-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MnoT5q1tkf66MWV5u91o71zyiDJm/nKG/44CzMn5joLu/25oKMDfJ18UA8HmOELL aaqEGrY3Kc2T56kmjsu5TQ== 0000950129-96-000905.txt : 19960724 0000950129-96-000905.hdr.sgml : 19960724 ACCESSION NUMBER: 0000950129-96-000905 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GARNET RESOURCES CORP /DE/ CENTRAL INDEX KEY: 0000820084 STANDARD INDUSTRIAL CLASSIFICATION: 1311 IRS NUMBER: 742421851 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16621 FILM NUMBER: 96566605 BUSINESS ADDRESS: STREET 1: 333 CLAY ST STE 4500 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7137591692 MAIL ADDRESS: STREET 2: 333 CLAY ST STE 4500 CITY: HOUSTON STATE: TX ZIP: 77002 10-Q 1 GARNET RESOURCES CORPORATION FORM 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ______________ Commission file number 0-16621 GARNET RESOURCES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 74-2421851 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 11011 RICHMOND, SUITE 650, HOUSTON, TEXAS 77042-6720 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (713) 783-0010 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of May 15, 1996, 11,492,162 shares of Registrant's Common Stock, par value $.01 per share, were outstanding. 2 GARNET RESOURCES CORPORATION (THE "REGISTRANT" OR THE "COMPANY") I N D E X
PART I - FINANCIAL INFORMATION PAGE - - ------ ---- Item 1. Financial Statements Consolidated Balance Sheets - March 31, 1996 (unaudited) and December 31, 1995 3-4 Consolidated Statements of Operations for the Three Months Ended March 31, 1996 and 1995 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995 (unaudited) 6 Notes to Condensed Consolidated Financial Statements-March 31, 1996 (unaudited) 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-14 PART II - OTHER INFORMATION - - ------- Item 6. Exhibits and Reports on Form 8-K 14-15
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, ASSETS 1996 1995 - - ------ ------------ ------------ (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 5,100,294 $ 5,713,191 Accounts receivable 2,759,306 2,302,712 Inventories 1,059,923 986,532 Prepaid expenses 234,484 249,454 ------------ ------------ Total current assets 9,154,007 9,251,889 ------------ ------------ NET ASSETS HELD FOR DISPOSITION 399,501 403,941 ------------ ------------ PROPERTY AND EQUIPMENT, at cost: Oil and gas properties (full-cost method)- Proved 48,783,325 46,044,011 Unproved (excluded from amortization) 3,628,421 4,598,001 ------------ ------------ 52,411,746 50,642,012 Other equipment 137,443 137,343 ------------ ------------ 52,549,189 50,779,355 Less - Accumulated depreciation, depletion and amortization (12,995,769) (11,384,135) ------------ ------------ 39,553,420 39,395,220 ------------ ------------ OTHER ASSETS 842,358 907,978 ------------ ------------ $ 49,949,286 $ 49,959,028 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Continued
MARCH 31, DECEMBER 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ------------ ------------ (unaudited) CURRENT LIABILITIES: Current portion of long-term debt $ 3,995,063 $ 4,043,758 Accounts payable and accrued liabilities 2,819,213 2,418,270 ------------ ------------ Total current liabilities 6,814,276 6,462,028 ------------ ------------ LONG-TERM DEBT, net of current portion 20,151,120 20,151,120 ------------ ------------ DEFERRED INCOME TAXES 737,006 640,919 ------------ ------------ OTHER LONG-TERM LIABILITIES 401,545 438,156 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 20,000,000 shares authorized, 11,492,162 shares issued and outstanding as of March 31, 1996 and December 31, 1995 114,922 114,922 Capital in excess of par value 52,491,212 52,491,212 Retained earnings (deficit) (30,760,795) (30,339,329) ------------ ------------ Total stockholders' equity 21,845,339 22,266,805 ------------ ------------ $ 49,949,286 $ 49,959,028 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED MARCH 31, --------------------------------- 1996 1995 ------------ ------------ REVENUES: Oil sales $ 2,897,089 $ 1,638,947 Interest 70,688 97,706 ------------ ------------ 2,967,777 1,736,653 ------------ ------------ COSTS AND EXPENSES: Production 868,055 815,398 Exploration -- 16,204 General and administrative 154,680 387,523 Interest 545,305 367,716 Depreciation, depletion and amortization 1,607,303 746,622 Foreign currency translation gain (95,272) (182,239) ------------ ------------ 3,080,071 2,151,224 ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (112,294) (414,571) PROVISION FOR INCOME TAXES 309,172 101,285 ------------ ------------ NET LOSS $ (421,466) $ (515,856) ============ ============ NET LOSS PER SHARE $ (.04) $ (.05) ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 11,492,162 11,186,641 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1996 1995 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (421,466) $ (515,856) Exploration costs -- 16,204 Depreciation, depletion and amortization 1,607,303 746,622 Deferred income taxes 96,087 -- Changes in components of working capital (748,144) (990,666) Other 25,659 54,153 ----------- ----------- Net cash provided by (used for) operating activities 559,439 (689,543) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (916,615) (3,406,500) Increase in joint venture and contractor advances (223,577) (135,846) Acquisition of interests in Argosy Energy International, net of cash acquired -- (92,621) Other 33,741 (32,727) ----------- ----------- Net cash used for investing activities (1,106,451) (3,667,694) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of debt (48,695) (15,378) Costs of debt issuances (17,190) -- ----------- ----------- Net cash used for financing activities (65,885) (15,378) ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (612,897) (4,372,615) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,713,191 7,990,605 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,100,294 $ 3,617,990 =========== =========== Supplemental disclosures of cash flow information: Cash paid for - Interest, net of amounts capitalized $ 468,994 $ 334,647 Income taxes 164,353 169,635
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 7 GARNET RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996 -------------------- (Unaudited) (1) FINANCIAL STATEMENT PRESENTATION- The condensed consolidated financial statements include the accounts of Garnet Resources Corporation, a Delaware corporation ("Garnet"), and its wholly owned subsidiaries. Garnet and its wholly owned subsidiaries are collectively referred to as the "Company." These financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and include all adjustments (which consist solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of financial position and results of operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company's prior audited consolidated financial statements and the notes thereto. (2) COLOMBIAN OPERATIONS- Through its ownership of interests in Argosy Energy International, a Utah limited partnership ("Argosy"), the Company has an indirect interest in a risk sharing contract in Colombia (the "Santana Contract") with Empresa Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"). The Santana Contract currently entitles Argosy and its joint venture partner to explore for oil and gas on approximately 86,000 acres located in the Putumayo Region of Colombia (the "Santana Block"), and provides for a 10-year exploration period expiring in 1997, subject to a requirement for additional partial relinquishments in 1997, and for a production period expiring in 2015. Argosy and its joint venture partner also have two association contracts (the "Fragua Contract" and the "Yuruyaco Contract") with Ecopetrol. The Fragua Contract covers an area of approximately 32,000 acres contiguous to the northern boundary of the Santana Block (the "Fragua Block"), while the Yuruyaco Contract covers an area of approximately 39,000 acres contiguous to the eastern boundaries of the Santana Block and the Fragua Block (the "Yuruyaco Block"). The 10-year exploration periods provided by the Fragua Contract and the Yuruyaco Contract will expire in 2002 and 2005, respectively, and the 28-year contract terms will expire in 2020 and 2023, respectively. Argosy and its joint venture partner also have the right until 2003 to explore for and produce oil and gas from approximately 77,000 acres located in the Putumayo Region (the "Aporte Putumayo Block") pursuant to other agreements with Ecopetrol. Argosy and its joint venture partner have notified Ecopetrol that they intend to abandon the remaining wells and relinquish the Aporte Putumayo Block because declining production rates have made continued operation economically unattractive. Argosy serves as the operator of the Colombian properties under joint venture agreements. The Santana Contract, the Fragua Contract and the Yuruyaco Contract provide that Ecopetrol will receive a royalty equal to 20% of production on behalf of the Colombian government and, in the 7 8 event a discovery is deemed commercially feasible, Ecopetrol will acquire a 50% interest in the remaining production from the field, bear 50% of the development costs, and reimburse the joint venture, from Ecopetrol's share of future production from each well, for 50% of the joint venture's costs of successful exploratory wells in the field. When accumulated oil production from the Santana Contract exceeds seven million barrels, Ecopetrol will continue to bear 50% of development costs, but its interest in production revenues and operating costs will increase to 65%. If a commercial field on the Fragua Block produces in excess of 60 million barrels, Ecopetrol's interest in production and costs will increase in 5% increments from 50% to 70% as accumulated production from the field increases in 30 million barrel increments from 60 million barrels to 150 million barrels. If a commercial field on the Yuruyaco Block produces in excess of 60 million barrels, Ecopetrol's interest in production and costs will range from 50% to 75%, based on annual measurements of profitability as defined in the Yuruyaco Contract. The joint venture paid all costs of the exploration program for the Santana Block during the first two years of the contract and thereafter the joint venture and Ecopetrol have been obligated to pay 70% and 30%, respectively, of such exploration costs. The joint venture bears all costs and risks of exploration activities on the Fragua Block and the Yuruyaco Block, subject to Ecopetrol's right to acquire a 50% interest in commercial discoveries. In the event a discovery is made and is not deemed by Ecopetrol to be commercially feasible, the joint venture may continue to develop the field at its own expense and will recover 200% of the costs thereof, at which time Ecopetrol will acquire a 50% interest therein at no cost to Ecopetrol or further reimbursement by Ecopetrol to Argosy. In March 1995 the Company increased its ownership in Argosy by exchanging 366,625 shares of Garnet's common stock with a value of $3.00 per share and cash totalling $142,703 for the partnership interests held by certain of Argosy's limited partners. The Company's resulting net participation in revenues and costs for the Santana Contract, the Fragua Contract and the Yuruyaco Contract are as follows:
PRODUCTION OPERATING EXPLORATION DEVELOPMENT REVENUES COSTS COSTS COSTS ---------- --------- ----------- ----------- Santana Contract: Before seven million barrels of accumulated production 21.8% 27.2% 38.1% 27.2% After seven million barrels of accumulated production 15.3% 19.1% 38.1% 27.2% Fragua Contract: Before 60 million barrels of accumulated production 21.8% 27.3% 54.6% 27.3% After 150 million barrels of accumulated production 13.1% 16.4% 54.6% 27.3% Yuruyaco Contract: Before 60 million barrels of accumulated production 22.0% 27.5% 55.0% 27.5% After 60 million barrels of accumulated production at maximum profitability 11.0% 13.8% 55.0% 27.5%
The joint venture has completed its seismic acquisition and drilling obligations for the first eight years of the Santana Contract, resulting in the discovery of four oil fields, all of which have 8 9 been declared commercial by Ecopetrol. The joint venture has the right to continue the exploration program through 1997 with an obligation to conduct exploration programs to be approved by Ecopetrol in 1996 and 1997. The joint venture has also completed its seismic obligations for the first two years of the Fragua Contract, but no wells have yet been drilled on the Fragua Block. Under the terms of a contract with Ecopetrol, all oil produced from the Santana Block is sold to Ecopetrol. If Ecopetrol exports the oil, the price paid is the export price received by Ecopetrol, adjusted for quality differences, less a handling and commercialization fee of $.465 per barrel. If Ecopetrol does not export the oil, the price paid is based on quoted prices for Colombia's Cano Limon crude oil, adjusted for quality differences, plus or minus a sales value differential to be determined by independent analysis, less Ecopetrol's cost to transport the crude to Cartagena and a handling and commercialization fee of $.365 per barrel. Under the terms of its contract with Ecopetrol, 25% of all revenues from oil sold to Ecopetrol is paid in Colombian pesos which may only be utilized in Colombia. To date, Argosy has experienced no difficulty in repatriating the remaining 75% of such payments which are payable in United States dollars. As general partner, the Company's subsidiary is contingently liable for any obligations of Argosy and may be contingently liable for claims generally related to the conduct of Argosy's business. (3) LONG-TERM DEBT- Long-term debt at March 31, 1996 and December 31, 1995 consisted of the following:
1996 1995 ------------ ------------ 9 1/2% convertible subordinated debentures $ 15,000,000 $ 15,000,000 Notes payable by Argosy to a U.S. bank 9,113,520 9,113,520 Note payable by Argosy to a Colombian bank 32,663 81,359 ------------ ------------ 24,146,183 24,194,879 Less - Current portion (3,995,063) (4,043,758) ------------ ------------ $ 20,151,120 $ 20,151,120 ============ ============
In 1993 Garnet issued $15,000,000 of convertible subordinated debentures (the "Debentures") due December 1998. The Debentures bear interest at 9 1/2% per annum payable quarterly and are convertible at the option of the holders into Garnet common stock at $5.50 per share. If the Company elects to prepay the Debentures under certain circumstances, it will issue warrants under the same economic terms as the Debentures. At the option of a holder, in the event of a change of control of the Company, the Company will be required to prepay such holder's Debenture at a 30% premium. The Debentures are secured by a pledge of all of the common stock of Garnet's wholly owned subsidiary which serves as the general partner of Argosy (see Note 2). Under the terms of an agreement with the holders of its Debentures, Garnet has agreed that it will not pay dividends or make distributions to the holders of its common stock. As of March 31, 1996, Garnet was not in compliance with the minimum net worth required by the Debentures. The Debenture holders previously waived compliance with this requirement through January 10, 1997. In May 1996 Garnet and the Debenture holders agreed to extend the waiver through July 1, 1997 subject to the termination of such waiver on October 31, 1996 if the ratio of the aggregate principal amount of outstanding Debentures to the sum of (i) the number of net barrels of proved oil reserves as of September 30, 1996 plus (ii) the number of net barrels of oil produced during the period from April 1, 1996 through September 30, 1996 is greater than 4.5 to 1. Such ratio was 4.2 to 1 as of March 31, 1996. 9 10 In 1994 Argosy entered into a finance agreement with Overseas Private Investment Corporation, an agency of the United States government ("OPIC"), pursuant to which OPIC agreed to guarantee up to $9,200,000 in bank loans to Argosy. The loans were funded in two stages of $4,400,000 in August 1994 and $4,800,000 in October 1995. The Company plans to use these funds to drill development wells and complete the construction of its production facilities in Colombia. OPIC's guaranty is secured by Argosy's interest in the Santana Contract and related assets, as well as the pledge of Garnet's direct and indirect interests in Argosy. The terms of the guaranty agreement also restrict Argosy's ability to make distributions to its partners prior to the repayment of the guaranteed loans. The maximum term of the loans is not to exceed seven years, and the principal amortization schedule is based on projected cash flows from wells on the Santana Block. The loans bear interest at the lender's eurodollar deposit rate plus .25% per annum for periods of two, three or six months as selected by Argosy. The interest rate at March 31, 1996 was 5 15/16%. In consideration for OPIC's guaranty, Argosy pays OPIC a guaranty fee of 2.4% per annum on the outstanding balance of the loans guaranteed. In 1993 Argosy received a loan from a Colombian bank, which is secured by receivables from Ecopetrol for well costs allocable to Ecopetrol but paid by Argosy. The loan bears interest at U.S. prime plus 2%, and is repaid in varying amounts from Ecopetrol's share of production from the wells. The interest rate at March 31, 1996 was 8 1/4%. (4) STOCK OPTION PLANS- Garnet and a predecessor entity have adopted stock option plans (the "Employees' Plans") pursuant to which an aggregate of 1,483,000 shares of Garnet's common stock is authorized to be issued upon exercise of options granted to officers, employees, and certain other persons or entities who perform substantial services for or on behalf of Garnet or its subsidiaries. The Stock Option and Compensation Committee of Garnet's Board of Directors (the "Committee") is vested with sole and exclusive authority to administer and interpret the Employees' Plans, to determine the terms upon which options may be granted, to prescribe, amend and rescind such interpretations and determinations and to grant options to directors. Current Committee members are not eligible to receive options under the Employees' Plans. In addition, Garnet has adopted the 1990 Directors' Stock Option Plan (the "Directors' Plan") pursuant to which an aggregate of 395,000 shares of Garnet's common stock were issuable as of March 31, 1996 upon exercise of options granted thereunder to directors who are not employees of the Company. As the Directors' Plan expired in accordance with its terms on March 8, 1996, no further options may be issued thereunder. Each option is exercisable for a period of 10 years and 30 days from the date of grant. The purchase price of shares issuable upon exercise of an option may be paid in cash or by delivery of shares with a value equal to the exercise price of the option. The Committee has determined that the right to exercise non-incentive options issued to employees vests over a period of four years, so that 20% of the option becomes exercisable on each anniversary of the date of grant. Non-incentive options issued to directors and other eligible participants generally are fully exercisable on and after the date of grant. The following is a summary of stock option activity in connection with the Employees' Plans and the Directors' Plan: 10 11
