Burlington Resources Oil & Gas Company, LP v. Petromax Operating Co., Inc., Woodbine Acquisition, LLC, N/K/A MD America Energy, LLC, Petro Texas, LLC, CH4 Energy II, LLC, and Texcal Energy South Texas, LP

Opinion

ACCEPTED

06-15-00044-CV

SIXTH COURT OF APPEALS

TEXARKANA, TEXAS 10/20/2015 7:43:29 PM

DEBBIE AUTREY

CLERK

No. 06-15-00044-CV

IN THE SIXTH DISTRICT COURT OF APPEALSFILED IN 6th COURT OF APPEALS

TEXARKANA, TEXAS 10/21/2015 8:59:00 AM

Burlington Resources Oil & Gas Company LP, DEBBIE AUTREY

Clerk

Appellant,

v.

PetroMax Operating Co., Inc., Woodbine Acquisition, LLC, Petro Texas, LLC, Ch4 Energy II, LLC, and TexCal Energy South Texas L.P.,

Appellees.

On Appeal from the 12th Judicial District Court Madison County, Texas, Cause No. 12-13130-012-10

BRIEF FOR APPELLANT

Fred Hagans Kirsten M. Castañeda Kendall C. Montgomery Roger D. Townsend HAGANS BURDINE MONTGOMERY ALEXANDER DUBOSE JEFFERSON & RUSTAY, P.C. & TOWNSEND LLP 3200 Travis, Fourth Floor 1844 Harvard Street Houston, Texas 77006 Houston, Texas 77008

Vincent L. Marable III John R. Mercy PAUL WEBB, P.C. Mercy Carter Tidwell, L.L.P. 221 N. Houston Street 1724 Galleria Oaks Drive Wharton, Texas 77488 Texarkana, Texas 75503

ATTORNEYS FOR APPELLANT

Oral Argument Requested

IDENTITY OF PARTIES AND COUNSEL

Appellant: Kirsten M. Castañeda State Bar No. 00792401

Burlington Resources Oil & kcastaneda@adjtlaw.com Gas Company LP ALEXANDER DUBOSE JEFFERSON & TOWNSEND LLP 4925 Greenville Avenue, Suite 510 Dallas, Texas 75206

Roger D. Townsend State Bar No. 20167600 rtownsend@adjtlaw.com ALEXANDER DUBOSE JEFFERSON & TOWNSEND LLP 1844 Harvard Street Houston, Texas 77008

John R. Mercy State Bar No. 13947200 jmercy@texarkanalawyers.com MERCY CARTER TIDWELL, L.L.P. 1724 Galleria Oaks Drive Texarkana, Texas 75503

Appellate counsel

Fred Hagans State Bar No. 08685500 fhagans@hagans-law.com Kendall C. Montgomery State Bar No. 14293900 kmontgomery@hagans-law.com HAGANS BURDINE MONTGOMERY & RUSTAY, P.C. 3200 Travis, Fourth Floor Houston, Texas 77006

ii

Vincent L. Marable III State Bar No. 12961600 trippmarable@sbcglobal.net PAUL WEBB, P.C. 221 N. Houston Street Wharton, Texas 77488

Trial and appellate counsel

Bennie D. Rush State Bar No. 17400425 1300 11th Street, Suite 300 Huntsville, Texas 77340-3857 Trial counsel

Appellee Brad D’Amico PetroMax Operating Co., Inc. State Bar No. 00783923 bd@canteyhanger.com CANTEY HANGER LLP 1999 Bryan Street, Suite 3300 Dallas, Texas 75201

David J. Beck State Bar No. 00000070 dbeck@beckredden.com Thomas E. Ganucheau State Bar No. 00784104 tganucheau@beckredden.com BECK REDDEN LLP 1221 McKinney Street, Suite 4500 Houston, Texas 77010-2010 Trial and appellate counsel

David Hammit State Bar No. 08857660 DAVID HAMMIT, LLC 109 South Madison Street Madisonville, Texas 77864 Trial counsel

iii

Appellees David J. Beck Petro Texas, LLC, State Bar No. 00000070 Ch4 Energy II, LLC dbeck@beckredden.com Thomas E. Ganucheau State Bar No. 00784104 tganucheau@beckredden.com BECK REDDEN LLP 1221 McKinney Street, Suite 4500 Houston, Texas 77010-2010 Trial and appellate counsel

John R. Bankhead State Bar No. 01676600 Attorney at Law 110 W. Cottonwood Madisonville, Texas 77864 Trial counsel

Appellee Greg W. Curry Woodbine Acquisition, LLC State Bar No. 05270300 greg.curry@tklaw.com Gregory D. Binns State Bar No. 24027148 greg.binns@tklaw.com Richard B. Phillips, Jr. State Bar No. 24032833 rich.phillips@tklaw.com THOMPSON & KNIGHT LLP 1722 Routh Street, Suite 1500 Dallas, Texas 75201

Trial and appellate counsel

Kevin R. Knight State Bar No. 11601400 LAW OFFICE OF ROGER KNIGHT, JR. P.O. Box 925 Madisonville, Texas 77864 Trial counsel

iv

Appellee Jesse R. Pierce TexCal Energy South Texas State Bar No. 15995400 L.P. jpierce@pierceoneill.com Brian K. Tully State Bar No. 24039217 btully@pierceoneill.com PIERCE & O’NEILL, LLP 4203 Montrose Blvd. Houston, Texas 77006

Trial and appellate counsel

v

TABLE OF CONTENTS

Page

Identity of Parties and Counsel ................................................................................ ii Table of Contents .....................................................................................................vi Index of Authorities .................................................................................................ix Statement of the Case...............................................................................................xi Issues Presented ..................................................................................................... xii 1. Burlington and the PetroMax Defendants disagree about the proper interpretation of an oil and gas assignment, which (in turn) determines whether certain leases are jointly owned and continue in effect an area of mutual interest (“AMI”) under an earlier letter agreement. a. Did the trial court err in rejecting Burlington’s interpretation as a matter of law, rather than holding the assignment to be ambiguous?

b. Alternatively, did the trial court err in concluding that the PetroMax Defendants’ interpretation is reasonable, rather than enforcing Burlington’s interpretation as a matter of law?

2. Burlington also moved for summary judgment on its right to acquire 25% of oil and gas leases or mineral rights acquired by the PetroMax Defendants in the AMI, without any reduction or limitation based on the scope of Burlington’s joint ownership of leases/rights within the AMI. Did the trial court err in denying Burlington summary judgment on this issue?

3. Did the trial court err in granting the PetroMax Defendants’ summary judgment motion and denying Burlington’s summary judgment motion?

Introduction ...............................................................................................................1 Summary of the Dispute ...........................................................................................2 Statement of Facts .....................................................................................................4

vi

TABLE OF CONTENTS (CONT’D)

Page

I. The 1975 Letter Agreement created an Area of Mutual Interest intended to endure as long as any lease in the AMI was jointly owned. ..................................................................................................4 II. Upon succeeding Buttes as a party to the 1975 Letter Agreement, the PetroMax Defendants performed those obligations until 2012. ..........................................................................6 III. The PetroMax Defendants performed under the 1975 Letter Agreement with knowledge of a subsequent 1994 assignment. .......10 A. Southland listed four wells for sale at an auction, as reflected in the resulting assignment. ......................................10 B. The PetroMax Defendants obtained two title opinions, both of which interpreted the 1994 Assignment as conveying only Southland’s interest in the four wells.............12 IV. Regardless of its own experts’ title opinions, in 2012, the PetroMax Defendants abruptly disavowed their obligations. ............15 V. The trial court concluded the 1994 Assignment unambiguously conveyed not just the listed wells, but all of Southland’s ownership interest in the four leases. .................................................16 Summary of Argument ...........................................................................................17 Argument.................................................................................................................19 I. The interpretation of the 1994 Assignment as conveying only Southland’s interest in four wells—and not all of its interest in four entire leases—is reasonable. .......................................................19 A. As reflected in the 1994 Assignment, Southland auctioned its interest in four wells and expressly reserved other interests. ..........................................................................20 B. Burlington’s interpretation comports with the 1994 Assignment’s language and harmonizes its provisions. ..........23 C. Burlington’s interpretation also is consistent with the circumstances surrounding the 1994 Assignment. ..................26

vii

TABLE OF CONTENTS (CONT’D)

Page

II. If the PetroMax Defendants’ interpretation also were reasonable, the resulting ambiguity would preclude summary judgment, requiring remand. ..............................................................28 III. However, Burlington offered the only reasonable interpretation of the applicable agreements, requiring rendition in Burlington’s favor. .............................................................................30 A. The 1994 Assignment conveys only Southland’s interest in the four enumerated wells. ...................................................30 B. In addition, the 1975 Letter Agreement does not provide for reduction of Burlington’s rights proportionate to the scope of its joint ownership. ....................................................34 Conclusion and Prayer ............................................................................................36 Certificate of Compliance .......................................................................................38 Certificate of Service ..............................................................................................39 Appendix 1975 Letter Agreement (CR:589-625) .......................................... Tab 1 1994 Assignment and Bill of Sale (CR:1029-34) ......................... Tab 2 Order Granting Defendants’ Motion for Summary Judgment on Title Issues (CR:1617).............................................................. Tab 3 Order Denying Burlington’s Motion for Partial Summary Judgment Seeking Various Declarations (CR:1618-19) .......... Tab 4 Order on Joint Motion to Sever and Abate (CR:1640-45) ............ Tab 5

viii

INDEX OF AUTHORITIES

Page(s)

Cases

Coker v. Coker, 650 S.W.2d 391 (Tex. 1983) ............................................................19, 28, 30, 32

Columbia Gas Transmission v. New Ulm Gas, Ltd., 940 S.W.2d 587 (Tex. 1996) ..............................................................................30 DeSantis v. Wackenhut Corp., 793 S.W.2d 670 (Tex. 1990) ..............................................................................36 Entergy Gulf States, Inc. v. Summers, 282 S.W.3d 433 (Tex. 2009) ..............................................................................29 Freeman v. Stephens Production Co., 171 S.W.3d 651 (Tex. App.—Corpus Christi 2005, pet. denied) ......................25 Houchins v. Devon Energy Prod. Co., L.P., No. 01-08-00273-CV, 2009 WL 3321406 (Tex. App.—Houston [1st Dist.] Oct. 15, 2009, pet. denied) (mem. op.) ..............................................30 Hous. Expl. Co. v. Wellington Underwriting Ags., Ltd., 352 S.W.3d 462 (Tex. 2011) ........................................................................20, 26 J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (Tex. 2003) ..............................................................................19

Luckel v. White, 819 S.W.2d 459 (Tex. 1991) ..............................................................................32

Neece v. A.A.A. Realty Co., 322 S.W.2d 597 (Tex. 1959) ..............................................................................35

Philipello v. Taylor, No. 10-11-00014-CV, 2012 WL 1435171 (Tex. App.—Waco Apr. 25, 2012, pet. denied) (mem. op.) .................................................................20, 27

R&P Enters. v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d 517 (Tex. 1980) ..............................................................................32

ix

INDEX OF AUTHORITIES (CONT’D)

Page(s)

Sun Oil Co. v. Madeley, 626 S.W.2d 726 (Tex. 1981) ..................................................................20, 27, 29

Treatises

Patrick H. Martin & Bruce M. Kramer, 2 WILLIAMS & MEYERS OIL & GAS LAW § 432 (4th ed. 2010) .............................................................................6

x

STATEMENT OF THE CASE

Nature of the Case: This is an oil and gas dispute. The parties disagree about whether Burlington jointly owns an interest in some leases in an area of mutual interest (“AMI”), as required to continue that AMI in effect. CR:445, 593, 1384. This question, in turn, is controlled by whether a 1994 Assignment: (1) conveyed an interest in four denominated wells while reserving other interests in four leases; or (2) conveyed all interests in four entire leases. CR:484-85; 1SCR:21-22.

Course of Appellant (Plaintiff Burlington) filed suit against Proceedings: Appellees (collectively, the “PetroMax Defendants”), asserting claims such as breach of contract and declaratory judgment regarding its ownership rights and the AMI’s continuing effect. CR:443-48. The PetroMax Defendants denied these claims, Appellee PetroMax asserted a counterclaim for suit to quiet title, and Appellee Woodbine asserted counterclaims for suit to try title, trespass-to-try title, and declaratory judgment. CR:365, 1378-87. Burlington and the PetroMax Defendants filed competing summary-judgment motions on Burlington’s ownership rights relating to the AMI. CR:484-85; 1SCR:21-22.

Trial Court The trial court denied Burlington’s summary-judgment Disposition: motion. CR:1618-19 (Apdx. Tab 4). The trial court granted the PetroMax Defendants’ summary judgment on title issues, ruling that:

(1) Burlington owns no interest in the AMI; and (2) the AMI provision has terminated.

CR:1617 (Apdx. Tab 3). On the parties’ joint motion, the trial court severed the remaining claims in order to render its summary judgment rulings final and abated the severed action pending this appeal. CR:1640-45 (Apdx. Tab 5).

xi

ISSUES PRESENTED

1. Burlington and the PetroMax Defendants disagree about the proper

interpretation of an oil and gas assignment, which (in turn) determines whether

certain leases are jointly owned and continue in effect an area of mutual interest

(“AMI”) under an earlier letter agreement.

a. Did the trial court err in rejecting Burlington’s interpretation as

a matter of law, rather than holding the assignment to be ambiguous?

b. Alternatively, did the trial court err in concluding that the

PetroMax Defendants’ interpretation is reasonable, rather than enforcing

Burlington’s interpretation as a matter of law?

2. Burlington also moved for summary judgment on its right to acquire

25% of oil and gas leases or mineral rights acquired by the PetroMax Defendants in

the AMI, without any reduction or limitation based on the scope of Burlington’s

joint ownership of leases/rights within the AMI. Did the trial court err in denying

Burlington summary judgment on this issue?

3. Did the trial court err in granting the PetroMax Defendants’ summary

judgment motion and denying Burlington’s summary judgment motion?

xii

INTRODUCTION

When parties disagree about the proper interpretation of a contract, a trial

court cannot reject a reasonable interpretation through summary judgment. If only

one interpretation is reasonable, the trial court may grant summary judgment

consistent with that interpretation. If more than one reasonable interpretation exists,

no summary judgment may be granted. There is not a third option by which a trial

court may choose between two reasonable contract interpretations—discarding one

and embracing another—as a matter of law.

Burlington and the PetroMax Defendants disagree on the proper interpretation

of an oil and gas assignment. Burlington’s interpretation is reasonable. It comports

with the circumstances surrounding the assignment, honors the assignment’s

language, and harmonizes all the assignment's provisions. Indeed, two noted oil and

gas lawyers hired by the PetroMax Defendants to offer title opinions---years before

this lawsuit was filed---reached the same interpretation.

Yet, when each side moved for summary judgment on its interpretation of the

Assignment, the trial court not only denied Burlington’s motion, but also granted the

PetroMax Defendants summary judgment consistent with their interpretation.

The claims on appeal should be remanded (if the competing interpretation is

reasonable) or judgment rendered in Burlington’s favor (if the competing

interpretation is not reasonable). Either way, the summary judgment cannot stand.

2

SUMMARY OF THE DISPUTE

The proper interpretation of the oil and gas assignment at issue will determine

whether Burlington currently has rights in an area of mutual interest (the “AMI”).

The AMI was created by agreement in 1975 (the “1975 Letter Agreement”), and it

continues in effect as long as the 1975 Letter Agreement’s parties jointly own any

leases within the AMI. It is undisputed that a lease called the Wilson Lease is located

in the AMI. Whether the AMI continues in effect turns on whether Burlington’s

ownership interest in the Wilson Lease was conveyed by a later assignment (the

“1994 Assignment”).

Burlington contends that it currently owns part of the Wilson Lease, which

means the AMI continues in effect. If the AMI continues in effect, the 1975 Letter

Agreement requires the PetroMax Defendants to offer Burlington a 25% working

interest in all leases and mineral rights they have acquired in the AMI.

The PetroMax Defendants contend that the ownership interests claimed by

Burlington were conveyed away by the 1994 Assignment, which would mean the

AMI terminated years ago. If the AMI no longer exists, Burlington has no right under

the 1975 Letter Agreement to acquire a 25% working interest in the leases/rights the

PetroMax Defendants have obtained in the AMI.

None of the parties in this case was an original party to the 1975 Letter

Agreement or the 1994 Assignment. Therefore, before delving into the relevant

3

facts, it is helpful to understand how everyone came to be involved in this dispute:

• The 1975 Letter Agreement creating the AMI, and its attached Joint

Operating Agreement, was between Aztec Oil & Gas Company and

Buttes Resources Company. CR:589-625 (Apdx. Tab 1).

• Aztec’s rights and obligations under the 1975 Letter Agreement passed

through company mergers to Southland Royalty and ultimately to

Burlington. CR:485 n.1, 626-30, 631-34, 635-36, 637.

 The 1994 Assignment, which was signed during the period that

Southland had succeeded to Aztec’s rights, is between Southland

and Samson Resources Company (which is not a party to this

lawsuit). CR:1029-34 (Apdx. Tab 2).

• Through a variety of agreements signed at various points in time, the

PetroMax Defendants acquired part of Buttes’ interests in the AMI,

subject to Buttes’ rights and obligations under the 1975 Letter

Agreement and 1975 JOA. CR:489-90, 638-46, 647-58, 659-60, 661-

62, 663-785.

 Most of the communications between the parties relevant to this

dispute occurred between Burlington and three of the PetroMax

Defendants: PetroMax Operating Co., Inc., Woodbine

Acquisition LLC, and TexCal Energy South Texas L.P.

4

STATEMENT OF FACTS

To understand the 1994 Assignment, one must first understand the interests to

which it applied. Hence, we present our Statement of Facts chronologically.

I. The 1975 Letter Agreement created an Area of Mutual Interest intended to endure as long as any lease in the AMI was jointly owned.

Forty years ago, Aztec and Buttes agreed to explore and develop oil and gas

leases together. See CR:589. Back in 1975, Buttes owned an undivided one-half

working interest in nine oil and gas leases. CR:589, 596. Through the 1975 Letter

Agreement, Buttes conveyed to Aztec an undivided 25% interest in the leases.

CR:589, 591-92. For future leases they might acquire, the parties established an Area

of Mutual Interest (“AMI”). CR:593.

If either party acquires a lease or mineral rights within the AMI, the 1975

Letter Agreement requires the acquiring party to offer the other party the same

proportionate interest as in the original nine leases. Id. Accordingly, if Aztec (now

Burlington) acquires leases in the AMI, Buttes (whose interests are now partially

held by the PetroMax Defendants) must be offered a 75% interest; likewise, if the

PetroMax Defendants acquire leases in the AMI, then Burlington must be offered a

25% interest. Id. To accept, the offeree must elect participation within 15 days and

reimburse the other for its share of the acquisition costs. Id.

A Joint Operating Agreement (the “1975 JOA”) governs operation and

participation in wells drilled on jointly-held leases within the AMI. To drill a well

5

on the jointly-held leases without all parties’ consent, the 1975 JOA requires the

party wishing to drill to notify the other parties in advance and give them a chance

to participate. CR:602-03 (§§11, 12).

The 1975 Letter Agreement provides that the AMI continues in effect as long

as jointly owned leases exist in the AMI. CR:593. After the first three years, the AMI

shrank to a boundary two miles outside the jointly-owned leases in the area at that

time. CR:593-94. As it turned out, at the end of three years, all nine original leases

remained jointly owned. CR:487; see also CR:74-75. So, the AMI continued in

effect with a boundary of two miles outside those leases. CR:594.

It is undisputed that five of the original leases no longer exist and that a sixth

lease is no longer jointly owned by Aztec’s successor-in-interest, Burlington.1 Three

of the original leases remain in the AMI: (1) the Wilson Lease; (2) the Gibbs Lease;

and (3) the Buchanan Lease. RR:7, 33. Burlington claims an ownership interest in

each of these leases, but for purposes of summary judgment, focused its attention on

the Wilson Lease. CR:436, 490-99; RR:7.

1 Four of the original leases terminated in 1979 at the end of their primary terms. CR:74. With regard to a fifth lease, all but one well was assigned to a third party in 1981, and the remaining well was assigned to another third party in 1997. CR:74, 77. A sixth lease expired upon cessation of production in 1999. CR:74.

6

II. Upon succeeding Buttes as a party to the 1975 Letter Agreement, the PetroMax Defendants performed those obligations until 2012.

The PetroMax Defendants succeeded to Buttes’ rights and obligations under

the 1975 Letter Agreement, and they initially acknowledged and performed those

obligations. In doing so, they repeatedly recognized Burlington’s continuing

ownership rights in the Wilson Lease.

For example, when defendant TexCal conveyed to defendant PetroMax

certain rights in the Wilson Lease in a 2009 farmout agreement, 2 they both

acknowledged Burlington’s rights to notice and participation in wells governed by

the 1975 JOA. CR:647, 651, 658-59. Indeed, TexCal limited PetroMax’s right to

earn under the farmout agreement to wells in which “Third Parties” did not

participate. CR:656. “Third Parties” included Burlington (denoted by the name of

its parent, ConocoPhillips). CR:656. And, in proposing the initial test well and

subsequent wells contemplated by the farmout agreement, PetroMax would be

required to give notices under the 1975 JOA. Id. 3

2 A “farmout agreement” is a contract to assign oil and gas lease rights in certain acreage upon the completion of drilling obligations and the performance of any other covenants and conditions set forth in the agreement. Patrick H. Martin & Bruce M. Kramer, 2 WILLIAMS & MEYERS OIL & GAS LAW § 432 (4th ed. 2010). 3 See also CR:659 (amending Farmout Agreement to remove from excepted lands— i.e., to add to the acreage subject to Farmout Agreement—the 160-acre drilling unit for the Wilson #5 Well), 661-62 (amending the DeFacto Termination provision and again including provisions regarding continuing rights to notice and participation under 1975 JOA).

7

Similarly, in 2011, defendants Woodbine, PetroMax, Petro Texas, and CH4

Energy expressly acknowledged in a Purchase and Sale Agreement that “Burlington

Oil & Gas Company owns an undivided 25% interest in and to 1537.83 acres out of

that certain Oil and Gas Lease dated August 29, 1974, between James D. Wilson, as

Lessor, and Curran R. Campbell, Inc., as Lessee . . . ,” i.e., the Wilson Lease.

CR:663, 781. The defendants further acknowledged that “[t]his is an outstanding

interest that has been non-consented in both the Wilson #1H and Wilson #2H wells.”

Id. They also “anticipated that Burlington (now Conoco-Phillips) will continue to go

non-consent on future wells.” Id.

In addition to these acknowledgments and agreements among themselves, the

PetroMax Defendants asserted the AMI’s continuing force and effect—and

Burlington’s continued joint ownership of the Wilson Lease—in communications

with Burlington. For instance, in 2009, TexCal and PetroMax sent Burlington

Authorities for Expenditure (“AFEs”) regarding participation in drilling the Wilson

#1H and #2H wells (i.e., the same wells referenced two years later in the

Woodbine/PetroMax Purchase Agreement discussed above). CR:786-87, 793-94.

The cover letters identify TexCal “as the current Operator of the Contract Area

covered by” the 1975 JOA. CR:786, 793. In proposing that PetroMax drill these two

wells on the Wilson Lease, both letters also notify Burlington that, “[i]n accordance

with the provisions of Article 12 of the JOA, you have 30 days after receipt of this

8

notice in which to indicate your election to participate in the proposed drilling of the

above referenced well and to pay the cost thereof.” CR:787, 794. The enclosures

(i.e., ballots and accompanying AFEs) reflect that, upon an election to participate,

Burlington would have a 25% working interest in the proposed wells. CR:789, 792,

796.

PetroMax also sent Burlington an AFE proposing to drill another well4 on the

Wilson Lease. CR:804-09. In the cover letter, PetroMax stated that, under the terms

of the 1975 JOA, Burlington had 30 days after receipt to return its election to

participate. CR:804. And, after Woodbine acquired interests from PetroMax,

Woodbine sent AFEs to Burlington for drilling five additional wells5 on the Wilson

and Gibbs Leases. CR:810-12, 814-17, 820-21, 825-26, 832-33, 837-38, 849-50.

As anticipated, Burlington went “non-consent” on several of the proposed

wells.6 CR:496-97. For each of these wells, Burlington wrote to Woodbine in 2012

and requested that Woodbine provide payout statements, regulatory information, and

plats. CR:497. Woodbine provided payout statements dated May 30, 2012, reflecting

4 This AFE concerned the Dunman/Wilson No. 1-H Well. CR:804.

5 These AFEs concerned the Wilson #3H, Wilson #6H, Wilson #5H, Gibbs #1H (later drilled as the Gibbs #2H Well), and Dunman Wilson A #2H wells. CR:810- 12, 814-17, 820-21, 825-26, 832-33, 837-38, 849-50. 6 These non-consent wells were the Dunman/Wilson No. 1-H, Wilson #1H, Wilson #2H, Wilson #3H, and Wilson #6H wells. CR:496-97.

9

Burlington’s working interest in the non-consent wells on the Wilson Lease as

follows (CR:497-98):

Non-Consent Well Burlington Interest

Wilson #1H Well .25 Wilson #2H Well (a/k/a Wilson Unit “A” # 2H) .24531250 Wilson #3H Well .24531250 Wilson #6H Well .25 Dunman/Wilson No. 1-H Well .10535714

Burlington did elect to participate in other wells on the Wilson and Gibbs

Leases, including the Wilson #5H Well.7 CR:820, 1136-37. Woodbine accepted

Burlington’s election to participate in the Wilson #5H Well. CR:498, 1137.

Woodbine also availed itself of the benefits of the 1975 Letter Agreement, accepting

Burlington’s payments of its share of the required costs. CR:498; see also CR:1137.

In accordance with its obligations under the 1975 Letter Agreement, Woodbine paid

Burlington proceeds from the Wilson #5H Well totaling $1,335,253.59. CR:498,

1137.

7 The wells in which Burlington elected to participate were the Wilson #5H, Gibbs #1H, and Dunman Wilson A #2H wells. CR:820, 1136-37.

10

III. The PetroMax Defendants performed under the 1975 Letter Agreement with knowledge of a subsequent 1994 assignment.

During the years that the PetroMax Defendants performed their obligations

under the 1975 Letter Agreement and recognized Burlington’s ownership rights in

the Wilson Lease, they did so with knowledge of a 1994 Assignment of certain

interests by a previous Aztec successor-in-interest, Southland Royalty.

A. Southland listed four wells for sale at an auction, as reflected in the resulting assignment.

In 1994, Southland listed for sale in an auction its interests in four wells in the

AMI: (1) the Wilson James D. Unit 2; (2) the Wilson James D. #3 (misspelled as the

“Wilson James D.O.” well); (3) the Buchanan 1; and (4) the Gibbs Bros. 1. CR:1497.

