Operator; and | |
| (iii) | Holmes & Company shall receive the Operator’s request for the Drilling Funds. | |
All subsequent wells will be invoiced to Union Town in the amount of $800,000 to be paid prior to construction of subsequent well locations. If during the course of drilling, Longshot determines the well cost is projected to exceed $800,000.00 for drilling through the terminus of the horizontal leg, Longshot will notify Union Town of the additional amounts necessary. Longshot may notify Union Town at any time after costs have exceeded $600,000.00 of the determination that costs may exceed $800,000.00. Upon notice by Longshot, Union Town shall then be entitled to 36 hours in which to elect to continue operations by paying the additional amounts, or elect to terminate operations by paying 100% of the costs to plug and abandon the well. Notice to be made by e-mail or fax. If no response is received in the 36-hour time frame Union Town shall forfeit all rights to the drill site and all 80-acre legal locations adjacent and diagonally offsetting the drilling well spacing unit.
| 5 | At the Payout of the Test Well and subsequent wells, Longshot will receive from Union Town an additional 15% working interest for a total working interest after the Payout of 30% on a well by well basis. Thus, interests of Union Town – Longshot shall be as follows: before the Payout: 85-15; and after the Payout 70-30. | |
| 6 | All assignments by Longshot of the parcels under the Leases under this Agreement shall be free and clear of any title defects, encumbrances or burdens, including overriding royalty interests by, through or under the assignor that would reduce the net revenue interest in the leases to less than 75%, in each case proportionately reduced to the Union Town's working interest, but otherwise shall be made without warranty of title, either express or implied. Each assignment shall be in the form attached hereto as Exhibit “E”. | |
| 7 | Upon completion of each well through the casing point, either as wells capable of production or as dry holes properly plugged and abandoned, Union Town shall earn an assignment of the parcel upon which said well was drilled. Three initial assignments of the first 80-acre spacing units and any subsequent assignments by Longshot to Union Town upon Union Town’s request and subject to this Agreement shall be made as follows: | |
| (i) | The Assignment Documents in the form substantially the same as the first three assignments attached as the Exhibit “E” to this Agreement shall be executed by Longshot (prior to Union Town's payment of the Drilling Funds as set out in section III.4, and in the case of the three initial assignments after Union Town's payment of $300,000 as set out in section III.1) and deposited under the Escrow Agreement with the Escrow Agent. | |
| (ii) | The Assignment Documents shall be released by the Escrow Agent in accordance with the terms and conditions of this Agreement and the Escrow Agreement. | |
| (iii) | Union Town shall record assignments only after the Assignment Documents are released to Union Town by the Escrow Agent. | |
| 8 | If Longshot fails to initiate the drilling of the Test Well as of July 31, 2011, Union Town may require Longshot to repay the initial payment of $300,000.00 or grant to Longshot an extension in time to initiate the drilling operations. | |
| 9 | If Union Town fails to fund the Test Well as per paragraph III.4 above, Union Town shall forfeit any and all funds previously paid to Longshot in accordance with section III.1 above and this Agreement shall terminate. Longshot may grant Union Town an extension if requested by Union Town. |
IV. Subsequent Operations
The parties agree that all subsequent wells drilled on the Contract Properties shall be subject to the terms of this Agreement and the terms of the Operating Agreement attached hereto as Exhibit “A”.
V. Properties and Interest Subject to this Agreement
| 1. | Properties subject to this Agreement are identified in Exhibit “C” and Exhibit “D” attached hereto. | |
| 2. | If during the term of this Agreement either Party purchases or in any other manner acquires oil, gas, and/or mineral lease or leases or mineral interests or any interest on, in, or covering or affecting any of the lands located within the AMI (the “Newly Acquired Property”), such property shall be subject to this Agreement. | |
| The Party purchasing or otherwise acquiring the Newly Acquired Property (the “Acquiring Party”) shall, within thirty (30) days after the date of the purchase or acquisition, deliver to the other Party a written notice setting forth the details concerning the purchase or acquisition, including the amount of consideration paid or agreed to be paid for such Newly Acquired Property. This notice should include all available title information concerning the Newly Acquired Property. The Party notified shall have the option, which may be exercised only by written notice delivered to the Acquiring Party within twenty (20) days after receipt of the Acquiring Party notice, to acquire an interest in the Newly Acquired Property. On exercising the option, the notified Party shall, within thirty (30) days, pay to the Acquiring Party the proportionate share of the cost of the purchase or acquisition of the Newly Acquired Property, which property shall then become a part of the Contract Properties. The cost of Newly Acquired Property shall include all delay rentals, which may become due under the terms of any lease acquired. | ||
| If the option is not exercised within the time and in the manner provided for above, the notified Party shall have no interest in the Newly Acquired Property with respect to which the option was not exercised and that property shall no longer be subject to the terms of this Agreement. | ||
| For greater certainty: | ||
| (i) | If the Newly Acquired Property is acquired by Longshot, Union Town in order to exercise the option and add that Newly Acquired Property to the Contract Properties shall pay 100% of the cost of the acquisition of such Newly Acquired Property. If the Newly Acquired Property is acquired by Union Town, it is automatically added to the Contact Properties without any payment by Longshot; | |
| (ii) | If the Acquiring Party is Longshot, it shall execute an assignment of the interest in the Newly Acquired Property on which the option has been exercised to the Escrow Agent to be dealt with as set out in section III.7. If the Newly Acquired Property is acquired by Union Town, it is automatically added to the Contact Properties without any assignment to Longshot. |
VI. Production in Kind
Each Party shall have the right and option for taking any part of production “in kind” to separately market its share of production to which it may be entitled or may become entitled to take in kind or separately market under the terms of this Agreement. The right and option to taking in kind may be exercised at any time and from time to time so long as there is production from the Contract Area.