Shares Price Range --------- ------------ Options outstanding at December 31, 1993 1,229,500 $2.50-$13.83 Options granted 140,000 4.05 --------- ------------ Options outstanding at December 31, 1994 1,369,500 2.50-13.83 Options granted 618,000 2.50-2.87 Options expired (658,398) 2.50-13.83 --------- ------------ Options outstanding at December 31, 1995 1,329,102 2.50-13.83 Options granted 480,000 1.19 Options cancelled (336,102) 4.00-11.75 --------- ------------ Options outstanding at March 31, 1996 1,473,000 $1.19-$13.83 ========= ============
As of March 31, 1996, options for 1,020,616 shares were exercisable. (5) INCOME TAXES- The provisions for income taxes relate to the Colombian activities of Argosy. No United States deferred taxes were provided because the tax bases of the Company's assets exceed the financial statement bases, resulting in a deferred tax asset which the Company has determined is not presently realizable. As of December 31, 1995, the Company had a regular tax net operating loss carryforward and an alternative minimum tax loss carryforward of approximately $26,400,000 and $26,000,000 respectively. These loss carryforwards will expire beginning in 2001 if not utilized to reduce U.S. income taxes otherwise payable in future years, and are limited as to utilization because of the occurrences of "ownership changes" (as defined in Section 382 of the Internal Revenue Code of 1986, as amended) in 1991 and earlier years. Such loss carryforwards also exclude regular tax net operating loss carryforwards aggregating approximately $4,500,000 attributable to certain of Garnet's subsidiaries, which can be used in certain circumstances to offset taxable income generated by such subsidiaries. (6) ACQUISITION OF RGO ENERGY INC. AND RGO PARTNERS, LTD.- In 1991, in transactions accounted for as purchases, Garnet acquired RGO Energy Inc. and RGO Partners, Ltd., two privately-owned entities (referred to collectively herein as "the RGO Entities"). At the date of acquisition, approximately 60% of the assets of the RGO Entities was comprised of cash, with the balance being primarily working, royalty and mineral interests in producing and undeveloped oil and gas properties in the United States. All of the working interests acquired in the mergers were sold in 1993. Because management intends to sell the remaining royalty and mineral interests when the market conditions are suitable, these assets are reflected as "Net assets held for disposition" in the accompanying consolidated balance sheets. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES Since December 31, 1995, the Company has expended approximately $1,000,000 for the acquisition, exploration and development of its oil and gas properties. Such expenditures include approximately $900,000 for exploration and development activities on the Santana Block in Colombia, and approximately $200,000 for exploration and related costs in Papua New Guinea. Funding for these activities was provided primarily by cash flow from operations and by available cash balances. Other than the OPIC guaranty, the Company has no significant lines of credit. Argosy and its joint venture partner have completed the seismic acquisition and drilling obligations for the first eight years of the Santana Contract, resulting in the discovery of four oil fields. The joint venture has the right to continue the exploration program through 1997 with an obligation to conduct exploration programs to be approved by Ecopetrol in 1996 and 1997. The Company plans to perform additional seismic work on the Santana Block during 1996, with estimated total costs to the Company of $600,000. The seismic programs required during the first two years of the Fragua Contract have also been completed. An additional seismic survey is planned for 1996, for which the Company's share of the costs is estimated to be $150,000. The Company also plans to conduct a seismic program on the Yuruyaco Block in 1996, for which its share of the costs is estimated to be $300,000. The Toroyaco and Linda fields, the first two fields discovered on the Santana Block, began producing in 1992. The Mary and Miraflor fields, the last two fields discovered, were declared commercial by Ecopetrol in 1993. Production from the four fields is presently approximately 9,000 barrels of oil per day. The Company's share of such production is 21.8%; it also receives an additional 21.8% of the production from certain wells until it recovers the drilling and completion costs for those wells allocable to Ecopetrol but paid by the Company. As of March 31, 1996, the Company was completing the construction of production facilities for the Mary and Miraflor fields, for which the Company's share of the remaining costs is expected to be approximately $350,000. The Company also plans to drill at least four additional development wells in the Toroyaco and Linda fields in 1996 and 1997. The Company's share of the costs of drilling and completing each of the wells in these fields is expected to range from $850,000 to $1,050,000. As described herein, the Company's operations are primarily located outside the United States. Although certain of such operations are conducted in foreign currencies, the Company considers the U.S. dollar to be the functional currency in most of the countries in which it operates. In addition, the Company has no significant operations in countries with highly inflationary economies. As a result, the Company's foreign currency transaction gains and losses have not been significant. Exchange controls exist for the repatriation of funds from Colombia and Papua New Guinea. The Company believes that the continuing viability of its operations in these countries will not be affected by such restrictions. It is anticipated that the Company's foreign exploration and development activities will require substantial amounts of capital. To finance its planned exploration and development 12 13 activities, the Company intends to utilize its existing working capital, cash flow from production in Colombia, and cash proceeds expected to be received from the sale of assets held for disposition, although there can be no assurance that any of such assets can be sold on terms acceptable to the Company. In 1995 the Company also identified and implemented more than $1.5 million in annual reductions of U.S. and Colombian general and administrative expenses and production costs. The Company may also consider entering into arrangements whereby certain costs of exploration will be paid by others to earn an interest in the properties. As of March 31, 1996, Garnet was not in compliance with the minimum net worth covenant required by the Debentures. The Debenture holders previously waived compliance with this requirement through January 10, 1997. In May 1996 Garnet and the Debenture holders agreed to extend the waiver through July 1, 1997 subject to the termination of such waiver on October 31, 1996 if the ratio of the aggregate principal amount of outstanding Debentures to the sum of (i) the number of net barrels of proved oil reserves as of September 30, 1996 plus (ii) the number of net barrels of oil produced during the period from April 1, 1996 through September 30, 1996 is greater than 4.5 to 1. Such ratio was 4.2 to 1 as of March 31, 1996. If Garnet is unable to increase its net worth to the minimum required by July 1, 1997 (or by October 31, 1996 if the waiver is terminated as a result of the failure to maintain the aforementioned ratio), it will be necessary to extend the waiver or renegotiate the terms of the debt. The present environment for financing the acquisition of oil and gas properties or the ongoing obligations of an oil and gas business is uncertain due, in part, to the substantial instability in oil and gas prices in recent years and to the volatility of financial markets. There can be no assurance that the additional financing which may be necessary to fund the Company's operations and obligations will be available on economically acceptable terms. In addition, the Company's ability to continue its exploration and development programs may be dependent upon its joint venture partners financing their portion of such costs and expenses. There can be no assurance that the Company's partners will contribute, or be in a position to contribute, their costs and expenses of the joint venture programs. If the Company's partners cannot finance their obligations to the joint ventures, the Company may be required to accept an assignment of the partners' interests therein and assume their financing obligations. If sufficient funds cannot be raised to meet the Company's obligations in connection with its properties, the interests in such properties might be sold or forfeited. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THE SAME PERIOD IN 1995 The Company reported net losses of $421,466 ($.04 per share) and $515,856 ($.05 per share) for the three months ended March 31, 1996 and 1995, respectively. Increases in 1996 in oil and gas revenues, production costs and depreciation, depletion and amortization primarily reflect higher oil prices and production from new wells and fracture stimulation treatments on existing wells in Colombia. Production costs per barrel decreased because of higher production volumes and the effect of the Company's cost reduction program implemented in the third quarter of 1995. The Company's comparative average daily sales volumes in barrels of oil per day ("BOPD"), average sales prices and costs per barrel in Colombia for such periods were as follows:
THREE MONTHS ENDED MARCH 31, 1996 1995 ------ ------- Average oil sales (BOPD) 1,786 1,151 Average oil price per barrel $ 17.83 $ 15.82 Production costs per barrel $ 5.34 $ 7.87 Depreciation, depletion and amortization per barrel $ 9.87 $ 7.18
13 14 General and administrative expenses decreased as a result of the aforementioned cost reduction program. The increase in 1996 in interest expense, net of amounts capitalized, is attributable primarily to the OPIC-guaranteed loan received in October 1995. The provision for income taxes, all of which relates to Colombian operations, was higher because of (i) increases in the Colombian presumptive income tax resulting from a higher tax rate effective January 1, 1996 and ongoing capital expenditures related to productive assets, and (ii) a deferred tax provision recorded in 1996. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS
ITEM EXHIBIT NO. ITEM TITLE NO. - - ---- ---------------------------------------------------- ------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession: Not Applicable (3) Articles of Incorporation and By-Laws: Not Applicable (4) Instruments defining the rights of security holders, including indentures: Not Applicable (10) Material contracts: (A) Operating Agrement for the Yuruyaco Area dated as of November 7, 1995 by and between Argosy Energy International and Neo Energy, Inc. 10(A) (11) Statement regarding computation of per share earnings is not required because the relevant computations can be clearly determined from the material contained in the Financial Statements included herein. (15) Letter re unaudited interim financial information: Not Applicable (18) Letter re change in accounting principles: Not Applicable (19) Report furnished to security holders: Not Applicable
14 15 (22) Published report regarding matters submitted to vote of security holders: Not Applicable (23) Consents of experts and counsel: Not Applicable (24) Power of attorney: Not Applicable (27) Financial Data Schedule. 27 (99) Additional Exhibits: Not Applicable
(B) REPORTS ON FORM 8-K No Reports on Form 8-K were filed by Registrant during the three months ended March 31, 1996. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GARNET RESOURCES CORPORATION Date: May 15, 1996 /s/ W. Kirk Bosche' ---------------------------- W. Kirk Bosche', Vice President and Treasurer (As both a duly authorized officer of Registrant and as principal financial officer of Registrant) 16 17 EXHIBIT INDEX
ITEM EXHIBIT NO. ITEM TITLE NO. - - ---- ---------------------------------------------------- ------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession: Not Applicable (3) Articles of Incorporation and By-Laws: Not Applicable (4) Instruments defining the rights of security holders, including indentures: Not Applicable (10) Material contracts: (A) Operating Agrement for the Yuruyaco Area dated as of November 7, 1995 by and between Argosy Energy International and Neo Energy, Inc. 10(A) (11) Statement regarding computation of per share earnings is not required because the relevant computations can be clearly determined from the material contained in the Financial Statements included herein. (15) Letter re unaudited interim financial information: Not Applicable (18) Letter re change in accounting principles: Not Applicable (19) Report furnished to security holders: Not Applicable (22) Published report regarding matters submitted to vote of security holders: Not Applicable (23) Consents of experts and counsel: Not Applicable (24) Power of attorney: Not Applicable (27) Financial Data Schedule. 27 (99) Additional Exhibits: Not Applicable
EX-10.A 2 OPERATING AGREEMENT 1 OPERATING AGREEMENT FOR THE YURUYACO AREA 2 TABLE OF CONTENTS Operating Agreement For the Yuruyaco Area
Article Page No. ------- -------- 1 Definitions ...................................... 2 2 Participating Interests and Relationship of the Parties ................................... 9 3 Operating Committee .............................. 11 4 Joint Operations/Scope of Agreement .............. 17 5 Operator ......................................... 18 6 Functions and Duties of Operator ................. 20 7 Programs and Budgets ............................. 26 8 Costs, Expenses and Advances ..................... 28 9 Default and Lien ................................. 32 10 Insurance ........................................ 38 11 Disposition of Petroleum ......................... 38 12 Operations by Less than all Parties .............. 40 13 Arbitration ...................................... 47 14 Assignment or Encumbrances of Interest ........... 48 15 Surrender ........................................ 51 16 Withdrawals ...................................... 52 17 Public Announcements ............................. 54 18 Confidential Information ......................... 55
3
Article Page No. ------- -------- 19 Force Majeure .................................... 56 20 Applicable Law ................................... 57 21 Termination ...................................... 58 22 Consequences of Termination ...................... 58 23 Notices .......................................... 59 24 Miscellaneous .................................... 60 Exhibit ------- "A" Contract Area .................................... 63 "B" Accounting Procedure ............................. 65
4 OPERATING AGREEMENT This Operating Agreement is made and entered into this 7th day of November, 1995, by and between Argosy Energy International, a Utah limited partnership ("Argosy"), and Neo Energy, Inc., a Texas corporation ("Neo"), hereinafter referred to individually as a "Party" and collectively as the "Parties". WITNESSETH WHEREAS, the Parties are joint owners of an Association Contract ("Contract") issued September 20, 1995, but effective November 19, 1995, by the Empresa Colombiana De Petroleos (Ecopetrol), covering certain acreage located in the Putumayo Basin region of the Republic of Colombia, S.A.; and, WHEREAS, the said Association Contract provides for two Seismic Programs to be undertaken and a subsequent option of drilling Exploration Wells in an attempt to find a Commercial Field. The Parties hereto agree to obligate themselves to conduct the Seismic Programs and to abide by the other provisions of the said Association Contract; and, WHEREAS, under the aforesaid Association Contract, Ecopetrol will have, under certain conditions, a Participating Interest in the Contract Area, which participation will be controlled by the Operating Agreement attached to the said Association Contract as Annex "B" (Ecopetrol Operating Agreement); and, WHEREAS, if there is any conflict between this Agreement and the said Ecopetrol Operating Agreement, as to the Participating Interest of the Parties and Ecopetrol, the Ecopetrol Operating 1 5 Agreement shall control. However, this Agreement shall prevail as to the Participation Interest of Argosy and Neo; and, WHEREAS, each of the Parties have agreed to participate in the exploration and in the development of the Contract Area and in the production of Oil, Gas and other liquid or gaseous hydrocarbons therefrom upon the terms and conditions set forth. NOW THEREFORE, in consideration of the mutual promises and mutual covenants herein contained, it is agreed by and between the Parties as follows: ARTICLE 1. Definitions As used in this Operating Agreement: 1.1 "Affiliate" means: (a) A company or corporation which is a direct or indirect subsidiary of a Party; (b) An individual, company or corporation of which a Party is a direct or indirect subsidiary; (c) A company or corporation which is a direct or indirect subsidiary of an individual, a company or a corporation of which a Party is a direct or indirect subsidiary; (d) Any person or entity which owns more than forty percent (40%) of a Party; or (e) Any partnership in which a Party or Parties owns, directly or indirectly, an interest greater than fifty percent (50%). 2 6 For the purpose of this definition, a company or corporation is a "subsidiary" of an individual, company or corporation if the latter owns more than fifty percent (50%) of all the shares of the former or which holds or controls voting rights by which its management is controlled. 1.2 "Agreement" means this instrument, any extension, renewal, amendment, substitution or modification hereof and the exhibits attached hereto and made a part hereof. 1.3 "Branch" shall mean the branch of Argosy located in the Republic of Colombia, as registered in document number 5323 inscribed with the formal requisites of the Republic of Colombia on October 25, 1983. 1.4 "Budget" means the basic planning instrument through which assignment of resources is made to specific projects to be applied within a Calendar Year or part thereof in order to attain the goals and objectives proposed. 1.5 "Calendar Year" means a period of twelve (12) calendar months commencing with January 1 and ending on the following December 31 according to the Gregorian Calendar. 1.6 "Commercial Field" means that part of the Contract Area which is capable of producing Oil in quantities and quality economically exploitable. 