We will refer to the first two wells, both offered for auction from the Wilson Lease,

as Wilson #2 and Wilson #3. These two wells were located on one of the two separate

tracts of land that comprise the Wilson lease. Id.

As shown by the map on the following page, the Wilson Lease consists of two

non-contiguous tracts.

11

• Tract 1 is the larger tract and contains the Wilson #1, Wilson #4, and Wilson #5 wells.

• Tract 2 is the separate, smaller tract and contains the Wilson #2 and Wilson #3 wells.

At the auction, Samson Resources Company purchased the interests sold by

Southland. CR:1029. Southland and Samson signed the 1994 Assignment. CR:1031.

The assignment provides for an Exhibit A that will both: (1) particularly describe

the Interests—including “oil and gas leases, leasehold interests, rights, and interests

attributable or allocable to the oil and gas leases or leasehold interests by virtue of

12

pooling, unitization, communitization, and operating agreements” being conveyed;

and (2) specifically note and reflect the “certain lands, leases, properties, interests,

leasehold rights, depths or formations” that Southland “reserves and retains unto

itself from the Interests . . . .” CR:1029. Thus, the Assignment provided that Exhibit

“A” would set forth both the interests being conveyed away and the interests being

reserved by Southland.

Indeed, Exhibit “A” contains two separate lists:

(1) a list of four leases owned by Southland, with an exception for

lands attributable to wells Southland previously had farmed out;

and

(2) a list of “Associated Wells.”

CR:1033. Unfortunately, Exhibit “A” does not specify which list sets forth the

conveyed interests and which list sets forth the reserved interests. Id. However,

consistent with the listing of only four wells in the auction catalog, the very first

words in the 1994 Assignment are: “Well Name: BUCHANAN 1, GIBBS BROS 1,

WILSON JAMES 2 AND WILSON JAMES 3”. Id.

B. The PetroMax Defendants obtained two title opinions, both of which interpreted the 1994 Assignment as conveying only Southland’s interest in the four wells.

The two lists in Exhibit A to the 1994 Assignment led to confusion for both

the PetroMax Defendants and Burlington. Consequently, before sending the 2009

13

AFEs to Burlington in connection with drilling on the Wilson Lease, TexCal and

PetroMax obtained two title opinions about whether Burlington still owned any

working interest in that lease.

In 2007, TexCal retained J. Jan Jircik, a Texas lawyer who is Board Certified

in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization, to perform

a title opinion. CR:860. Jircik did not interpret the 1994 Assignment as conveying

all of Southland’s interest in the Wilson Lease, but instead interpreted the 1994

Assignment as if it included only Southland’s interest in the Wilson #2 and Wilson

#3 wells and the associated production units, i.e., Southland’s interest in Tract 2.

CR:896. Jircik opined that the interest Southland had reserved in the Wilson Lease

“was eventually acquired by Burlington Resources Oil & Gas Company, L.P.” Id.

Accordingly, as to the two Wilson wells listed for auction, expressly identified at the

top of the 1994 Assignment, and included as “Associated Wells” on its Exhibit “A,”

Jircik concluded that Burlington did not own any gross working interest. CR:863-

64. But as to wells located on Tract 1 of the Wilson Lease,8 Jircik opined that

Burlington owned a gross working interest of .2500000. CR:862, 865-66.

In 2009, PetroMax retained Ronald Moore, another Texas lawyer Board

Certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization,

8 At the time, these wells were the Wilson #1, Wilson #4, and Wilson #5 Wells. CR:862, 865-66.

14

to provide a title opinion on acreage in the Wilson lease. CR:1035. Moore likewise

concluded that Burlington owned a working interest in several portions of the Wilson

lease. CR:1035-37.

Jircik’s opinion was provided to PetroMax and Woodbine. CR:501. There is

no evidence, however, that either of the title opinions was provided to Burlington.

Upon receiving the 2009 AFEs from PetroMax proposing wells to be drilled on the

Wilson Lease, Burlington initially informed PetroMax that it “has completed a

diligent review of files internal and external and determined Burlington has no

working interest. The files show that all interest has been conveyed out to other

parties.” 3SCR:2075; RR:51-52.

In response to Burlington’s contention, Moore supplemented his opinion.

CR:1079. He set forth “Jircik’s and our interpretation” that Burlington did own a

“25% WI in Wilson Lease less 160 acre Production Units for Wilson No. 2 and 3

wells”. CR:1080 (emphasis added). He also opined that, in the 1994 Assignment,

“Southland Royalty Company assigned what appears to be only its interest in the

Wilson Well Nos. 2 and 3 Production Units to Samson Resources Company, leaving

the balance of its interest still owned by Southland (2210/34).” CR:1079.

Burlington later reached the same conclusion. As described above in Section

II, Burlington elected to participate in certain wells and paid its share of the costs.

15

Burlington also asserted its right to payout statements and other information

regarding non-consent wells in which it did not elect to participate.

In sum, for 18 years, Burlington and the PetroMax Defendants operated

consistently with the interpretation of the 1994 Assignment as conveying only the

interests offered at auction: the four wells and associated production units.

IV. Regardless of its own experts’ title opinions, in 2012, the PetroMax Defendants abruptly disavowed their obligations.

In 2012, the PetroMax Defendants abruptly changed position. Woodbine

asserted that, contrary to the Jircik opinion, Burlington had “divested the last of its

interest in the Wilson Lease as of September 9, 1994” and “does not own an interest

in . . . the Wilson Lease . . . .” CR:1130. Woodbine attempted to return to Burlington

$190,692.84, purported to be the costs Burlington had paid in association with the

Wilson #5H well minus the well proceeds Woodbine had already paid Burlington.

CR:1130-31. Woodbine also stopped work on another proposed well in which

Burlington had elected to participate. 9 See CR:1131. Only after repudiating

Burlington’s right to participate did Woodbine drill that well. Id.

Burlington’s demands for the PetroMax Defendants to comply with the

ongoing requirements of the 1975 Letter Agreement have been met consistently with

refusal. CR:1130-31, 1138-40. Woodbine has obtained permits for at least 11 wells

9 This was the Dunman Wilson A #2H well. CR:1130-31.

16

associated with the Wilson lease, without providing Burlington notice or an

opportunity to participate. CR:1138-39. Woodbine and PetroMax also have acquired

leases within the AMI without offering the requisite 25% working interest to

Burlington. CR:1139.

V. The trial court concluded the 1994 Assignment unambiguously conveyed not just the listed wells, but all of Southland’s ownership interest in the four leases. Burlington filed the underlying lawsuit in order to enforce its rights under the

1975 Letter Agreement and 1975 JOA. CR:433-49. Besides requesting declaratory

relief, Burlington brought separate claims for, inter alia, breach of contract, specific

performance, conversion, and breach of duty to pay proceeds. CR:443-48. In

addition to the PetroMax Defendants’ denials of these claims (CR:322, 364-65,

1390-91, 1397-98), PetroMax asserted a counterclaim for suit to quiet title, and

Woodbine asserted counterclaims for suit to try title, trespass-to-try title, and

declaratory judgment. CR:365, 1378-87. Burlington and the PetroMax Defendants

filed competing summary-judgment motions on the questions regarding

Burlington’s ownership rights relating to the AMI. CR:484-85; 1SCR:21-22.

Each side moved for summary judgment regarding Burlington’s ownership

interest in any leases within the AMI to continue the AMI in effect. CR:484-85;

1SCR:21-22. The trial court denied Burlington’s summary-judgment motion, but

17

granted the PetroMax Defendants’ competing motion on title issues. CR:1617-19.

The trial court ruled that:

1. Burlington does not own any interest in the AMI described in the 1975

Letter Agreement made the basis of this suit; and

2. The AMI provision in the 1975 Letter Agreement has terminated.

CR:1617.

On joint motion by all parties, the trial court severed the remaining claims into

a separate lawsuit in order to render its partial summary judgment final. CR:1632,

1635, 1640-43. The trial court then abated the severed case pending this appeal.

CR:1643. Thus, the severed issues remain pending and are not presented for review

in this appeal.

SUMMARY OF ARGUMENT

Burlington’s interpretation of the 1994 Assignment is reasonable.

Burlington’s interpretation comports with the very first words of the assignment,

setting forth only interests in four wells to be conveyed. Burlington’s interpretation

also honors the assignment’s reservation provision. Unless Exhibit A is interpreted

so that the list of wells sets forth the interests being conveyed and the list of leases

sets forth the interests being reserved, the reservation provision would be rendered

meaningless.

18

Moreover, Burlington’s interpretation is consistent with the circumstances

surrounding the assignment. Only Southland’s interests in four wells were offered

for sale at auction. And the interpretation’s reasonableness is confirmed by two title

opinions from board certified lawyers who were hired long before suit was filed, not

by Burlington, but by the PetroMax Defendants.

Because Burlington’s interpretation is reasonable, the trial court’s summary

judgment rejecting that interpretation cannot stand. What happens next—remand or

rendition—depends on whether the PetroMax Defendants’ competing interpretation

also is reasonable.

If the competing interpretation were reasonable, the 1994 Assignment would

be ambiguous. On that basis, the matter should be remanded for trial. But if, as

shown below, the PetroMax Defendants’ interpretation is unreasonable, then as a

matter of law, Burlington is entitled to rendition of judgment that the AMI continues

in effect.

Burlington also moved for summary judgment that its right to obtain a 25%

working interest in leases and mineral rights is not proportionately reduced based on

any decrease in the scope of Burlington’s joint ownership interests generally in the

AMI. The 1975 Letter Agreement provides for proportionate reduction of the 25%

requirement under other circumstances, but not based on diminution of the number

19

or size of leases/rights held jointly by Burlington in the AMI. Accordingly,

Burlington also is entitled to summary judgment on this point.

ARGUMENT

I. The interpretation of the 1994 Assignment as conveying only Southland’s interest in four wells—and not all of its interest in four entire leases—is reasonable.

The 1994 Assignment expressly provides that its Exhibit A lists both the

interests being conveyed and the interests being reserved. CR:1029. The problem is

that, in setting forth the two lists, Exhibit A does not expressly identify which list

sets forth the interests being conveyed and which sets forth the interests being

reserved. See CR:1033. But the language and circumstances surrounding the creation

of the 1994 Assignment demonstrate that it is reasonable to interpret the 1994

Assignment to convey only Southland’s interest in the enumerated wells.

Whether a contract is ambiguous is a question of law. E.g., Coker v. Coker,

650 S.W.2d 391, 394 (Tex. 1983). A contract is ambiguous whenever it is reasonably

susceptible to more than one meaning. Id. at 393. When a contract is ambiguous, its

interpretation presents a question of fact precluding summary judgment. Id. at 394.

In determining whether a contract is ambiguous, courts examine and consider

the entire writing, striving to harmonize and give effect to all provisions so that none

is rendered meaningless. J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex.

2003); Coker, 650 S.W.2d at 393. Courts also consider the facts and circumstances

20

surrounding the contract’s execution. E.g., Hous. Expl. Co. v. Wellington

Underwriting Ags., Ltd., 352 S.W.3d 462, 469 (Tex. 2011); Sun Oil Co. v. Madeley,

626 S.W.2d 726, 731-32 (Tex. 1981); Philipello v. Taylor, No. 10-11-00014-CV,

2012 WL 1435171, at *7 (Tex. App.—Waco Apr. 25, 2012, pet. denied) (mem. op.).

In this case, the 1994 Assignment’s text and surrounding circumstances establish

that Burlington’s interpretation is reasonable.

A. As reflected in the 1994 Assignment, Southland auctioned its interest in four wells and expressly reserved other interests.

The 1994 Assignment exists because Southland decided to auction off its

interest in four wells. CR:1497. Consistent with Southland’s auction listing, the first

words in the 1994 Assignment are: “Well Name: BUCHANAN 1, GIBBS BROS 1,

WILSON JAMES 2 AND WILSON JAMES 3”. Compare CR:1029 (emphasis in

original) with CR:1497 (auction listing). The 1994 Assignment expressly provides

that Southland is conveying some interests, but reserving others. CR:1029. The

assignment discusses both conveyance and reservation in general terms, expressly

leaving the particulars and specifics to be set forth in Exhibit A. Id.

In describing the conveyance and reservation generally, the 1994 Assignment

speaks in broad, generic terms. For instance, the assignment describes the interests

being conveyed (defined collectively as the “Interests”) to include:

The oil and gas leases, leasehold interests, rights and interests attributable or allocable to the oil and gas leases or leasehold interests by virtue of pooling, unitization, communitization, and operating

21

agreements, licenses, permits, and other agreements, all more particularly described on Exhibit “A” hereto, limited as to the lands and depths indicated on Exhibit “A” (collectively the “Leases”), together with identical undivided interests in and to all the property and rights incident thereto . . . .

CR:1029. And, the assignment describes the interests being reserved equally broadly

(id.):

[Southland] reserves and retains unto itself from the Interests those certain lands, leases, properties, interests, leasehold rights, depths or formations as specifically noted and reflected on Exhibit “A” . . . . As provided in the 1994 Assignment, Exhibit A sets forth two lists in the

following format: (1) a list of all the interests Southland owned in four leases; and

(2) a list of the same four wells on the assignment’s first page:

22

The top list is untitled. CR:1033. It names the Odom, Gibbs, Wilson, and

Buchanan Leases:

The right side of the top list sets forth the legal description of each lease. Id. Under

the legal descriptions appears an exception for acreage Southland had farmed out

and retained only an overriding royalty interest:

23

Thus, the top list specifically notes and reflects all of Southland’s ownership interest

in the entirety of the four, denominated leases.10

On the other hand, the bottom list names only the wells that appear at the top

of the 1994 Assignment and in the auction catalogue:

B. Burlington’s interpretation comports with the 1994 Assignment’s language and harmonizes its provisions.

Interpreting Exhibit A so that the top list describes the interests Southland is

reserving from the 1994 Assignment and the bottom list describes the interests

Southland is conveying is consistent with: (1) the list of four wells at the top of the

assignment; (2) the language providing that Exhibit A describes both interests being

conveyed and interests being reserved to Southland; and (3) the entire reservation

provision, which expressly provides that Southland reserves and retains to itself the

10 After the 1994 Assignment was signed, the Odom Lease expired upon cessation of production in 1999. CR:74.

24

certain lands, leases, properties, interests, leasehold rights, depths or formations as

specifically noted and reflected on Exhibit A. Compare CR:1029 (setting forth

language in 1994 Assignment) with CR:1033 (Exhibit A). If both lists in Exhibit A

described the interests conveyed, then contrary to the reservation provision, no part

of Exhibit A would note or reflect any interest being reserved.

The exception, in the top list of leases, of acreage Southland had previously

farmed out from the four leases does not constitute a “reservation.” The exception

describes an interest Southland did not own. By definition, Southland could not

“reserve and retain unto itself” an interest it did not own. Rather than constituting

the reservation, the exception describes what is not included in the reservation: the

portions of the leases that Southland had farmed out under a previous agreement.

See CR:74-75, 82-85, 501-05, 1380-81. Without this exception, the top list would

not have accurately described all of the interest Southland owned in the four leases.

By accurately describing the interest Southland did own in the four leases, the top

list identifies with reasonable certainty the interest Southland reserved and retained

unto itself from its conveyance of the four wells.

The PetroMax Defendants suggest instead that use of the term “leases” in the

description of the interests being conveyed must mean that the 1994 Assignment

conveys the leases set forth in Exhibit A. Yet, the term “leases” appears in both the

provision describing the interests being conveyed and the provision describing the

25

interests being reserved. CR:1029. Because it is used to describe generally both types

of interests, the term does not aid in determining whether the list of leases on Exhibit

A describes the interests being conveyed or the interests being reserved. Moreover,

in describing both conveyed and reserved interests, the assignment speaks not only

of “leases,” but also of “interests” less than an entire lease. Id. So, just as it is possible

that an entire lease could fall into either category, it is possible for interests less than

an entire lease (i.e., four wells and their associated production units) to fall into either

the category of interests being conveyed or the category of interests being reserved.

The general use of the term “leases” must be read in conjunction with the list

of specific wells set forth at the top of the same page. For example, in Freeman v.

Stephens Production Co., 171 S.W.3d 651, 653 (Tex. App.—Corpus Christi 2005,

pet. denied), a deed purported to convey “that certain lot, tract or piece or parcel of

land . . . .” Despite this general description of the interests conveyed as a single lot,

the deed later specifically described the interests conveyed as “All of Lot 1, Block

15; Lot 2, Block 15; The West 17.51 acres of Lot 3, Block 15; All of Lot 10, Block

15,” etc. Id. Reading the entire deed as a whole, it was reasonable to interpret the

singular phrase “lot, tract or piece or parcel of land” to mean multiple lots. Id. at 654.

In this case, it is equally reasonable to interpret the interests collectively defined as

the “Leases” to mean only the wells and related production units specifically

identified at the top of the first page. Compare id. at 653-54 with CR:1029.

26

Unless Southland’s interest in the four wells was the only interest being

conveyed, there was no reason to list those four wells at the top of the first page or

in Exhibit A. If the 1994 Assignment conveyed all of Southland’s interest in the four

leases, there was no reason to highlight four of the wells on those leases. Southland’s

interest in the four wells already would be part of the conveyance of all its interest

in the leases. Nor can the list of “Associated Wells” be explained as an inventory of

all the wells on the four leases. For example, the “Associated Wells” list does not

identify the Wilson #1 well. See CR:1033.

The plain language of the 1994 Assignment establishes the reasonableness of

Burlington’s interpretation. Southland assigned only its interest in the enumerated

wells (i.e., the wellbores and related production units), while reserving the remainder

of its interest in the Wilson, Gibbs, Buchanan, and Odom leases.

C. Burlington’s interpretation also is consistent with the circumstances surrounding the 1994 Assignment.

Even without considering the surrounding circumstances, Burlington’s

interpretation comports with the language in, and harmonizes the provisions of, the

1994 Assignment. See Argument §I(A), supra. Nonetheless, it is appropriate also to

consider the circumstances surrounding the assignment. Circumstances that existed

prior to and contemporaneous with the execution of the 1994 Assignment are

properly examined in determining whether the assignment is ambiguous. See Hous.

27

Expl., 352 S.W.3d at 469; Madeley, 626 S.W.2d at 731-32; Philipello, 2012 WL

1435171, at *7.

Southland offered for auction only its interest in four wells. CR:1497.

Southland did not list for auction only the wellbore, nor did it offer the entire

leasehold. Instead, Southland’s auction listings encompassed:

(1) its interest in the Wilson #3, Buchanan 1, and Gibbs Bros 1 wells; and

(2) an “after payout only” interest (“APO”) only with regard to the Wilson

James D. Unit 2 Well.

Compare id. (reproduced above, listing interests offered by Southland) with

CR:1459 (listing another seller’s wellbore interest with the notation “WELLBORE

28

ONLY”) and CR:1475 (listing another seller’s entire leasehold interest with the

notation “LEASEHOLD”).

The limited scope of interests submitted by Southland to the auction house is

echoed by: (1) the discrete list of four wells at the top of the 1994 Assignment; and

(2) the discrete list of four wells on Exhibit A. It is entirely reasonable to read the

1994 Assignment, including Exhibit A, as conveying only those particular interests

Southland actually offered for auction and reserving to Southland all other interests

it owned.

Because Burlington’s interpretation of the 1994 Assignment is reasonable, the

trial court erred in granting summary judgment in the PetroMax Defendants’ favor.

See Coker, 650 S.W.2d at 393-94. The only question remaining is whether reversal

of the summary judgment should be accompanied by: (1) remand for further

proceedings in the trial court consistent with this Court’s opinion and judgment; or

(2) rendition of summary judgment in Burlington’s favor. This remaining question

turns on whether the PetroMax Defendants’ competing interpretation of the 1994

Assignment also is reasonable.

II. If the PetroMax Defendants’ interpretation also were reasonable, the resulting ambiguity would preclude summary judgment, requiring remand.

Despite the logic and consistency with Texas law demonstrated by

Burlington’s interpretation, the PetroMax Defendants contend that the 1994

29

Assignment should be interpreted to convey all of Southland’s interest in the Wilson,

Gibbs, Buchanan, and Odom leases, except for the lands attributable to the H.K.

Odom Wells, James D. Wilson #4 Well and the Buchanan #2 Well. Even if this

interpretation were reasonable (see Argument §III(A), infra), it would not support

summary judgment against Burlington’s own reasonable interpretation. Faced with

two, competing reasonable interpretations, a court cannot conclude that, given all

the language, the 1994 Assignment “plainly and clearly discloses the intention of the

parties.” See Madeley, 626 S.W.2d at 731-32.

The inherent reasonableness of Burlington’s interpretation is confirmed not

only by the 1994 Assignment and its surrounding circumstances, but also by the fact

that not one, but two, accomplished oil and gas lawyers hired by the opposing parties

reached the same interpretation before any litigation arose. The PetroMax

Defendants’ repeated invocation of “plain language” to support their now-contrary

position does not diminish the reasonableness of the earlier title opinions they

themselves obtained. “[R]easonable people ‘will sometimes disagree about what

reasonable people can disagree about,’ but even so, it is difficult to maintain that

language is plain in the face of a substantial, legitimate dispute over its meaning.”

Entergy Gulf States, Inc. v. Summers, 282 S.W.3d 433, 446 (Tex. 2009) (Hecht, J.,

concurring).

30

To the extent that the Court finds PetroMax Defendants’ competing

interpretation of the 1994 Assignment reasonable, the resulting ambiguity would

preclude summary judgment. See Coker, 650 S.W.2d at 394. That ambiguity would

require reversal of the trial court’s summary judgment rulings and remand for further

proceedings consistent with this Court’s opinion and judgment. Id.

III. However, Burlington offered the only reasonable interpretation of the applicable agreements, requiring rendition in Burlington’s favor.

A. The 1994 Assignment conveys only Southland’s interest in the four enumerated wells.

In truth, however, the PetroMax Defendants’ interpretation is unreasonable.

Competing interpretations of a contract do not create an ambiguity unless both are

reasonable. Columbia Gas Transmission v. New Ulm Gas, Ltd., 940 S.W.2d 587,

589 (Tex. 1996). Because the PetroMax Defendants’ interpretation is unreasonable,

this Court should render judgment in Burlington’s favor, ruling as a matter of law

that the AMI continues in effect.

To interpret the 1994 Assignment as conveying all of Southland’s interest in

entire leases fails to harmonize all provisions of the contract and renders some of the

contractual language meaningless. For example, reading both lists as collectively

describing the conveyed interests would render meaningless the 1994 Assignment’s

reservation provision. See Houchins v. Devon Energy Prod. Co., L.P., No. 01-08-

00273-CV, 2009 WL 3321406, at *4-5 (Tex. App.—Houston [1st Dist.] Oct. 15,

31

2009, pet. denied) (mem. op.) (stating principle that an interpretation that fails to

harmonize the provisions is not reasonable). This provision expressly “reserves and

retains” to Southland the “certain lands, leases, properties, interests, leasehold rights,

depths or formations as specifically noted and reflected on Exhibit ‘A’ . . . .”

CR:1029. What lands, leases, properties, interest, leasehold rights, depths or

formations are specifically noted and reflected on Exhibit A? Exhibit A gives us two

options: (1) the set of four leases; and (2) the set of four wells. CR:1033. No one

contends that the set of four wells was reserved and retained. Such a contention

would be unreasonable given that these were the same wells submitted for auction

and listed at the top of the Assignment’s first page. CR:1029, 1497.

That leaves only the set of leases at the top of Exhibit A to describe the

reserved interests. Yet, the PetroMax Defendants contend that the reservation is

limited to the narrow “exception” from the listed leases. As discussed above in

Section I(B), the exception describes acreage Southland had already farmed out. See

CR:74-75, 82-85, 501-05, 1380-81; see also 2SCR:14. Southland could not reserve

to itself an interest it did not hold at the time of the Assignment, i.e., “the lands

attributable to the H.K. Odom Wells, James D. Wilson #4 Well and the Buchanan

#2 Well.” CR:1033 (emphasis added). On the other hand, it was logical for

Southland to (1) convey its interest in the four listed wells, and (2) reserve the

32

remainder of its interest in the four listed leases, which it owned with the exception

of the lands attributable to the farmed-out wells.

Reading both lists on Exhibit A as describing the interests being conveyed

also would render impermissibly meaningless the list of four wells in the Assignment

and on Exhibit A. See Luckel v. White, 819 S.W.2d 459, 462 (Tex. 1991); Coker,

650 S.W.2d at 393; R&P Enters. v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d 517,

518-19 (Tex. 1980). If the Assignment conveyed all of Southland’s interest in the

four listed leases, including interests in any wells drilled on them, there was no

reason to list four of the wells included in that transfer.

It is illogical to read the title of the list of wells—i.e., “Associated Wells”—

to mean “the wells associated with the four above leases.” For instance, the Wilson

#1 well, which also was located on the Wilson Lease, is not included in the list of

“Associated Wells.” CR:1033. Thus, the list does not set forth the wells “associated”

with the four leases, but instead identifies the wells “associated” with the sale at

auction, i.e., the only interests being assigned.

That the 1994 Assignment and Exhibit A afford different treatment to

different wells on the Wilson Lease is entirely consistent with the surrounding

circumstances. Recall that the Wilson Lease consists of two, non-contiguous tracts.

The Wilson #2 and #3 wells—whose wellbores and associated production units

formed the entirety of Tract 2—were included in the list of four wells being

33

conveyed. Because Southland had farmed out its interest in the Wilson #4 well,

Exhibit A excepted the lands attributable to that well from the Wilson Lease interest

that Southland reserved to itself. But, the Wilson #1 well was not conveyed (through

the list of four wells) or carved out from the reservation (through an exception to the

list of four leases).

Southland did not offer its interest in that well at auction, so it was not

included in the auction catalogue, the list of wells at the top of the 1994 Assignment,

or the list of “Associated Wells” in Exhibit A. Unlike the Wilson #4 well, Southland

still owned its working interest in the Wilson #1, though the interest was subjected

to an after-payout penalty when Southland went non-consent. Therefore, unlike the

Wilson #4 well, the Wilson #1 was not included in the exception from the list of

leases. As a result, Southland reserved and retained unto itself its interest in the

Wilson #1 well, which it holds to this day. 11

The PetroMax Defendants’ interpretation ignores these distinctions. It would

render meaningless the list of wells in the 1994 Assignment, the assignment’s

reservation provision, and the list of “Associated Wells” on Exhibit A.

11 In addition, although the Wilson #5 well has quit producing, Burlington still owns an interest in the leasehold acreage pursuant to Humble Resources Company’s reassignment of all interest in the Wilson #5 and associated acreage after termination of its farmout agreement. CR:922-1028, 1037.

34

Consequently, the PetroMax Defendants’ interpretation does not comply with

contract construction principles and is unreasonable.