VII. Term
This Agreement shall be for a term (the “Term”) commencing on the Effective Date and shall continue in force, except as otherwise provided, for a period of longer of:
| (i) | 2 years; or | |
| (ii) | The date, on which all operations then being conducted by the terms of this Agreement have been completed and all obligations of the Parties provided for in this Agreement have been fully discharged. |
The Term may be extended for one year periods by either Union Town or Longshot proposing and drilling a minimum of one well per year.
VIII. Notices
Unless otherwise provided, all notices and communications to be given under the terms of this Agreement shall be delivered by U.S. Mail, or facsimile, addressed to the respective Parties as follows:
| To Longshot Oil, LLC | |
| 1011 South Jefferson | |
| Spokane, WA 99204, USA | |
| Attn: Glen Landry | |
| ***@*** | |
| To Union Town Energy Inc. | |
| 1859 Whitney Mesa Dr., | |
| Henderson, NV 89014, USA |
| Attn: Terry Fields | |
| ***@*** |
Unless otherwise specified in the notice, the date and time of a notice shall be the date and time at which the written E-mailed or faxed notice is delivered to the Party to whom it is addressed. Each Party may change its address by notice to the other Party. No transfer of any interest pursuant to the terms of this Agreement shall be effective until the transferor or transferee (after complying with all other requirements of this Agreement) notify all other Parties of the address and designated representative of the transferee.
X. Laws and Regulations
The terms of this Agreement and all operations conducted under it shall be subject to all valid laws, rules, regulations, and orders of any regulatory body having jurisdiction, and be governed by the laws of the State of Montana.
XI. Assignability
This Agreement shall be binding on the Parties and their respective heirs, successors and assigns. All rights created by this Agreement are freely assignable at anytime, but the Party assigning an interest shall give written notice to the other Party to this Agreement prior to the time of the assignment.
XII. Force Majeure
The obligations of each Party, except for the payment of money, shall be suspended while, but only for so long as, a Party is prevented from complying with an obligation in whole or in part, by strikes, lockouts, acts of God, unavoidable accidents, uncontrollable delays in transportation, inability to obtain necessary materials in open markets, inadequate facilities for the transportation of materials, or as a result of any order, requisition, or necessity of the government, or other matters beyond the reasonable control of a Party, whether similar to the matters specifically enumerated above or not; provided, however, that performance shall be resumed within a reasonable time after the cause of force majeure has been removed; and provided further that no Party shall be required, against its will, to settle any labor dispute.
XIII. Captions and Titles
The captions and titles used in this Agreement shall not be construed as adding meaning to the subject matter of this Agreement, but are used only for reference and convenience.
XV. Miscellaneous
| 1. | In the event either Party (the “Selling Party”) should decide to dispose of all or any part of its interests in the Contract Properties or any renewals or extensions thereof (the “Transferable Interest”), the Selling Party shall first notify the other Party (the “Other Party”) and the Other Party shall have the right to acquire the Transferable Interest on the terms and conditions offered by the Selling Party (the “Offer”). The Other Party shall within 60 days notify the Selling Party whether it accepts or declines the Offer. In the event the Other Party declines the Offer or does not notify the Selling Party on its decision within 60 day period, the Selling Party shall be free to sell the Transferrable Interest to 3rd parties, provided the terms and conditions of the sale are the same as those of the Offer. If the terms and conditions differ from the ones of the Offer, this section applies again and the Selling Party shall make such new offer to the Other Party first. |
| In the event the Other Party accepts the Offer, the closing of the purchase pursuant to the Offer shall be within 30 days of the acceptance of the Offer by the Other Party. | |
| This section XV.1 shall remain in force and effect for 2 years after the Term of this Agreement. | |
| 2. | This Agreement shall inure to the benefit of the Parties and their respective heirs, devisees, legal representatives, successors, and assigns. |
| 3. | This Agreement may be executed in any number of counterparts, each of which shall be considered an original for all purposes, and all counterparts together shall be deemed one and the same Agreement. |
| 4. | All the monetary amounts shall be in the currency of the United States unless otherwise stated. |
This Agreement is signed by each Party as of the date opposite their respective signatures, and when signed by Parties shall be deemed effective as of the stated Effective Date.
| Longshot Oil, LLC | |
| Union Town Energy Inc. |