1.7 "Completing" means, with respect to a well, installing the production string of tubulars in the hole (except surface and intermediate casing) and associated equipment for the well to and including: 3 7 (a) In the case of a gas well, the wellhead and the running of adequate back pressure tests. (b) In the case of an oil well, the wellhead. 1.8 "Contract Area" means the land described in the Exhibit A, subject to Article 15. 1.9 "Development Well" means any well deemed a Development Well by Ecopetrol under the Ecopetrol Contract. 1.10 "Drilling Costs" means all money expended (exclusive of Completing costs and Equipping costs) for drilling, coring, logging and testing a well for the recovery of Petroleum and in the case of a well which is not completed for the taking of production of Oil, includes the costs of abandoning the well pursuant to the Regulations and costs of restoring the drilling site as required by applicable law, leases or agreements. 1.11 "Ecopetrol" means Empresa Colombiana de Petroleos, an official economic entity of the Republic of Colombia. 1.12 "Ecopetrol Contract" means the Association Contract with Empresa Colombiana de Petroleos dated September 20, 1995. 1.13 "Equipping" means equipping a well beyond the wellhead including, without limitation, the installation of the pump, flow lines and production tankage and, in the case of a gas well, a heater or dehydrator or other hydrate control facility. 1.14 "Exploration" or "Exploratory Well" means any well designed as such by the Parties, to be drilled or deepened in the Contract Area in the search for hydrocarbons and deemed an Exploratory Well by Ecopetrol under the Ecopetrol Contract. 4 8 1.15 "Joint Account" means the set of accounts maintained by the Operator in accordance with the provisions of this Agreement and of the Accounting Procedure attached hereto as Exhibit "B" in which the Operator shall record all charges, expenditures and credits made by it in carrying out the Joint Operations hereunder which are chargeable or creditable to the Parties as provided. 1.16 "Joint Lands" means an ownership interest, be it direct or indirect, in all of the lands, Oil and Gas leasehold or fee interests and other Oil and Gas interests intended to be explored, developed and operated for Oil and Gas purposes under this Agreement. 1.17 "Joint Operations" means the activities or work carried out or in the process of being carried out on the Joint Lands in the name or for account of all the Parties. 1.18 "Member" or "Members" means the persons or entities comprising the Operating Committee as defined in Article 3 hereof. 1.19 "Non-Operator(s)" means any Party to this Agreement other than the Operator. 1.20 "Notice" means a written notice as set forth in Article 23 hereof. 1.21 "Oil", "Gas", or "Oil and Gas" means oil, gas, casinghead gas, gas condensate and all other liquid or gaseous hydrocarbons and other marketable substances produced therewith and which may include substances of any other nature whatsoever combined, in suspension or mixed therewith and found in a liquid state or gaseous state either at the deposit or after production under 5 9 normal conditions of temperature and pressure. 1.22 "Operating Committee" or "Committee" means the committee established pursuant to Article 3 hereof. 1.23 "Operating Costs" means all money or costs expended, exclusive of drilling costs, completion costs and equipping costs, to operate a well or wells on the Contract Area for the recovery of Oil and Gas. 1.24 "Operator" means the Colombian Branch of Argosy Energy International, who shall carry out directly for the Parties the operations required to exploit the Petroleum found in the Contract Area. 1.25 "Participating Interest" means the percentage of interest in the Contract Area owned by a Party. 1.26 "Party" means any Party to this Agreement, or any other entity acquiring a Participating Interest in a manner consistent with this Agreement. As of the date hereof the only Parties are Argosy and Neo. 1.27 "Petroleum" means Petroleum and natural gas and every other mineral or substance, or any of them, otherwise also defined herein as Oil and/or Gas. 1.28 "Program" means a program for carrying out Joint Operations as determined by the Operating Committee pursuant to Article 7. 1.29 "Proportionate Share" means, with respect to a Party hereto, a percentage share equal to that Party's Participating Interest. 6 10 1.30 "Recovery Petroleum" means: (a) In the case of a Sole Risk Well that is a Wildcat Well, as defined in Section 1.35(b), all Petroleum produced from formations which were penetrated by the well, provided that such formations must be below the stratigraphic level in which Petroleum was found to be present in any and all wells previously drilled in the area described in Section 1.35(b); (b) In the case of a Sole Risk Well that is a Wildcat Well as defined in Section 1.35(a) all Petroleum produced from the formations which were penetrated by the well; (c) In the case of a Sole Risk Well that is a Development Well and after delivery of all Recovery Petroleum required under Section 1.35(a) and (b), as applicable, all Petroleum produced from such Development Well. 1.31 "Regulations" means all statutes, laws, rules, orders and regulations in effect from time to time and made by governmental authorities having jurisdiction over the Contract Area and over the operations to be conducted thereon. 1.32 "Retained Proceeds" means the value of the Recovery Petroleum after deducting (a) royalty payments, if any, to the Colombian government and/or Ecopetrol on the Recovery Petroleum in question, and (b) taxes (other than taxes computed by reference to profits, income, distributions, or capital) and other payments of a like nature, if any, levied by the Colombian Government or agency thereof on the Recovery Petroleum in question and after deducting the value of the portion of the Recovery Petroleum in question 7 11 which is delivered to Ecopetrol on account of its participation, if any. 1.33 "Seismic Program" means the obligations that the Parties have committed to perform as described in Clause 5.1.1 of the Ecopetrol Contract, during the first year of the Ecopetrol Contract. 1.34 "Sole Risk Well" and "Sole Risk Development" means those operations as to which not all Parties participate as set forth in Article 12. 1.35 "Wildcat Well" means any well deemed an Exploratory Well by Ecopetrol and which additionally meets the following criteria: (a) A well drilled in the Contract Area which at the time of spudding is located in an area lying outside the interpreted closure of any geological structure (or stratigraphic trap) into which a well has been drilled, in which such last-mentioned well Petroleum in commercial quantities has been found to be present during a positive test; or (b) A well drilled or deepened in the Contract Area which (i) at the time of spudding, deepening or reworking is located in a surface area lying inside the interpreted closure of any geological structure (or stratigraphic trap) into which a well has been previously drilled in which such previously drilled well where Petroleum in commercial quantities has been found to be present during a positive test, (ii) is drilled or deepened to a depth below the stratigraphic level in which Petroleum was found to be present within the interpreted closure and (iii) is not 8 12 completed in the horizon in which such Petroleum was found to be present. ARTICLE 2 Participating Interests and Relationship of the Parties 2.1 All rights and obligations in the Ecopetrol Contract (except for the rights and obligations of Ecopetrol and the Government of Columbia) and all equipment, materials and facilities owned by or hereafter purchased for the operation of the Joint Lands shall be owned by the Parties in undivided interests in the percentages set out in Section 2.2 below, as modified from time to time in accordance with Section 2.3 below. 2.2 Except as modified by Section 2.3 below, the Parties shall, during the term of this Agreement, own all rights, interests and benefits hereunder and under the Ecopetrol Contract and all Petroleum produced pursuant thereto and shall assume and discharge all of the liabilities and obligations set forth in the Ecopetrol Contract and this Agreement, according to the following Participating Interests: Argosy 55% Neo 45% All Joint Account costs shall be shared by the Parties on the basis of their respective Participating Interests. 2.3 The percentages set forth in Section 2.2 above are the initial Participating Interests of the Parties. If, from time to time, the Participating Interest of any Party increases or 9 13 decreases as provided for in this Agreement, the proportion of the obligations, liabilities, costs and expenses to be borne and paid by that Party, as well as its Proportionate Share of the rights and benefits, shall be increased or decreased correspondingly in accordance with the provisions of this Agreement. 2.4 Except as provided in Article 12 hereof, a Party's Participating Interest must be the same in all parts of the Contract Area. Only Participating Interests in the entire Contract Area may be transferred under Article 14 of this Agreement. 2.5 The liability of the Parties shall be severed, not joint or collective. Each Party shall be responsible only for its obligations, and shall be liable only for its Participating Interest or Proportionate Share of the costs of Joint Operations. Accordingly, the liens granted among the Parties in Article 9 are given to secure only the debts of each severally. It is not the intention of the Parties to create, nor shall this Agreement be construed as creating, a mining or other partnership or association, or to render the parties liable as partners. 2.6 Except as provided in Article 12 hereof, all property of every kind and description acquired pursuant to this Agreement shall be owned in undivided shares by the Parties in accordance with their respective Participating Interests. During the term of this Agreement, each Party agrees that it shall at no time resort to any proceeding or action at law or other action to partition or divide any such property or any portion thereof jointly owned by all Parties subject to this Agreement. 10 14 2.7 Each Party hereby elects to be excluded from the application of all of the provisions of Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), as permitted and authorized by Section 761 of the Code and the regulations promulgated thereunder. Operator is hereby authorized and directed to execute such evidence of this election as may be required by the Secretary of the Treasury of the United States or the United States Internal Revenue Service, including specifically, but not by way of limitation, all of the returns, statements and data required by the Code and applicable regulations thereunder. Should there be any requirement that each Party further evidence this election, each Party agrees to execute such documents and furnish such other evidence as may be required by the United States Internal Revenue Service. Each Party further agrees not to give any notice or take any action inconsistent with the election made hereby and, further, to take such action consistent with the foregoing election as may be necessary or desirable to effect or evidence the same result with respect to any other taxing jurisdiction or authority. ARTICLE 3. Operating Committee 3.1 To provide for the orderly supervision and direction of the Joint Operations, the Parties shall pursuant to this Agreement forthwith establish an Operating Committee in accordance with Section 3.3 hereof. Any future Members of the Operating Committee, 11 15 other than the initial Members, shall represent an entity or an individual who may become a successor to a Party's Participating Interest in the Joint Lands or who may become a successor to a portion of a Party's Participating Interest in the Joint Lands. 3.2 In addition to the powers and responsibilities otherwise set forth in this Agreement, the Operating Committee shall have the following powers and responsibilities, the exercise of which shall be the proper business of the Operating Committee: (a) To establish policies from time to time governing various aspects or activities of the Joint Operations; (b) To review, adopt and revise Programs and Budgets; (c) To select the location for wells to be drilled under said Programs and to approve the program for drilling, deepening, reworking, sidetracking, testing, Completing, plugging and abandoning of wells thereunder; (d) To select areas to be relinquished or surrendered under the terms of the Ecopetrol Contract. (e) To appoint such technical, financial, accounting, legal or other committees as may be appropriate for studies, analyses or reports on matters pertaining to the Joint Operation; (f) To consider the advisability of purchasing, selling or exchanging information from, to or with third parties, other than affiliated companies, and making of contributions, such as bottom hole or dry hole contributions, subject to government approval, if required; and, (g) To consider such other matters pertaining to the 12 16 Joint Operations as may be specifically referred to the Operating Committee by the Parties. 3.3 (a) Except as provided in Section 3.3 (b), Argosy and Neo each shall have the right to appoint two Members to the Operating Committee. These Members of the Operating Committee appointed by Argosy and Neo are appointed by agreement of each Party as well as the alternative Member(s) who shall be authorized to represent and bind such Party at meetings of the Operating Committee. A party may change its Member from time to time by Notice to all other Parties. The Members to serve on the Operating Committee are hereby appointed and identified as follows: Members Alternates ------- ---------- Argosy: Douglas W. Fry W. Kirk Bosche' Santiago Gonzalez Edgar L. Dyes Neo: Ronald Suttill Robert C. Boyd Appointment of these Members of the Operating Committee shall require no additional notice apart from the execution of this Agreement. Such Members shall serve as Members as provided hereby until they resign or are removed as provided herein. (b) Upon the transfer of fifteen percent (15%) or greater Participating Interest by a Party to an individual or entity ("New Party"), the New Party shall have the right to appoint a Member to the Operating Committee who shall be entitled to vote such New Party's Participating Interests. 13 17 (c) Any Party holding less than a fifteen percent (15%) of the Participating Interests shall not be entitled to have a Member on the Operating Committee. 3.4 A Chairman of the Operating Committee ("Chairman") shall be selected by the Members. For a period of six months from the date hereof a Member representing Neo shall be Chairman of all meetings of the Operating Committee. If a Member representing Neo is not present at the commencement of such a meeting, the Members present shall elect one of their number to be the chairman of such meeting. After the expiry of the aforementioned six month period, the Chairman shall be elected for a period of one year by a majority vote of the Operating Committee. 3.5 The Operating Committee may consider any matter including, without limitation, those referred to in Section 3.2 above. A meeting shall be held every other month unless properly called sooner by the Operator or any Member. Commending with the initial meeting of the Operating Committee and for each meeting of the Operating Committee thereafter, the time, place and date of the next subsequent meeting of the Operating Committee shall be set by a sixty percent (60%) vote of the Operating Committee at its current meeting before adjournment. Each alternating meeting shall 14 18 be held in Columbia with the ensuing meeting to be held in a place to be determined by the Operating Committee. At least fifteen (15) days' Notice of a meeting hereunder shall be given to the Members unless the Members unanimously waive their right to such Notice in writing. Any Member may be present and participate in any meeting of the Operating Committee by conference telephone call in which all Members participating therein can hear one another. The Operator, when dispatching Notice of any meeting shall attach an agenda giving reasonable details of all matters to be considered at the meeting. Any Member may, by Notice given to the Chairman at least ten (10) days prior to a meeting, propose additional items which shall be included on the agenda. When a meeting is called by Operator at the request of a Member, the Operator shall include on the agenda such matters as are requested by the Member for inclusion on the agenda. Matters not on the agenda may be voted upon only if all the Members are present in person or, if not present in person, by telephone, and they unanimously agree to submit such matters to a vote. Any duly called meeting of the Operating Committee may be suspended or delayed by a majority vote of the Members (in person or by telephone) at such meeting but, in any case, a meeting of the Operating Committee shall be held and completed once in each quarter of the Calendar Year. 3.6 (a) The Operating Committee shall determine all matters properly coming before it as follows: (i) In voting on any matter the Members shall vote the Participating Interest they represent; 15 19 (ii) Except as otherwise specifically provided for in this Agreement, the Members shall determine or approve matters by the affirmative vote of sixty percent (60%) of the Participating Interest. (iii) A Member not in attendance at a called meeting may vote on any matter submitted for a vote at the meeting by Notice ballot to Operator or by telephone call to the Operator, such oral vote being confirmed in writing by the Member to the Operator as follows: A Member who participates in a called meeting by telephone shall confirm his vote by a telephonic facsimile to the Operator within three (3) business days of such called meeting. (iv) Operator may submit any matter, with reasonable details of any proposed expenditure, to each Member by Notice. Each Member shall vote by Notice transmitted by telephonic facsimile to the Operator within twenty (20) days from the date of receipt from the Operator of the ballot Notice. Such vote shall be binding unless Operator or any Member gives written Notice of a meeting to consider the item addressed in the ballot Notice pursuant to Section 3.5 above within twenty-five days from the receipt of the ballot by the Members. Operator shall promptly notify each Member of the result of a vote hereunder; (v) A Member who does not vote at a meeting or by ballot, as the case may be, on any matter shall be deemed conclusively to have voted affirmatively; (vi) A determination of a matter by the voting Members in accordance with this Agreement shall be binding upon all the Parties. 