Burlington’s interpretation is the only reasonable interpretation. It compels

the conclusion that, as a matter of law, Burlington still jointly owns an interest in (at

the very least) the Wilson #1 well, which continues the AMI in effect. Consequently,

in the alternative to the remand requested above, Burlington is entitled to rendition

of judgment that, pursuant to the 1975 Letter Agreement and 1994 Assignment, its

ownership interest continues the AMI in effect.

B. In addition, the 1975 Letter Agreement does not provide for reduction of Burlington’s rights proportionate to the scope of its joint ownership.

Finally, in its summary-judgment motion, Burlington sought a ruling that the

1975 Letter Agreement does not provide for a reduction of the undivided 25%

interest to be offered to Burlington in leases and mineral rights within the AMI if

Burlington’s joint ownership in the nine original leases diminishes over time.

CR:523-26. The 1975 Letter Agreement provides that the AMI continues in effect

“as long as leases are jointly owned within such area . . . .” CR:593. Upon acquiring

any oil and gas leases or mineral rights within the AMI, Buttes agreed to offer to

Aztec an undivided 25% interest in those leases/rights. Id. No provision was made

for a reduction in that percentage if Aztec’s (or later, Burlington’s) ownership share

of leases/rights within the AMI diminished over time. Id.

35

Had the parties wanted to provide for that reduction, they knew how to do so.

The 1975 Letter Agreement does provide for a proportionate reduction in the interest

required to be offered to Aztec if Buttes acquires less than the full 100% interest in

an oil and gas lease or mineral rights in the AMI. CR:593. But the parties chose not

to make a similar provision for any reduction in proportion to Aztec’s joint

ownership of leases within the AMI. Texas courts are not allowed to rewrite the

agreement to add such a provision. See, e.g., Neece v. A.A.A. Realty Co., 322 S.W.2d

597, 600 n.3 (Tex. 1959).

As shown above, Burlington is entitled to reversal of the trial court’s holding

that the AMI provision terminated. Because Burlington offered the only reasonable

interpretation regarding its undiminished right to a 25% interest in leases/rights

acquired within the AMI, this Court should reverse the trial court’s denial of

summary judgment on that issue, as well. Further, the Court should render judgment

that Burlington’s rights under the 1975 Letter Agreement and AMI to the offer of a

25% interest in leases or mineral interests acquired in the AMI by Buttes’ successors-

in-interest are not subject to reduction or limitation based on Burlington’s ownership

share of leases and rights within the AMI.

36

CONCLUSION AND PRAYER

In determining whether ambiguities exist in oil and gas assignments, it is

critical to analyze and apply consistently the principles that govern all contracts. The

most basic policy of contract law is to protect the parties’ justified expectations.

DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 677 (Tex. 1990). The ability to form

justifiable expectations about contractual rights and obligations depends, in turn,

upon the certainty with which parties may predict how the law will interpret and

enforce their agreement. Id. This essential legal framework is weakened by summary

judgments that stray from fundamental principles governing contract construction,

particularly in an area of widespread importance such as oil and gas assignments.

Appellant Burlington Resources Oil & Gas, L.P. asks this Court to reverse the

trial court’s summary-judgment rulings and (1) either remand the issues to the trial

court for further proceedings consistent with this Court’s opinion and judgment, or

render judgment that the AMI continues in effect; and (2) render judgment that

Burlington’s rights to acquire a 25% interest in leases or mineral interests acquired

by Buttes’ successors-in-interest in the AMI are not subject to reduction or limitation

based on the scope of Burlington’s joint ownership of leases and rights within the

AMI. Burlington also asks for all other relief to which it is entitled at law or in equity.

37

Respectfully submitted,

/s/ Kirsten M. Castañeda

John R. Mercy Kirsten M. Castañeda State Bar No. 13947200 State Bar No. 00792401 jmercy@texarkanalawyers.com kcastaneda@adjtlaw.com MERCY CARTER TIDWELL, ALEXANDER DUBOSE L.L.P. JEFFERSON & TOWNSEND LLP 1724 Galleria Oaks Drive 4925 Greenville Avenue, Suite 510 Texarkana, Texas 75503 Dallas, Texas 75206 Tel: (903) 794-9419 Tel: (214) 369-2358 Fax: (903) 794-1268 Fax: (214) 369-2359

Vincent L. Marable III Roger D. Townsend State Bar No. 12961600 State Bar No. 20167600 trippmarable@sbcglobal.net rtownsend@adjtlaw.com PAUL WEBB, P.C. ALEXANDER DUBOSE 221 N. Houston Street JEFFERSON & TOWNSEND LLP Wharton, Texas 77488 1844 Harvard Street Tel: (979) 532-5331 Houston, Texas 77008 Fax: (979) 532-2902 Tel: (713) 523-2358 Fax: (713) 523-4553

Fred Hagans State Bar No. 08685500 fhagans@hagans-law.com Kendall C. Montgomery State Bar No. 14293900 kmontgomery@hagans-law.com HAGANS BURDINE

MONTGOMERY & RUSTAY, P.C. 3200 Travis, Fourth Floor Houston, Texas 77006 Tel: (713) 222-2700 Fax: (713) 547-4950

Attorneys for Appellant

Burlington Resources Oil & Gas Company LP

38

CERTIFICATE OF COMPLIANCE I certify pursuant to TEX. R. APP. P. 9.4(i)(3) that this Brief complies with the length limitations of Rule 9.4(i) and the typeface requirements of Rule 9.4(e).

1. Exclusive of the contents identified by Rule 9.4(i)(1) and inclusive of all textboxes, footnotes, and endnotes, this Brief contains 7,543 words as counted by the Word Count function of Microsoft Word 2010.

2. This Brief has been prepared in proportionally spaced typeface using:

Software Name and Version: Microsoft Word 2010 Typeface Name: Times New Roman Font Size: 14 point

/s/ Kirsten M. Castañeda

Kirsten M. Castañeda

39

CERTIFICATE OF SERVICE

I hereby certify that on the 20th day of October, 2015, a true and correct copy of the foregoing Brief, including Appendix and hyperlinked materials, is served on Appellee by e-mail and e-service via efile.txcourts.gov to counsel of record as described below:

Mr. Brad D’Amico Mr. David J. Beck bd@canteyhanger.com dbeck@beckredden.com CANTEY HANGER LLP Mr. Thomas E. Ganucheau 1999 Bryan Street, Suite 3300 tganucheau@beckredden.com Dallas, Texas 75201 BECK REDDEN LLP Counsel for Appellee PetroMax 1221 McKinney Street, Suite 4500 Operating Co., Inc. Houston, Texas 77010-2010 Counsel for Appellees PetroMax Mr. Greg W. Curry Operating Co., Inc., Petro Texas Greg.Curry@tklaw.com LLC, and CH4 Energy II, LLC Mr. Gregory D. Binns Gregory.Binns@tklaw.com Mr. Jesse R. Pierce Mr. Richard B. Phillips, Jr. JPierce@pierceoneill.com Rich.Phillips@tklaw.com Mr. Brian K. Tully THOMPSON & KNIGHT LLP BTully@pierceoneill.com 1722 Routh Street, Suite 1500 PIERCE & O’NEILL, LLP Dallas, Texas 75201 4203 Montrose Blvd. Counsel for Appellee Woodbine Houston, Texas 77006 Acquisition, LLC n/k/a MD America Counsel for Appellee TexCal Energy LLC Energy South Texas, LP

/s/ Kirsten M. Castañeda

Kirsten M. Castañeda

40

No. 06-15-00044-CV

IN THE SIXTH DISTRICT COURT OF APPEALS

Burlington Resources Oil & Gas Company LP, Appellant,

v.

PetroMax Operating Co., Inc., Woodbine Acquisition, LLC, Petro Texas, LLC, Ch4 Energy II, LLC, and Texcal Energy South Texas L.P., Appellees.

On Appeal from the 12th Judicial District Court Madison County, Texas, Cause No. 12-13130-012-10

APPENDIX TO BRIEF FOR APPELLANT

Tab

1975 Letter Agreement (CR:589-625) ..................................................................... 1 1994 Assignment and Bill of Sale (CR:1029-34) .................................................... 2 Order Granting Defendants’ Motion for Summary Judgment on Title Issues (CR:1617) ...................................................................................................... 3

Order Denying Burlington’s Motion for Partial Summary Judgment Seeking Various Declarations (CR:1618-19) .......................................................... 4

Order on Joint Motion to Sever and Abate (CR:1640-45) ...................................... 5

Tab 1

Tab 1

589

'

,_ .. :

BUTTES RESOUHCES COMPANY

SOUTHWEST DlVlSJbN

TELEX: 1100 MILAM MAIL] NG ADDR£55 '71!12:.?.:97 P. 0. BOX 20&7 SUITE 733

HOUSTON, TEX,t.S 7700 I

HOUSTON, TEXAS 77002

(713) 2Z~.i414

January 7, 1975

Mr. 'lhomas E. Scott Aztec Oil & Gas Company 2000 First National Bank Building Dallas, Texas 75202

Re: Drilling and Joint Operating Agreement - Aztec Oil & Gas Gompwy 00-660 - So. Zulch Prospect Madison, Brazos and Grirhes Cos., Texas

Dear Mr. Scott:

Buttes Resources Company (hereinafter referred to as "BRC") owns an undivided one-half (1/2) working interest in and to the oil and gas lea.ses. described. and 'r.eferred. to in. Exl;jib;Lt "A" attached hereto and made a part hereof, which leases and the lands covered thereby are referred to herein as "said leases". You have expressed' a desire to participate with BRC in the drilling of a test well in search of oil or gas subject to the terms and conditions hereinafter contained, and this letter, when accepted by you in the space hereinbelow provided, shall set forth the terms of our agreement concerning the drilling of such test well and the operation and development of said leases.

-

I.

Prior to comnencing drilling operations of the test well, BRC shall ·cause title to the tract of land upon which such test well is to be drilled to be examined by an attorney of its choice.

II.

BRC agrees to furnish you the following information:

A. A plat on which said leases and the proposed location of the test well are noted.

590

. ·1.·

Mr. Scott -2- January 7, 1975

B. The estimated cost of drilling the test well to 9,200 feet, including the cost of all open hole logging Which will be condUcted. Such estimated costs are set forth on the author:ization for expenditure (ARE;); attached hereto ,<il?'Exl'ii~it "B" and by this reference rrade a: part hereof. · :· '·

C. Copies of said leases ar.~d all other pertinent legal documents.

Aztec shall have a period of ten d<iYS after receipt of said title material within which to accept or reject the said leases. If Aztec rejects title to said leases, it shall point out to BRC the deficiencies upon which such rejection is based and BRC, at its option, shall have a period of sixty days after receipt of such advice :from Aztec within which to cure such defects in title to Aztec's satisfaction. In the event such defects are not so cured within said sixty-day period, Aztec ID<>Y withdraw from this agreement and all obligations hereunder be.tween Aztec and BRC shall be terminated.

D. A copy of the title._opinion covering the lease or tract upon which the test well is to be drilled setting forth the fee ownership of the minerals and the ownership of the oil and gas lease covering such mineral interests, based upon abstracts o;f title or a search of the county records and q.pproving title into BRC for drilling and production. No well shall be comnenced under this agreement Jfuwever, until Aztec has approved title to the drillsite lease or tract.

III.

Subject to all other terms and provisions hereof, BRC agrees to comnence or cause to be corrmenced, at the earliest possible date, operations for the drilling of a test well in search of on or gas at a mutually agreeable location on said l12ases. such test well shall be drilled with due diligence and in a good and workmanlike manner to a depth of 9,200 feet beneath the surface of the earth, whichever is the lesser depth, herein called the "objective depth,'', unless some "impenetrable ", as that term is defined below·, j_s encountered prior to reaching the objective depth. The term "irl]penetrablE'l" as used in this agreeroont shall mean formations or conditions which would render fwther drilling operations by a prudent operator' impracticable or which cannot be penetrated by the use of customary drilling procedure or techniques.

If an impenetrable is encountered prior to reaching the objective depth, the provis,tons of Section 3~ Ci (?f .the Join~:CJPe!'at:lrig Ai!i~etrent: attached )lereof· as .EXhil'lit. "C" shalll;lt?Come effectiVe. · ·

Upon reaching the objective depth for the test well, BRC shall cause such logs and tests to be made which are mutually agreed upon.

-- - --· - - --.-.·- --- - - - - -

~. --. -·- ---- ---------,----

591

Mr>. Scott -3- January 7, 1975.

N.

Your representative shall be allowed free access to the derrick fioor and to any and all information, {l;eological or otherwise, pertaining to the drilling of the test well. Prior to running any logging device, coring or taking any fonnation tests, or other similar type test, BRG shall first give you notice in sufficient time to allow your representative to be present to witness such test. BRC agrees to furnish you two (2) copies of each field print and two (2) Cbpies of each final print of electric logs and shall telephone daily reports to your representative. Any notice required hereunder to be given to BRC shall be furnished to;

Buttes Resources Company Attention: Mr. V. K. Kr'aus llOO Milam Building, Suite 733 P. 0. Box 2067 Houston, Texas 77001 Office Phone: (713) 223-1414 Heme Phone: (713) 682-7327

Any notice required hereunder to be given by BRC to you shall be furnished to:

Aztec Oil & Gas Company 2000 First. National Bar1k Bldg. Dallas, Texas 75202 DRILLING REPORTS & GEOIDGICAL NOTICES: Attention: Mr. Kenneth A. Wood Office Phone: (214) 741-1272 Home Phone: (214) 254-8090 or Mr. R. K. Taylor Office (214) 741-1272

v.

In consideration of BRC's agreement to drill the test well described above you agree to bear and pay the costs, risk:;; and expenses incurt'ed in drilling and testing prior to the running of production casing. for a completion attempt and plugging and abandoning if no completion is attempted on such test well as set out below. Except as ptherwise in this agreement provided, such payment shall be due and payable on or b~fore thirty days after you receive invoices for the same.

A. 33-1/3% of all of BRC's costs, risks and expenses incurred in drilling and testing for the test well and jn plugging the well if no completion attempt is made.

592

ll!r:'. Scott -4- January 7, 1975

B. .$46,331. 50 as your share of the acquisition costs paid by BRC for said leases, including broke:r-age and recording costs incurred in conne.ct.ion With the acquisition of the same as of the date hereof.

C. Subject to the tenns of the Joint Operating Agreenent Exh:i.bit "C" hereto, 25% of all costs incurred after the date hereof, including, without lim1tation, :r-entals, curative wor'k, outside legal costs and costs of governmental regulatory applications and hearings in connection with said leases.

All of the costs, risks and exPenses incurred in drilling, testing, completing, etc. shall be supported by invoice or s.tateo-ents of charges, copies of which BRC agrees to make available upon request . Such costs, risks and expenses shall be invoiced to you when BRC receives invoices fo!' the same.

VI.

Subject to the provisions of Paragraph VII, Upon receipt of payment of your share of the costs and expenses set out inParagraph V-B, which you have agreed to pay herein, BRC agrees to assign to you, with warranty of title, by, through and under BRC but not otherwise, an undivided 25% interest in said leases. Such assignment Shall be subject to the terms of this agreement, the Joint Operating Agreement attached hereto as Exhibit "C", (by this reference made a part hereof), and your proportionate part of the lessors' royalty provided for in said leases and the over-riding royalty provided for in Exhibit "E" hereto. It is understood and agreed that all operations conducted after the test well nas been drilled to the objective depth or plugged and abandoned as a dry hOle i f no cornpletior1 is attelllpted shall be conducted under the terms of the Operating Jlgl"eement attached hereto as Exhibit; '.'C'', with your interest therein being an undivided one-fourth (1/4).

VII.

If any rental shall become due after the date hereof and prior to the Joint Operating Agreement attached hereto as Exhibit "C" becom'ing effective under any of said leases, then BRC shall pay the same and you agree to reimburse BRC for 25% of such rental paynent Within thirty days after rece:ipt of BRC' s invoice; provided, BRC shall not be liable for erroneous payment or inadvertent failure to pay ·a:f!Y such rental.

593

Mr. Scott -5- January 7, 1975

VIII.

It is. not the purpose or intention of this agr'eeirent to create, nor shall the same b.e construed as creating .any pdning pqrl;nership, conmercial partnership or other pqrtnership relation nor (>hall the operations of the parties hereunder be construed to be considered as a joint venture. 'Ihe liability of the pqrties hereto shall be several and not joint or collective.

Each of the parties hereto elects, under the authority of Section 761 (a) of the Internal Revenue Code of 1954, to be excluded from the application of all of the provisions of Subchapter K of Chapter 1 of SubtitJ.e A of t!:le InternaJ. Revenue Code of 1954. I f the· :Income tax laws of the states in which the property covered hereby is 1ocated contain, or may hereafter contaJn, provisions s:i.rnilar to those contained :in the SUbchapter of the Interna], Revenue Code of 1954 above referred to under which a Similar election is permitted, each. of the pqrties agt>ees that such election shlUl be exercised. If applicable, BRC is hereby author- . ized to execute and file on behalf of both parties hereto such elections with t!:le appropriate governmental agencies.

IX.

Exhibit "I)P denotes an Area of J)lutu;ll Int¢rest , outlined in red.

Tf you acquire any oil and gas leases or mineral rights within the Area of Mutual Interest after the <)ate hereof; then you agree to offer to BRC an undivided three-fourths (3/4) interest in saJd leases or mineral interest so acqlllred;. and i f BRC accepts said interest, then BRC will immediately re:lnlburse you far its proportionate part of the acquisition costs. If.BRC acquires any oil and gas leases or mineral rights within the Area of Mutual Interest after the date hereof:, then BRC agt>i;'es to · offer to you an undivided one-fourth (1/4) interest in said leases or mineral interest so ~quired; and if .AZTEC accepts said interest, then AZTEC will immediately reimburse BRC for it.s proportionate j>!'rt of th.e acquisition costs.* Such ot'fer or offers .arE: to. be made in wr'iting and offeree shall have fifteen (15) days in Which to. accept or reject such offer. If either so acquires·an oil or gas lease or mineral interest and the other party does not desire to pqrticipate in such acquisition, then the acquirihg party shall own said oil and gas lease or mineral · interest free and clear of all terms and conditions of this agr>eement. If both parties participate in such acquisition, th.<'n the oil .aJ14 gas .lease or mineral. interest Shall be subject to the terms and condition$ of the Joint operating Agreement attached hereto as Exhibit "C". If the interest in oil and gas li;'ases or mine.ral rigl1ts acquired represents less than the full 100% interest w such interest, then the rigbts of the . parties hereunder to acquire such interest shall be proportionately re- .

duced. 'l'he Area of IYlutual :mterest as outlined in Exhibit "D" shall last as long as leases are joint}y owned within 13uch area, ·hOWever,

*In the event an interest in oil. and/or mineral rights is acquired by llRC pursuant to that certain Letter Agreement d!lted October 16, 1974, bat~een Buttes Resources Company and Curran R. Campbell, then BRC agrees to of~er to AZTEC one-half (1/Z) of the interest so acquired by llRC and i f AZTEC accapts said intel:est, then AZTEC shall i11Unedfately rein1burse BRC for its. proportionate part o:J;- J3RC 1 s aCtual acquisi,~ion cOsts.

594

''""

Mi:'. Scott -6- January 7, 1975

three years 1'rcm the date of this agreement;._if &<~,td area is still :In effect, it shall be contracted to an area/~~·~lhe two miles outside the then remaining jo:lntly owned leases.

x.

The terms, covenants and conditions hereof sball extend to and be binding upon the parties hereto, the:i:r successors and assigns. 'Ihis instrument shall not be assigned bY you either in whole or :In part unless you have first obtained written consent frelrn BRC. In the event that you are acquiring this .undivided working interest for the account of more than one (1) person or entity, then you represent that you have sole investment discretion to purchase such interest for such accounts.

XI.

It is mutually understood that there is no obligation Ufion BRC to carmence a well under the terms of this agreerent. and .there shall be rio penalty for failure to conmence such well; however, BRC shall make its best effort to commence the drilling of the ·well at the earliest possible date. However, :In the event BRC does not corrmence the test well here:ln provided for within one. year from the date of this Ei:greement:

l. Then this Agreement, at Aztec's option (which shall be exercised within 30 days after the end of one year from the date hereof), shall terminate and be of no further force and effect. In the event Aztec elects to so tenninate this agl'eement, then BRC shall refund to Aztec the amount of money which Aztec has paid to BRc as of the date of such termination plus $2,500,00, being the finders fee which Aztec has paid to Mi:'. Bill Richardson, and Aztec, upon receipt of such pa~nt, shall reassign to BRC its interest in this agreement and :In the said leases.

XII.

TI'lis agreement and the Operating Agl'eement attached hereto are both subject to the terms and conditions of the Letter Agreement dated Septemer 4, 1974, between Curran R. Campbell, Inc. and W. A. Nowotny and the Assignment of Oil, Gas and Mineral Leases dated October 18, 19711, from Curran R. Campbell, Inc. to Buttes Resources Company, both attahced hereto as Exhibits "E" and "F", respectively··

'Ihe foregoing sets forth the entire agreement between the par1;ies, and there are no verbal or oral agl'eernents between the parties not set out herein in ~II'iting. If either party desires to anEnd this agreeli'Ent, then such amen~nt shall be accomplished by an instrument in writing executed by both parties hereto,

595

Mr. Scott -7- January 7, 1975

If the terms and conditions herein set forth meet with your approval, please indicate your approval and acceptance by signing this agreement in the space provided below and returning one (1) fUlly executed original of this agreement to Buttes Resources Company, P.o. Box 2067, Houston, Texas, 77001 - Attention: Mr. John D. FuJ.ton.

If this agreement is not signed and returned within fifteen (15)

days form your receipt hereof, then this agreement, at BRC's option, shall terminate and be of no force and effect.

This agreement has been executed in duplicate, each of which shall constitute an origianl.

Very truly your$, BUTl'E3 RESOURCES COMPANY

BY:ROG~'f.~oo/'' ~

VICE PRESIDENI'

JDF/RCC/mjw Attachments AGREED TO AND ACCEPI'ED THIS 6ti._ DAY OF .J ,. N.t,ll\.~.8 -,..:::;.19,--:')c:c'S";;.

AZTEC OIL & GAS CaviPANY

596

Exhibit "A" to Letter Agreement dated 12-1-74 . batwee!] Buttes Resources Company and Aztec Oil & Gas Company

RECORDED

LESSOR LESSEE VOLUME - PAGE

A.Y. Benge et ux Curran R. Campbell, Inc. 203 - 4,59 - Madison County

J. Philip Gibbs, Jr., Curran R. Campbell, Inc. 203 - 414 ~ Madison County Attorney

Faye Andrews Curran R. Campbell, Inc. 203 - 411 - Madison County

T.L. Hurry et ux Curran R. Campbell, Inc. 203 - 409 - !1adison County

James D. Wilson, Ind. Curran R. Campbell, Inc. 21 - 667 - Brazos County & Ind. Ex.

Henry K. Odom et ux Curran R. Campbell, Inc. 21- 661 - Brazos County

George W. Boswell et al C:urran R. Campbell, Inc. 203 - 858 - Madison County

B.J. Cooley et ux curran R. Cam'pbell, Inc. 203 - 856 - Madison County

Raymond B. Buchanan Curran R. Campbell, Inc. 21- 679 - Brazos County et ux

597

A.A.P.L. FORM 610

MODEL FORM OPERATING AGREEMENT-1956 Non-Federal Lands

OPERATING AGREEMENT

DATED

J ........... .,J I fiecemtrnr 1·

FOR UNIT AREA IN TOWNSHIP .. - - - - - - , RANGE---··· Counties

Madis=.,-]lu=s..&..GJ;imes_ ~ STATE OF...__1:.~xa£.. - - - ' - - -

South Zulch Area

A.MERlCAN .-.SsOCJ,.TION OF P.ETROLEUM LANDMEN APPROVED FORM. A.A.I>.L. NO. 6\0 MAY Bl ORDERED DIRECTLY FROM THE PUBLiSHER ROSS- M"'RTIN COMPANY, BOX 800, TULSA 7~1()\

Exhibit "C" r:o Agreement between Buttes Resources Company and Aztec Oil & Gas Company, _dated~ JPr-'..j~ ~,._, \, \'i.l.r

598

~· '

;_.:

A-4.P.L. FORM 61 o

TAaLE OF CONTENTS

Tltlo ......

1. Definitions

l. Xitlo i'nllliiRatiAI-1, Loss of Leases and Oil and Gas Interests ·····-····

•

4. Inte.tes-U; of Par-ties 2

Operator of Unit

5.

'

6. Employees 3 7. 'f'esl Well

'

8. Costs and Ex.penses 3

9. O~rator's- Lien 4

10. Term of A~l'eemE:nt ... 4

11. Limitation. on Expenditures ..... • 12. Operations by Less Than All Pa!'ties ..... -~-·. 5

13. Right to Talt-e Production in Kind 6

14. Access to Unit Area 7

15. Drilling Contracts 7

16. Abandonment o£ Wells 7

17. Delay Rentals and Shut-in Well Payments -------- 8

Pa£e:wtial Rilhllo Puoel•a:lC ............... . B

19. Selection of New Ope:rato1· B

20. Maintenance of Unit Ownership 9

21. Resignation- o! Operatol" ········-- 9

22. Liability of Ptu·ties .... 9

23. Renewal or Extension of Leases ·-· 9

24. Surren-der of l.A:ases .. --·····-·· ········• 10

25. Acreag-e or Cash Contributions .. ······ ........................ 10

26. P1·ovlsion Concerning Taxation ---·--···---···-··· 10 .... 11

27. Insut·an-ce -···········

11

28. Claims and Lawsuil:s

Force Majeure 11 29.

3-G. Notices ··-··············· 11

31. Other Condi-tions ........... ----···--- 12

599

A.AY.L. FORM 61c •.

·

OPERATING AGREEMENT

TliiS AGREEMENT, entered into this~-- day of December , 19E-., between Buttes Resources C~pany

hereafter designated as "Operator'', and the signatory parties other than Operator.

WITNESSETH, THAT, WHEREAS, the parties to this agreement are owners of oil and gas leases covering and, if so lndicated, -unleased mineral interests in the tracts of land described in Exhibit "A", and all partie$ have reached an agreement to explore and develOp these ieases and interests for oil and ga,s to ttle extent and a!l hereinafter provided;

NOW, THEREFORE, it is agreed as follows:

l. DEFINITIONS

As used in this agreement 1 the foJlowing words and terms shall haye th~ meaningS here tlSet·ibed to thetn.

( l) The words "party" and- "pa-rties" shall alt'fays mean a party, or parties, t-o this agre,ement. (2) The parties to this agreement shall always be referred to as 1'it" or "they'', whether the parties be corporate bodies, partnerships, associations, or persons real.