16 20 (vii) Any Party who is not entitled to appoint a Member by reason of Section 3.3(c) as above, may arrange to have its Participating Interests voted by a Member. (b) The Chairman shall prepare the agenda and keep minutes of the proceedings of each meeting of the Operating Committee and a copy thereof shall be forwarded to each Member. The minutes shall include the names of the Members present or participating by conference telephone call as described in Section 3.4 and any formal resolutions passed by the Operating Committee. Unless a Member takes objection to contents of minutes by notice to Operator and all other Members within twenty days of receipt of the minutes, the minutes shall be deemed conclusively to be correct. 3.7 Operator shall call an annual meeting of the Operating Committee on or before November 1st in accordance with Section 3.5 hereof to consider among other things the matters set forth in Article 7 hereof. 3.8 Each Member of the Operating Committee shall be responsible for his own travel expenses in connection with attendance at the meetings of the Operating Committee. ARTICLE 4. Joint Operations/Scope of Agreement 4.1 Each Party recognizes that in accepting the Ecopetrol Contract certain obligations will be required of it and, in furtherance of that recognition, each Party has agreed to, or will when required of it agree to contribute to the Joint Operations the 17 21 sums of money necessary, to satisfy when due, its Participating Interest share of the minimum expenditures required to satisfy the first year's obligations under the Ecopetrol Contract. Until those minimum expenditure and work obligations are satisfied, the Parties agree that the Sole-Risk Drilling provisions (Article 12 hereof) and the Withdrawal provisions (Article 16 hereof) shall not be applicable. 4.2 The scope and purpose of Joint Operations are limited to prospecting, exploring and drilling for Petroleum, developing, operating and producing Petroleum accumulations in the Contract Area, treating and field processing Petroleum produced under this Agreement. Notwithstanding any implication which may be drawn from the foregoing or from any other provision contained herein, this Agreement is not intended to and shall not extend to any joint financing arrangement or to any joint marketing or joint sales of Petroleum. ARTICLE 5. Operator 5.1 The Branch shall be the Operator for the Joint Operations and for operations conducted pursuant to Article 12 hereof, and shall conduct and direct and have full control of all such operations in the Contract Area, as permitted and required by, and within the limits imposed by this Agreement. Operator shall conduct all operations in a good workman-like manner in accordance with this Agreement and with good oil field practice, in compliance 18 22 with all applicable laws, rules and regulations governing such operations, and in accordance with Programs and Budgets approved by the Parties and the Ecopetrol Contract. Non-operators shall take all reasonable steps to assist the Operator in the performance of its obligations set forth herein. 5.2 Except in the case of gross negligence, as provided for in Section 5.5 below, when the vote shall be sixty percent (60%), the Operator hereunder may be removed as Operator at any time by a eighty percent (80%) affirmative vote in interest of all of the Participating Parties. The Non-Operators shall jointly and promptly give to Operator Notice of such removal and such removal shall be effective on the date on which a successor Operator, appointed by the Operating Committee and/or Ecopetrol, shall be ready and able to assume the obligations of Operator in accordance with the provisions of this Agreement. 5.3 Subject to compliance with the provisions of the Ecopetrol Contract, Operator may at any time resign by giving to each of the Non-Operators Notice of such resignation. Such resignation shall be effective one-hundred eighty (180) days after the date of Notice thereof or on the date on which a successor Operator appointed by the Operating Committee and/or Ecopetrol shall be prepared to assume the obligations of Operator hereunder, whichever shall first occur. 5.4 Upon removal of the Operator by a vote of the Participating Parties or resignation of the Operator, a new Operator shall be appointed by a sixty percent (60%) affirmative 19 23 vote in interest of the Participating parties. 5.5 Operator shall not be liable to any Non-Operator hereto for anything done or omitted to be done by Operator in the conduct of operations hereunder except that Operator shall be liable for such acts or omissions in his capacity as Operator which constitute gross negligence, willful misconduct or a material breach of this Agreement. ARTICLE 6. Functions and Duties of Operator 6.1 In accordance with agreed Programs and Budgets, and subject to the provisions of this Agreement, the Ecopetrol Contract, Regulations and such instructions as may be given from time to time by the Operating Committee, Operator shall have exclusive charge of and shall conduct all operations of the Joint Lands, and in connection therewith, shall have the following rights, duties and obligations: (a) Operator shall represent the Participating Parties with Ecopetrol and with other agencies of the Government of Colombia and furnish to them all information, data and notices which the Participating Parties are required to furnish under the Ecopetrol Contract. Operator shall promptly furnish the Non-Operators with copies of all communications and notices which the Operator receives from Ecopetrol or any agency of the Government of Colombia and any Non-Operator may attend all meetings of Operator with Ecopetrol or any agency of the Government of Colombia, if he or it so desires. 20 24 (b) Operator shall secure or have secured and furnish all supervision, labor, services, contractors and subcontractors, materials and equipment, permits and rights necessary or appropriate for Joint Operations hereunder and shall have custody of all materials and equipment. The selection of employees, the number thereof, their hours of labor and their compensation shall be determined by Operator. (c) Operator shall use its best efforts to conduct diligently all operations in accordance with practices generally followed in exploration, development and production operations by the petroleum industry, to confirm to good oil field and production engineering practices and accepted conservation principles and to perform such operations in an efficient and economic manner. All operations shall be conducted in compliance with the terms of the Ecopetrol Contract, this Agreement and Regulations. (d) Operator shall proceed with due diligence to secure or cause to be secured for the Joint Account such permits, easements and their rights to the use of the Joint Lands and other rights as may be required or appropriate to the conduct of operations in accordance with the Ecopetrol Contract, this Agreement and Regulations. (e) Operator shall make a reasonable effort to notify the Non-Operators of the time of coring and testing of Exploratory and Development Wells which are undertaken at the direction of the Operating Committee and shall permit, upon receipt of authorization in writing by any Non-Operator, the employees and Members of any 21 25 such Non-Operator to have full access to the area of operations at all reasonable times and at their own risk and expense for the purpose of observing any and all operations being conducted by Operator and inspecting all materials, equipment and other properties. Such employees and Members shall at all times observe Operator's safety Regulations. (f) Operator shall furnish the Non-Operators at the earliest possible date, with copies of all reports furnished to Ecopetrol; copies of drilling and related contracts; reports of crude Oil runs and stocks; an accurate monthly report showing production and detailed disposition of the volumes of Oil, condensate, water, associated Gas, non-associated Gas and other substances; true and legible copies of all electrical logs, gamma ray logs, mud logs and other well surveys; copies of all production tests, bottom hole pressure and temperature surveys, reservoir fluid analyses, core analyses, and any other survey or measurements conducted on said wells; copies of all geological and geophysical data and information and daily drilling reports. Operator shall furnish to any Non-Operator any additional information pertaining 22 26 to Joint Operations on the Contract Area when a special request thereof is made; however, the cost of gathering and furnishing any additional information not ordinarily furnished by Operator to the Non-Operators shall be charged to the Non-Operator whose employees request the information. Each Non-Operator, through its employees, or agents duly authorized in writing for such purpose, shall be permitted at reasonable intervals and during usual business hours to examine and make copies of any and all data and interpretations thereof, including but not limited to cores, samples, logs and surveys concerning operations conducted hereunder. (g) Operator shall use its best efforts to keep the Contract Area, Joint Lands and associated property free from liens, charges and encumbrances arising out of the operations hereunder, except as otherwise provided herein. (h) Operator shall promptly pay all costs and expenses incurred in connection with operations hereunder, except as otherwise provided herein. (i) Operator shall keep full and complete records of accounts and technical operations hereunder and prepare and furnish to each of the Non-Operators such reports, statements, data and information as may be required from time to time by the Operating Committee concerning the Ecopetrol Contract or the operations conducted thereunder. 6.2 Operator shall undertake to carry out the Programs provided to Operator by the Operating Committee (the "Adopted Programs") within the limits of the respective Budget and approved Authorities for Expenditure ("AFE") for such Programs approved by the Operating Committee and provided to Operator (the "Adopted Budgets") and shall not undertake any operations not included in such Adopted Programs or make any expenditures during a Calendar Year in excess of the budgeted amounts adopted therefor except as follows: (a) If necessary to carry out the Adopted Programs for 23 27 a Calendar Year, Operator is hereby authorized to make during such Calendar Year, expenditures in excess of the Adopted Budget applicable to each Program therefore in an amount not to exceed ten percent (10%) of the total respective Adopted Budget or $50,000 whichever is less in such currencies as may be appropriate. Any expenditures in excess of the Adopted Budget shall be reported promptly in writing to the Non-Operators by Operator. (b) Operator is also hereby authorized to expend for operations on the Contract Area, during the Calendar Year, a sum not to exceed $50,000 or the equivalent in other currencies, on items not included in the Adopted Budget for that year, provided that such expenditures are not for purposes previously rejected by the Operating Committee and provided that an itemized report of such expenditure shall be submitted for approval to the Non-Operators as soon as possible following such expenditure, and if the Operating Committee shall approve such expenditures, the expenditures shall be considered expenditures included in the Adopted Budget and shall not count against expenditures allowed by virtue of Section 6.2(a). (c) Notwithstanding any other provisions under this Agreement, in the event of explosion, fire, flood or other emergency occurring on the Contract Area, Operator may take all actions it deems advisable to protect and safeguard life and property and the operations hereunder. Operator shall promptly report to the Non-Operators a full description of the event and the actions taken. 24 28 6.3 In the event an operation has been approved by the Operating Committee, it shall not be necessary for Operator to obtain additional approval from such Committee for any third party contract relating to that particular operation unless the value of such contract exceeds the approved amount by ten percent (10%). 6.4 Any and all claims and suits by third parties arising out of the operations of the Joint Lands or relating to the Joint Lands and brought against Operator or the Non-Operator, or any of them, may to the extent not covered by insurance be compromised and settled or defended by Operator; provided, however, that Operator shall not pay more than the equivalent of $10,000 in the settlement of any such claim or suit without first obtaining the approval of the Operating Committee. When the amount of any such claim or suit brought against Operator or the Non-Operators hereto, or any of them, shall exceed the equivalent of $10,000, Operator shall promptly notify the Non-Operators in detail of the claim or suit and shall comply with any directions given by said Operating Committee with respect thereto. Each Non-Operator shall have the right to participate through its own counsel, at its own expense, in the settlement, compromise or defense of any claims and suits hereunder in amount in excess of the equivalent of $10,000, however, other than as provided in this Agreement, the Ecopetrol Contract and Regulations all expenditures incurred by Operator in prosecuting, defending, compromising or settling any such claims shall be borne by the Participating Parties. 6.5 Operator will maintain such office or offices in Colombia 25 29 as may be necessary, appropriate or required by the Regulations. 6.6 Except as otherwise provided herein or in the Ecopetrol Contract, Operator shall initially pay for the Joint Account all taxes (except income taxes) with respect to property held for the Joint Account. 6.7 The Operator shall have a first and preferred lien on the interests of the Non-Operators in the Contract Area and/or in the Petroleum produced and saved under this Agreement or the proceeds from the sale of such Petroleum and on the material and equipment acquired for the Joint Account to secure for Operator the payment of any sum due the Operator under this Agreement from the Non-Operators. The Parties agree that further documentation is unnecessary for the Operator to perfect his interest in such lien against the Non-Operators under this Section. 6.8 The Operator, subject to the approval of the Operating Committee, shall hire an exploration manager, who shall reside in Colombia. ARTICLE 7. Programs and Budgets 7.1 As soon as practicable after the effective date of this Agreement, the Operator shall submit to the Parties two proposed Programs and Budgets for the remainder of the current Calendar Year, the next succeeding Calendar Year and an estimate for the next four years. (a) The Operations Program and accompanying Budget shall 26 30 cover the Seismic Program, all operations and related costs, such as the day to day expenses of the Joint Operations, the costs of operating and maintaining any production on the Contract Area (including remedial well work under $25,000 per well per occurrence), the allocation of general and administrative expenses to such operations and any and all other expenses connected with such operations (the "Operating Program and Budget"). This Budget shall include forecasts of production and revenue, if any, and costs on a monthly basis. (b) The Drilling Program and related Budget shall cover the drilling, deepening, recompleting, significant remedial well work in excess of $25,000 per well per occurrence and the Completing and Equipping of any well or wells on the Contract Area together with general and administrative expenses allocated to such operation (the "Drilling Program and Budget"). This Program shall include detailed AFE's showing estimated expenditures by project on a monthly basis. 7.2 On or before the first day of October of each year following the year in which this Agreement is first effective the Operator shall submit to the Operating Committee the proposed Drilling and Operation Program and Budget for the next succeeding Calendar Year and provisional Program and estimated Budget for the following four Calendar Years. 7.3 The final Drilling Program and Budget will be approved separately by the Operating Committee before the first day of December prior to the commencement of the Calendar Year to which it relates. 27 31 (a) Approval of the Operating Program and Budget shall constitute authority for the Operator to arrange joint Operations and related expenditure in accordance with the approved Program. (b) Approval of the Drilling Program and Budget shall not constitute authority for the Operator to arrange Joint Operations and commence expenditure until the relevant AFE has been approved. 7.4 The work Programs and Budgets shall be at least sufficient to satisfy any drilling operations necessary to maintain or perpetuate the Ecopetrol Contract or the Seismic Program (the "Commitment Expenditures"). 7.5 The Operator or any Non-Operator may also from time to time submit to the Operating Committee revisions of the Programs and Budgets covering additions, deletions and adjustments which it considers to be in the interests of Joint Operations. 7.6 The Operator shall not be obliged to perform any work or incur any expenditure or indebtedness hereunder for the Joint Account until the corresponding Budgets have obtained all necessary approvals from Ecopetrol and other governmental agencies. ARTICLE 8. Costs, Expenses and Advances 8.1 Except as herein otherwise specifically provided, all costs and expenses, rewards and benefits, accruing or resulting from Joint Operations shall be borne and paid by and accrued to the Parties in proportion to their respective Participating Interests. 28 32 8.2 Except as herein otherwise specifically provided, the Operator shall pay and discharge all Joint Account costs and expenses and shall charge the Parties with their respective Participating Interests shares of such costs and expenses and shall render accounts in respect thereof in accordance with the Accounting Procedure attached as Exhibit "B" to this Agreement. 8.3 The Operator, at its election, shall have the right to demand and receive from each Party payment in advance of its respective share of the estimated amount of expenditures for each month to be incurred in Joint Operations in U.S. Dollar as required by Operator, which right may be exercised only by submission to each Party at least ten (10) days but not more than thirty (30) days prior to the beginning of each month of the Budget period an itemized statement showing the amount to be advanced (for local expenditures in Colombian Pesos and for other expenditures in U.S. Dollars) for the particular month by each Party as its Proportionate Share of the cash expenditures. U.S. Dollar funds as received shall be maintained in an account administered by the Secretary and expenses incurred and payable in U.S. Dollars shall be paid from the Parties account after approval of such payments by the Operator. Peso cash calls shall be remitted to a joint Colombian bank account established and maintained for the benefit of the Parties. The monthly cash calls shall be paid within thirty (30) days after receipt by the Party of such itemized statement or by the first of the month to which the cash call applies, whichever comes later. Payment shall be considered made when good funds have 29 33 been received at the place designated by Operator. Proper adjustment of each monthly cash call shall be made between advances and expenditures in the currency so advanced as a part of the calculation for the cash call for the next succeeding month, to the end that each Party shall bear and pay its Proportionate Share of actual expenditures. The Operator shall prepare and present to each Party a quarterly statement which shall reflect a summary of main types of expenditures under appropriate cost headings together with such other details as may be agreed upon by the Parties. The Operator shall include a quarterly and cumulative-from-inception summation of costs in the quarterly statements. Payment of any cash calls pursuant to this Section 8.3 shall not prejudice the right of any Parties to protest or question the correctness thereof within the time limits specified in Section 2.20 of the Accounting Procedure attached hereto as Exhibit "B". 8.4 The Operator shall pay all fees, rental and imposts (except each Party shall pay to the Colombian Government all taxes computed by reference to profits, income, distributions or capital) required by the Regulations to be paid on account of Joint Operations or by the terms and provisions of the Ecopetrol Contract and shall charge to the Joint Account any such fees, rentals and imposts so paid. 8.5 Each Party shall timely pay, deliver or cause to be paid or delivered to the appropriate governmental authority all taxes computed by reference to income, profits, distributions or capital properly payable by such Party and such Party shall hold the other 30 34 Parties free from any liability therefrom. Operator shall, in accordance with Clause 13 of the Ecopetrol Contract, deliver to Ecopetrol the portion of the production from the Contract Area representing Ecopetrol's royalty. If the Operator is requested by Ecopetrol to pay a royalty in money as provided for in Clause 14.6.1 of the Ecopetrol Contract, then Operator shall make such payment, and each Party shall furnish Operator with all information necessary for it to do so and shall advance to Operator such funds as are necessary to pay timely to Ecopetrol the royalty in respect of the share of production taken from the Contract Area disposed of by such Party. 8.6 The Operator shall use its best efforts to deliver to the Parties not later than March 31 following the close of each Calendar Year, a final certified statement of the Joint Account for such Calendar Year, which shall be deemed to be conclusively accepted by the Parties if not questioned in writing within twenty-four (24) months of the date of its receipt by the Parties. The cost for the certified statement shall be paid from the Joint Account funds. 8.7 An Accounting Procedure making provisions for billings, payments and allocation of all direct and indirect costs, expenses and overhead charges and containing the principles to be adopted for all accounting and fiscal purposes is attached to this Agreement and marked Exhibit "B" and forms a part of this Agreement. 8.8 If Ecopetrol participates with the Parties in Joint 31 35 Operations under the Ecopetrol Contract, then the proceeds received by the Parties from Ecopetrol as reimbursement for prior costs pursuant to Clause 9 of the Ecopetrol Contract shall be owned and shared by the Parties in the same proportion as each bore such costs subject to the provisions of Article 12 hereof. ARTICLE 9. Default and Lien 9.1 If any Party shall fail to advance to Operator its share of expenditures, or to pay its share of the costs and expenses which are due under this Agreement within thirty (30) days of the date on which such funds are payable, such Party shall be in default, and Operator shall immediately so notify ("Defaulting Party") by telephonic facsimile or registered mail. A copy of such Notice, specifying the amount, shall be simultaneously forwarded to each other Party ("Non-Defaulting Party") to acquaint it with the facts constituting such default. 9.2 Each Non-Defaulting Party shall, within fifteen (15) days of receiving a copy of the Notice to the Defaulting Party given by the Operator pursuant to Section 9.1, advance to Operator that proportion of the amount with respect to which the Defaulting Party is in default which the Participating Interest of such Non-Defaulting Party bears to the Participating Interest of all Non-Defaulting Parties. Each Non-Defaulting Party shall continue to advance to Operator an identical share of all future amounts payable by the Defaulting Party pursuant to this Operating 32 36 Agreement until the Defaulting Party has fully remedied its default in accordance with Section 9.3 hereof or the Defaulting Party fails to remedy its default and the Non-Defaulting Parties start recouping as provided in Section 9.4, or the Defaulting Party's interest under the well and the acreage allocated thereto shall have been assigned pursuant to Section 9.5 hereof, or operations shall have been abandoned pursuant to Section 9.5. The failure of a Non-Defaulting Party to advance any amounts payable pursuant to this Article shall be deemed to be a failure to pay or advance such Party's share of expenses under this Agreement, and will result in such Party becoming a Defaulting Party. All amounts advanced by a Non-Defaulting Party pursuant to this Article shall thereupon become a debt due by the Defaulting Party, payable on demand and bearing interest at the annual rate of eighteen percent (18%) or the maximum legal rate permissible, whichever is the lesser, commencing on the date such funds are so advanced. Any Non-Defaulting Party shall in addition to all other rights available under this contract or otherwise have the right to bring suit to enforce the collection of any sums payable by a Defaulting Party. 9.3 The Defaulting Party may remedy its default within thirty (30) days following its receipt of the Notice provided for in Section 9.1 above by paying to Operator all amounts in default and all interest which has accrued thereon pursuant to Section 9.2 hereof. All amounts so paid to Operator shall be promptly distributed and paid to the Non-Defaulting Parties proportionately to the contributions theretofore made by them pursuant to the said Section 9.2. 33 37 9.4 If the Defaulting Party fails to remedy its default within the thirty (30) day period above referred to in Section 9.3 and if the amount in default represents Operating Cost, then, in addition to the other legal remedies available to them, each Non-Defaulting Party shall recoup from any production on the Contract Area otherwise allocable to the Defaulting Party three hundred percent (300%) of their respective share of such amount in default plus any interest which may have accrued as provided in Section 9.2. 9.5 If the Defaulting Party fails to remedy its default within the thirty (30) day period above referred to in Section 9.3 and if the defaulted amount represents Drilling and/or Completion and Equipping Cost, then, in addition to the other legal remedies available to them, each Non-Defaulting Party shall have the option (but only after consultation with the other Non-Defaulting Parties) exercisable by giving Notice to all Parties (including the Defaulting Party) within one hundred twenty (120) days after the expiration of the said thirty (30) day period referred to in Section 9.3 to have assigned to said Non-Defaulting Party the entire Participating Interest of the Defaulting Party in the well and the acreage allocated to it if it is a Development Well or the Wildcat Area if it is an Exploratory Well. In addition, each Non-Defaulting Party shall recoup the amount of default as provided in Section 9.4. Such assignment shall be free of all liens, charges and encumbrances, except those arising in favor of one or several of the other Non-Defaulting Parties pursuant to this Agreement. If 34 38 said option is exercised by more than one Non-Defaulting Party, the Defaulting Party shall assign its Participating Interest to such Non-Defaulting Parties in proportion to their respective Participating Interests or in such other proportion as such Non-Defaulting Parties may agree. The Defaulting Party shall, at its cost, execute and deliver any and all documents and take any and all action necessary to effect the assignment of its Participating Interest to such Non-Defaulting Party(ies). If the Non-Defaulting Parties (or any one of them) have not elected by the end of the said thirty (30) day period referred to in this Section 9.5 to acquire all of the Defaulting Party's Participating Interest as set out above, no assignment of the Defaulting Party's Participating Interest shall be made and, in that event, the Joint Operations shall be abandoned at the earliest possible date and each Party, including the Defaulting Party, shall pay its share of all costs of abandoning the Joint Operations. 9.6 In the event any Party is declared in default on three consecutive payments due to the Joint Account, the entire Participating Interest of the Defaulting Party under this Agreement and the Ecopetrol Contract shall automatically be assigned to the Non-Defaulting Parties without any further action of either party. 9.7 Until such time as the assignment of its Participating Interest has been completed pursuant to Section 9.5 or 9.6 hereof, and to the extent that such cooperation may be necessary or appropriate, the Defaulting Party shall cooperate with the other Parties to take any action which the Non-Defaulting Parties wish to 35 39 take within the scope of this Agreement to protect the rights and benefits of the Parties under the Ecopetrol Contract. 9.8 In addition to the remedies for default set forth above, a Defaulting Party grants to each Non-Defaulting Party a lien upon its share of Petroleum when extracted, the proceeds therefrom and its Participating Interest to secure payment of its share of expenses, together with interest thereon at the rate provided in Section 9.2 hereof. Upon any party becoming a Defaulting Party, Operator shall have the right, without prejudice to other rights or remedies, to apply any proceeds in Operator's possession from the sale of the Defaulting Party's share of Petroleum against any amounts payable by the Defaulting Party pursuant to this Agreement. Each purchaser shall be entitled to rely upon Operator's written statement concerning the amount of any default. 9.9 During any period after Notice is given pursuant to Section 9.1, the Defaulting Party shall not have the right to receive any data, reports or information relating to the Contract Area except for Notice of future cash calls required and shall not have the right to make any representation with respect to, or vote on, any matters submitted to the Operating Committee, but shall nevertheless be bound by the decisions of the Operating Committee; and the voting rights of the Defaulting Party shall inure to the Non-Defaulting Parties in proportion to their respective Participating Interests. 9.10 The remedies contained in this Article are not exclusive and are without prejudice to any remedies or actions at law or 36 40 equity that are or may be available to the Non-Defaulting Parties for the enforcement of their rights and collection of all sums due and owing from a Defaulting Party. The failure to exercise any right or remedy at any time shall not constitute a waiver of such right or remedy or estop the future exercise of such right or remedy with respect to any default or subsequent defaults in the performance by any Party of its obligations hereunder, including but not limited to the obligation to advance funds. 9.11 Notwithstanding any other provision of this Agreement, upon the failure of a Party to pay its Proportionate Share of a Commitment Expenditure, as defined in Section 7.4 hereof, all parties shall be given notice of such failure and the Party failing to pay its Proportionate Share of the Commitment Expenditure (the "Forfeiting Party") shall have ten (10) days thereafter to make such payment. If such payment is not made within ten (10) days, the Parties other than the Forfeiting Party shall pay that proportion of the amount which the Forfeiting Party has failed to pay which the Participating Interest of such non Forfeiting Party bears to the Participating Interest of all non Forfeiting Parties and the Forfeiting Party shall assign all of its right title and interest in and to the Ecopetrol Contract and the Contract Area to the non Forfeiting Parties as above and the Forfeiting Party shall have no further participation in the Ecopetrol Contract and the Contract Area. 37 41 ARTICLE 10. Insurance 10.1 Operator shall purchase for the Joint Account and shall require contractors to purchase all insurance required to comply with the Regulations applicable to the Contract Area and any other obtainable insurance approved by the Operating Committee. Such insurance shall waive all right of recourse against the Parties. Each policy of insurance obtained pursuant to this Section 10.1 shall, to the extent of their respective insurable interests, include all Parties as named insureds and shall, if Parties request, include as named insureds any mortgagees or other holders of a security interest in this Agreement. 10.2 It is understood and agreed that any Party may carry any other insurance for their own account pertaining to the Joint Operations at their own cost and expense. ARTICLE 11. Disposition of Petroleum 11.1 Subject to the terms of the Ecopetrol Contract and the Regulations, each Party shall have the right at all times to take in kind, own and sell or otherwise separately dispose of its Participating Interest share of all Petroleum produced and saved from the Contract Area as a result of Joint Operations, all in accordance with this Agreement, except for Petroleum which is unavoidably lost or required to be used by the Operator in Joint Operations. Any extra expenditure incurred in taking in kind or 38 42 separate disposition by any Party of its Proportionate Share of production shall be borne by such Party. Any Party taking its share of production in kind shall be required to pay for only its Proportionate Share of such part of Joint Operations facilities which it uses. 11.2 If any Party shall fail to make any arrangements necessary to take in kind or separately dispose of its Proportionate Share of the Petroleum produced from the Contract Area, if and when any Party shall have the right to do so, Operator shall have the right, subject to the prior written revocation by the Party owning it, but not the obligation, to sell such Party's Petroleum for the account of the non-taking Party. The Parties hereby appoint Operator to serve as their representative under this Agreement for the administration, amendment, renewal and renegotiation thereof, including without limitation, giving and receiving Notices and requests, making and witnessing tests, delivering the quantities of Petroleum deliverable, rendering bills for Petroleum delivered, and receiving payments therefor, allocating and prorating and distributing payments among the various Parties; and the Parties shall indemnify and hold Operator harmless for its actions or inactions as such representative except for those matters attributable solely to Operator's gross negligence or willful misconduct. 11.3 In the event that different qualities of Petroleum produced from the Contract Area are segregated so as to form two or more separate grades of Oil, then all of the estimates, advices and 39 43 declarations required to be given shall specifically relate to each of the grades of Oil and to the equipment and facilities necessary for making available each of such grades for delivery to each Party. 11.4 All risk of loss of Petroleum produced from Joint Operations shall be borne jointly by all Parties up to the point where the Petroleum passes the outlet flange of the Joint Account facilities, after which point risk of loss shall be borne by the Party taking delivery. ARTICLE 12. Operations by Less than all Parties 12.1 Provided that the principal obligations of the Parties under the Ecopetrol Contract have been fulfilled, any Party may at any time and from time to time (subject to Section 12.2 below) propose the drilling, deepening, Completing, plugging back or reworking of a well by furnishing all other Parties with a written detailed program for the proposed operations, and an estimate of the total cost thereof, which shall include, if applicable and available: (a) The surface location, the proposed bottom hole location, seismic section and seismic structure map, and proposed spudding date; (b) The proposed total depth and casing program and anticipated stratigraphic section; (c) The proposed testing and logging Program; 40 44 (d) Types of drilling rigs and/or major facilities to be used and (e) Any acreage or cash contribution pledged in support of the proposed operations. Any Party may at any time propose the development of an area lying inside an interpreted closure of any geological structure (or stratigraphic trap) into which a well has been drilled in which Petroleum has been found to be present. The proposal shall contain such technical justifications, cost estimates and other information as are appropriate to the particular project. If the drilling, deepening, Completing, plugging back or reworking of any particular well or the development of an area is proposed to the Operating Committee and is not approved, then the Party or Parties, or any of them, who voted in favor of such operations may elect to have such operations conducted by giving written Notice to that effect to the other Party or Parties, the Party or Parties making such election being hereinafter called the "Drilling Party" whether one or more, and the other Party or Parties being hereinafter called the "Non-Drilling Party", whether one or more; provided that the deepening or plugging back of a jointly owned producible well may not be carried out by the Drilling Party unless such operations are approved by the Operating Committee. Conversely, if the drilling, deepening, completing, plugging back or reworking of any particular well or the development of an area is approved by the Operating Committee, then 41 45 any Party not having voted in favor of such operations shall not participate in such operations notwithstanding such approval, except as provided for in Sections 12.2 and 12.3 below, the Party or Parties having voted in favor of such operations being hereinafter called the "Drilling Party", whether one or more, and the Party or Parties not having voted in favor of such operations being hereinafter called the "Non-Drilling Party", whether one or more. The above-mentioned well and such development operations are herein called the "Sole Risk Well", and "Sole Risk Development", respectively, and operations of either type or both are herein called "Drilling Operations". 