(3) '!'he term 1'-oil and gas" shall include oil, gas, casinghead gas1 gas condensate, Jand all other liqJ..1,id or gase~ ous hydrocarbons, unless an intent to limit the .inclusiveness of this term is specifically stated.

(4) The term "oil and gas intciesls" shall mean unleased fee and mineral interests in tracts of land lying within the Unit A-,:ea which are owned by parties to this agreement.

(5) The term "lTnit Area" shall ref~r to and Include allot the lands, oil and gas leasehold inler-esb and oil and gas interests intended t-o be developed and operated for oil and gas pu·rposell undeL· this agreement. ·such lan!ls1 oil and gas leaSehold interests and oil an~ gas interests are described in ;Exhibit ''A".

( 6) The term "drilling unit" shall mean the area fixed for the drilling bf on_e. well by OTI;k7: or rule o! any state or federal Qody having authority. If a drilling WJit is not fixed _by any such rule or order, a drilling unit shall be the dn1ling unit as established by the pattern of drilling iil the Unit Area or as fi_xed by ex,. press agreement oi the parties.

(7) All exhibits attached to this agreem<:>nt are made a part of the contract as fully as though copied in ful'l m· the contract.

(B) The w<lrds "equipment" and "materla:Is" as used hel"e ate synonymous and shall mean and include all oil field supplies and personal property acquired for use in the Unit Area.

2. TITLE EXAMINATION} LOSS OF LEASES AND ·OIL AND GAS INTERESTS

Prior to the commencQment of auy well, operator shall cause title to be examined on the drilling unit and a title opinion prepared by a competent· attorney of .his choice. Operator shall submit copies of the title opinion to all parties who are to participa~e in the drilling of such Mell aOd such well shall not be commenced until all such parties have approved title to the drilling unit.

_,_ "Joint Loss"

600

''

·A ..11;.P.L FORM 61C

HlieeliePs al'!d fli er:eess reyalt), sit J'l&)mef!ts, aRti stiu1r &peeial \wrliea 6, A ee of each supplemental opinion, and of all final opinions, shall be sent promptly to each party. the examining ati01·ney c:on(:E!~ng the validity of the title to each oil and gas in~rest and e~ amount of interest covered thereby shall be binding and conclusive on the parties, but leases as to primary term, royalty provisions,_ dr'iUing obligations,_ and special b ens.- shall be a tnatt.er for apptoval and acceptance by an authorired- represent_ative of each party.

All title examinations shaU be made, and title reports sub · , within a period oL___,days after the submiSSion ot abstracts a,nd title papers. Each party sha , n good faith, try to satisfy the requirements of. the examining attorneys concerning its leas~ and inte , and each &:hall have a period >L__ _ _ _ days from receipt of tiUe report for this purpose. If t ttle to any lease, or oil and gas interest, is finally rejected by the examining attorney, all parties- s then be asked to state in writing whether they will waive the title defects and ac~t the leases o · ter'ests, or ':"hether they will ~tand on the attorney's opinion. If one or more parties refuse to waive t' detects. this agreement shall, in t~at case, be_ terminated and abandoned, and all abstracts and title pers shall be returned to their senders. If all title.s are approv~ .by t~ enmining at~

torneys., or accepted by all partieS, and if' all leases are accepted as to primary terms, royalty provisions, drilli. obligations and s-pecial burdens, all subsequent :provisions ot this agreement shall become operative

B. Failure of Title:

A«or aP ti\les aFe ap~'£9" e~ SF a:ae'O'p•o;! 1 Any defects ot title that may develOp shall be the joint responsibility of aU parties and, if a title loJi$ occurs, it shall be the lo~ of all parties, with eaeh bearing its proportionate part of the loss and 0! any liabilities incurre~ in the loss. If such a loss occurs, there· shall be no change in, or adjustment of, the interests of the patties in the remaining portion of the Unit Area.

C. Loss o[ Leases For Other Than Title Failure:

If any lease or interest subject to this agreeme11t be lost through failure to develop or because express or implied covenants have not been performed, or if any lease be permitted to expire at the end of its primuy tenn and not be renewed or extended, the loss shall not be C<lnsidered a fa,Uu.re ~;>f title and all such losses shall be joint losses. and shall be borne by all parties in proportion to their interests and there shaU be no readjustment of interests in the remaining portl.on of the Unit Area.

3. lRJLEt...SBB BIL .um GA:S IH'f'EBES'J!S

the purpose of this agreement as if it were a leased interest under the !ann of a· s ease attached as Exhibit "B" and for the primary term therein stated. As to ests,. the owner shall receive roya1ty on to,~.sJ'-'"hal1lrgwasu!l.e;a;s;e attached hcr.eto as Erl\ibtt ''B". Such party shall, however, be of this agreement relating to lessees, to the extent that it ow~s

4. INTERESTS OF PARTIES

Exhibit "A" lists all of (he parties, and their :respective petcentagtf! or fx:actional interests undel thiii agreement. Unless cllanged by, other provisions, all costs and liabilities lnc~d in operations under this contract shall be borne and paid, and all equipment a,nd material acquired in operations on the Unit Area shall be owned, by the parties as their interests are given in Exhibit "A". All productlon of oil and gas from the Unit Area, subject to the payment of lessor's royalties, shall a:J.so be owned by ihe parties in the samt- manner.

-·- "Joint Los&"

601

A.A,P.J.:. FORM 610 ' " .

U the_ futeres:t of any party in any ·.oil and gas lease covered Qy this agreement is subject to an overriding royalty, production _payment, Or other charge over and above the usual one .. eigthh ( Ml) royalty, Such party shall assume an(i alone bear all such excess obligations and shall account for them t_o th~ oWners: tbeteof out of. its share of the working interest production of the Unit. Area.

5. OPERATOR OF UNIT

Buttes Resources Company _______________ shall ---::C.:..:C:..:C:::::.::.::::_c::.::r::::e:..._ be tl\e Operator of the Unit .Area, and Shall ~ontlucr and direct and haVe full control ot all operations on the Unit Area as permitted and required by; and within the limits_ of, this agreement. It shall conduct all such operations in a good . and workmanlike manner, but it shaH have no liability as Oper.ator to the other parti~s for losses sustained, or liabUities _Incurred, except such as may result froril gross negligence Or from breach of the provi~ions of tbis agxeetnent.

6. EMPLOtEl:.S

The number of employees and their sel~ction, and the hou-rs of labor and the compensation for ~ervices performed, shall ~ determined b:f Operator. All emplOyees shall be the- employees et Operator.

On or before the'"·---- day of _ _ _ _ _ _ _ _ _ _ 19 _ _! Operator .shall corornence t 1-

ing of a well for oil and gas in the following location:

and shall thereafter continue the drilling of the well with due diligen

unless granite or other practically impenetrab substance .is encountet·ed at a lesser depth or unless all parties agree to complete the well at a lesser -d Operator shall make reason e tests ol all formations encountered during drilling which give indication of containing oil and g n quantities sufficient to test, unless thi4 agreement shall be limited in its application to ~ specific maWm or formations, in which event Op-eratur shall be required to test only the formation or to co.tions to which- this agreenJent may apply.

perator's judgment the- wen wlll not pr.oduee oil or gas in paying quantities, and it wishes to abandon the tetit as a dry hole, it shall firSt secure the consent ot all parties to the plugging, and the •

8, COSTS AND EXPENSES

EXcept as herein otherwise specifically provided, Operator shall promptly pay and discharge aU costs and expenses_ incurred in the developmetlt and operation of the Unit Area pursuant to this agreement and shall charge each of the parties hereto with their respective proportionate shares upon the -coSt and expense basis provided in the Acco\lnting Pr~cedure attached hereto and marked Exhibit ''C". If any provision o( E~­ hibit "C'• should be inconsistent with any provision contained in the body of this agreement, the provisiOns in. the body of this agreement shall prevail.

Operator, .at its election, shall have the right from t,ime to time to demand and reCeive from the other parties payment in ad'Vance of their respective shar.es of the estimated amount of the costs to be incurred in a:perations hereunder during the next SUC(Ieeding month, which right may be exercised only by submission to each such party of an itemized statement of sud). e$Umated costs, togetb~T with an invoiCe for its S}lare thereof . Each such statement and invoice for the paym~nt in advand! of .estimated costs shall be submitted on or before the 20th day of the next preceding mont-h. Each: party shall pay to Operator ifs proportionate share of. such estimate within fifteen (15) days after such esthna~ and invoice is received.. If any par_ty fails t~r its

0

share of said es-timate within said time, the amount due shall beaT interest at the rate of.:N. percent( per annum until paid. Proper adjustment shall be made rno»thly between advances and actual cost, to the end that each party shall bear and pa'y its. proportiOnate shate· of actl.ltl1 cost$ incurred, and no more.

_,_ Revjsed 1967

602

9. OPERA':\'OR'S LIEN

Operator is given a first and pref-erred lien on the interest ot each party covered by this contract, and In each party's interest ln oi1 and gas produced and the proceeds thereof, and upon each party's interest in material and equipment, to secure the payment Of a:ll sums due from each such party to Operator, In the event any party fails to pay any amount owing by it to Ope•ator as its share of such costs and ex'pense or such advance estimate within the time J.irnited for payment thereof, Operator, w~thout prejudice to . other elj:isting remedies, is authorized, at iU election, to collect from the: purchaser or Pu•chasers Of oU or gas, the proceeds accruing to the working interest or interests in the Unit Area of the delinquent party up to the amount owing by such party, and each purchaser of oil or gas is authori~ed to rely upoh Operator's statement· as to the amount O'W'ing by such party.

In the event of the neglect or failure of any non-operating party to promptly pay its proportionate part of the cost and expense o! development and operation when due-, lhe other non-operating parties and Operator; within thirty (30) days after the rend.ition of s_!:atements therefor by Operatot", shall proportionately contribute to the payment of such delinquent indebteCiness"'and the non~operatin&: parties so contributing shall be entitled to the same lien rights as are granted to Operator in· this section. 'Upon the payment· by such delinquent or . defaulting party to Operator of any amount or amounts on such delinqu.entindebt~dneSs, Or upon .any recovery on behalf of the non-operating parties \lnder the lien conferred aboVe, the amount or amounts- so paid or rep covered shall be· distributed and. paid by Operator to the other non-op.erating parties .and Oper~tor proportionately in accordance with the contributions theretofore made by them.

10. TERM OF AGREEMENT

This agreement shall remain in full force and effect for as long as any of the oil and gas leases subjected to this agl'eement remain or are continued in force as to any part of the Unit Area, whether by production, extension , renewal or otherwise. ,.... ;,.o&,_..,...,..,,....,._.,.........,....,,._y,,_.;.,..,¥<'1l-<MHe&;,.,..,..,..,...,...,,..>jo,.... a dry hole and no other well is producing oil or gas in paying quantities from the Up.it A•.-...""'__,_ .. of ninety {90} days after abandonment of the first test well, this inate

"''""'~" agree-ment, in which event this agreement shall con-

'"..,='" have been drilled and completed. If production r-esults there-

"'""~annnue in force thereafter as if said first test well had been J?roductive in paying "result therefrom this agreement shalt tenninate It is agreed,, however, that the termination of this agreement shall riot.:relieve any party hereto from any liability which has accrued or attached prior to the. date of such tennination.

ll. LlMITATIO:N" ON EXPENDITURES Without the consent of all parties; (a) No well shall be drilled on the Unit Ar~a e1·ee}lt It"') "eU eK pnsslJ ptodded Evt h• this &gteetuw4; .ani except any well drilled pursuant to the provi'sions of Section 12 ot this agreement, it being understood that the consent to the drilling of a well shall include Consent to all n~s.o;aty expenditu•es in the drilling, testing, completing, and equipping of the well, including necessary tankage; (b) No well shall be reworked, plueged back or deepened except a well reworked., plugged back or deepehed pursuant to the provisions of Section 12 of this agreement, it being understood that !he consent to. the reworking, plugging back OI' <;leepening of a well shall include consent to all nee~ expenditures in conducting such operations and completing and equipping of said well to produce, including neceSsary tankage ; (c) Operator shall not undertake any single pro]ect reasonably estimated to require an ·expenditure in excess o_t Ten Thousand and no/1,00-----------------------.---- Dollars ($ 10,000.00 except in connection with a w,ell the driBing, reworking, deepening, -or plugging back of which has been pr_e- viously authorized by or pursuant to this agreement; provided, howeve;r, that in case of explosion, fire, flood, or other sudden emergency, whether of the same or different nature, Operator may lake 6Uch s_leps and incur such expenses as in its opinion are required to deal with the emergenc_y and to safeguard life and property, but Qpetator shall, as promptly as possible, report the emergency to the other parties. Operator shall, upoh request, furnish copies of its- "Authority for Expenditures" for any single project costing in ex~ cess o1 $ 5sOOO.OO

-4..-

603

A..f\,P.L, FORM 61 -

12. OPER~TIONS BY L£55 THAN ALL l"ARTIES

If all the parties cannot mUtually agree upon the drilling of any well on the Unit Area ether ll.&a t1 tesf, e-Jl prr ·hhll In it~ .iulis~ ~, or upon the rew.or-king, deepening or plUgging baCk of a dry hole dtilled at the joint expense of all pat1ies or a well jointly owned by all the parties and not then producing in paying quantiUes on the Unit Area. any party or parties wishing to d1iill, rework, deepen or p1uC back such a well n'lay give the other parties written notice of the proposed operation, specifyin& the work to be performed, the location, proposed depth, objective formation and the estimateQ cost of the operation, The parties receiv~ ing such a notice shall ha-ve thirty (30) days (except as to reworking, plugging back or drilling deeper', where. a drilling rig is on location, the period shall be liinited to (orty-eight (48) "hours enehtsi e af Sat 1:1 !Ia) er s~e .Qa.rl- after reei!ipt of the ·notice within which to notify thi! parties wishing to do the work whethet they eled to patticipate in the- cost of ~he proposed operation. Failure of a p;;tty receiving such a notice to so reply to it within the period above fixed shall eonstitu.te an election by that party not. to participate in the cost of the proposed operation.

If any party receiving such a no.tice elects not to· participate in the proposed oPet:ation (such party or parties. beintt hereafter referred to as '"Non-Consenting Party''), th~n in order to be entitled to the benefits of this section, the party or parties giving the notice and such other parties as shall elect to participate in t e . . . ninety 90)

operation (all sueh parbes· bemg hereafter referred to a·s the "ConSenting Pa"rlies"} shall, withirt ll>o·w-'t~ days after the expiration of the notice period of thirty {3(,) days (or as promptly as possible after the expiration of ·the -t8-hour period where the drilling rlg is on location., as the case tnay be} actually commence work on the proposed operation ami complete it with due diligence.

The entire cost and risk of conducling such operations shall be borne by the Consenting Parties in the proportions that their respective interests as shOwn in Exhibit "A" bear lo thf:! total interests of all Consenti.ng Parties. Consenting' Parties sball ke!!p the leasehpld estates involved in such operations free and clear o! all liens and en<:umbrances or every kind created by or arising from the operations of the· Consenting Patties. I! such an operation results in a dry hole, the Consenting Parties shall plug and abandon the well at tbelr sole cost, risk and expense. It any well drilled, reworked, dee~ned or plugged back under the provisions of this section results in a producer -of bil andlor gas in paying quantities, the Consenting Parties shall complete and e~uip the well to produce at their sole cost and risk, and lhe well shall then be· turned over to Operator and shall be operated by "it at the expeme and for the account of the Consenting Parties. Upon commencll'!ment ot operations for the drillil'lg, reworking, deepening or plugging back of any such well by Consenting Parties in :<~ccordance with the provisions of this section, each Non-Consenting Piarty shall be· deemed to have relinqulshed to- Consentin&: Parties, and lhe Consenting Parties shall own and. be entitled to teceive, in proportion to their respective interests, ·all of such Non-Consentin~ Party's inter~st in the well, its leasehold operating rights, and share of production therefrom until th~ proceeds or market value thereof (after deducting production taxes, royalty, overriding royally and other interests payable out of or meas"Ured by th;e product!Qn from such well acc:ruing w.ith respect to such interest until it reverts) shall equal the total of the following.:

{A)~ of each such Non-Consenting Party's Share of the cost of any newly acquiJ"ed surf'ace equipment .beyond the wellhead connections (including, but J).Ot limited to, stock tanks, separaiors, treaten, pumping cquipm~nt and pipl.ng), p]U!; ~of each such "Non-<;:oMent!ng Parly'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 section, it being agreed that each Non-Consenting Party's share of such cost$ and equlement wjll be that interest which would have been chargeable to e:~eh Non-Consenting Party had it participated in the well !rom the beginning oi the operation; and

(B) ~of that portion of the costs and expenses· of drilling, reworking, deepening or plugging ba~, testing and completing, after deducting any cash contrib~.tt~ons re<!eived under Section 25, and~ of that portlori of the cos't of newly acquired equipment in the well (to and including the wellhead connections), which would have been chargeable to such }'fon-Gonsent~ng Pa:rty if .st had participated therein.

604

A.'A;l'.L. FORM 610

In the case ot any reworklng-, plugging back· or deeper drilling. operation, the Consentin& Parties shall be permitted to ~se, free of cost, all casing; tubing ancl other equipment in the wen, but the ownership of all such equipment shall remain unchanged; and upon abandonment of a well after such reworking, plugging ~ack or deeper drilling, the Co~nting Parties shall account tor nil such equipment to the owners thereof, with each partY receiVing its proportionate part in kind or in value.

Within sixty (60) days after the completion of any operation under this ~;ecU.on, the p;arty conducting the operations for the Con$e_nting Parties shall furnish each Non-Consenting Party with an inventory of the equipment in and connected to the well, and an. itembed statement of the CO!it of drilling, deepening, plugging back, testing, completing, and equipping the well for production; or, at its option, the operating party, in lieu of an itemi1.ed statement of such costs· Of operation, may ,;ubmit a 9eta1led statement of Inonthl:y billings. Each month thereafter, during the time the Consenting Parties. are being rei_mbursed as provided above, the Consenting i?.arties shali furnish the Non·Con.s~nting Parties with an itemi:red statement of all costs: ar\d liabilities incurred in t,he operation.flf the well, together with a statement of the quantity bf oil and gas produced from it and the amount of proceeds realized from the saie Of the we-ll's working interest production during the preceding month. Any amount realized trom the sale or other disposition o! eqUipment newly acquired in connection with any such operation which would have been owned by a Non-Consenting Party had it participated therein shall be Credited against the total unreturned costs of the work done and of the equipment purchased, in determining when the. inter~t of such Non-Consenting Party sh~l reve;rt to it as Bboye provided; if there is a credit balance it shall be paid to such Non-Consenting Party.

It and when the Consenting Parties recover from a Non~Consenting Party's relinquished interest the amounts provided for above, the relinquished interests of such Non-Consenting Party shall automatically revert to it and from and after such reversion such NOn~Consenting Party shall own. the same interest in Sl.l.Ch well, the operating rights and working interest ·therein, the material and equipmertt i.n·or ·pertaining thereto, and the production therefrom as such Non-Consenting· Party would have owned had it participated in the drilling, reworking, deepening or plUgging back of said well. Thereafter, such Non-Consenting Party shall be charged wlth and shalt pay its proportionate part of the t:urther costs ·of the operation of said well in accord~

ance with the terms of this agreement and the accounting procedure schedule, Exhibit "C", attached hereto.

Notwithstanding the pr-ovisions of this Section 12, it is agreed that without the mutual consent of all partie·s, no wells shall be Completed in or produced from a sourc.e of supply f:rom which a well located elsewhere on the Unit Area is producing, unless such well conforJru!: to the then-existing well spacing pattern for such .source of supply.

The provisions o1 this section sh_all have no application whatsoever to the drilling oi the initial test well on the Unit Mea, but shall apply to the reworking, deepening, or plugging back of the initial test well after it bas been- drilled to the depth specified Jn Section '7, if it is, ot: therea[ter shall prove to be, a dry hole ot non-commerci;ll well, and to all other wells. drilled, reworked, deepened, or plug-ged ·back; or pro- PQS!!d t,o be drille4, reworked, deepened, -or plt,~gged baCk, upOn the Unit Area subsequent to the drilling of

the in'itial test well

13. RIGHT TO TAK'E PRODUCTION IN IOND

Eaeh party shall take in kind or separately dispose of its proportionate share of all oil and gas Preduced from the Unit A.rea, exClusive of production which may be used in development and producing operation $ and in preparing and treating oil for marketing purposes and production unavoidably lost. Each party shall pay or deliver, Or cause to be paid ot delivered, all royalties, oVerriding royalties, or other payments due on its share of such production, and shall hold the other parties free trpm, any liability therefqr. Any extra expenditur~ incUrred in the taking in kind or separate disposition by any pat-.ty of its ptopm-tiona.te share of the production shall be borne· by such- party.

Each party shall ~ecute all division orders and contracts of sale pertaining to its interest in production from the Unit .Area, and shall be entitled to rece\ve paym~t diJ:'(!ct from the pur:~haser or Purchasers thereof for its shB.l'e of ali production, _,_

605

•• r • . ·/)..A.P.L. FORM 6

In the event- ahy party shall fail to make· the arrangements n_ece£sary to· take in k\nd or separate1y dispose of its proportionate share or the oil and gas produc~d from the Unit. Area, Operator shall have the right, subject to r~ocation at Vfl-11 by the party owning it, but oot tOe. obligaUoo, to purchase such oil and gas or sell it to others for the· time being, at not les~ than the market. price prevailing in the area, which shall in na event be less than the price which OperatQr receives tor iis portion of tile oil aild gas ptodu.ced from the Unit Area. Any such purchase or sale by Operator· shall be subject always to the ri,ght of the owrun- or the production to e:<:ercise at li:ny time its right to take in kind 1_ or separately dispose of, its share of _all oil and gas not previously delivered to a purchaser. Notwithstanding t.he foregoing, Operator shall not make a sale into ·interstate commerce of any other party's. share of gas production without firSt iiving such other party ·sixty (60) p;.ys notice of :ilUCh intended sale.

H. ACCESS TO UNIT AREA

Each party shaH have access to the Unif Area at all reasonable ti~es, at its sole risk, to fnspnct or observe operations, and shall have access at reasonable times to lnformation pertaining to the development or operation thereof, including ·operator's books. and records relating thereto. Operator shall, upon request, furnish each of the other parties with copies of all drilling reports, well logs, tank tables, daily gauge and run tickets and reports of stock on hand at the first ot each month,: and shall make available samples of any cores or cuttings taken from any well dr!Ued on the Unit Areav

15. DRILLING CONTRACTS

All wells drilled on the Unlt Area shall be drflled on a Competitive contract basis at the usual rates prevailine: in the area. Operator, if it so deSires, may employ its own tools- and equipment in the drilling of wells, but its charges there~or shall not exceed the prevailing rates in 'the field, and the rate of such charges- shall be agreed upori by the parties in writiog before drilling operations are commenced, and such work shall be performed by Operator under the same te.rms- and conditions as shall be customary and usual irt the field in contracts of independent contractors who are doing work of a s.imilar nat1.1re..

16. ABANDONMENT OF Wl!LLs

No well, other than any well which has been drilled or reworKed p\ll"5,Uant to Section 12. hereof for which the Consenting Parties have not been fully reimbursed as therein provided, which has been completed as a producer shall be plugged an.d abandoned without the consent of aU part,ies; provided. however, if all parties do not agree to the abandonment of an)' well, those wiShing to continue its ot~era:tion shaU tender to each of the other parti-e!! its proportionate share of the· value of the well's salvable material and equipment , determined in accordance with the provisionl!i of Exhibit "C", less fhe estimated' cost of salvaging and the estimated cost of plugging' and abandon41g. Eilch abandoning Party shall then assign to. the nonabandoning patties, without warranty, exvress or implied, as l.o t'itlc or as to quantity, quality, or fitness for use of the equipment and material, all of its inter-est in the well and its equlpmen:t, to~ether with its interest i~ the lea!iehold estate as to, but only as to, the interval or intervals of the formation or formations lben open to production. The assignments so limited shall eticompa.ss the "d.rilling' unit~• upon whicli the well iS located. The payments by, and the assignments to, the assignees -shall be in a ratio based upon- the relationship of their respective percer:rtages ot participation in the Unit Area to the aggregate or the pet~ntages of participation in the. Unit Area of all a~s_lg'n·ees. There- shalt be no readjustment- of· interest in the remaining portion of the Unit Areav

After the as~ignn1.ent, lh~, assignors shall have no further responsibility, liability, ox- interest in the operation of or production from the well in the interval or interVal~ then oPen. Upon request of the assi'gnees., Operator' shall continue to operate the assigned ~ell for the account of the non-ab8l;ldoning parties at the rateS and charges -c:ontemplli.ted by this agreement, plus any additiQn-al cost and ·charges: which may arise- as the result of the separate- ownership of the assigned well.

606

1- """'ry··-·:w RENTALS ANI' Sl!UT- IN GAt;_,- • ""' ..,\'NEN'J:S

·.·ope1:citor shaJ. .... pay all delay rentals and shut-1. .. well payments ·Hhich fl'\~ybe required unde).· the terms of all leases covered by this agreeroent a:nd submit evi.dence of each payment to the other parties. Each party .shall notify the other, in writing, at icast thirty (30) days prior to the date any rental payment is due, as to t\+wther. or not it elects to participate in the ·payment thereof. Iri the event either party elects not to participate in a rental payme11t, and the other po.rty elects to part.icipate there-in. then the p.arty desiring not to- participate s·hall promptly cxecut~ and deliver to the party desil"'ing to participate in such rental payment an as~ignment of st1ch non-part_;_cii)ating patty's right, title and interest in and t-o such le_ase, or leases-. and such lease, or leases-; shall no long.er be subject to this agreement. The amount of such payments·, when made for the account of both parties, shall be c.haq;.ed by Operator to the joint account of the parties. Operator shall not be liable to the other party in damages for the loss of any l_ease or interest therein if, through mist :ake or oversight, any rental or shut-in ~-te-ll payment is not paid, or. is erroneously paid .. There shall be no readjustment of interests of the parties in the remaining portion of the Unit Area in the event of a failure to pay, or erroneous payment of~, rental or shut.:.. in well payments. If any party secures a new lease covering the terminat-ed interest, such acquisition shall be subject ·to the proviS-i011S of paragraph 22 of this agreement.

Operator shall promptly notify each other party hereto of the da·te. on \o-'1hich any gas well located on the Unit Ar:ea is shut in and the reason therefor and the date on which said well is restored ·to production.