12.2 Within thirty (30) days after receipt of the Drilling Party's Notice of election, or within thirty (30) days after the approval of the Drilling Operations by the Operating Committee, as the case may be, each Drilling Party and each Non-Drilling Party may elect by written Notice to the Drilling Party and Operator to participate in the Drilling Operations and be a Drilling Party for the purposes of this Article. The Drilling Party shall, within sixty (60) days after the expiry of the second Notice period aforesaid, send written direction to the Operator to commence Drilling Operations. If such Notice is not sent within said sixty (60) days after the expiration of the second Notice period, all right of the Drilling Party arising from its notice of election shall be forfeited. 12.3 If the Drilling Operations are for a well on which drilling equipment is then located and Drilling Operations may be 42 46 commenced immediately, the words "thirty (30) days" in each instance in Section 12.2 above shall be read as "twenty-four (24) hours" and the words "sixty (60) days" shall be read as "seventy-two (72) hours", each of the Notices in respect of such periods shall be given by telephonic facsimile, and from the time of the first Notice given by a Drilling Party under Section 12.1 above or from the time of approval of the Drilling Operations by the Operating Committee, as the case may be, all Drilling Parties in respect of such Drilling Operations, irrespective when they become Drilling Parties, shall bear all risk, cost and expense relating to such Drilling Operations and shall pay all standby charges, costs and expenses due to any delay in operations occasioned by the giving and the receipt of the Notices referred to in said Section 12.1. 12.4 If at the end of the last 30-day period or 24 hour period as provided for in Sections 12.2 and 12.3 above, as the case may be, there exists no Non-Drilling Party in respect of such Drilling the following Sections of this Article shall not have effect with respect to said Drilling Operations and the operations shall be conducted as Joint Operations. If there exists a Non-Drilling Party with respect to such Drilling Operations, the following Sections of this Article shall have effect with respect thereto. 12.5 Operator shall commence the Drilling Operations as soon as practicable after receipt of direction to do so as provided in Section 12.2 above and in accordance with approved work Drilling 43 47 Programs, if any, and shall perform them continuously and diligently and drill each well to the depth specified, in a bona fide effort to find and produce Petroleum and/or shall undertake the development of the area, as applicable. The entire cost and risk of the Drilling Operations be borne by the Drilling Party and the Drilling Party shall have the right to make all decisions in respect to the Drilling Operations. Equipment being used in Joint Operations may not be employed in Drilling Operations unless approved by the Operating Committee. 12.6 The Drilling Operations shall be operated by Operator for the sole account of the Drilling Party and Drilling Party shall advance to Operator, in accordance with Operator's billing therefor, the costs and expenses required for such operations. 12.7 The Drilling Party shall be entitled to receive and dispose of all of the Recovery Petroleum produced and saved until, if it is a Development Well, the Drilling Party shall have received from the Retained Proceeds and shall have been credited therefrom with an amount equal to the sum of: (a) eight hundred percent (800%) of the costs and expenses incurred and paid by the Drilling Party for the drilling, Completing, and testing of said well and the Equipping of said well through and including the well- head equipment. (b) five hundred percent (500%) of the cost of all additional equipment required for producing said well, including costs and expenses incurred and paid by the Drilling Party in providing necessary storage, transportation and other facilities 44 48 required to deliver such Petroleum in a marketable state to the point where the Drilling Party receives such production from Operator; and, (c) five hundred percent (500%) of the costs and expenses incurred and paid by the Drilling Party for the operation of said well until such time as the Drilling Party is reimbursed pursuant to clauses (a) and (b) of this Section. 12.8 Promptly following the election by each Party whether or not to participate in the drilling of the Sole Risk Wildcat Well, the Parties shall determine by unanimous agreement the areal extent of the wildcat area hereinafter called "Wildcat Area". In the event the Parties fail to agree unanimously as to the areal extent of the Wildcat Area within seventy-five (75) days after the written Notice, the areal extent of such Wildcat Area shall be determined by an independent consultant selected by 60% in interest of the Operating Committee. 12.9 Upon commencement of the drilling operations of a Sole Risk Wildcat Well the Non-Drilling Party shall transfer and assign to the Drilling Party (in such form as such Drilling Party may reasonably require) all of its Participating Interest with respect to the Wildcat Area. If the Drilling Party has not established a Commercial Field within the Wildcat Area within three years of the aforementioned assignment, the Drilling Party shall reassign the Non- Drilling Party's interest in the Wildcat Area to the Non-Drilling Party. 12.10 After the Drilling Party has been reimbursed as 45 49 provided in Section 12.7 above, the drilling operations shall be conducted as Joint Operations and the Petroleum produced and saved from the applicable well or wells shall be received by the Parties the same as in the case of a well drilled for the Joint Account. 12.11 For the purpose of reimbursement under Section 12.7 above, each Drilling Party shall be credited for Retained Proceeds of the Petroleum produced and saved and sold or otherwise disposed of from a well during the pay-out period at the value at the point where the Drilling Party receives such production from Operator. 12.12 If a Sole Risk Well is dry, it shall be plugged and abandoned by the Operator at the sole risk, cost and expense of the Drilling Party. 12.13 The Non-Drilling Party shall at its sole risk and cost have access to each such well drilled by the Drilling Party to observe all Drilling Operations and the Non-Drilling Party shall, upon request, be furnished with samples saved in the drilling of such wells and shall, upon completion of the drilling of any such well, be furnished with true and correct copies of all well logs and shall be given access to all other information obtained in the drilling of such wells. 12.14 Notwithstanding any of the other provisions of this Article, no drilling operations shall be conducted if there is a substantial risk that the drilling operations would appreciably impair the present or potential future production from a producing well or one capable of producing nor shall any drilling operations be commenced if same would adversely affect from an operating or 46 50 economic standpoint or otherwise any current or contemplated Joint Operations under this Agreement, it being intended that all Joint Operations shall have priority over any drilling operations and that drilling operations in which the concerned Parties have together the highest interest shall have priority. Without prejudice to the foregoing provisions of this Section if, in the reasonable judgment of any Party, drilling operations which have not been approved by the Operating Committee may cause any such risk or adverse influence on Joint Operations, such Party shall so advise the Operator and the other Parties stating the reasons substantiating its judgment and the drilling operations shall not be undertaken unless approved by the Operating Committee. 12.15 Nothing in this Agreement shall entitle a Party to fail or refuse to bear its share of expenditures required by the Ecopetrol Contract. ARTICLE 13. Arbitration 13.1 Any differences or disputes arising out of, concerning or relating to this Agreement or the breach thereof shall be settled by reference to three arbitrators to be appointed one (1) each by each of the Parties and the third arbitrator to be appointed by the other two arbitrators. 13.2 The decision subscribed to by at least two of the arbitrators shall be final and binding upon the Parties to the arbitration. The arbitration proceedings shall be governed by the rules of the International Chamber of Commerce then in force. 47 51 ARTICLE 14. Assignment or Encumbrance of Interest 14.1 Any Party may at any time transfer, assign or otherwise dispose of all or a part of its Participating Interest, provided that such transfer, assignment or other type of disposal is in accordance with the provisions of this Article 14. A Party shall not transfer any Participating Interest, or a party thereof, in less than the entire Contract Area. Any attempted assignment in contravention of this Section 14.1 shall be null and void ab initio. 14.2 Every transfer, assignment or disposal of a Party's Participating Interest, or part thereof, shall be made expressly subject to this Agreement. Each transferee taking any such interest shall, either by the terms of the instrument of transfer or by separate agreement in writing with the Parties, assume and agree to be bound by all of the transferor's obligations, liabilities and duties under this Agreement and the Ecopetrol Contract with respect to the interest taken. A transfer of a Participating Interest, or part thereof, shall not be effective unless made by an instrument in writing duly executed by the Parties thereto in accordance with the Regulations. 14.3 A Party may mortgage or otherwise pledge as security its interest in the Ecopetrol Contract, provided that such mortgage or pledge is expressly made subject to this Agreement and such Party complies with the provisions of this Article 14. 14.4 Notwithstanding any sale, mortgage or other assignment 48 52 or charge or other disposition by any Party of all or a part of its Participating Interest to a third party, such Party shall remain liable to the other Parties for obligations and commitments arising under this Agreement in respect of such interest as though no such sale, mortgage or other assignment or charge or other disposition had taken place, but only to the extent that a purchaser, mortgagee or other assignee or charges itself does not pay or perform such obligations and commitments. Provided, however, in the event a Party assigns all or a part of its Participating Interest to a third party, such assigning Party shall be released from the obligations and commitments assumed by the assignee in respect of the interest assigned but only if the non-assigning Parties so release such assigning Party in writing, which release shall not be unreasonably withheld if the assignee is financially and technically capable of fulfilling all such obligations and commitments. 14.5 No sale, mortgage or other assignment or encumbrance of this Agreement, the Ecopetrol Contract or the Contract Area shall be made except subject to and in accordance with such consents and approvals as are required by this Agreement, the Ecopetrol Contract and the Regulations; provided that as to transfers of Participating Interests between the Parties which are required by this Agreement, including transfers contemplated by Article 9 of this Agreement, the prospective transferee shall, from the time the transfer is to be effective according to this Agreement and until the aforesaid consents and approvals are obtained, assume all costs, expenses, 49 53 and obligations attributable to the Participating Interest to be transferred and shall during such period be entitled to all of the rights and benefits attributable to the Participating Interests to be transferred. 14.6 If Joint Operations with Ecopetrol are commenced under the Ecopetrol Contract, then the provisions of this Agreement shall, as among the Parties, be applicable mutalis mutandis to those operations subject to the following: (a) The provisions of Sections 8.2, 8.3, 8.6, 8.7 and Exhibit "B" (Accounting Procedure) of this Agreement shall not be applicable to Joint Operations with Ecopetrol except that expenditures made by Operator which are not covered by the Ecopetrol Contract and the Accounting Procedure attached thereto but which are incurred by Operator for the conduct of the Joint Operations shall be charged to the Joint Account and paid by the Parties in accordance with the Accounting Procedure attached to this Agreement as Exhibit "B" and subject to the audit rights of the Non-Operators contained therein. (b) As to any operations which qualify as "Drilling Operations" pursuant to the provisions of Article 12 of this Agreement, the Drilling Party shall have the right to vote the Non-Drilling Party's Participating Interest in any matters in respect of those Drilling Operations which are presented to Ecopetrol under the Ecopetrol Contract for a vote and the Non-Drilling Party shall furnish the Drilling Party the documentation which may be necessary to demonstrate this right. 50 54 ARTICLE 15. Surrender 15.1 In the event it becomes necessary under the Regulations or the Ecopetrol Contract to surrender any part of the Contract Area, Operator shall at least ninety (90) days prior to the date on which Notice of such surrender is to be given to Ecopetrol give Notice in writing to the Operating Committee setting forth in detail any and all requirements of surrender. Such Notice shall include descriptions of the specific area or areas Operators proposes to surrender, together with descriptions and boundaries of the area or areas to be retained. 15.2 The Operating Committee shall determine the area or areas to be surrendered. 15.3 Any surrender of all or a part of the Contract Area, other than a surrender which is required under the Regulations of the Ecopetrol Contracts, may only be effected with the unanimous vote of the Parties. ARTICLE 16. Withdrawals 16.1 Subject to the following provisions, each Party (hereinafter referred to as the "Withdrawing Party") shall have the right to relinquish its entire Participating Interest by giving Notice to such effect to the other Parties ("Non-Withdrawing Parties"); provided that no Party shall be entitled to relinquish its Participating Interest or to withdraw from this Agreement if it 51 55 is a Defaulting Party under Article 9 hereof. 16.2 The effective date of such withdrawal shall be the later to occur of: (a) Ninety (90) days from the date Notice thereof is given to all Parties; or, (b) the date Ecopetrol has approved such intended withdrawal. 16.3 Each of the Non-Withdrawing Parties shall have sixty (60) days from the giving of said Notice to elect whether to take over that proportion of the Withdrawing Party's Participating Interest which the Participating Interest of such Non-Withdrawing Party bears to the Participating Interest of all Non-Withdrawing Parties. If the Non- Withdrawing Parties do not elect within the said sixty (60) days to take over the Withdrawing Party's entire Participating Interest in such proportion as may be agreeable to them, all Parties shall take the appropriate measures to terminate the Ecopetrol Contract and this Agreement, and each Party shall pay its Proportionate Share of all costs of abandoning the Joint Operations. 16.4 Such right of withdrawal shall be subject to the following provisions: (a) The Withdrawing Party shall, without compensation of any kind and at its sole risk and expense, prepare and execute all necessary documents to assign its Participating Interest free and clear of all liens and encumbrances, take any and all steps necessary to obtain the approval of Ecopetrol to such assignment, and deliver such documents to the Non-Withdrawing Parties. The 52 56 latter shall pay to the Withdrawing Party the reasonable salvage value of its Participating Interest in any existing equipment, facilities and wells, less the estimated cost of (i) salvaging the same, and (ii) plugging and abandoning such wells, as determined by the Operating Committee. If the said estimated costs are in excess of the aforementioned salvage value, the Withdrawing Party shall pay its Participating Interest share of such excess in cash to the Operator. (b) The Withdrawing Party shall pay all expenses incurred in connection with its withdrawal, including but not limited to, any taxes or other fees on the assignment of its Participating Interest. Any obligations of a Withdrawing Party imposed by Ecopetrol shall, however, be reduced to the extent that they can be reduced or canceled, and the Withdrawing Party shall pay any penalties required to be paid in order to obtain such reduction or cancellation. If more than one Party joins in the withdrawal, then such Parties shall pay all such expenses and penalties in proportion to their respective Participating Interests. (c) On the effective date of withdrawal, the Withdrawing Party shall cease to be a Party to this Agreement, except to the extent provided herein. The Withdrawing Party shall continue to be responsible for its share of the claims, costs and expenses incurred or to be incurred pursuant to Programs and Budgets approved by the Operating Committee prior to the effective date of withdrawal and for taxes, fees and charges owing to Ecopetrol. 53 57 (d) Until such time as a valid assignment of the Withdrawing Party's Participating Interest is completed and the transfer thereunder is approved by the Ecopetrol, the Withdrawing Party shall remain obligated to join in any action required of the Parties for the maintenance in force of the Ecopetrol Contract, it being understood that the Withdrawing Party shall not, by such joinder or participation in any action following the effective date of withdrawal, incur any financial responsibility or obligation accruing after the effective date of withdrawal other than as provided in this Article 16. (e) Each Non-Withdrawing Party shall share in the benefits, obligations and rights attributable to the Withdrawing Party's Participating Interest in the proportion that such Non-Withdrawing Party's Participating Interest bears to the total Participating Interests of all Non-Withdrawing Parties, or in such other manner as may be mutually agreed upon by the Non-Withdrawing Parties. ARTICLE 17. Public Announcements 17.1 No Party shall, without the consent in writing of the other Parties, issue or make any public announcement or public statement regarding this Agreement, the Ecopetrol Contract or Joint Operations unless it is necessary for a Party to make such public announcement or public statement in order to comply with the Regulations or with the requirements of a duly constituted 54 58 government agency or an established stock exchange, in which case a copy of such public announcement or public statement shall be furnished to the other Parties prior to the publication. ARTICLE 18. Confidential Information 18.1 All information and data made available or obtained from Joint Operations shall be and remain confidential among the Parties during the term of this Agreement and for two (2) years thereafter, and a Party shall not, during such period without the prior consent of all Parties disclose such information and data to any entity which is not a Party to this Agreement except that a Party may disclose, without having obtained such prior consent, such information and data to: (a) Affiliates of a Party, (b) as required by a stock exchange or similar regulatory entity or a government agency of pertinent jurisdiction, (c) lending institution or merchant bankers or contractors of a Party, and (d) an entity which is engaged with a Party in good faith negotiations for the acquisition of all or any part of the Participating Interest of such Party, provided that in each instance the Party shall obtain a written commitment from the entity to which the information and data is disclosed that such entity shall treat such information and data as confidential and shall obtain any waivers or consents from Ecopetrol which may be 55 59 required by Clause 6 of the Ecopetrol Contract, provided further that if a Party is required to disclose such information and data to a government agency of competent jurisdiction, then the Party may make such disclosure without having obtained a written confidentiality commitment from such agency. ARTICLE 19. Force Majeure 19.1 In the event a Party is rendered unable, wholly or in part, by Force Majeure to carry out its obligations under this Agreement or the Ecopetrol Contract, upon such Party's giving Notice and reasonably full particulars of such Force Majeure in writing to the other Parties within a reasonable time after the occurrence of the cause relied upon, the obligations of such Party, insofar as they are affected by such Force Majeure, shall be suspended during the continuance of any inability so caused. The suspended obligations shall be resumed as soon as reasonably practicable after such Force Majeure has been removed. The provisions of this Article 19 shall not suspend the obligation of a Party to make timely payment of its share of costs, expenses and advances under this Agreement and Exhibit "B" or obligation of Operator to keep the Contract Area free of liens, charges and encumbrances. 19.2 The term "Force Majeure" as used herein shall include acts of God, fire, unavoidable accidents, acts of war or conditions arising out of or attributable to war (declared or undeclared), 56 60 laws, rules, regulations and orders of any government or government agency, strikes, lockouts, and other labor disturbances, delays in transportation, floods, storms, earthquakes and other natural disturbances, insurrections, riots and other civil disturbances and all matters reasonably beyond the control of the Party concerned, whether or not similar to those enumerated. Force Majeure shall likewise include: (a) In those instances where any Party is required to obtain permits, licenses, or permission from the Colombian Government or agency or company thereof to enable such Party to fulfill its obligations under this Agreement and such Party has made timely and proper request for same, the inability of such Party to acquire or the delays on the part of such Party in acquiring upon not unreasonable terms and conditions (including costs) such permits, licenses or permission; and (b) In those instances where any Party is required to secure or furnish materials, supplies, equipment and labor for drilling, constructing, installing or maintaining facilities or equipment, and such Party has made timely and proper attempt to obtain same, the inability of such Party to secure or furnish upon not unreasonable terms and conditions (including costs) such materials, supplies, equipment and labor. ARTICLE 20. Applicable Law 20.1 This Agreement shall be governed by the laws of the 57 61 State of Texas, U.S.A., except for any matter which is necessarily subject to and controlled by the applicable laws of the Republic of Colombia. Venue of any litigation or arbitration proceeding shall be in Salt Lake County, Utah, U.S.A., unless otherwise required by law. Should venue be so required in another jurisdiction, it is the intent of the Parties that construction of this Agreement remain in accordance with the laws of the State of Texas. ARTICLE 21. Termination 21.1 With the exception of Article 9, this Agreement shall be terminated by either: (a) consent of all Parties; or (b) the provisions under Section 9.5 of this Agreement; or (c) the expiration of or surrender or withdrawal by the Parties of the Ecopetrol Contract. ARTICLE 22. Consequences of Termination 22.1 On termination of this Agreement (whether by agreement or otherwise) such assets as may have been held for the Joint Account shall be applied in the first instance towards the discharge of the debts and liabilities of the Joint Account. Any deficiency shall be met by cash calls upon the Parties in proportion to their respective Participating Interest immediately prior to such termination. 58 62 22.2 The assets held for the Joint Account shall be distributed to the Parties in such manner as they may agree or, failing such agreement, the assets (other than cash) shall be sold and the monies thus available and any other cash held for the Joint Account shall be distributed to the Parties in proportion to their respective Participating Interest immediately prior to the termination of this Agreement. 22.3 Any termination of this Agreement shall be without prejudice to any accrued rights and remedies of the Parties; and the provisions of this Agreement with respect to the settlement of disputes by reference to arbitration and with respect to confidential information shall continue to have effect notwithstanding such termination. ARTICLE 23. Notices 23.1 Any Notice required or permitted to be given under this Agreement, including but not limited to bills, statements, invoices, cash calls, reports and Notices, shall be given in writing in the English language and shall be deemed to have been sufficiently given when received whether delivered personally, sent by commercial courier service, sent by telegram or telephonic facsimile with charges prepaid and addressed to the Party at its address as set forth below or at such other address as such Party may have designated by Notice given in accordance with this Article to all other Parties. Argosy Energy International 333 Clay Street, Suite 4500 59 63 Houston, TX 77002 Attention: Mr. Douglas Fry, President Telephone (713) 759-1692 Fax No.: (713) 759-9122 Neo Energy, Inc. 8235 Douglas Avenue Suite 400, LB 84 Dallas, TX 75225 Attention: Mr. Ron Suttill, President Telephone: (214) 691-3464 Fax No.: (214) 361-0010 23.2 Any Party may from time to time change its foregoing Notice information by given written Notice thereof to the other Parties. 23.3 A copy of all Notices given under this Agreement by any Party to any other Party shall be given concurrently to all Parties and Operator by the same medium of communication as was used in giving the original Notice. ARTICLE 24. Miscellaneous 24.1 The topic headings used herein are inserted for convenience only and shall not be construed as having any substantive significance or meaning or as indicating that all of the provisions of this Agreement relating to any particular topic are to be found in any particular Article or Section. The terms "herein", "hereof" and "hereunder" and like terms are in reference to this Agreement unless specified as applying to a particular Article or Section. 60 64 24.2 There shall be no modification or amendment of this Agreement except by written instrument signed by all Parties. 24.3 If any provision of this Agreement conflicts with a provision of the Ecopetrol Contract or of the Regulations, then this Agreement shall be deemed modified mutatis mutandis accordingly. 24.4 Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the Parties, their respective successors and assigns. 24.5 If any Party receives a contribution of cash toward the drilling of a well or other Joint Operations conducted in the Contract Area, except in return for a part of its Participating Interest, the contribution shall be owned and shared by the Parties in the same proportion as each bears the costs of the drilling of such well or other Joint Operations. 24.6 If any Party receives a contribution of acreage towards the drilling of a well or other Joint Operations conducted in the Contract Area, except in return for a part of its Participating Interest, the contributed acreage shall be owned and shared by the Parties in the same proportion as their respective Participating Interests in the operation that the contribution is made to. 24.7 No waiver by any Party of any breach of the covenants, conditions and provisions herein contained shall limit or affect such Party's right with respect to any other breach. 24.8 The Parties represent and warrant to each other that all corporate and/or partnership authorities and approvals necessary in 61 65 order to execute and fulfill the obligations set forth in this Agreement have been obtained. 24.9 No party hereto shall do or cause to be done any act which violates the Foreign Corrupt Practices Act or the International Boycott Laws of the United States. Any party who violates the provisions of this Section 24.9 hereby agrees to indemnify and hold harmless the Partnership and the other Partners from and against any and all liabilities which shall arise by reason of said parties actions. IN WITNESS WHEREOF the Parties have caused this agreement to be executed by their duly authorized Representatives the day and year first above written. ARGOSY ENERGY INTERNATIONAL By Argosy Energy Incorporated, Managing General Partner By ---------------------------- Its --------------------------- NEO ENERGY, INC. By ---------------------------- Its --------------------------- 62 66 EXHIBIT "A" Contract Area The Contracted Area is called "YURUYACO", it consists of an area of fifteen thousand six hundred fifty-three (15,653) hectares with two thousand six hundred eighty (2,680) square meters and is located within the municipal jurisdictions of Santa Rosa in the Department of Cauca and Albania and Valparaiso in the Department of Caqueta.- This area is described below and, as appears in the map that is attached as Appendix "A", which forms an integral part of this contract, as well as the corresponding calculation tables: The reference point has been taken as the Geodesic Vertex "YAPURAMIA-1323" of the Agustin Codazzi Geographical Institute whose GAUSS plane coordinates with origin 3degrees WEST of Santa Fe de Bogota are: N-619,502.81 meters, E-1,092,804.61 meters which correspond to the geographical coordinates, Latitude 01degrees 09' 28".651 to the north of the Equator, Longitude 76degrees 14' 49".675 to the West of Greenwich. From this Vertex, one follows a direction of S 79degrees 04' 30".597 E for a distance of 5,291.29 meters until arriving at Point "A", starting point, whose coordinates are: N-618,500.00 meters. E-1,098,000.00 meters. From this point "A" one follows in a NORTHERN direction for a distance of 6,000.00 meters until arriving at Point "B" whose coordinates are: N-624,500.00 meters, E-1,098,000.00 meters. The straight line "A-B" borders on part of Line "C-B" of the "FRAGUA" Association Contract signed with Argosy Energy International. From this Point "B" one continues with a direction of N 47degrees 29' 22".391 E for a distance of 8,139.41 meters until arriving at Point "C" whose coordinates are: N- 63 67 630,000.00 meters, E-1,104,000.00 meters. From Point "C" one continues in an EASTERN direction for a distance of 4,000.00 meters until arriving at Point "D" whose coordinates are: N-630,000.00 meters, E-1,108,000.00 meters. From this Point "D" one continues in a SOUTHERN direction for a distance of 6,000.00 meters until arriving at Point E" whose coordinates are: N-624,000.00 meters, E- 1,108,000.00 meters. From this Point "E" one continues in an EASTERN direction for a distance of 4,000.00 meters until arriving at Point "F" whose coordinates are: N-624,000.00 meters, E- 1,112,000.00 meters. From this Point "F" one continues in a SOUTHERN direction for a distance of 6,000.00 meters until arriving at Point "G" whose coordinates are: N-618,000.00 meters, E-1,112,000.00 meters. From this Point "G" one continues in a WESTERN direction for a distance of 6,000.00 meters until arriving at Point "H" whose coordinates are: N-618,000.00 meters, E-1,106,000.00 meters. From this Point "H" one continues in a direction of S 47degrees 47' 00".404 W for a distance of 10,801.90 meters until arriving at Point "I" whose coordinates are: N-610,741.83 meters, E- 1,098,000.00 meters. From this Point "I" one continues in a NORTHERN direction for a distance of 7,758.17 meters until arriving at Point "A", starting point and closing the boundaries. The "I-A" line borders for its entire length on the "D-C" line of the "SANTANA-B" Association Contract signed with Argosy Energy International. 64 68 EXHIBIT "B" Accounting Procedure Attached to and made a part of the Operating Agreement, covering the Yuruyaco Area, between Argosy and Neo entered into the 7th day of November, 1995. The purpose of this Accounting Procedure is to establish equitable methods for determining charges and credits applicable to operations under the Operating Agreement. The Parties agree that if any of such methods prove unfair or inequitable to Operator or Non-Operator(s), the Parties will meet and in good faith endeavor to agree on changes in methods deemed necessary to correct any unfairness or inequity. 1. General Provisions Definitions "Agreement of Non-Operator(s)" shall mean the unanimous agreement or action of the Non-Operators. "Controllable Material" shall mean material which the Operator subjects to record control and inventory. A list of types of such materials shall be furnished to Non-Operator(s) upon request. "Joint Account" shall mean the account maintained by the Operator to record all costs and expenses incurred in connection with Operations. For purposes hereof, charges and credits accruing because of Operations shall be shared by the Parties in accordance with their respective Participating Interests as stated in the Operating Agreement. 65 69 "Material" shall mean movable property, including supplies and equipment, acquired and held for use in Operations. "Operating Agreement" shall mean the Operating Agreement to which this Accounting Procedure is attached. "Operations" shall mean Operations conducted in or with respect to Contract Area in accordance with the Ecopetrol Contract and the Operating Agreement. Unless the provisions of this Accounting Procedure specifically provided otherwise, other terms, words or phrases contained herein shall have the same meaning as defined in the Operating Agreement. 2. Statements, Billings, and Adjustments 2.1 Each Party to the Operating Agreement shall be responsible for preparing its own accounting and tax reports to meet Colombia's and other country's requirements except as otherwise agreed between them. To the extent practical, Operator shall furnish Non-Operator(s) with statements and billings in such forms required to discharge such responsibilities. 2.2 Operator shall bill Non-Operator(s) on or before the 30th day after the last day of each month for their proportionate share of Joint Account expenditures for such month. Such billings shall be accompanied by statements of all charges and credits to the Joint Account as set forth below for the billing month and the year-to-date: 66 70 A. Statement of all charges and credits to the Joint Account, summarized by appropriate classification indicative of the nature thereof, the portion of such costs charged to each of the Non-Operators, the amount of funds advanced to the Operator by each of the Non-Operators, and the commitments and expenditures made against such advances. B. Operator shall furnish a description of such accounting classifications. C. Amounts included in the billings shall be expressed in the currency in which Operator's records are maintained. In the conversion of currencies, in the accounting for advances of different currencies as provided for in Article 3 below, or in any other currency transactions affecting the Operations, it is the intent that none of the Parties shall experience an exchange gain or loss at the expense of, or to the benefit of, the other Parties. Operator shall furnish Non- Operator(s) sufficient currency exchange data to enable Non-Operator(s) to translate the billings to the currency of their corporate accounts. D. Payment of any such bills shall not prejudice the right of any Non-Operator(s) to protest or question the correctness thereof; however, all bills and statements rendered to Non-Operator(s) by Operator 67 71 during any year shall conclusively be presumed to be true and correct after twenty-four (24) months following the end of any such year, unless within the said twenty-four month period a Non-Operator takes written exception thereto and makes claim on Operator for adjustment. No adjustment favorable to Operator shall be made unless it is made within the same prescribed period. The provisions of this section shall not prevent adjustments resulting from a physical inventory of the Property acquired for the Operations. 3. Advances and Payments 3.1 If Operator so requests, Non-Operator(s) shall advance to Operator their share of estimated cash requirements for the succeeding month's Operations according to the procedure set out in Article 8 of the Operating Agreement. 3.2 Should the Operator be required to pay large sums of money on behalf of the Operations, which could not be anticipated at the time of providing the Non-Operator(s) with said monthly estimates of its requirements, the Operator may make a written request of the Non-Operator(s) for special advances covering the Non-Operator(s) share of such payments. Non-Operator(s) shall make their proportional special advances within ten (10) days 68 72 after receipt of such notice. 3.3 If Non-Operator(s) advances exceed their share of expenditures, the next succeeding cash advance requirements, after such determination, shall be reduced accordingly. However, Non- Operator(s) may request that excess advances be refunded. The Operator shall make such refund within ten (10) days after receipt of Non-Operator(s) request. Such refund shall be made in the currency so advanced. 3.4 If Non-Operator(s) advances are less than their share of actual expenditures, the deficiency shall, at Operator's option, be added to subsequent cash advance requirements or be paid by Non-Operator(s) within ten (10) days following the receipt of Operator's billing to Non- Operator(s) for such deficiency. 3.5 If Operator does not request Non-Operator(s) to advance their share of estimated cash requirements, Non-Operator(s) shall pay their share of expenditures within ten (10) days following receipt of Operator's billing. 