Should any party desire to sell all cir aqy part of its interests under this contr.act, or i terest& in the Unit Area, it shall promptly give written notice to the other parties, w" cerning its pt"Oposed sale, which shall include the name and address of the pectlve purchaser (who must be ready, willing and able to purchase), the purchase pt·ite 1 and all shall then have an optional prior right, for a period of te days a:fter receipt of the notice, to purchase on the same terms and conditions the interest whi e other party proposes to sell; and, if this optional Tight is exercised, the purchasing parties shall e the -putchased interest in the propoxtions that the interest of each bears to the total interest o purchasing parties. However, there shall be no preferent-ial right to purctlase in those cases: whe ny party wishes to mortgage its interests, or ~o dio;pose of its int-erests by merger, reorgani,tation, olidation, or sale of all of its assets, or a sale or transfer of Its interests to a subsidiary or pany, or subsidiary of a parent company, or to any company in which any one patty owns a ma-

19. SELECTION OF NEW OPERATOR

Should a sale be made by Operator of its tight.'! and interest~ the other patties shall have the right within sixty (60) days after the date of such sale, b:y majority vote in interef;t, to select a new Operata!. If a new Operator is -not so selected, the transferee of the present Operator shall assume the duties 'of a)'Ld act as Operator. In_ ejther case, the retiring Operator shall contin\.le to SQJ.·ve as Operato'r, and discharge its duties in that capacity under this agreement, unt-il its successor Operator is selected an_d begins to functioh, but the present Operator shall t~ot. be obligated to continue the perfox:manc-e of its duties for more than .12.0 days after the sale of its rights and interests has been cotrtpleted,

_,_ "Joint Lo~"

607

A.A.I'.L. FORM 61 o

20. MAINTENANCE OF UNIT OWNEltSHIP

For the put:po&e of maintaining uniformity of owner!lhip in the oil and gas leasehold interests covered by this contract, and no~Withstanding any other provisions t-o the contrary, no party shall sell, encumber, transfer or make other disposition of its interest in the leases embraced within the Unit Area and in well$, equjpment and production unless such dispOsition covers either:

( 1) the entire 'interest of the party in all leases and equiptrrent and prodUction; or

(2) an equal undivided interest in all leases and equip;ment a,n<J pre:duction in the: Unit Area.

E.very such sale, encumbrance, transfer or other disposition made by any party shall be made expressl:r subject to this agreement, apd shall be made without prejudice to the ri&"hts of the other parties.

If at any time the interest of any party is divided among and owned by four- or more co-owners, Opera-

tor may, at its diScretion, iequlre such co-owners 1.o appoint a single trustee or agent with f-ull authority !o receive notices, approve expenditures,-·re'ceive billlva:s for a,nd approve and pay such party's share of the joint expenses, and to deal generally with, and with power to bind, the co-owners of such PiJ;'rty's intet-ests within the scOpe of the operations embraCed irr t.his contract; however, all such co-o'Vners shall ent~r into and execute all contracts or agreements for the disposition o! their respective shares o[ the oil ani! gas produced from the Unit Area and lQey shall have the right to receive, separatelf, payment of the sale proceeds thereof.

Zl. RESIGNATION OF OPERATOR

Operator may resign from .its duties :a.nd obligations as Operator at any time upon written notice of not less than ninety (9ft) days given to aU other parties. In this case, all parties to this contract shall select by majority vote in h1terest, not in numbers, a new Operator. wh~ shall aSS\l:me the ·responsibiliti~ and duties, and have the rights, prescribed ·for Operator by this agreement. The retiring Operator shall deliver to its succeDO-r all records and in~Qnnation necessary to the discbl!.rge by ~e new Oper11tor of its duties and oblige.tions.

~2. LIABILITY OF -PARTIES

The liability o! the parties shall be several, not joint or collective. Each party sba\1 be responsible only tor its obllgafions, and shall be It-able only for its proportionate share of the costs of developing and operating the Unit Area. Accordingly,. Ule lien gx'atlted by each p:uty to Operator in Section 9 is given to sec Ure only the debts of each severally. It ·is not the intention of the parties to c1·eate, nor shall this agnement be construed as creating, a mining or othet partnership or association, or to render them liable as pntners.

23. RENEWAL OR EXTENSION OF LEASES If any party secures a renewal of any oil and _gas lease subject to this .contract, each and all of the other parties shall be notified promptly, and shall have the right to partici'?ate in the ownership of the renewal lease by paying to the party who acquired it their several proper propoi.1ionate shares of the ·acquisition cost. Which shall be in proportion to the interests held at that ~e by the parties in the Unit Area.

If some, but less than all, of the parties elect to participate: in the purchase of a renewal lease, it Shall be owned by ijle parties who elecJ to participate therein, i.n a ra«o based upon the _relati.onship of ti).eir respective percentage of particiP.ation in the unit area to the aggr~gate of the percentages· of participation in the unit area: of aU parties put.icip;iting in the purchase of sut:~ renewal lease. Any ren.ewa.Jl~se- in which less than all the partie:;. elect to participate shall not be :subject to this agt·eement.

Each party who participates in the purchase of a renewal lease shlill be given an .assignment of i'l:s proportionate interest therein by the acquiring party.

The p1·ovisions uf this section shall apply to renewal leases whether theY are "fOr the entire interest covered by the expiring lea$~! or cover only a portion ·of- its area or an intereSt therein, Aily renewal lease taken before _the expirtttion of its predecessor lease, or iaken or conu·acled for within six (6) months after the expiration of the existing le~se shall be subject tp thi.s provision; but- any lease taken or contracted fm· more than six (6) months after the expiration of an existing lease shall not be deemed a rentwal lease and shall not be subject to the provi~ions of this section.

The provisions in this section s"hnll apply also- and. in like manner to extensions of oil and gas ieases.

_,_

608

24. SURRENDER OF LEASES

The leases t?v~ed by this- agreement, in so far as they embrace acreage in the Unit Area, shall not be surrend~r~ in whole o.r in part. Unless all pcu:ties consent.

However, should any party desire to surrender its interest in any lease or in any portion theteof, and other parties not agree or consent, the party desiring to suiret)der sh•U assign, Without express or implied . wartanty of tine, all of its interest in such lease, or portion thereof, and any well, ma~a:I and equipment which. may be located thereon ~nd any rignts in production thereafter secured, to the parties not desiring to surrender it. Upon such assignment, the assigning_ party shall be relieved from an obligations th.en:after ac-, cruing, but- not theretotore accrued, with respect to tM acreage assigned and the operation of any well thereon , and tl'!E' assigning party shall have no further interest in the lease assigned and its equipment and p:roduction. The parties assignee shall pay to the party ~signor the reasonable salvage value of the lal..ter's intereSt in any wells artd equipm~t on ~the assigned acreage, determined in aocordan.ce with the provisions of Exhibit "C'', less the estimated cost of salvaging and the estimated cost of plugging and abal)doning, n: the assignment is in favot of more than one party, \he assigned interest shaD be shared by the parties assi~ee in the proportions that. the interest of each bears to the interelit of all paTties as5i&nee.

Any assignment or surrender made under this provision shall not' reduce or change the assignors' or surrendering parties' inte:rest, as itv was Immediately before. .the assignment, in the balance of the Unit Area; and the acreage assigned or surrendered, and subsequent Operations thereon, shall not thereafter be subject to the tenns and provisions ·of this agreement

2:5. ACREAGE OR CASH CONTRIBUTIONS

If any party receives while this agreement is in force a cOntribution. of cash toward the drilling of a well ·or anY other operation on the Unit Ar:eaj such contributh;m shall be paid to the party who conducted_ the drilling or other operation and shall be applied -by it against the c.ost of such Q.rllling Qr other operation. If the contribution be in the form of acreage, the paj:ty to whom the contribution is made &hall promptly execute an assignment of the acreage, without warranty of titi~, to all parties to this agreement in proportion to their interests in the Unit Area at that time, and such act"e'-ge shall become a part of the Unit Area and be governed by all the provisions of this contract Each party shall promptly notify all Qther parties of all acreage or money contributions it may obtain in support of any well or any other operation on the Unit Area.

26. PROi'ISION CONCERNING TAXATION

Eaeh of the parties hereto elects,_ Wlder the authority pf Section 761(a) of the Internal Revenue Code o.f 1954, to be exclucl.ed frOm the application of ali of the provisions !>f SubchapWr K of Chapter 1 of Subtitle A of the Internal Revenue Code of 1954. If the income tax laws of tbe state. or states J.n which the property covered hereby is located contain, <lr mal' hereafter contain, provisions similar to those contained in the: ~ubchapter of the Interfial Revenue Code ot 1~54 above referred to under whieh a similar election 1s permitted, each of the parties agrees that such election shall be exercised. Each party authorizes and directs the Operator to execute such an election or elections oO~_ its behalf and to file the election with the proper governmental ofti~ or agency. If requested QY th'e Operator so to do, each party ·agrees to execute and join in .such an eleclion.

Operator shall ;render for ad valorem taxation. an properlf subject to \his agreement Which by laW should be rendered for s·uck taxesi and it shall pay all such tax-es- assessed thereon before they becotne delin~

quent. OperatOr shall l;llll all other parties for their proportio;nate shafe of all tax payment$ io the manner provided in Exhibit uc".

If any tax as!essment is co~i9-ered unreasonable by Operator, it may at its ~scretion protest such valuation wit.hin the thrle-and manner prescribed by law, .am~ prosecute the protest to a final determination, unless all parties agree to abandon the protest ~;~rior to flna1 determination, When any such protested valuation shall have been finally determined, Operator shall pay the -asse!sment for the joint acCount, together with interest .and penalty accrued, and the total cost shall then be assessed against the parties, and be paid by them, as provided in Exhibit "C". The above two paragraphs are subject, however~ to paragraph 3L-B.

609

'J\.li,.P.l,,. FORM 611

27. INSURANCE!

• Al all times whHe operations are conducted hereunder, Operator shall comply with the Workmen's Compensation Law of the Slate -where the operations are being conducted. Operator shall also carry or provide insurance for the benefit of the joint account of the parties as may be outlined in :tx"hibit "0" attached to and made a part- hereof. Operator shall requiTe all contradors engaged i'n work on or for the Unit Area to comply with the Workrnen'!i CotnpensatiQn Law of the Slate Where the operations ue bel.ng conducted and · to maintain such other insurance as Operator may require.

In the event Automobile Public LiaPifity Insur~nce is specified in sa.ld Exhibit "D", or subsequently receives the approval of the parties, no dire(t charge shall be made by Operator for premium~ p~J~.id for such in-· surance for operator 1s tully owned automotive .equipment.

2$, CLAIMS AND LAWSUITS

If any party to this contract is sued on an alleged c;i.us~ of action arising out of operations on the Unit Arr:a, or on an allered cause of action involving title to any lease or oil and gas interest subjected to this contract , it shall give prompt written notice of the. suit to the Operator and all other parties.

The defense of lawsuits shalt be under the general direction of a commltt~e of lawyers representing the parties, with Operator's attorney as Chairman. Suits .may be settled during litigation only with the joint consent of all parties. No charge shall be made for services performed by the staff attorneys for any of the parties, but otherwise all expenses incurred in the defense of suits, together with the amount paid to discharge any final judgment, shall be co~sidered costs of 6peration and shall be charged to and pa.ld by all parties in proportion to their then interests in thf;!. Unit Area. Attorney!, other than staff attorneys for the parties, shaH be employed in lawsuits involvfug Unit Area operations -only with the consent of all parlies; if outside: counsel is employed., their fees and expe<nses shall be considered Unit Area expense· and shall be paid by Opera-tor and charged to all of the parties in proportion to their then interests in the ·unit Area. The provisions of this paragta:ph shall not be applied in any instance where the lOss which may result from the suit is treated as an indivi-dual loss rather than a joint loss under prior provisions of this agreement. and all such suits shall _be handled by and be the sole responsibility of the party or parties concerned.

Damage claims c-aused by and arising out of operations on the Unit Area, conducted for the joint ac~ count of all parties, shall be handled. by Operator and its attorneys, the settlement of ~lahns- of this kind Shall be within the- discretion of Operator so long as the amount pa1d m setuement ot any one cloum does not exceed. one lhousand ($!000.00) dollarS and, if settled, the sums paid in settlement shall be chaJ:ged as expense to and be paid. by l!ill parties in proportion to their then intel'ests in the Unit At·ea.

29. FORCE MAJEURE

lf any party is render-ed unable1 wholly or in part, by fon:e- majeure to carry out its obligations under this agteeinent, other· than the obligatiOn t_o make money payments, that party shall give to all other parties prompt written notice of the fOrce majeure with reasonably full particulars concerning_ it; thereupon, the obligations of the party giving' the notice, so far as they are affected by the -{or«' majeure, shall be ws'pended during, but no l"onger than, the continuance of the foree majeure. The affected party shall us-e all possible diligenee to remoVe the force majeure as- quickly as posSible..

'l'be requirement that any force majeure sball be remedied with all reasonable dispatch shall not require· the settlement of strikes, lockouts., or other labor difficulty by the party invoh:ed, conttacy to its wishesi how all such difficulties sh;ill be handled shall be entirely within the discretion of the party concern-e.~.

The term "force maleure" as here employed shall mean an act of God, strike, lockout, or other indUstrial disturbance, act of the public enemy, war, blo~kade, public riot, Jightni.ng, fire, storm, flood, explosion, governmental restraint, unavailability of equipment, and any other cause, ·whether or- the kind specifically enumerated above or otherwis~. which is not reasonably within th~ control {Jf, the 'Party claiming suSpension,

3U. NOTICES

All notices a.uthori~d or requ,ired betwe~n the p~rtie~. _and required by any of the provisions of this agreement, sh-all, unless· otherwise specifically provided, be given in wtiting by United States mail or Western Union Telegram, postage or charges prepaid, and addressed to the party to whQm the notic:e is given at the

610

A.A'.P.L. FORM 6.10

aildr~~seF listed on Exhibit "A''. Tha originating notice to be given. und~r any provision hereof shall be de.med given only when rec~iv~d by the party to whom such n::ltice is d.treckd and the time tOr such party to give any notice in response thereto shaH run from the date the originating notice js received The second or apy re- ·sponsive notice t!hall be deemed giV'efl when deposited in the United States. mall or with the Western Union Teleeraph Company, with postage or charges· prepaid. Eat:h party shall have· the right to· change its address at any time, and from time to time, by giving written notice thereof to all other. parties.

31. 01'HER CONDITIONS, IF ANY, ARE:

(a) If any party herer.o hereafter s9Quld create any overriding royalty, production paymerit~ or other burden against its working interest production and if any other party or parties should conduct nonconsent operations pursu-ant to any provisions of this agre~nt and, as a re·sult, become entitled to rece;i.ve the ~rking interes& production otherwise belonging tQ the non-participating party, the party or parties entitled to receive the working interest prodUction of tbe non-participating party shall receive such production free and clear of burdens against such production which may have been created subsequent to this agreement and the non-participating party creating such subsequent burdens shall save the participating party or parties ha:tmless with respect to the recei.pt of such working int-erest production.

(b) At and during such time, or times, as non-operator is ~ercising the right to take in kind or separately dispose of its proportionate part of the production as set forth in Section 13 hereof, non-operator shall pay or arr·ange for the payment of all prodUction, severance, gathering, sales or similar· taxes imposed upon such part. At and during such time, or times, as Operator is purchasing or selling non-Operator 1 s proportionate part of the production as set forth in said Section 13, Operator shall pay or arrange for the payment of all production, severance, gathering, sa+es or similar ta~es imposed upon sucP part.

(c) No-twithstanding any provision to the contrary appearing elsewhere herein, consent to the driLling of a well shall not be deemed ~ consent to -the setting of casing and a completion attempt. After any well drilled pursuant to this agreement has reached its authorized depth, or an impenetra·ble is encountered as set out in Paragraph III of the letter agreement dated December 1, 1974, to :which this Operating Agree:m.ent is attached, Oper.ator shall giv-e imm-ediate notice to non-Operators together with all information and data obtained in the drilling of such well up to- such time. Cbncurrent therewith Opera~or shall also advise non-Operators of his recommendation, 9ecisiop or intent respecting further operations. The parties rece~ving such notice, information~ data and advice shall h~ve fortyeight (48) hours in which to elect whether' or not they desire to set casing and to participate in the completion attempt. Failur'e of a party re_ceiving such notice so to reply withi~ the period above fixed shall constitute an election by- that J'arty not to participat-e in the cost of a completion attempt. If all of, t:he parties e-lect to plug and S.bandon the well. Operator shall plug and -abandon same at the elCpense of all of the parties. If one or more, but less than all of the parties elect .to set _pipe and attelit.pt- a completion, the provisions of Section 12. shall apply to the operations thereafter conducted by less than all parties,

611

. A.A.P.L FOl~M· "

This agreement may be signed in counterpart, ond shall be binding upon the parties and uppn their heirs, successors, represeritaLive:; and assigns.

OPERATOR

Buttes Resources Comp~y

~:

By Q~PM C . d)" f="> Chapman

Roger·C~ V:i.c.e-President

NON-OPE:AATOR ~

Aztec Oil & Gas Company

lli.CS hes1dent

THE. STATE OF TI:..

COUNTY OF !lARJUS - -·x

1

1

BEFORE ME 1. the titl.deraigned authority, on this day personally appeared ROGEa C. OiAPMAN, k~own to me to be the person ~hose. name is subscribed to the foregoing instrument as Vice President of BUTtES RESOURCES COMPANY, a corporation~ and acknowledged to me that he executed- the same as the act and deed of said corporation for the purposes and consideration thete~n expressed, and in the. capacity therein stated.

!1 GIVEN UNDER MY !LIND AND SEPfj<fF OFFICE,. this the ,1# dey of CU£.i"~ ,19 •

SHARON S, SIMMONS

Notar}' PubliC In and for Harris County, Te~ M,¥ c:tJmml$&ion fxP.lr:es June l, 19o_;Z;£.

Texas

THE STATE OF TEXAS 1

I

COUNTY OF ll_IL!.AS 1

BEFORE ME~ the undersigned.• a Notary Publ.i-E;:, in and for said 'County-.

and State, on this· day personally appeared J(~ q. ,,:C 9 fu J , known to me to be the person and officer whose name is s~bscribed to the foregoing ~nstrument an~ acknowledged to me that the same was the act of- the said AZTEC OIL & GAS COMPAh'Y~ a corporation, and that he executed the same as the act of "such corporation ·far the purposes and consideration therein expressed~ and i.o. the c~pacity therein stated.

!1 GIVEN UNDER MY HAND Ah'll SEAL OF OFFICE, this the -'-8'-":!-

__ day of

4-r«n ,,.... , 19?5 • (/ ---

Notary P~blic- in and for Dallas.Coun~y~ Texas

SUB ELLEN PER!t.Yj I•!crr.ry Fulllit· lit and WI' Ohl.ltts <;uur.ty, 'te...,w. lft .~log Bxpke.! J'WIC z_ J91S,

l

l

. _, ,.

l

612 '

'

613

- EXHIBIT "A11

Attached to and made a part of Operating Agreement with Buttes Resources Company as Operator.

When this Operating Agreement becomes effect.ive, as to a particUlar Well, Exhibit "A" shall be. prepared, listing all wo1:king interest owner$? their percent of interest and the spec:t.fic lands desigh.ate.d for suclt well.

614

EXHIBIT "B"

Attached to and made a part of Operating Agre~ment with Buttes Resources COmpany as Operator,

11

There is no Exhibit 1\ 11 •

615

COPAS- 15161

by the

R•c.,.,.,...n.;~.c~_ Coundl o1 f'atroleuril A~ntonts Socialin o1 No11h Amerlcd

-------------------.------ -----------uUin>rl rn'iiW'

EXHIBIT .. c ,. I

Attached to and made a part ot .. .21?:..£~.~-~~e~me.nt - - - - - - I -----------------------·----------·----

ACCOUNTING PROCEbURE

JOINT OPERATIONS

L GENERAL PROVISIONS

1. Definitions "J"oint Account" shall mean the account showing the charges and credits accruing because ot the Joint Operations and whi<:h are to be shared by the Parties, "Joint Property" shall titean the real and personal property subject to the agreement to wblch this. Accounting Procedure is attached. - t•Joint Ope-rations" shall mean ,aU operation's ·necessary or proper-for the development, operation protection and ma-intenance of the Joint Property. ' "Operator" shall mean the party designated to conduct the Joint Operations. "Non-Operator_s" shall mean the parti~ to this agreement other than the Oper!ltor. ''Parties" shall mean Operator and Non-Operators, "Material" shall m·~an personal property, equipment or supplies acquired or held tor use on the J.oin.t Property. "Controllable· Material" shall be defined as set forth uhder the subparagraph selected below: A. [ ] Material which at the time is so classified ID the Material Classification Manual as most recently recor .nmended by the Council of Petroleum Accountants Societies· ot. North. America.

B. [X] Matetial which is ordiJlarlly so <:lassified _and controlled by Operator in the conduct of its operaticsns.

List shall be funrlshed Non-Op~ators upo.n request.

2. Statements and Billings Ope~tor shall bill Non-Operators on or be1ore the last day of eaeh month --for their proportionate share ot costs and expenses for the preceding month. Such bills will be accompanied -by statem~nts reflecting the total charges and credits as set forth under the subpar!lil""aph selected below: A. [ ] Statement in detail of all charges and credits to the Joint Account. B. [X] Statement of all charges and credits to the Joint Account, summarized by appropriate- classifications indleative of the nature. th-ereof.

C. [ ) Statement of all charges and credits to the Joint AccoUnt, swnrnarized by appropriate dassification indicative of the. nature thereof·, except that items of ControllAble Material md unusual charges ·and credits shall be detailed.

S. Advances and "Payments b;y "Non-Opcntors Unleu otherwise provided tor in the agreement,_ the Opetator may require the ]ion-Operators to advance their share of estimated cash outlay for the succeeding .month's operation, Operator shall adjust each monthly billing to reflect advances received from the Non-Operators. Each Non-Operator shall pay its proportion of aU bills within fifteen (l~) days after receipt If payment is not made witlUn sueh time, the unpaid balance shall bear interest monthly at the rate of ten per cent ~lO'f'0 ) per annum or the maximum contract rate ~ermitted by the applicable usury laws in the state in which the Joint Property is located, whichever is the lesser.

4. Adjustments Payment of any such -bills shall not prej.udice the right of any Non-Operator to protest or q'Uestion the correctness thereof; provided however, all bills and statements 'rendered to Non-Operators by Operator during any calendar year shall conclusivey be presumed to be true and co·rrect af~r twenty-four (_2.4) months following the end of any such calendar year, unless wi~ the said. twenty-four ~2.4) month period a Non-Operator takes written exception thereto and J?B-kes claim on Operator ~or ~djustment. No adjustment favcir~ble to Operator shall be made- unle$ it is made within the same prescri~d period. The. provisions of this paragrap)t shall not prevent adjustments. resulting from a physical in-ventory of the Join,{;- Property as provideQ. for in Section vn.

5. Audits A Non.-Opet:ator, upon notice in wtiting to "Operator and aU other' N"on-Operatot:s, sb~l have the ri·ght 'o audit Operator's accoup.t.s and recor&J relating to the acco1-1nting hereunder for any calendar year within the twenty-fOllr (2.4) JllOnth period following tl"le _end of- such calendar yea"T; provided howev-er, the making: of an audit shall not extend the time for the taking of written exception to arid the adjustments of aCCounts as provided for ln Paragraph 4 o1 this Section I. Where there ate two or more .lilon-'OPerators, the N-on-Operatori!l Sl"!-all make eyery reasonable effort to conduct joint .or s4n~ltaneous audits, in a manner which Will result in a minimum ot inconvenience to the Operator. Operator shall bear no portion of the Non-Operators' audit oost iDeurred under this paragraph unless agreed to by the Operator.

6. Appr~valby Non-Operaton Where an approval or other agreement of Non-Operators is expressly required under Paragraphs 5A.. 5B, 6A and a of Section Il:, Section III, Section V, Section VI, and Pa'ragr.al?h 4 of Section Vll,. of this Accounting Procedure and if the weement to which this· AccoUnting Procedure. is attache_d cQntains no contrary provisions: in reJ!:ard thereto, the Operator shall notify all Non-Operators and the agreement or approv;tl of a majority in interest of the Non- Operators shall be controlling' on· all Non-Operators,

616

'F· . . .

I'•Ii'''

' ··' ).,, .q(J

H. DIRE.CT CHARGES

Operator shall cJ::iarge. the Joint Accouht with the following items: 1. Rentals and Royalties Lease rentals and. x:oyalties paid by Operator for the Joint Operations.

2. Labor A. (1) Salaries and wages of Opetator's employees directly employed on the Joint Property in the conduct of Joint Operations.

(Z) Salaries of Arst-level supervisors in the field if such charges are excluded !rom overhead rates in Option A of Section m.

(3) Salaries and wages of technical employees temporarily assisned to and directly employed on the Joint Property if such charges are excluded from overhead rates in Option :B of Section m (4) Salaries and wage!; .ot technical employees either teml)orarily or perm~ently as.slgned to an.d directly employed in the opeJ11.tion of the Joint Property if such cilarges -are excluded from overhead rates in Option C ot. Section Ill.

B. Oper~t.O".f's cost of holiday,. vacation, sickness and diSability bene!its and other customary allowances paid to the employees whost! salaries and wages are chargeable to the Joint Account under Paragraph .2A of this Section II and Paragraph rA of Section Ill; except that in the case of those employees only a pi'o rata portion of whosfl! salaries and wages are chargeable to -the Joint Account under Paragrat:~h lA of Section 10 1 not more than the same pro rata portion oi the benefits and allowances he1·ein provided for shall be charged· to the Joint Account. Cost under this Paragraph 2)3_ 11\ay be charged on a "when and as paid basis'' or by ''percentage asse:smeht" Qn the amount of salaries and wages chargeable to the J()lnt Account. under Paragraph 2A of this Se;cbon II and Paragraph IA of Section m. lf percentage as&eSsment is used, tbe rate shall be b~d on the Operator's cost ex~rience.

C. Expenditures or. contributions made pursuant to assessments imposed by governmental authority. whi.ch are applicable to. Operator's labor cost of sal~ies ami wages chargeable to the Joint Account under Paragraphs 2A and 2:S of this Section n and Paragraph 1A of. Section III.

D. Reasonable personal expenses of those employees whose salaries and wages are chargeable to the Joint Ac-

~unt under Paragraph 2A of this Section U and fot which expenses the enipl~ees are teiJI~bursed under Operator's usual practice.

·3. Employee Benefits dperator;s current cost of established plans for emplOyees' group life insUrance, hospitalization, pension, retire.,. ment, stock purchase, "Utrift, bonus, and other bene;fit Pians of a like nature, applicable to Operator's labor cost chargeable to the· Joint Account under Paragraphs 2A and 2B of this SE!ction II and Paragraph IA of Section III shall be chargeable as indicated in the subparagraph selected below-: A. ( ] 0perator1s actual cost. B. (XI" Operator's actual cost not to ~:xceed fifteen per cent (15%).

4. Material Material purchased or furnished by Operator for use on the Joint Property as provided under Section IV. So· far as it is reasonably practical and consistent with efficient and economical operation, only such Material shall be purchased for or transferred to the Joint Property as may be required for· irrunediate use; and the accumula~on of surplus stocks shall be avoided.

5.. Transportation Transportation of ~ployees and Materia~ necessary for the Joint Operations hut subject to the following limitations : A. If Material is moved tO the Joint Property from: the Operator's warehoUse or other properties, no charge shall be made to the Joint Acaojmt_ for a distance greater than the distance from the .nearest reliable supply store, recognized barge terminal, or railway receiving point where like material is normally available, unless agreed to by Operator and Non-O~erators.

B. If surplUS Materi•l.is moved. to Operator's. warehoU're or other storage point, no charge shall be made to the Joint Account for a distance g"eater t.hal1 the distance to the neatest relia\;lle supply store, recognized "barg~ terminal, or railway Tll!:ceiv.ing point unless agreed to by Operators and Non-Operators. No charge shall be made to the Joint Account for moving Material to oth~r propt!rties belongblg to O:Perator, unless agreed to by Operator and Non-Operators.

c. In the appllcation of Subparagraphs A and B above, there sh•ll be nJJ equalizatian of ac~al ~oss trucking costs of $100 or less.

6. Services A. The cost of contract services and utilities procured. from outside ~oUrces Qther than services covered by Para-

Jraph 8 of this Section II and Paragraph lB of Section UI. The cost of professiopal consultant -services shall not be charged to the Joint Account unless agreed to by Operat-or and Non-Operators:.

B. Use and service of equipment and facilities ·furniShed by Operator as provided in ParagraPh 5 of Section IV.

7. Darrragt;S and Lo~s to Joint Pro11erty All costs or expenses necessary for the repair or replacement of Joint Propert:y made necessary because of damages or losses incurred by ftr.e, flood, stb"rm, theft; accident; or o_tber ca';lse, except to the extent that the damag!!" or Joss could have been avoid-ed through the exerc~se of reasonable dihgence. on th~ part of Operator,· Operator· shall f!ll"nish Non-OperatorS written notice of damages or lossef iJ:~.C\.!.rred as soon as pra"ticable after a report the1·eof has been received by Operator.

8. Legal Bx,pense Ait cQsts and expens.es of handling investigating, and set~b)g Ittiga,tion ·or claims ansmg by reason of tl:te. Joint Operations or neceSsa-ry to proted or recove_r the Joint Property, inclu~g, .but not limited. ta, !ttorney's fees, court cos.ts, cost of inve~tigation or procuring evidence and amounts. p~1d m setUemen~•.or satisfachon of anys;u~h litigation or claims; provided, (a) no t:barge sh.Ul be n1ade for tl!.e serv1ces. of Operators legal staff or ot~er regularly .employed pen~onnel (such services- being considcted. to be Ad,mUnstntive Ov~htad under Section Ill), unless agreed t-o by Opetator and Non-Operators, and {b) ~o ch~rge shall_ be_ made for the fees and expenses of oUtside attoljleys unless the en'lployni.ent of such attotneys lS agreed to by Operator and Noh-Op~ators.

9. Taxes All taxes of every kind and nature assessed or l~vied upon or fu co.nnection wlth the Joint Property, the ~peration thereof, ot the production therefrom:, and which taxes have been paid by the Operator for the benefit of the PartieS.

617

,-'-----;'----------------------~~~~~I -

Ia~-- I Net premiums pt~id for insure.nce req.uir:ed to be carried on the Joint PropertY fot the protection of the Parties. In the event Joint Operations 11-re conducted in a state in which Opera_tor may act m self-insurer for Workmen'$

I

Compensation andjo:r Employers Lla.bility unde~ the respective stnte's l.a:wS' Operator may at its election include ' the risk under- its self-insurance prcrgram ·and in that event, Operator shall i~cJude a charg~ therefor on th~ followingbasis : ---·--·---------~e£_~-~---~~---~~E-~-~~p~~---~~_,l;.?~_f::~--~~~-~::.~~E:.~~~~L~~:.~.?!.~---·-------------------·---------- -------·--·-·········· ····-·-----···-····---·-------------- -----·-····-··-- .... ··--------~-- ······-··---------------·--------·-----·---- ··-----··--··········-----·· ······---··--··-······--·-·-·-----·····--········-··-············ --·-------···- ·-···-···-···········---··-···---·----· 11. Oth~tr Expenditures Any other eXpenditure not covered or dealt with In the foregoing provisions of this Section II, or in Section Ill, and which is incurred by the Operator for the nece:sl)ary and proper conduct ot the Joint Operations.

lll. INDIRECT CHA~ES

Operator may charge the Joint Account. for indirect costs either by use of an allo~ation of district expenSe items plu$ the rate for administrative overhead, and phu the warehousing charges·, all as ptovided klr in Paragraph 1 of this Section lll or by combining all three ?f said items under the r:a~es provided for in Paragraph 2 or 3 o% thb Section ill, .u indicated next below:

OPERATOR SHALl. C"6ARGE INDUlEC:r COSTS TO THE JOINT ACCOUNT· UNDER THE TERMS OF:

[ ] Paragraph 1. (District Expense, Admini$trative Overhead and Warehousing") [X] Paragraph 2. (Combined ltates - Well Basis) [ ] Paragraph 3. (Combined Rates - Percentage Basis)

The cost and eXpense ot services from outside sources in C()nnection with matters of taxation,. traffic, accounting or matters before or involving governmental agencies shall be considered as included in the overhead rates provided for In the above selected Pa1:agraph oi this Section m unless such caSt and expense are agreed to by Oper.atol' and Non- Operators as a direct charge to the Joint A-ccount.

THE OVERHEAD RATES PROVIDED FOR IN ANY OF TBE PARAGitAPRS SELEOTE·o AB.OVE A. [ ] shall [XJ shall not include salaries and personal expenses of first-level s~pervisors in the field. B. [ J shall [J(] shall not include salaries, wages and personal expenses -of teehni<;al employees temporarily assigned to and directly em{)loyed on the Joint Property.

C. [ Xl shall ( ] :shaU not include salaries, wages and personal exp.enS!Os e>t techni~l employe:e;s ~ithe~; temporarily or permanently assigned tel and dil'ectly em.i?loyed in the ope;ation of the .::roint Propert;Yo

1. District Expense, Administrative Overhead and Wareltousing A. District Expense Operator sh<~ll charge the Joint Account with a. pro rata portion of the salaries, wages and expem;es of Operator's production superintendent and other employees serving the Joint Property and ather properties of the Operator in the same operating area, whose time. is not allocate<! dire~tly to t;he prop$'ties, and a pro rata portion of the cost· of maintaining and QJ?erating a production offiae known as Operator's.. _.......... .

-------.. ·····-·----· .. ·-·-··------------- office located at .or near ···-···--···-·-··-·-·-· .. ········-···----··----··------ (or a comparable office jf location changed); and necessary sub-offices (if any), maintained for the convenjence of the above.¥described offjce,. lilnd all necessary camps, including housing fa,cilities for employees if required, used .in connec!ion with th~ operati~ns of the. Joint Property and other properties in the same operating_ area. The expel"lse of, less any revenue from, such facilities may, at the option o1 O_perator, include depreciation of investment or a fair monthlY rental hi lieu of depr.e:Ciation. SUch charges shall be apportiOhed to all pro:perties served. on sQme equitable basis consiStent With Oper.at9r'-s accounting practice.

B. Adnilnistr.ative Overhead Operator shall charge administrative overhead to the Joint Aec.ount at the following rates, which charge shall be in lieu of the cost and t_xpense of all offices of the Operator not <:ovel'ed by Paragraph lA of this Se~on III, including salaries, wages ailod expenses of _personnel.~SSigo~d 'to such officers. s~e.l:l c:harge_ s.hall be in· a~di­ tion t.o the sa~aries wages an4 e)('penses of· employees_ of Operator_ authorlze;d to be chars:ed duect as provided in Paragraphs 2 a~d .8 pf sectiOn U. SUCh charge shall be rnade on the basis indicated befOW~ either {1) Well basis or {.2) pe'rc!!nt"age ]:lasls, at the rates. shOWn theteundet. (1) [ ] Well Basis

RA'l'E P'ER WElL. PElt MONTH D$1'/LLJI-IG WELL RATE l'li.ODliClt"G W(LL RATE (Ute TGtal O..p1h) (U$10 Clln.M Prod.,c;l>fl Do!plh"} "Eoch"W411 Ht11-l fM All Wolh; 0T¥!" Tu

(2) [ ] Percentage Basis

PERCENTAGE BA;.SIS

Development: ···--··-··-----·· Percent· ( ·%) ot·the cost .Of development ot the JOint Property exclusive of cost.~ pn,- vided under Paragrapb 8 of. Section .n and. all salvage .credits. Operating: -----··--··---······· Per:cent ( %) of the cost of operating the Joint Pro~~ty e.:11:du~ve of Costs _-provided under: Paragnphs 1 and ·8 of Section II, all sal:va~e credits:; the v~Iue of ll1.]ected subs~ces purchase_d for seconda:ry recovery and all taxes and assessments which are lev1ed, .assessed .and ;pa1d upon the Itnrtt>ral

-·-

interest in and to the: Joint Property.

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618

r-'-·· C. Operator's Warehouse Operaling an.d Maintenance Expense [ ] Indude_d in district :expense [ ] No chnrge either dlfect or indirect ( ] Perc~tage basis (describe full)') .. ····-··+>••••·······-------·········-·······-~------···----~--------·······-·--·------

---------····------········-----,.------· ··-------·····-····-·

2. Combine(l Rates- Well Basis Oper-atOr shall charge the Joint A-cCount for the seJ.·vices covered by Paragraph 1 of this Section III on the basis indicated below:

3. Combined. Rates- Perctmtag-eBnsis Operator· shall charge the Joint Account for Jhe services covered by Paragraph 1 of this Section III ·on the b<~sili indieated below: A. Pevelopment:

.. Percent ( %) ot the cost of development <l! the Joint Property exclusive of costs provided under Pa"Cagraph 8 of Section II and all salvage credits.

B. Operating:

................ l?ercent ( %) of the cost of operating the Joint Property exclusi..,.e of costs \)rov1dNl Wlder Parag.r;:1phs. 1 and 8 -of SectiDn II, oll salvage credits, the value of injected sub.c;tance$ pu1·.chascd (fll" secondary recovery and all taxes ;md ;tssessrilellts which are levied, assessed and paid upon the mine•·ol interest in and to the Joint Property.

4. Application of Adminis-trative OVerhead or Combined lta.tes - \Veil Basi:;

The following limitations, instructions and charges shall apply in the application of the rates as provided under either P1.1ragnp1"1 IB (1) o1· Paragraph 2 of this -$ection III, A. Charges for <h:illing wells shall begin 011 the dale each well is spudded and terminate on the date the dr"illin~ or cQmpletion r-ig is released, whichever is iatet, except that ·no charge shall be m~e. dUring the suspension of drilllt1g operaHons !or flftcen (15) or more consecutive days.

B. The status of wellS shall.be as. follows:

(1) Producing gas wells, -'lnjectlon wens· for recovery operations, wt~ter supply: wells utUUed for waterflooding operatjons and salt water disposal wells shall be considered the same as producing oil wells.

{2.) Wells. permanently shut down but on which plugging opet·ations are deterred shall be dropped from the well s~hedule at the time. the shuido:wn is eifected. Aily well being plugged -or produced dudng any portion or the month shall be considered as a producing well for the enhre month.

(3) Wells being plug-ged baCk, drilled deeper, converted to a source or input w,ell, or which are undergoing any type of w.orkover that requiJ:es the use of a drilling rig or workover rig capable of drilling shall be considered the same as drilling wens.

(4.) Temporarily shut~down wells, which 11re not.p1·oduced or worked upon for a period of a full calencl;~r mClnth, shall not be included in the well sche!iule, provided however, wells shut in by governmental regulatory body sha11 be included" i'n the Well schedule only in the event the ailowable production i$ transferred to s:o1ne other weil or we).ls on the Joint Property.· In ·the even.t of a unit allowable, shut-in wells shall be cot,~nted .i:n determining the charge here~nP.er for su~h month if said wells contribute allowable production that is actually produced during s.uch month from one. or more unit well!\ as a result of allowable transfer, inclusion in the unit aUO\\-<Ible Or other ch'cttmst.atie!!S1 bUt the total :;hut-in well cp.unt shall be limited to tbe· minimum number of shut-in wells ne~ to provide the· contrlbu.ted allowable act.ually produced dUJ"ipg the month.

(5) Gas welts shall be included ip th.e well schedule it di:re'"tJy connected to a permanent sale.-; outlet even though temporarilY shut in due to overp:rodudlon or failure of purchaser .to take the allow-ed production ..

(B) W-eUs ·comple~q. in mu.ltiple horizons, shall be ·cOnsidered as a producing well for each separately producing horizon, providinj"!: each cotnple.tion is considet·ed a separate well by· governmental or other statewide regulatory authority.

C. The well rates. for producing Wells shall be applied to the individual leases; "Pl:Ovided that, whenever leases covered by this agreement are operated as a unitized project, the well rat;es shall be applied to the total number Of prpduclng wells, irre"st>ective of individual leases. · D. The well rates shall be adjusted as of tbe first day of April eaCh y-ear following the effeCtive dat-e of the agreE~rtlent to whieh this Aecounting Procedure. is attaehed,· 'l'he adju.stment shall be computed by multiplying the rate currently in use. by tlle percentage· increase or decrease in the average weekly c.arh)n.g~ of Crude Petroleum and Gas ProduCtion Workers fOr the las~ calendar year compared to the preceding ~alendnr year as shown by ''The Inde:x of Average Weekly Earnings of CruQe. Petroleum and G-<!ii Production Worken;" as puhlished by the United.Sttltes Department of Labor, Bureau of Labor Statistics~ or the equivalent Canadian IO.dex as published by the Dominion Bureau o( Statistics, as. applicable. The adjusted rates shall be the rates currently in use, plus Or rnin.us the Computed aqjU.stJ:nent.

5. Applil:athm of Administrative~ OvcJ;hcail or Combin"Cd R;ttes Per.cen~gc Basis p. . .

For the purpose or determining charges: on a Percentage Bal>is ':luder .P~r_agraph. 1_~ (2) or ~a.-a.gtll!'h 3 of t~•s Section III. Development. shall include all costs in ~qnnectipn w1th dn1Ung, redt:Jlhng, deepemng or any ren:~llal operations on.. any or al1 we~ Is j~vt;lvi"g the use o! drilli~g Cl'ew _and equil?~el}.t; also, prel~minary · expcndl1iU:fCS necessary In preparation tor dnllmg a-nd exponditut:es tllcurred m abandomng when. well ·15. not comp1eted as a pr<Jducerj and otlginal cost ·of. cons.truction or ins:tallatioil Qf f~ed aSsetS:, t?e eltpans~on ·O~ f1xed assets .and M_Y other project clearly disc;er~-ible as a fixed asset, excep:t MaJor Construction as det'med m Paragraph 0 of th1s Section III. All other costs $hall be considered as Operating. 6. Major Construction Overhead .

For the construction of ~ompressor plants, water stations, secondary recovery systems, drilling and production platforms, salt water dispOsal facilities, and other such projects, as distinguished from the mo:re usual drilling

-------

and producing operations,_ Operator in a~dition to the Adm_inistrative Overhead or: Combined Rates p1·ovided for in ml1il~

Paragr_aph 1, 2 or 3 o_f thiS Sect~~ III shall either n£!gotiate ·a rate prior to l?eginnlng of construction or shall charge the Jo1nt Account Wlth an a::fdihqnal overhead charge as follows: A. Total cost less than $25,000, no charge. B. 'rotal _co:st more than $25,lroo. but less than $100.000, ....... .J....·----····1'0 of total cost. C. 'I'otal cost of $100,000 or more, ----~--------.-- % of the first $100,000 plus -------~-~---·· % of all oVer $100 000 of total cost. '

'l"otal_cost shal~ mean the total gro.ss L'6st of any one project For the purpose of this paragraph the component parts of a smgle pto)ect shall not be treated separately and ~he cost of drilling wells shall be excluded. 7. Amendment of Rates The speC!~fie raiies p;o~ided fo~ in this Section III may be! amended frotn time to time by mutual agreement between the Parties hereto tf, ~n practice, the rates are found to be insufficient· or- excessive.

IV. BASIS OF CHARGES TO JOINT ACCOUNT

Subject to the further provls!ons of this Section IV, Operator wiU procure all Materi:U and services for the Joint Properly. At the Operator!s option, Non-Operators may supply Material or services for the Joint Property. 1. Purchases Material purchased and .servh:e procUl·ed shall ~e charged at the price paid by Operator after deduction of all discounts actually received. 2. Material furnished fr:om Ope't'atol"'s. Warehouse or Other Properties A. New Material (.Condition "A")

(1) Tubular goods, except line pipe, shall be _priced on a mnxim.um carload andjor barge load weight basis regardless of quantity tran"Sferred and equalized to the lowest prevaUi:ng _price t.o.b. railwny receiving point or r-ecognized barge terminal nearest the Joint Property where such Material is normally av&ilable effective ~t date of transfer.

(2) Line pipe shall be priced at the current replacement cost etfective at da~ of transfer !tom a reliable supply store nearest the Joint Property where such Material is normally i\lV'&ilable if the movement is less than 30,00Q PO\lllds. If. the movement is 30,000 poi.mds- or- more; it shall be priced on the saxM basis as· casing and tubing under Subparagraph ( 1) o! this p_aragrapb.

(3) When the Operatot has. equalil:ed actual hauling costs as provided for in :Paragraph 5 of Section n Operator is permitted to include ten cents (10~) per hundred-weight on all tubular goods furnished from his stocks in lieu of loading and unlOading .cos~ sustained.

( 4) Other Material shall .be priced at the current replacement cost of the. same kind of Mat~rial, ef!ective at date of movement and f.o.b. the supply store or railw;r.y receiving point nearest the Joint Property where Material of the same kind iS normally availab~e.

(5) The Joint Account shall not be credited with cash discounts applicable to priceS _provided for in tbis Paragraph .2 of Section IV.

B. Used Material (Condition "B" and "C")

(1) Material in sound. and S!!lrviceable c;:ondition and suitabl~ for reuse without reconditioning, sh~Il be classitled as Condition ''B" and priced at seventy-five per cent {76%) of the current price of new Material

(2) Material which is not siP-table for its original function until after reconditioning shal1 be furnished to the Joint Account under one of the two methods defined below: (a) ·Classified as Condition "B" and priced at seventy-five per cent {75%) of the curtent price of new MateriaL The cost of reconditioning shall be absorbed by the Operator of the ttansferring property.

{b) Classified as Condition "C" and prlr:ed at fifty per cent {59%) o! cunent pril!e of new Material.

The cost of reconditioning also shall be charged to the receiving property, provided Condition "C'' vallle, plus cost o"f reconditioni:ng, doe: not exce-ed Condition "B" value.

(3) Obsolete Material trr Material which cannot be classified aS' Con4ition "B" or Condit.ion "C" shall be priced at a value comme11$ura*e. with its use. Material n:o long'er suil;o;ble for its origfual purpose but usable for some other purpose, shall be priced on a Pasis comparable with that of items nonnally used for suCh oiher purpo$;e.

(4) Material ii'lvolVing ~ection cOsts shall be ch;ug&i. at a.PPlicable.percentage of th~ curr~nt knocked-down price o_f new Material.

3. Premiunt Prices Whenever :M'ah!rlal i$ not readily obtainable at prlees specified in P;n:agraplls 1 a~ ·2 of. th~s-.Section IV because of national ~ergenclE!:s, strikes pr other unusual causes over which the OperaOOT has no control, ~he Operator may charge- the Joint Account for the required. Material at the Operator's actual cost incurred in procuring Sl.lch Material, in malting it suitable for use, a:nd irt- moving it to the Joint Property, provided, that notice in writing is- furnishe.;i to Non-Operatqrs 9f the propo~d charge prior to billing. Nop.. Operators for such Material. Each Non-Operator shall have the ri.ght.., by so electing and notifying Operator within 10 days_ after: re-ceiving notice from Operator, to furnish in. kind all or part of his share of such Material suitable for use aml acceptable to Operator.

4.. Warranty of Material Furnished by Operator Operator does not warrant U1e. Material furniE"hed. In case of defe~tive Material, credit shall not be pan..-<ed to the Joint Account until adjustment' has been received by Operator from the manufacturer& or their agents..

5. Equipment and Facilities Furnished by Operator A. Operator shall ch$1'l}e the J_oint Aeeount for use_ of equJpmertt and !a~1ities at rates comm~~l'a1.e wilh cost of o-wnership and operation. Such rates shall include cGJst of maintenanc_e, repairs, ot.Mt Operating expense, insurance, taxes; depreciatiOn, and int-erest on investment not to e~eed six Per ~eX'It (6%) per annum, provided such rates shvll not exceed Uwse currenUy pr.evailing. in the imme~iate area _within which the Joint Property is located. In lieu of r.ates based on costs o:f oWners_htp ahd openrt1on of. eqU'Lj)ment, other than automotiv_e, Operator .may elect to use comme.rc1a1 r.a·teS prevailtng ih the area of the JQint Pt·o_pcrly less 20%; for autonloti'1"e equipment, rates as published by the J?etroleum l\tiofor Transport Assocwtion may be used. ~tes for laboratory services shall not exceed those currently prevailing iJ: performed by

-5-

----------619----- ----------·

I outside service laboratories. Rates for trucks, tractors ana well service units m.ay include wages and expenses of operator.

B. Whenever requested~ Operator Shall inform Non-Opentors in advance of the rates it propQSes to charge. C. 'Rates shall be revised a.g,,d adjusted from time to time when found to be either· excessi""~ or insufficient,

V. DISPOSAL OF MATERIAL

I The ?perator may purchase, but shall be under no obligation to putehase, interest. of Non-Operators in surplus

I. CQndH;Ion "A" or "B" Material. The disposition of surplus Controllable M~terial nut purchased by Qpel'!ltcil' shall be agr~d i~ by Operator and 'N'on-Dper!ltor~, provided Operator shall dispose of' normal accumulations of ju~k and

I scrap- Material either by transfer or sale from Joint Property. 1. Material Purchasc;d by the Oper:ator or Non-Operatou.

I Material purchased by either t:he Opetator or N~;~n-Operatots shall be credited.by thll!: Operator to the Joint AcCount !:ot- the month. in which the Material is remov~ by t:he purchaser.

2. Division in Kind DiviSion ?f Material in kind, H made between Opet·atm• and NOn-Operators, shall be _-in proportion to the res;ective interests m such Material. The Parties· Will thereupon be charg-ed individually with the value of the M.a.terial receivcil or receivabl!!;~ ·Proper credits· sl1all be made by the Operator to the Joint Account.

3. Sales to: Outsiders Sales to outslders of Material. from the Joint- Property !:hall be. credited by Operator to the Joint Accow1 t at the net amount collected by O;>erator from vendee. Any claim by vendee related to such sale shall be charged back to- the Joint Account if and when paid by Operator.

VJ. BASIS OF PRICING lUATERIAL TRANSFERRED FROM JOINT ACCOUNT

Material ~urchased by either Operator or Non-Operators or divided. ii)_ kind,. unless agreed to ~Y OPerator and Non- Operators shall be priced on the following l;:!asis: L New Prico Defined New pr-ice as used in this- Section VI shall be the price specified fot new Material in Section IV. 2. New MatCI'iat New Material {Condition "A"), being new Material procured for the JOint Property but never used1 at one hundred per .cent (100%) oLcurrent new price (plus sales tax if any), 3. Good Used Material Good used Material (Condition "B"), being qsed M3te.Tial in sound and serviceable condition, suitable for- reuse without reconditioning: ' A. At seventy-five per cent (7S%) of current new price ii Material was charged to Joint Attount as nC!w, or B. At sixty-five per cent (65o/c) at current new price if Material was originally charged to the Joint Account as secondhand at seventy-five per cent (75%) of new price.

4. Other Used Matel'ial Used Material (Condition "C"), at fifty per cent (SO%) of cummt new price, belD.g used Material which: A. Is not in sound and· serviceable condition but suitable for reus¢ after reconditioning, or B. Is serviceable for original function but not suit~ble for reconditioning. 5. Bad-Order Material Material (Condition "D"), no longer suitable for its original purpose without excessive repair c-ost but Usable fut· :rome other pUrpose at a price Comparab-le with that of It-ems normally used :or su<!h other Pllrpose. 6. Junk Material Junk Material (Condition "E"), being obsolete and scrap Material. at prevailing prices. 7. Temporarily Used 1\-hterial When U~e use of Material Is temporary and its servlce tq the Joint Pro';)erty does not justify the reduction in price~ provided tor in Paralinph 3B of t-his Section VI, such. Material shall be priced on a basis that will l~3n~· a net charge to the Joint Account consistent with the value of the servit!e :rendered.

VII. INVENTORIES

The Operator shall maintain detailed records of Controllable l\IJaterial. 1. Periodi<: Inventories, Notice a'nd Representation At reasonable inter\-·als, inventori<!$ shalt be taken by Operator of 1he Joint Account Controllable Material. Written notice of intention to tak!! inventory shall be. given by Opera,tor at. least thirty (30) days before any inventory is to begin so that N-on-Operators may be repte."ented when .any inventot·y iS ta·ke'11. Failu1'e oi Non-OpC'I'ators to be 'represented at an inventory shall bind N:on-Opetators to a<;cept t-P.~· )nv~nt~ry -taken by Operator.

2.. Recoriciliatio'n and Adjustntent of Inventories Recon~iliation of inveutory with the Joint Accoun-l s-hall be made, and n list qf o'lerag~s and sho~'tag!!s sh<~-ll be furnished to the Non-Operat-ors. Inventory adjwtmcnts shaH btc! made by Operator vnth the .Tomt Accou.nt for overages and shor~ages, but Operator shall be held accountable to Non-Operators only iox- shortages due tQ lack of reMonable diligence.

3. Special Inventories S~ial Inventories may be taken whenever there is <:~nY sale or change of interest in the Joint Property. It shaH be the duty of the party selling tG notify all other Parties as quickly u possible atter the transfer of interest takes place. In such cases, both th~ seller <~nd the purchaser ·shall be governed b:y such invent-ory.

4.. E~pcnse of Conducting Periodic Inventories The expense of conducting periodic inventories shall not be charged to the Joint Account unless agreed to by Operator and Non-Operators.

I -6-

I---···--·-- 620

621

EXHIBIT 11 D 11

Attached to and made a part of that certain OpeJf..~£t~~~~~~~~~n£'0dated lJecember 1 1974, between ~~B ffa~ £;; ana., Operator, and Aztec Oil 6 Gas Company , Non-Operators.