3.6 Payments of advances or billings shall be made on or before the due date, and if not so paid, the provisions of Article 9 of the Operating Agreement shall be applied with respect to the Party or 69 73 Parties not making payment on or before said due date. 4. Audits 4.1 A Non-Operator, upon at least thirty (30) days advance written notice to Operator and other Non-Operator(s), shall have the right at its sole expense to audit the Joint Account and related records for any year or portion thereof within the twenty-four (24) month period following the end of such year; provided, however, that the conducting of an audit shall not extend the time for the taking of written exception to and the adjustment of accounts as provided for in Article 2 above. Where there are two or more Non-Operators, the Non-Operators shall make every reasonable effort to conduct joint or simultaneous audits in a manner which will result in a minimum of inconvenience to the Operator. 4.2 Subject to prior approval of the Parties, the cost of any audit or verification of the Joint Account that is for the benefit of all Parties, shall be chargeable to the Joint Account. 4.3 When a Sole Risk party has conducted a Sole Risk Project for which reimbursement is claimed pursuant to Article 12 of the Operating Agreement, the Non-Sole Risk Party shall have the right for its own 70 74 account to have auditors consult with the auditors of such Sole Risk Party with respect to all costs and expenses for which reimbursement is so claimed. 5. Chargeable Costs and Expenditures 5.1 Operator shall charge the Joint Account for all costs necessary to conduct Operations in or with respect to the Contract Area. Such costs shall include, but are not necessarily limited to: A. Ecopetrol Contract, License or Permit Payments All expenditures necessary to acquire and to maintain rights to the Contract Area. B. Labor and Related Costs The salaries and wages of Operator's (or its Affiliates') employees who are directly engaged in Operations, whether on a permanent or temporary basis, as well as the cost of employee benefits, customary allowances and personal expenses under Operator's (or its Affiliates') usual practices, including all amounts imposed by governmental authorities with respect thereto or on account of such employees. C. Material Material purchased or furnished for use in Operations, as provided under Article 6 below. D. Transportation and Employee Relocation Costs 71 75 1) Transportation of Material and other related costs such as expediting, crating, dock charges, inland and ocean freight and unloading at destination. 2) Transportation of employees as required in the conduct of Operations. 3) Relocation costs of employees permanently or temporarily assigned to the Operations in Colombia except when the employee is reassigned from the Operations in Colombia to another location classified as a foreign location by Operator. Such costs shall include transportation of employees' families and their personal and household effects and all of their relocation costs in accordance with Operator's (or its Affiliates') usual practice. E. Services 1) Contract services, professional consultants and other services procured from outside sources other than services covered by 5.1(H). 2) Technical services, such as, but not limited to, laboratory analysis, drafting, geophysical and geological 72 76 interpretation, engineering and related data processing, performed by the Operator (and/or its Affiliates) for the direct benefit of the Operations, provided such costs shall not exceed those currently prevailing if performed by outside technical service companies. 3) Use of equipment and facilities furnished by Operator (and/or its Affiliates) at rates commensurate with the cost of the ownership and operation thereof, but such rates shall not exceed those currently prevailing in the general vicinity of the Contract Area, or elsewhere in Colombia. 4) Whenever requested by the Non-Operator(s), Operator shall inform Non- Operator(s) in advance of the rates it proposes to charge, which charge shall form part of the relevant Budget and Program. Rates shall be revised and adjusted from time to time when found to be either excessive or insufficient. F. Damages and Losses to Property All costs or expenses necessary for the repair or replacement of property used in Operations resulting from damages or losses incurred by 73 77 fire, flood, storm, theft, accident or any other cause. Operator shall furnish Non- Operator(s) written notice of damages or losses in excess of Twenty-Five Thousand Dollars (U.S. $25,000) each, as soon as practicable. G. Insurance 1) Premiums for insurance required by the Ecopetrol Contract, the Operating Agreement or the Regulations and acquired for the benefit of the Operations. 2) Credits for settlements received from the insurance carrier and others and attributable to the Joint Account. 3) Actual expenditures incurred in the settlement of all losses, claims, damages, judgments and other expenses for the benefit of the Operations. H. Legal Expense All costs or expenses of handling, investigating and settling litigation or claims arising by reason of the Operations or necessary to protect or recover property used in Operations including, but not limited to, attorney fees, court costs, costs of investigation or procuring evidence and 74 78 amounts paid in settlement or satisfaction of any such litigation or claims; however, no charge shall be made for the services of the legal staff of the Operator (or its Affiliates) unless by prior agreement of the Non-Operator(s). I. Duties and Taxes All duties and taxes (except taxes based on income and royalty based on production from the Contract Area), fees and governmental assessments of every kind and nature. J. Offices, Camps and Miscellaneous Facilities Net cost of maintaining, equipping, furnishing and operating any offices, suboffices, camps, warehousing and other facilities directly serving the Operations shall be charged to the Joint Account. If such facilities serve Operations in addition to the Joint Operations, the net costs shall be allocated to the properties served on an equitable basis. The charge under the foregoing paragraph shall be for services of all personnel and offices of Operator and its Affiliates who are not directly assigned to Operations and shall be charged each month at the following rates on 75 79 total expenditures attributable to Operations in the preceding month: 1) The percentages for such administrative overhead cost shall be three and one- half percent (3 1/2%) of all annual joint account exploration expenditure and shall be two percent (2%) of all annual joint account development and production expenditure. The fee for administrative overhead shall be charged to the joint account monthly in arrears, based upon the direct expenditures incurred during such month. 2) The minimum overhead charge per month shall be U.S. $5,000 per month. The above administrative overhead rates shall be reviewed by the Operating Committee periodically, but not more frequently than annually. If such charges are found to be insufficient or excessive, same will be revised effective on the month following that when the agreement is reached, the intent being that the Operator recover its actual overhead costs applicable to Operations and shall neither gain nor lose by the reason of the fact that it acts as Operator. 76 80 K. Other Expenditures Any other expenditures not covered or dealt with in the foregoing provisions but which are incurred by the Operator (or its Affiliates) for the conduct of the Operations shall be charged to the Joint Account of the Parties. 6. Material 6.1 Purchases A. Cost of equipment, machinery, materials, articles purchased or furnished by Operator for the Joint Account, provided such cost shall not exceed that currently prevailing in normal arm's-length transactions in the open market. Such costs shall include export brokers' fees, transportation charges, loading and unloading fees, export and import duties, and license fees associated with the procurement of material and equipment, applicable taxes and intransit losses, if any, not covered by insurance, less any cash, volume of trade discounts. 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 Account as may be required for immediate use; and accumulation 77 81 of surplus stocks shall be kept to a minimum considering the distance from source of supply and the time required to receive deliveries of materials in remote locations. 6.2 Material Furnished by Operator A. Material required for operations shall be purchased for direct charge to the Joint Account whenever practicable, except that Operator may furnish such material from its stock under the following conditions: 1) New material transferred from the warehouse or other properties of Operator shall be priced at the current replacement cost on a world-wide competitive basis of the same kind of material, effective at date of movement and f.o.b. the supply point nearest the Contract Area where material of the same kind is available. B. Used materials furnished by Operator (Conditions "B" and "C"): 1) Material and equipment which is in sound and serviceable condition and suitable for use without repair or reconditioning shall be classified as Condition "B" and, except as provided hereinbelow, priced at 78 82 seventy-five percent (75%) of current new price of like material. 2) Material and equipment not meeting the requirements of subparagraph 1) above, but which can be made suitable for use after being repaired or reconditioned shall be classified as Condition "C" and priced at fifty percent (50%) of current new price of like material. The cost of reconditioning shall also be charged to the Joint Account provided the Condition "C" price, plus cost of reconditioning, does not exceed the Condition "B" price; and provided that material so classified will meet the requirements for Condition "B" material upon being repaired or reconditioned. 3) Tanks, derricks, buildings, and other items of material involving erection costs, if transferred in knocked-down condition, shall be graded as to condition as provided in this paragraph 6.2(B) and priced on the basis of knocked-down price of like new material. 4) Material and equipment including drill pipe, casing and tubing, which is no 79 83 longer useable for its original purposes but is further useable for some other purpose, shall be graded as to condition as provided in this paragraph 6.2(B) and valued on the basis of current new price of items normally used for such other purpose if sold to outsiders, and if retained in the Joint Account valued at no more than at depreciated value. 5) Current new price, whenever used in this paragraph 6.2(B) shall have the same meaning and be determined in accordance with paragraph 6.2(A). 6.3 Premium Prices A. In the event material is not obtainable at recognized current list prices from general supply sources due to national emergency, strikes, governmental regulations or other unusual circumstances over which Operator has no control, the provisions of the prior paragraphs pertaining to pricing materials and costs of transportation shall not apply and Operator may supply such scarce materials from any available source, charging therefor the current replacement cost, including the cost of transporting such material to the Contract 80 84 Area, provided, when practicable, that a Non-Operator who becomes an undivided interest owner in such material shall be given the opportunity to furnish its share in kind. 6.4 Warranty of Material Furnished by Operator A. Operator does not warrant the material furnished beyond the warranty furnished by the dealer or manufacturer. In case of defective material, credit shall not be passed until adjustment has been received by Operator from the manufacturers or their agents. 7. Disposal of Equipment and Materials A. Operator shall be under no obligation to purchase the interest of Non-Operators in surplus new or used materials. Unless the removal of surplus equipment and materials is otherwise restricted in this Agreement, Operator shall account for the disposition of surplus equipment and material as follows: 7.1 Material Purchased by Operator or Non-Operator A. The value of materials and equipment transferred to Operator shall be included in the monthly statement of operations for the month in which the materials or equipment are removed from the Contract Area. B. Materials and equipment transferred to Non- 81 85 Operators shall be paid for by Non-Operators immediately following delivery of materials and equipment and upon receipt of invoice. Operator shall thereupon include credit for the payment in the monthly statement of Operations for the month in which the materials or equipment were paid for by Non-Operators. 7.2 Division in Kind A. When materials and equipment are divided in kind between Operator and Non-Operators, each Party shall be charged individually with the value of the materials and equipment so divided in proportion to its Percentage Interest, and corresponding credits shall be made currently in the monthly statement. 7.3 Sales to Outsiders A. Sales to outsiders of materials or equipment shall be made with the consent of Non- Operators as to both terms and price, and when made, proceeds shall be credited by Operator at the full amount collected from vendee. Any claims by vendee for defective materials, or otherwise, shall be charged back if and when paid by Operator. 7.4 Disposal of Junk 82 86 A. Operator, on behalf of itself and Non-Operators, shall have the right to remove from the Contract Area, and dispose of junk materials and scrap. The net proceeds from the sale or transfer of all such materials shall be credited currently in the monthly statement. 8. Basis of Price Materials Transferred From Joint Account A. Materials and equipment transferred to either Operator or Non-Operators or divided in kind among them, unless otherwise agreed, shall be valued on the following basis of condition and price: 8.1 New Material A. New materials and equipment (Condition "A") acquired for the Joint Account but not used, at one hundred percent (100%) of current new price. 8.2 Used Material A. Materials and equipment which are in sound and serviceable condition and suitable for use without repair or reconditioning shall be classified as Condition "B" and except as provided hereinbelow shall be priced at seventy-five percent (75%) of current new price of like materials. B. Materials and equipment not meeting the 83 87 requirements of subparagraph 8.2(A) above, but which, after being repaired or reconditioned, will meet the requirements for Condition "B" material, shall be classified as Condition "C" and, except as provided below, shall be priced at fifty percent (50%) of current new price of like materials. When the Operator desires to take the materials into its one hundred percent (100%) account, the Joint Account shall be charged with repair costs and the Operator shall grant credit at Condition "B" value in those instances where the cost of repairs plus the value of Condition "C" do not exceed the value at Condition "B". C. Materials and equipment, including drill pipe, casing and tubing which are no longer useable for their original purpose but are further useable for some other purpose, shall be graded as to condition as provided in paragraph 6.2(B) and priced on the basis of current price of items normally used for such other purpose. D. Unserviceable materials and scraps shall be considered junk, classed as Condition "D" and, if transferred to Operator, valued at prevailing junk prices in the district where 84 88 the Contract Area is located. Such items with an original book value in excess of U.S. $10,000.00 shall be brought to the attention of the Operating Committee for review. E. In cases where items of major equipment due to unusual circumstances or condition cannot be graded as to condition as provided in paragraph 6.2(B) of such items shall be priced by the Operator on a fair and equitable basis. F. Current new price, wherever used in this paragraph 8.2 shall have the same meaning and be determined in accordance with subparagraph 6.2(A). 9. Inventories 9.1 Periodic Inventories - Notice and Representation A. At reasonable intervals, inventories shall be taken by Operator of all Joint Account storehouse stock and installed material and equipment on which detailed accounting records are normally maintained for material control purposes. Operator shall give Non-Operators written notice at least thirty (30) days in advance of its intention to take inventory, and Non-Operators, at their sole cost and expense, shall each be entitled to have a representative present. The failure of any 85 89 Non-Operator to be represented at such inventory shall bind such Non-Operator to accept the inventory taken by Operator, who shall in that event furnish each Non- Operator with a reconciliation of overage and shortages. Inventory adjustment to the Joint Account shall be made by Operator for overages and shortages but Operator shall be held accountable to Non-Operators only for shortages due to lack of reasonable diligence. 9.2 Special Inventories A. Whenever there is a sale or change of interest in the Property, a special inventory may be taken by the Operator provided the seller and/or purchaser of such interest agrees to bear all of the expense thereof. In such cases, both the seller and purchaser shall be entitled to be represented and shall be governed by the inventor so taken. 10. Termination A. As soon as practical after the termination of this Agreement, the Joint Account shall be finally settled and balanced by whatever cash payments among the Parties are necessary following presentation by Operator to all Parties of a final statement of the costs and credits in the Joint 86 90 Account, subject to any adjustments that may be required as the result of any final audit performed in accordance with the procedures provided elsewhere in this Operating Agreement. Operator shall give Non-Operators written notice at least thirty (30) days in advance of its intention to take inventory, and Non-Operators, at their sole cost and expense, shall each be entitled to have a representative present. The failure of any Non-Operator to be represented at such inventory shall bind such Non-Operator to accept the inventory taken by Operator, who shall in that event furnish each Non-Operator with a reconciliation of overage and shortages. Inventory adjustment to the Joint Account shall be made by Operator for overages and shortages but Operator shall be held accountable to Non-Operators only for shortages due to lack of reasonable diligence. 87 EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1996 MAR-31-1996 5,100,294 0 1,889,521 0 1,059,923 9,154,007 52,549,189 (12,995,769) 49,949,286 6,814,276 20,151,120 114,922 0 0 21,730,417 49,949,286 2,897,089 2,967,777 868,055 868,055 1,607,303 0 545,305 (112,294) 309,172 (421,466) 0 0 0 (421,466) (0.04) (0.04)
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