As to all operations hereunder, Operator shall carry insurance .for the Q~nefit and protection of the· pa·rties hereto as .follows:

(a) Workmen's Compensation Insurance as contemplated - b-y the laws o£ th,e State oi Texas ~'Qd ~ncluding an Employer's Li~abilit_y- limit of- $100, 000 each accident.

(b) ComprehensiV'~ General Liability Policy 'With Bodily Injury limits of $100, 000 each. persc;n and $300,000 each occurrence, and a Property Damage limit of $100, 000 each occuTrence and subject to an ag-gregate limit of $100, 000.

{c) CompreP,.ensive Automobile Policy covering all owned, non-owned and hired automobiles for Bodily Injury limits o! $100, 000 each person and $300, 000 each occurrence, and a Property Damage limit o£ $190, 000 each occurrence.

(d) Umbrella Liability providing a $1, 00-0,000 Combined Single limit as excess of the Bodily Injury and/or Property Damage and/or Employers 1 liability limit set forth in (a), (b) and {c) above.

AU damage or injury to the joint prope·rty not cove red by insuranc~ required by this agreement shall be bo.t•ne by the partiea. hereto in proportion t:o their interest. thetein, The liabillty, if any, o£the parties he.reto .in damages fot claJ:rns growing out o! bodily injury to or death o! third partie·s, or injury to or destruction of property o! third parties, re.sulting !rom the. ope-rations, conducted- hereunder not covered by insurance required by this agreement shall be born,e in proportion to their interest in the Unit A't'ea and each party individually may acquire ·such additional insurance a.s it deems proper to protect itself against such claims.

622

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623

CUR\<.AN R. CAMPBELL, INC.

l!tll\ tti\f'll\. Ol" ·r Ht~ SOl• I tiWl";:-;T tH;II DI~G llO\'.:noN. TliXAS 1100~ \"Till ~~.(.J).l.II'J

S:O.:...rt11- ·N91\.""'fti ZULCU PROSPECT

lMES COUNTIES. TEY~S

l1r. W. A. NotWtl\Y 8106 Mulli.ns Houston, Texas , 77036

This letter is tO evidence and confirm an agreemen~ between you (Novotny) and the undersigned (CaQpbell) as !allows:

l. (a) As used herein, the term "Existing Burdens" means all royalties and overriding royalties burdening any lease re.fcrred to he·rei.n at the.. time it is acquired by Campbell or its s\lcces.S·ors o:r assigns.

(b) As u!>c.d herein, the t.erm u~.rea of Hutual lnterest 11 moans the area outlined in blue on thc plat attached h·ercto and made .a part hereof and signed by the. President of Campbell for purposes of id"entificar.ion.

2. As t.o all leases acqui;red by C:a-rupbell, its s\lcc-essor.s or assigns, on actea.ge loc.a~ed '-'!thin the Area of Mutual Interes·t. 1 N.owotny shall be assignad the following overrid-ing royalties:

(i) lf the ~ist.in& Burdens are 1/Sth or less • then the over-

riding royalty shall be l/24th of 8/8ths.

(ii) If the Existing Durdcns are g;r·eate:r than ~/8th. but. not greater than l/Gt.h, t.hen the ovcrridin~ royalty shall be l/48th of 8/8ths.

(iii) H k~x.istinr, Burdens a-re .greater than 1/6th, then Nowotny.

shall not be entitled t.o s.ny ovex(iding royalty .

.3. All assignments of ove:rridj:t\& toyaltiC!s to be made under t:.\\e p1·ovied.on.s hereof Shall be made·without: warranty; either expressed Or iutplied, and (·ach ctsstsnoient shall rorovide, as to each lease. that should the Lessor, tli"erein own less than the entire fee simple estar.e in the oil, ~as and other r:li.nerals in <Jnd under the land covered by the lease. t.hen the overriding r.oyalties therein assit.~led shall he reduc.cd 1)roportionately and shall be p;)ya.ble in Lhe proportions· wh ic·h. the Lcs$ors int·erest in t.hf'! oil, gas and otl1cr iitinetnls bears to the entire iee simple estate thc.r-e.ill-•

.. ···----·. --..........···~·-~ .... ··-----~··-··· ·-···-· .··~ .. - ~---··-·-----··-··-- --·----------··-' .....

Exhibit "E 11 t,o Lett·er Agreement between Buttes Resources Company and Aztec Oil. & Gas Comp·any, dated ,~eE' J..F 1!»4-• ..!.\-~<1/ol\.'i"\, l~"1(""

624

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:~orth Zulch Prospect.

,.t ~!.ldison - Brazos ...:: Gri.uies Counties. T-exas '.·

.tt. It i-s further expressly provided and ~greed that ch~ Area of Hutual In1:e-rcst and the: 'tight a(_ NO'i."'tny to receive. assignments of ovenidi.n.g roy.a:lt.:I.es in Accor:dance -with the provisions cf this l-etter agtee.mcnt shc.ll rctc..'\in in effect for the .same pQ·riod of til'lle -that the Area of Nutual Interest sp-ecified in Operating Agree111ent remains in effect.

5. Campbel~ to pay NoWotny .$5,000.00 vhen well is drilled and losged ~

6. This agreement shnll be binding upon and shall inure to the benefit of Nowotny and Campbell and their respective heirs, successors and assigns.

If the for~going i~ your understanding o"f our c.gree1nen"t, please indicate your approval and aCceptanct,>; by si-gning t.he .attached copy hereof at the place pr:ovided and returning sallle to. Campbell.

Yours ve1-y truly,

C:UP.RAN R. CA.'iP.BELL, INC.

/JJ ' /[• . ' ·i Cd~!1r1 (J~L''cl!<£( Curran R. Gamp.bell, ~resi-d-ent APPROVED A."iD ACCEPTED: this_;.._day of~,~i-~-' 1914.

W. A. )1owotny....-

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Il ... : - ' - ' ....... .,......-

625 -- .·

Tab 2

Tab 2

1029

,.'\o ··; ... _..

VOL 417 ""' 709

Well Name: BUCHANAN 1, GIBBS BROS. 1, WILSON JAMES 2 AND WILSON JAMES 3

1.2235

ASSIGNMENT AND BILL OF SALE

STATEOFTEXAS § § KNOW ALL MEN BY THESE PRESENTS THAT:

COUNTY OF MADISON §

SOUTMl.AND ROYALTY COMPANY, a Delaware Corporation, whose address i& 400 N. Sam. H<>uston Parkway Eas~ Suite 1200, flouston, Texas noso C'Asslgnor"), for and in conoiderallon of ONE flUNDRED DOLLARS ($100.00) and other good and valuable conskieration, receipt of which is here acknowledged, does hereby assign, transfer, grant ~ convey unto whose address is

("Auignee"), an of Assignor's right, tiDe and interest in and to the following:

0) The oil and gas leases, leasshold interesls, righ!a and interests a1bibutable or aBocable to the oil and gas leases or leasehold in.terests by virtue of poo6ng, unitization, communitiUtion, and operating agreementS, Hcenses, pennits, and other agreements, all more particularly described on ExhiM "A' hereto, Hmfted as to the lands and depths indicated on Exhibft "A" (collectively the 'Leasss"), together with identical undivided interests in and to all the property and rights incident thereto, including, but not limited to, a!\ rights tn, to and under all agreements, product purchase and sale contracts, leases, permits, rights..of-way, easements, licenses, farmouts, options, orders, and other contracts or agreements of a similar nature to the extent same relate to the Leases;

(ii) The wells, equipment, materials and other personal property, fiXtures and improvements on the Leases as of the EffecUve Date (as hereinafter def~ned), app1.:.1rtenant thereto or used or obtained in connection with the Leases or with the production, treatment, sale or disposal of hydrocarbons or waste produced therefrom or attributable thereto, and all other appurtenances thereunto belonging (the "Equipment"); provided, however, Equipment shall not include vehicles, communications equipment, tools, warehouse stock, compressors or leased equipment located on the Leases;

(iiij All unitization, communltization, pooJing, and operating agreements, and the units created thereby which relate to the Leases or interests therein described on Exhibit "A" or which relate to any units or wens located on the Leases, including any and all units formed under orders, regulations, rules, and other offiCial acts of the governmental authority having jurisdiction, together with any right, title and Interest created thereby in the Leases; and

(iv) All of Assignor's rights to claim revenues or gas resulting from any underproduction attributable to Assignor's interest in the Leases.

Al·of Assignor's interest in the above-mentioned assets is herein collectively mferred to as the "Interests" .

.Assignpr reserves and retains unto itself from the Interests those certain lands, leases. ;properties, interests, leaSehold rights, depths or formations as .specifically noted and reflected on:~ibit ~'A" ,and the right of joint use of any agreements ass1gned hereunder where needed f_or tAe exp~n, d~Welopment, and operation of any rights or acreage (either horizontally or \fel'ti.e:a&ly) retaine(i by Assignor or where needed in order to exercise ancillary rights in, or for . - to, adjoinlng or nearby properties .owned by Assignor.

TO HAVE AND TO HOLD the Interests unto Assignee, its successors and assigns, forever, :s.u_bject to -the

follow!~ terms and conCrtions:

SM:ASSIGNR.DOC ~~8130194

11-~\§0rract

EXHIBIT Copy of OrigineJ Rled in Madison County Clerk's Office

z~

1030

- .. .... ,.

,

-

•.,

1. This Assignment is a~pted subject to, and Assignee agrees to assume and perform any and all of the iabl6ties and obUgations. or allegad or thraatonad liabilities and obligations, of Assignor under the Interests and existing on and gas teases assignments, operating agreements, product purchase and sale contracts leases' permits, rights--of-way, ficenses, easements, options, orders, and a~y oth.,; agreements or contracts ~utable to and affecting tha Interests, Including but not 1111'11ted to, any and aD obligations (I) to pay and deiver royalties, overr1dlng royelties, non-participating royalties, and other burdens on production, (ii) In connection with or arising out of balancing of overproduction or underproduction from the Interests and (~i) in compliance with aU laws and governmental regulations wtth respect ~ the Interests including, but not llmltad to, the lawful plugging and abandonment of oil and gaa wells and the restoration of the surface of the land as nearly as possible to its prelease condition, whether or not such liabilities and obligations, or aUeged or threatened liabirlties and obligations, are caused by Assignor's negligence and 'Mlether or not such liabilities and oblgatlons, or alleged or threatened liabiUUes and obligations, arise .during the period of, or from, or In connection With Assignor's ovmership or operation of the Interests. Without limltatlon of the foregoing, Assignee agrees to assume and perform any and aD of the UabilitieA and obligations, or aUeged or threatened liabilities and obligations, of Assignor for claims, losses, damages, costs, expenses, diminutions In vatue, suits, and causes of action of any ldnd or character, with respect to the environmental condition of the Interests, regardless of when the events occurred that caused such condition to exist and whether or not caused by or attributable to Assignors negligence. Assignee shall, to the fullest extent permitted by law, protect, defend, indemnify and hold Assignor and its directors, officers, employees, agents and representatives of each of them, harmless from and against any and all claims, losses, damages, casts. expenses, diminutions in value, suits, causes of action or judgments of any kind or character with respect to any and all liabilities and obligations or alleged or threatened liabilities and obligations, including, but not limited to, any interest, penalty and any attorneys' fees and other costs and expenses incurred in coMection with Investigating or defending any claims or actions, whether or not resulting in .any liability, attributable to or arising out of (I) ownership or operation of the Interests subsequent to the Eff.ectlve Date, and (ii} Assignee's assumption of any !iabfiity or obligation In accordance with this paragraph.

THE INDEMNIFICATION, RELEASE AND ASSUMPTION PROVISIONS PROVIDED FOR IN THIS ASSIGNMENT SHALL BE APPLICABLE WHETHER OR NOT THE LOSSES, COSTS, EXPENSES AND DAMAGES IN QUESTION AROSE SOLELY OR IN PART FROM THE GROSS, ACTIVE, PASSIVE OR CONCURRENT NEGLIGENCE, OR OTHER FAULT OF ASSIGNOR.

2. THIS ASSIGNMENT AND BILL OF SALE IS EXECUTED, DELIVERED, AND ACCEPTED WITHOUT ANY REPRESENTATION, WARRANTY OR COVENANT OF TmE OF ANY KIND OR NATURE, EITHER EXPRESS, IMPLIED OR STATUTORY. THE INTERESTS ARE BEING CONVEYED AND ASSIGNED TO AND ACCEPTED BY THE ASSIGNEE IN THEIR "AS IS, WHERE IS" CONDillON AND STATE OF REPAIR, AND WITH ALL FAULTS AND DEFECTS, WITHOUT NN REPRESENTATION, WARRANTY OR COVENANT OF ANY KIND OR NATURE, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MARKETABILITY, QUALITY, CONDITION, MERCHANTABILITY, ANDIOR FITNESS FOR A PARTICULAR PURPOSE, ALL OF WHICH ARE EXPRESSLY DISCLAIMED. IT IS UNDERSTOOD AND AGREED THAT ASSIGNEE SHALL ACCEPT ALL OF THE SAME IN THEIR "AS IS, WHERE IS" CONDITION AND STATE OF REPAIR AND WITH ALL FAULTS AND DEFECTS, INCLUDING, BUT NOT LIMITED TO, THE PRESENCE OF NATURALLY OCCURRING RADIOACTIVE MATERIAL (NORM). IN ADDITION, ASSIGNOR MAKES NO REPRESENTATION, COVENANT OR WARRANTY, EXPRESS, IMPLIED OR STATUTORY, AS TO THE ACCURACY OR COMPLETENESS OF NN DATA DELIVERED TO ASSIGNEE WITH RESPECT TO THE INTERESTS, OR CONCERNING THE QUALITY OR QUANTITY OF HYDROCARBON RESERVES, IF AtfY, ATTRIBUTABLE TO THE INTERESTS, OR THE ABILITY OF THE INTERESTS TO PRODUCE HYDROCARBONS, OR THE PRICES WHICH ASSIGNEE IS OR WILL BE ENTITLED TO RECEIVE FOR ANY SUCH HYDROCARBONS.

3. TO THE EXTENT APPLICABLE TO THE INTERESTS OR NN PORTION THEREOF,

2

'I ATrue and Correct

(---~------~--~~-----------------------~--yct~O-ri~-M-1----­ Filad in Madison County Clerl<'s Office

~·

1031

, .•.>.:..,:

' ...

vo: 417 "" 711

ASSIGNEE HEREBY WAIVES THE PROVISIONS OF THE TEXAS DECEPTIVE TRADE PRACTICES ACT, CHAPTER 17, SUBCHAPTER E, SECTIONS 17.41 THROUGH 17.63, INCLUSIVE (OTHER THAN SECTION 17.555, WHICH IS NOT WAIVED), TEXAS BUSINESS & COMMERCIAL CODE.

-4. This Assignment and Blll of Sale shall inure to the benefit of and be binding upon the parties hereto, their heirs, successors and assigns.

5. This Assignment end Bill of Sale may. be executed by Assignor and Assignee in ony number of counterparts, each of which shan be deemed an original instrument, but all of which together shaJI e;onstitute one and the same instrument.

4"'-

IN WITNESS WHEREOF, this instrument is executed the-.:!_ d&y of September, 1994, but shall be etrecthle as of lhe 1st day of September, 1994 (the "Effective Datej.

ASSIGNOR SOUTHLAND ROYALTY COMPANY ATTEST:

By~

~--------------- Name: Kent Beers Title; Attomey-jn-fact

ASSIC¥NEE

~S>s> ~"'L~pu.'-,t'j <) c'S>~~~. . ~.

ATTEST:

~---------------

·i i

I

A True and Correm Copy of OriginaJ Aled in MadisOn County Clerk's Office ·------~-

-

1 'IOL 4.17 t"'b 712

I STATE OF TEXAS § §

COUNTY OF HARRIS §

BEFORE ME, the undersigned au1hority, on this day personally appeared Kent Beers, Attorney-in-Fact for Southland Royalty Company, a Delaware Corporation, known to me to be the person whose name is Subscribed to the foregoing Instrument, and acknowtedged to me that he executed the same for the purposes ancl consideration therein expressed and in the capacity therein &tilted. /7/J GIVEN UNDER MY HAND AND OFFICIAL SEAL OF OFFICE on this~ day of September, 1994.

CORPORATION ACKNOWJ EOGMENT

STATE OF TEXAS § §

COUNTY OF HARRIS § BEFORE ME, the undersigned authority, on this day personally appeared

~==;;;==;;=~;;=;,;;;:;;;=;=~;;;;~;:;;~~~~~~~~ ~ known to me to be of

the person and officer whoSe name Is subscribed to the foregoing instrument. and acknowladged 1o me that he/she executed the same for the purposes and consideration therein expressed and in the capacity therein stated as the act and deed of said corporation.

GIVEN UNDER MY HAND AND OFFICIAL SEAL OF OFFICE on this _ _ day of September, 1994.

MY COMMISSION EXPIRES:

Notary Public in and for the S1ate of Texas

ATTORNEY-IN..fACT

STATEOFTEXAS § §

COUNTY OF HARRIS §

BEEOR~ ME, the undersigned authority, on this ~}"'rsonally,JI!'~ed~~ ~1( I l )')t, , Attomey·<r>-Fact for ~ ~I llalll!ln/J known to me to be the person whose name is subscribed to the foregoing Instrument~ :1 acknowledged to me that sheJhe executed the same for the purposes and consideration therein expressed and In the capacity therein stated.

GIVEN UNDER MY HAND AND OFFICIAL SEAL OF OFFICE on this & day of September, 1994.

4 ATrue and Gorrec\ Copy at Original Filed in MadisOn

-~ Gountv Clerl<'s Office . J.

---,------~-____.....,.-.,~I '.. \· 1032 '

1033

·---------

EXHIBIT A

Page 1 or E:dl1bit CO filE IlL ..•..• lYPE lNSTitlKNT .•... IMST DAlE. GRAifltfllESSO!t•..•.•••...•• ............ GRNITEE lESSEE ............................... RECilmlNB DATA. LEGN. DESCRlPTlOII .............. ,, ......... . OZ1187QO Oll NIO Gt!S LEASE 10/08114 HENRY K.. llOOK, ET UX CURRAII R. CAMPBELL. INC, 2:11661 BRAZOS 943 IGES, IIH IR LESS. t£SCRIBEO IIIIDSE.

COONTY

( I 021186110

02.118900

OIL NIO GAS l.EASl

OIL NO GAS LEASE

08/lA./74

08/29/74

GIBBS BI!OD£iiS Alii CCI4PAHY

JAI£5 D. WILSON, IND. & IND. EX.

CUJIAAH R. CAMPBEll. lltC.

CURRAH R. CAMPBEll. INC.

203/414 tMnlSO. 184.1 ACRES, lfliE OR lESS, DESCRIBED IN crutnY

~·~LEASE.

l£ASE.

203/-464 HNJISON 20n.33 ACREs. NlRE OR USS, DESCRIBED IN

02119500 Oll NtD &AS -LU.SE 10111174 RA'OOND B. B~. ET UX COORAN R. CAMPBELL. IN.C. 211679 BRAZOS COUHTY

222.06 ACA!S, tO\E OR LESS, DESCRIBED IN \.EASE.

1

LESS H«J EXCEPTED FROH 11£ AIIOVE ME TilE lA.1m ATlRIBliTABLE 'Rl 1liE tl. K. 0004:1/EU.S.J.. JAMES D. Wll.SOH #4 ~!ELL MD ll!E. BUCIIAIWI w: wru..

J

,j

'I I

j

ASSOCtmP WEl!.S • PROPERlY MJIIBER ••• DP WELL HUMBER WELL NI\ML .................. , , ••••..•••••••..••. • LOCATION ......... ························· 21188 GIBBS BROS 1 A. NIJNLEV SvY., A·l76 21189 21189 ""'

1409,81464 85900

WILSOM JN£5 0 13 Wll.SOM JAHES 0 12

JESSE K. OAVIS SVY. A·103 J£SSE K. DAVIS SVY., A-103 twUllN NEVELL£ SVY .. A-185 21195 6900 BOOW!AIIl ~

P-

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-.l

g:ng» c 8:~ ~3's_ a;

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FILED

IJ~' a/ •

. $£P 2 I 1994

~ :,~:~~Fo;•;:,SON }G 'i•,;~if.:~\lq,LEMAN, O«k of th• CouniY c.,.,'"'"' I for said County do hervbv certify that the ab(We \n~~L;~~~~:i:~ ~~d ihe ~-

,day o f ¥ - - . 19 9. ¥.'.

"" fllodfoc """din mv offi" tho -::~-

"'v of~ 19. :·'~'· .. " . . /1,·: ". 'i'. .... o'dock .. ,(J.....m.anddiJiyrecordedthe, ....~ayof. - - - •· ... 19 .. f. ... at ...~P.6...... o'dock /J

... "'1: A~(:;A.•I! •.I.Jl acordsohaidCountv,inVol.., .m.in . •W};: ~- .,-,-~7 "Q"

• . , .. , .. , ofPatp!S ,ll ./.

WITNESS my hand and seal of said office, this~~-~- .dtH of. ~;(j;A 4!4"""".... .,,19 .?f. ... , f)!k:_ln.~

County aerk., Madison County, Texil$

,_. 1034

Tab 3

Tab 3

No. 12-13130-012-10

BURLINGTON RESOURCES OIL & GAS § IN THE DISTRICT COURT OF COMPANYLP, § §

Plaintiff, § §

V. § §

PETROMAX OPERATING Co., INC., MD § MADISON COUNTY, TEXAS AMERICA ENERGY LLC § f/k/ a/WOODBINE ACQUISITION LLC, § PETRO TEXAS LLC, CH4 ENERGY II, § LLC, and TEXCAL ENERGY SOUTH § TEXAS, LP, § §

Defendants § 12TH JUDICIAL DISTRICT

ORDER GRANTING DEFENDANTS'

MOTION FOR SUMMARY JUDGMENT ON TITLE ISSUES

On this day came on for consideration Defendants Motion for Summary Judgment

on Title Issues (the "Motion"). This Court having considered the Motion, all responses

and replies, together with any exhibits, and the arguments of counsel, has determined

that the Motion should be, and hereby is, GRANTED.

It is therefore, ORDERED, ADJUDGED, and DECREED that:

1. Burlington does not own any interest in the AMI described in the 1975 Letter Agreement made the basis of this suit; and

2. The AMI provision in the 1975 Letter Agreement has terminated.

Signed this /0 day of--+'~""------'--'-'-'----'----~· 2014

~

...1

Filect~his ' "- Day of i ,r_-~•'iL • I

,20/C,·

, ' \e at~··'· ~ . · 1• 0<. ~O'clock Judge Presiding -l t{_. /.5 ,_ - . Cieri< L<_ c · -

t2fh 1278th Judicial District c 0 ,, .

MADISON COUNTY' r",: c C.\.. ..._.

- - - - - - D·s•·· · 1617

Tab 4

Tab 4

No.12-13130-012-10

BURLINGTON RESOURCES OIL & GAS § IN THE DISTRICT COURT OF COMPANYLP, § §

Plaintiff, § §

v. § §

PETROMAX OPERATING Co., INC., MD § MADISON COUNTY, TEXAS AMERICA ENERGY LLC § f/k/ a/WOODBINE ACQUISITION LLC, § PETRO TEXAS LLC, CH4 ENERGY II, § LLC, and TEXCAL ENERGY SOUTH § TEXAS, LP, § §

Defendants § 12TH JUDICIAL DISTRICT

ORDER DENYING BURLINGTON'S MOTION FOR PARTIAL SUMMARY JUDGMENT SEEKING VARIOUS DECLARATIONS

On this day came on for consideration Burlington Resources Oil & Gas Company

LP's ("Burlington") Motion for Partial Summary Judgment Directed to Defendants

Woodbine and PetroMax and Seeking Declarations that: 1) the Area of Mutual Interest

of the January 7, 1975, Letter Agreement Remains in Force and Effect, 2) Burlington

Jointly Owns a Leasehold Interest Within the Area of Mutual Interest and 3)

Burlington's Rights Under the 1975 Letter Agreement and AMI Are Not Subject to

Reduction or Limitation Based on the Amount of Burlington's Leasehold Ownership

(the "Motion"). This Court having considered the Motion, all responses and replies,

together with any exhibits, and the arguments of counsel, has determined that the

Motion should be, and hereby is, DENIED. ,_!._ ) i ',......_

Filed Tpis 1 Day -~ of (~ -e , 20 I~· ·.. \ at£. ~l~:L m O'clock '//..:1 oc.J · ~ · . Clerk 12th /278th Judicial District Court 1618 -1- MADISON COUNTY, TEXAS _ _ _ _ _ _ Deputy

Judge Presiding

Tab 5

Tab 5

Mar131512:48p p.4

CAUSE NO. 12-13130-012-10

BURLINGTON RESOURCES OIL & § IN THE DISTRICT COURT OF GAS COMPANY LP § §

v. § §

PETROMAX OPERATING CO., INC., § MADISON COUNTY, TEXAS WOODBINE ACQUISITION, LLC, n/k/a§ MD AMERICA ENERGY, LLC, § PETRO TEXAS, LLC, CH4 ENERGY II,§ LLC, and TEXCAL ENERGY SOUTH § TEXAS L.P. § 12TH JUDlCIAL DISTRICT

ORDER ON JOINT MOTION TO SEVER AND ABATE

The Court, having considered the Joint Motion To Sever And Abate,

has concluded that the motion should be granted and hereby renders the

following order:

It is hereby ORDERED, ADJUDGED and DECREED that the

following claims asserted in this case by the following parties are hereby

severed and made the subject of a separate action styled Burlington

Resources Oil & Gas Company LP v. PetroMax Operating Co. Inc.

Woodbine Acauisition. LLC n/kla MD America Energy, LLC, Petro Texas,

LLC. CH4 Energy II, LLC, and TexCal Energy South Texas L.P., in the 12th

Judicial District Court of Madison County, Texas, and having docket

number 12-13130-012-10-A:

Filed This / q Day ot 7)~ ,20 IS

at.~mf'clock

~ .•• Clerk

12th I 270th Judlcl~;~l District Court 1640

MAOISON COUNjf. TEXAS • . "' -·- ~ s~ANNED

1641

Mar 13151248p p.5

a) Counts 1, 2, 4 and 5 of Defendant MD America Energy, LLC f/k/a Woodbine Acquisition LLC's First Amended Counterclaim, filed on September 26, 2014;

b) The following portions of Count 3 of Defendant MD America Energy, LLC f/kla Woodbine Acquisition LLC's First Amended Counterclaim filed on September 26, 2014:

(1) the request for a declaratory judgment related to record ownership in the Wilson #4 Well and the Buchanan #2 Well;

(2) the request for a declaratory judgment that the notices of lis pendens related to this matter filed by BROG be dissolved;

(3) the request for relief under Texas Property Code section 12.008 and Texas Civil Practice and Remedies Code section 12.002 arising from the wrongful nature of the notices of lis pendens;

c) Defendant TexCal Energy South Texas, L.P.'s request for attorneys' fees contained in its Plea to the Jurisdiction, First Amended Answer and Special Exceptions to Plaintiffs' Second Amended Petition, filed on September 26, 2014, and

d) Defendant PetroMax Operating Co., Inc.'s counterclaims for equitable suit to quiet title and attorneys' fees in its First Amended Plea to the Jurisdiction, Answer and Counterclaim and Special Exceptions to Plaintiffs First Amended Petition, filed on June 27, 2013.

The district clerk is directed to file in Cause No. 12-13130-012-1 0-A the

following pleadings previously filed in this case and orders previously

rendered in this case:

Plaintiff Burlington Resources Oil & Gas Company LP's Second Amended Petition, filed on July 3, 2013.

Mar131512:48p p.6

v2. PetroMax Operating's First Amended Answer to Plaintiff's First Amended Petition, filed on June 27, 2013.

>3. Defendants Petro Texas, LLC's and CH4 Energy II, LLC's Plea to the Jurisdiction, Answer and Special Exceptions, filed on June 26, 20"13.

MD America Energy's Plea to the Jurisdiction, Answer, and {/

Special Exceptions to Plaintiff's Second Amended Petition, filed on September 26, 2014

'; 5. TexCal Energy South Texas' Plea to the Jurisdiction, First Amended Answer, and Special Exceptions to Plaintiff's Second Amended Petition, filed September 26, 2014

' 6. Defendant MD America Energy, LLC f/k/a Woodbine Acquisition LLC's First Amended Counterclaim, filed on September 26, 2014.

Plaintiff's Original Answer to Woodbine's Counterclaim and Special Exceptions filed on August 26, 20'19.

'8. Defendant TexCal Energy South Texas, L.P.'s Plea to the Jurisdiction, First Amended Answer and Special Exceptions to Plaintiffs' Second Amended Petition, filed on September 26, 2014.

., 9. Defendant PetroMax Operating Co., Inc.'s First Amended Plea to the Jurisdiction, Answer and Counterclaim and Special Exceptions to Plaintiffs First Amended Petition, filed on June 27, 2013.

The two summary judgment orders signed by this Court on December 10, 2014

.· 11. This Order on Joint Motion to Sever and Abate.

1642

SCANNED

Mar131512:48p p.7

The effect of this order is to render final for appeal the summary

judgment orders signed by this Court on December 10, 2014.

It is ORDERED, ADJUDGED and DECREED that the severed case,

Cause No. 12-13130-012-1 0-A, is hereby abated during the pendency of

the appeal by Burlington Resources Oil & Gas Company LP of this Court's

December 10, 2014, orders.

Dated: ___,_I_,_7-..L~--=.:..::.:.__ _ _ _ , 201s

DISTRICT JUDGE PRESIDING

APPROVED AS TO FORM:

HAGANS BURDINE MONTGOMERY & RUSTAY, P.C.

2 /- '

l/

By: -F...:.~:..!.e~~H~a-g_a.,t.ftr-;;,-r, ;:·'S,.:z:--c.......::=-------

State Bar No. 08685500 fhagans@hagans-law.com Kendall C. Montgomery State Bar No. 14293900 kmontgomery@hagans-law.com

3200 Travis, Fourth Floor Houston, Texas 77006 Telephone: (713) 222-2700

1643

SCANNED

Mar 131512:49p p.8

Telecopier: (713) 547-4950

ATTORNEYS FOR PLAINTIFF BURLINGTON RESOURCES OIL & GAS COMPANY LP

THOMPSON & KNIGHT LLP

By~~ State Bar No. 05270300 greg.curry@tklaw.com Richard B. phillips, Jr. State Bar No. 24032833 rich.phillips@tklaw.com

1722 Routh Street, Suite 1500 Dallas, Texas 75201 Telephone: (214) 969-1700 Telecopier (214) 969-1751

ATTORNEYS FOR DEFENDANT WOODBINE ACQUISITION, LLC, n/k/a MD AMERICA ENERGY,LLC

BEcK REDDEN LLP

~·~f IJ!M, pr-~~ t/David J. Beck State Bar No. 0 000070 dbeck@beckredden. com Thomas E. Ganucheau State Bar No. 00784104 tganucheau@ beckredden. com

1221 McKinney Street, Suite 4500 Houston, Texas 77010 Telephone: (713) 951-3700 Telecopier: (713) 951-3720

1644 SCANNED

Mar 131512:49p p.9

ATTORNEYS FOR DEFENDANTS PETROMAX OPERATING CO., INC., PETRO TEXAS LLC and CH4 ENERGY II, LLC

PIERCE & O'NEILL, LLP

,.~[ r--~il~~~ State Bar No. 15995400 jpierce@pierceoneill.com Brian K. Tully State Bar No. 24039217 btully@pierceoneill.com

4203 Montrose Boulevard Hou~on,Texas77006 Telephone: (713) 634-3600 Te!ecopier: (713) 634-3601

COUNSEL FOR DEFENDANT TEXCAL ENERGY SOUTH TEXAS, LP

1645 SCANNED

HYPERLINKED MATERIALS [Not included in paper copy]

Freeman v. Stephens Production Co., 171 S.W.3d 651 (2005) 162 Oil & Gas Rep. 563

171 S.W.3d 651

Court of Appeals of Texas, Corpus Christi–Edinburg.

Paul FREEMAN, Appellant,

v.

STEPHENS PRODUCTION COMPANY, A Division of Stephen Group, Inc., et al., Appellees.

No. 13–04–208–CV. | Aug. 18, 2005. | Rehearing Overruled Sept. 29, 2005.

Synopsis Background: Production company alleging it was lessee of all oil, gas and other minerals under certain land brought action against grandson of grantor who conveyed land to lessors' predecessors in interest, seeking declaration that grantor did not reserve a one-half interest in the mineral estate. Grandson counterclaimed, and lessors filed plea in intervention. The 389th District Court, Hidalgo County, Leticia Lopez, J., granted production company summary judgment, and grandson appealed.

Holdings: The Court of Appeals, Dori Contreras Garza, J., held that:

[1] genuine issue of material fact as to whether reservation clause in grantor's deed applied to all land conveyed by deed or just one lot precluded summary judgment on production company's declaratory judgment claim;

[2] genuine issue of material fact precluded summary judgment on estoppel by deed defense raised by grandson; and

[3] evidence submitted by grandson on his adverse possession claim was insufficient to establish that grantor and his successors in interest actually possessed the mineral estate for the requisite period of time.

Reversed and remanded.

West Headnotes (10)

[1] Judgment Particular Cases Genuine issue of material fact as to whether reservation clause in grantor's deed to lessors' predecessors in interest applied to all land conveyed by deed or just one lot precluded summary judgment, in declaratory judgment action brought by production company seeking declaration that grandson of grantor did not own a one-third of the one-half interest in the mineral estate allegedly reserved by grantor in all of land conveyed by deed.

Cases that cite this headnote

[2] Deeds Language of Instrument If the language of a deed is unambiguous, the court's primary duty is to ascertain the intent of the parties from the language of the deed by using the four corners rule.

Cases that cite this headnote

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1

Freeman v. Stephens Production Co., 171 S.W.3d 651 (2005) 162 Oil & Gas Rep. 563

[3] Contracts Ambiguity in General Whether a written instrument is ambiguous is a question of law for the court.

Cases that cite this headnote

[4] Contracts Existence of Ambiguity A written instrument is ambiguous if its meaning is uncertain and doubtful or it is reasonably susceptible to more than one meaning.

Cases that cite this headnote

[5] Estoppel Nature and Elements in General “Estoppel by deed” stands for the general proposition that all parties to a deed are bound by the recitals therein, which operate as an estoppel, working on the interest in the land if it be a deed of conveyance, and binding both parties and privies; privies in blood, privies in estate, and privies in law.

4 Cases that cite this headnote

[6] Estoppel Persons Estopped in General Estoppel by deed can be applied against grantors and grantees alike, along with their privies.

2 Cases that cite this headnote

[7] Estoppel Persons to Whom Estoppel Is Available Although the party against whom estoppel by deed is sought must be a party or a privy, there is no corresponding requirement for the party invoking estoppel.

3 Cases that cite this headnote

[8] Judgment Particular Cases Judgment Landlord and Tenant Cases Genuine issue of material fact as to whether acknowledgements in subsequent conveyances and mineral lease regarding mineral reservation in grantor's deed to mineral lessors' predecessors in interest acknowledged that all of property conveyed by deed or just one lot was subject to the reservation, precluded summary judgment on estoppel by deed defense raised by grantor's grandson, in declaratory judgment action brought by lessee of mineral estate seeking declaration that grandson of grantor did not own a one-third of the one-half interest in the mineral estate allegedly reserved by grantor in all of land conveyed by deed.

Cases that cite this headnote

[9] Judgment Evidence and Affidavits in Particular Cases Inventory of grantor's estate and affidavit of grantor's grandson regarding grandson's knowledge regarding the estate's inventory was insufficient to establish, in grandson's motion for summary judgment on his adverse possession claim, that grantor and his successors in interest owned a one-half interest in mineral estate allegedly reserved by grantor in all of land conveyed by grantor's deed, where such evidence did not prove or purport to prove that either grandson,

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Freeman v. Stephens Production Co., 171 S.W.3d 651 (2005) 162 Oil & Gas Rep. 563

grantor, or any of grandson's predecessors in interest actually possessed the mineral estate for the requisite statutory period of time.

Cases that cite this headnote

[10] Mines and Minerals Adverse Possession Actual possession of the minerals must occur in order for a person to obtain ownership of a mineral interest by adverse possession.

Cases that cite this headnote

Attorneys and Law Firms

*652 Carlos H. Ochoa, McAllen, Gary E. Ellison, Houston, Mickey Olmstead, Austin, for Appellant.

Steven W. Ellis, Corpus Christi, Charles C. Murray, Atlas & Hall, J.W. Dyer, Dyer & Associates, McAllen, for Appellees.

Donald G. Sinex, Houston, Peter A. Vermillion, Austin, for intervenors.

Before Justices YA#NEZ, CASTILLO, and GARZA.

OPINION

Opinion by Justice GARZA.

In this appeal from the trial court's final summary judgment, the parties dispute the terms of a 1946 deed by which Paul Freeman conveyed title to certain property to Kenneth R. Hixon and Mary Katherine Hixon (the “Freeman–Hixon Deed”). Freeman's grandson, also named Paul Freeman (“Paul”), claims that the Freeman–Hixon Deed reserved to his grandfather a one-half participating interest in and to all oil, gas, and other minerals in or under the land conveyed by the deed. Paul contends that he owns a one-third interest in this reservation. His claim is opposed by Stephens Production Company, which asserts rights to certain portions of the mineral estate through a mineral lease executed by the Hixons' successors in interest, some of who are intervenors in this matter and also oppose Paul's claim.

Stephens filed suit for declaratory judgment against Paul and four other defendants, asking the trial court to declare that the disputed reservation in the Freeman–Hixon Deed only affected a portion of the *653 conveyed land known as Lot 288. 1 Paul counterclaimed, seeking a declaration that the reservation was not limited to Lot 288 but affected the entire property conveyed by the deed. Subsequently, the lessors of Stephens' mineral lease filed a plea in intervention, seeking a declaration that the Freeman–Hixon Deed did not reserve any mineral interest in the land covered by their mineral lease with Stephens (“the Closner Lots”) and to establish their ownership of the mineral estate of the Closner Lots. 2

1 The other defendants are Hemus, Ltd., which was non-suited; Paula Kendall Taylor, individually and as independent executrix of the Estate of Byrd Freeman Kendall, deceased; Clemmie Dora Freeman; and Charles Macon Freeman.

2 The intervenors are Charlie A. Hudson; Gregory T. Smith; Bruce Ihrig; Charlie Hudson, Jr.; David Drinkard; Meredith Land & Minerals Company; Winne Land & Minerals, Inc.; and M.G. and B.B. Smith Partners, Ltd.

Stephens, Paul, and the intervenors each filed traditional motions for summary judgment, arguing that the Freeman–Hixon Deed was unambiguous and supported their respective positions. In addition, Stephens and the intervenors argued that Paul's

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Freeman v. Stephens Production Co., 171 S.W.3d 651 (2005) 162 Oil & Gas Rep. 563

claim for declaratory relief was barred by res judicata. In response, Paul argued that the claims asserted by Stephens and the intervenors were barred by estoppel by deed and limitations. Before the trial court ruled on their motion, the intervenors settled their claims with all defendants other than Paul, and all claims between these defendants, the intervenors, and Stephens were dismissed with prejudice. The trial court then entered a final summary judgment for Stephens and the intervenors against Paul, who now appeals by four issues. Because genuine issues of material fact remain unresolved, we reverse the judgment of the trial court and remand for further proceedings consistent with this opinion. 3

3 The well-settled standard of review for summary judgments is concisely stated in Fiallos v. Pagan–Lewis Motors, Inc., 147 S.W.3d 578, 582 (Tex.App.-Corpus Christi 2004, pet. denied).

I.

[1] In his first issue, Paul contends that the trial court erred as a matter of law by interpreting the reservation clause to apply only to Lot 288. Paul contends that the following language from the deed unambiguously reserves an undivided one-half interest in the mineral estate of all lots conveyed by the deed:

I, Paul Freeman, ... do Grant, Sell and Convey, unto the said Kenneth R. Hixon and Mary Katherine Hixon of the County of Hidalgo of Texas all that certain lot, tract or piece or parcel of land lying and being situated in Hidalgo County, Texas, to-wit:

All of Lot 1, Block 15; Lot 2, Block 15; The West 17.51 acres of Lot 3, Block 15; All of Lot 10, Block 15; All of Lot 9, Block 15; All of Lot 11, Block 15; All of Lot 12, Block 15; out of the Closner Subdivision of Porciones 71 and 72, also known as the San Juan Tract, Hidalgo County, Texas; EXCEPT such minerals as Grantor does not own; AND ALL of Lot No. 288 of the Kelly–Pharr Subdivision of Porciones 69 and 70, Hidalgo County, Texas; EXCEPT that there is reserved in Grantor an undivided one-half participating interest in and to all of the oil, gas or other minerals in or under said tract of land....

[2] [3] [4] If the language of a deed is unambiguous, the court's primary duty is to ascertain the intent of the parties from the language of the deed by using the “four corners” rule. *654 French v. Chevron U.S.A., 896 S.W.2d 795, 796 (Tex.1995). Whether a written instrument is ambiguous is a question of law for the court. Lopez v. Munoz, Hockema & Reed, 22 S.W.3d 857, 861 (Tex.2000). A written instrument is ambiguous if its meaning is uncertain and doubtful or it is reasonably susceptible to more than one meaning. Towers of Tex., Inc. v. J & J Systems, Inc., 834 S.W.2d 1, 2 (Tex.1992). Such is the case here.

No single reasonable meaning clearly emerges from the language of the instrument. To the contrary, we are equally uncertain and doubtful of the opposite interpretations advanced by the parties. The reservation speaks of its subject as a “tract.” Use of this singular noun indicates that the reservation applies only to Lot 288 and not to the other lots. Nevertheless, the first clause of the grant also speaks of a “lot, tract or piece or parcel of land,” even though the deed conveys eight different lots. Thus, the reservation's use of the singular noun “tract” to describe its subject is consistent with the deed's use of the singular noun “tract” to describe multiple lots and, in fact, the entire conveyance. This indicates that the reservation applies to all lots. Still, the deed refers to the Closner Lots collectively as the “San Juan Tract” and then proceeds to list Lot 288 separately, indicating that the Closner Lots and Lot 288 are treated as two different tracts. The reservation would then apply only to the second tract, Lot 288. Further complicating matters is the reservation's location in a clause rather than a separate sentence. It thus appears to modify only the noun immediately preceding it, Lot 288. Given the foregoing considerations, this Court can only speculate as to the effect of reservation. We are uncertain and doubtful of both interpretations advanced by the parties.

Because the deed is ambiguous, the trial court erred by granting summary judgment based on its interpretation of the deed. A jury should hear evidence and determine the parties' intent. See Columbia Gas Transmission Corp. v. New Ulm Gas, 940 S.W.2d 587, 589 (Tex.1996); see also J. Hiram Moore, Ltd. v. Greer, 172 S.W.3d 609, ––––, No. 02–0455, 2005 WL 1186334, *4, 2005 Tex. LEXIS 428, *10 (May 20, 2005) (publication pending). Paul's first issue is sustained in part and overruled in part.

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Freeman v. Stephens Production Co., 171 S.W.3d 651 (2005) 162 Oil & Gas Rep. 563

II.

[5] In his second issue, Paul contends that the trial court erred by denying his motion for summary judgment based on estoppel by deed. As this Court recently noted in Sauceda v. Kerlin, “Estoppel by deed stands for the general proposition that ‘all parties to a deed are bound by the recitals therein, which operate as an estoppel, working on the interest in the land if it be a deed of conveyance, and binding both parties and privies; privies in blood, privies in estate, and privies in law.’ ” Sauceda v. Kerlin, 164 S.W.3d 892, 915 (Corpus Christi, 2005, no pet. h.) (quoting Wallace v. Pruitt, 1 Tex.Civ.App. 231, 20 S.W. 728, 728– 29 (Tex.Civ.App.-Houston 1892, no writ)).

In support of his motion for summary judgment, Paul produced evidence that Kenneth R. Hixon and other subsequent interest holders executed multiple conveyances, as well as an oil, gas, and mineral lease, acknowledging that the mineral reservation covered all land conveyed by the Freeman–Hixon Deed, including the Closner Lots. Based on this evidence, Paul argues that the doctrine of estoppel by deed prevents Stephens and the intervenors from taking a position contrary to that of Hixon and their other predecessors in interest.

Stephens and the intervenors, in turn, argue that estoppel by deed cannot be *655 applied against grantees but only against grantors. They further contend that Paul cannot use estoppel by deed because he was not a party to the instruments upon which he relies. Finally, they maintain that the instruments produced as evidence by Paul conveyed interests in Lot 288, as well as the Closner Lots, and thus their references to the prior mineral reservation simply placed later grantees on notice of the reservation's existence as to certain acreage out of the land conveyed (i.e., Lot 288).

[6] [7] We disagree with two of these contentions. First, estoppel by deed can be applied against grantors and grantees alike, along with their privies. See id. at 915–916. Second, this Court is aware of no requirement that the litigant invoking estoppel by deed be a party to the deed. Although the party against whom estoppel is sought must be a party or a privy, to this Court's knowledge, there is no corresponding requirement for the party invoking estoppel. No cases imposing such a requirement have been cited by Stephens or the intervenors.

[8] We turn to the evidence produced in support of Paul's motion. As argued by Stephens and the intervenors, the instruments relied upon by Paul convey interests in both the Closner Lots and Lot 288. Because there is no dispute that Lot 288 is subject to the reservation of the Freeman–Hixon Deed, the acknowledgment of the reservation in these instruments is not necessarily an acknowledgment that the reservation applies to the Closner Lots. In fact, two of the instruments use the same murky language and format as the Freeman–Hixon Deed, making this Court no more certain of their meaning than that of the Freeman–Hixon Deed. 4

4 These instruments are (1) a warranty deed from Kenneth Hixon and Katherine Hixon to Morris Granville Smith recorded on December 10, 1947 and (2) a special warranty deed from Morris Granville Smith and his wife, Barbara Smith, to intervenor M.G. and B.B. Partners, Ltd., which is dated August 29, 1997.

However, one of the instruments uses a different format and provides some evidence that the reservation applies to the Closner Lots. This document, a special warranty deed, was executed on September 18, 2001 between intervenor M.G. and B.B. Smith Partners, Ltd. and Keller Real Estate Investments, Inc. (the “Smith–Keller Deed”). It specifically conveys 66.23 acres out of Lots 1, 2, 3, and 10, Block 15 of the Closner Subdivision, which it refers to as “Tract 1.” The Smith–Keller Deed states that Tract 1 is subject to the undivided one-half reservation provided for by the Freeman–Hixon Deed. Although the Smith–Keller Deed thus appears to be conclusive proof that the reservation applies to the Closner Lots, its evidentiary value is belied by a second conveyance made within the same deed. Along with Tract 1, the Smith–Keller Deed also conveys land referred to as “Tract 2,” which is comprised of 239.01 acres out of Lots 2, 3, 8, 9, 10, 11, 12, and 13, Block 15 of the Closner Subdivision and Lots 287, 288, 289, and 290 of the Kelly–Pharr Subdivision. Notably, the deed does not list the reservation provided for by the Freeman–Hixon Deed as one of the 47 reservations applicable to Tract 2. This is especially noteworthy because Tract

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Freeman v. Stephens Production Co., 171 S.W.3d 651 (2005) 162 Oil & Gas Rep. 563

2 includes not only portions of the Closner Lots but also Lot 288. Tract 2 also includes Lots 2, 3, and 10, portions of which are included in Tract 1 and expressly made subject to the reservation of the Freeman–Hixon Deed. Further diminishing the evidentiary value of the Smith–Keller Deed is the exclusion of Lots 9, 11, and 12 of the Closner Subdivision from Tract 1. These lots are included in Tract 2, which is not expressly subject to the reservation *656 of the Freeman–Hixon Deed. In sum, the Smith–Keller Deed is some evidence that the reservation extends to the Closner Lots, but it is inconsistent and therefore insufficient to eliminate all genuine issues of material fact. See Tex.R. Civ. P. 166a(c).

The final instrument submitted by Paul is a November 19, 1975 oil, gas, and mineral lease executed by Morris Granville Smith and Barbara Smith in favor of Paul S. Freeman, Paul's grandfather. The lease grants

All our mineral interest in Lots One (1), Two (2), Three (3), Eight (8), Nine (9), Ten (10), Eleven (11), Twelve (12) and Thirteen (13) ... in Block Fifteen (15), John H. Closner, et al Subdivision, Hidalgo County, Texas; and Lot Two Hundred Eighty–Eight (288), out of the Kelly–Pharr Subdivision, Hidalgo County, Texas.

The lease provides a “pooling” area of 320 acres and then states that “for purposes of calculating the rental payments hereinafter provided for, said land is estimated to comprise 160 acres, whether it actually comprises more or less.” According to Paul, the difference between the 320–acre pooling area and 160–acre estimation of the land proves that the Smiths only owned one-half of the mineral interest in the land, which is the same land conveyed by the Freeman–Hixon Deed. Paul argues that the Smiths thus acknowledged that the reservation of the Freeman–Hixon Deed extends to the Closner Lots.

Although the mineral lease is some evidence to support Paul's contention, it fails to eliminate all genuine issues of material fact. See id. The exact acreage of the land covered by the mineral lease is not stated anywhere in the lease. Paul assumes that the acreage is 320, but this amount is derived from the pooling provision, not from any statement regarding the exact acreage of the land. If the correct acreage of the land were 160 acres, Paul's theory would fail because the mineral interest conveyed would be 100% of what the Smiths owned. Without parol evidence, it is impossible to know with any certainty whether the actual acreage is 160, 320, or some other amount. Accordingly, Paul did not establish his entitlement to judgment as a matter of law on his defense of estoppel by deed. Paul's second issue is therefore overruled.

III.

In his third issue, Paul contends that the trial court erred by granting intervenors' motion for summary judgment based on res judicata. The trial court's judgment specifies that its decision was based on its interpretation of the Freeman–Hixon Deed, not on res judicata. The judgment states that the Freeman–Hixon Deed did not reserve any mineral interest in the Closner Lots to Paul Freeman Senior. Accordingly, this Court need not consider whether the judgment could be upheld based on res judicata. See Tex.R.App. P. 47.1; State Farm Fire & Cas. Co. v. S.S., 858 S.W.2d 374, 380 (Tex.1993). Paul's third issue is overruled.

IV.

[9] [10] In his fourth issue, Paul contends that the trial court erred by failing to grant his motion for summary judgment against the intervenors based on limitations. According to Paul, the intervenors or their predecessors-in-title have been on notice of his grandfather's claim of ownership of the minerals since at least 1949 and are therefore barred by the statute of limitations from disputing ownership. We construe this as a claim of adverse possession, as the only authority relied upon by Paul is Natural Gas Pipeline Co. of America v. Pool, 124 S.W.3d 188, 192–93 (Tex.2003), a case involving a claim of adverse possession of a mineral estate. Paul's motion *657 for summary judgment alleges that his grandfather “long continued possession and exercise of dominion as an owner of one-half of the mineral in the subject lands”; however, the evidence attached to the motion

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Freeman v. Stephens Production Co., 171 S.W.3d 651 (2005) 162 Oil & Gas Rep. 563

is insufficient evidence to prove this assertion. 5 Because actual possession of the minerals must occur, see id., the trial court did not err by denying Paul's motion for summary judgment based on adverse possession. Paul's fourth issue is overruled.

5 Attached to the motion are an inventory of the estate of Pat Freeman and an affidavit by Paul, which discusses Paul's knowledge regarding the inventory. The evidence does not prove or purport to prove that either Paul, his grandfather, or any of Paul's other predecessors-in-interest actually possessed the mineral estate for the requisite statutory period of time.

V.

As it relates to the claims between Stephens, Paul, and the intervenors, the judgment of the trial court is reversed and the case is remanded for further proceedings consistent with this opinion. The remainder of the judgment, specifically, the dismissal with prejudice of the claims between Stephens, the other defendants, and intervenors, has not been challenged in this appeal and is therefore affirmed. See Tex.R.App. P. 44.1(b).

All Citations

171 S.W.3d 651, 162 Oil & Gas Rep. 563

End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7

The Oil&Gas Asset I CLEARINGHOUSE I P.O. Box 67l787 Houston, Texas 77267-l787 7ll/87J.4600 Fax 7ll/87l-IJOS5

Lot# Description Buyer Total I 164.13 FI.SXEN F-44 1 BPO W1 .135877 I-PO WI TX .136817

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1lQ cllt8lag hi PfO'Iided for oonvenlence purpos• only. AU Information Is providod wfthout warranty a to ecouracy or completenass.

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1401 I 1497 BURCOP00001606

I The OiJ&Gas Asset I CLEARINGHOUSE P.O. Box67!787 Houston, TcXlLI77267-1787 71l/87H600 Fax 713/873-0055 I Lot# Description Buyer Total

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1459 BURCOP00001567

I The Oil&Gas Asset I CLEARINGHOUSE P.O. Box 67\787 Houston, Texas 77267-1787 713/873-4600 Fax 713/873-0055 I Lot# Description Buyer Total

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BPO NRI .805736 APO NRI .006736 MCfD 18.00

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I This catliog ill provided for oonvenlence purpo1" only. Alllnfonnadon 11 provided without watnlnty a to 1oouraoy or completenet~•.

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I 1171

1475 BURCOP00001 583