Paid Up Oil & Gas Lease Form

The following remark was made by the CEO of Chesapeake at the
Chesapeake Energy Corporation Institutional Investor and Analyst Meeting
Wednesday, October 13, 2010 8:00 a.m. CT  http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=104617&eventID=3305274


"I don't like to buy acreage for fair price, I like to go in and put a play together where we put our army of 5,000 landman to work, and we are buying it lease by lease for a very inefficient cost average to the rest of the industry to try and replicate and we make it a transaction where there is not a public market, it's us and the landowner, and we're gonna most generally going to get the benefit of that side of the transaction, so think about again, every time we move we are buying acreage worth 5 to 10 times what we pay"

Aubrey McClendon
chief executive officer, chairman, and co-founder of Chesapeake Energy

I have been asked repeatedly about what should be included in a oil and gas lease. As I have said like a mantra in this blog, I am not an attorney and I don't offer legal advice. With that caveat emptor said, the Paid Up Oil & Gas Lease form below covers many of the things a good lease form incorporates. I was furnished the lease form with no strings attached and no obligation not to disseminate it. I don't know if it is suitable for you or if fits your needs, but the lease form covers a lot of areas that landowners urgently need to address in any oil and gas lease they might ultimately sign. Beware; the oil company will try to get you to sign their lease form which denies you many basic oil and gas rights that you need to protect. When you take the oil company oil and gas lease form to your attorney he will charge you expensive billing hours to review the lease and he will probably amend it by including many or most of the provisions found in the sample lease form below. One of the more insidious ways the oil company maneuvers during negotiations is to get landowners to run up large legal fees to wear them down. If you will take the time to know and understand what needs to be incorporated in a good lease form in advance, you are then empowered to negotiate the three most important parts of a oil and gas lease, the lease bonus amount, the royalty amount, and the way your land will be used, referred to as a SUA or surface use agreement. Learning to comfortably handle your own negotiations will save you a lot of money and give you a good idea in advance whether the oil company is making a serious offer or not. Oil companies are notorious for making offers and then withdrawing the offer or making a substitute offer after you believe you have an agreement. Don't get in the lawyer trap and wind up having to sign a bad lease because you ran up a big legal bill and find yourself in a weakened condition. Understand up front that the oil company does not play fair. By all means have your oil and gas lease reviewed by a competent oil and gas attorney prior to signing it.

PAID UP OIL & GAS LEASE

STATE OF TEXAS §

COUNTY OF ____________ §

THIS LEASE AGREEMENT, dated the 31st day of August, 2009 (the effective date hereof for all purposes), executed by and between______________________________________________________, whose mailing address is ____________________, (hereinafter called "Lessor"); and_______________________________________., whose mailing address is ________________________________(hereinafter called "Lessee");

W I T N E S S E T H:

(A) In consideration of the sum of TEN DOLLARS AND NO/100 DOLLARS ($10.00) and other good and valuable cash consideration paid to Lessor, the receipt and adequacy of which are hereby acknowledged by Lessor, Lessor hereby leases and lets unto Lessee the exclusive right to explore and drill for, develop, produce, extract, remove and dispose of oil, gas, other liquid or gaseous hydrocarbons and sulphur in or under the lands hereinafter described as the leased premises, provided, however, sulphur shall be covered by this lease only if produced incidental to or in conjunction with the production or processing for sale of any liquid or gaseous hydrocarbons produced from the leased premises. It is expressly understood that this lease covers oil, gas and/or other liquid or gaseous hydrocarbons only, along with products and by-products thereof, but does not cover any other minerals (such as coal, sand or gravel) or elements (such as uranium, thorium, or any other fissionable elements) except as they may constitute products or by-products of the produced oil, gas and/or other liquid or gaseous hydrocarbons and it is further understood that coal bed methane or seam gas is the only by-product of coal included in this lease.

(B) The “leased premises" are situated in the County of Live Oak, State of Texas, described on Exhibit “A” attached hereto and made a part hereof.

For the purposes of calculating money payments to be computed on an acreage basis, the leased premises are estimated to comprise ______ acres, whether the actual acreage is more or less.

(C) TO HAVE AND TO HOLD unto Lessee, its successors and assigns, subject to the provisions hereinafter set forth for three (3) years from the effective date hereof (called "primary term”), and as long thereafter as oil, gas or other hydrocarbon is produced from the leased premises in paying quantities hereunder or this lease is maintained in force in any other manner hereinafter provided.

DELAY RENTALS

ONE: This is a paid up lease no rentals are due.

POST-PRODUCTION RIGHTS AND OBLIGATIONS

TWO: (a) After the expiration of the primary term, production of oil, gas or other hydrocarbon in paying quantities, either on the leased premises or on lands pooled therewith (or with any part thereof), the rights granted herein shall be maintained in effect for so long as oil, gas, or other hydrocarbon is being produced in paying quantities. It is provided, however, that if; after the production of oil, gas or other hydrocarbon in paying quantities, the production thereof should cease from any cause, and Lessee is not then engaged in drilling or reworking operations, this lease shall terminate unless Lessee resumes or restores such production, or commences additional drilling or reworking operations within ninety (90) days thereafter and continues such operations without the lapse of more than ninety (90) days between abandonment of work on one well and commencement of reworking operations or operations for drilling of another, in an effort to restore production of oil, gas or other hydrocarbon.

(b) If Lessee is engaged in drilling operations on the lease premises at the end of the primary term, this Lease shall not terminate if Lessee conducts a program of continuous drilling, allowing no more than 120 days to elapse between the completion of one well and the commencement of operations for the next succeeding well. If Lessee is not actually drilling on the leased premises at the end of the primary term, but this Lease is maintained at the end of the primary term by some other lease provision, to continue to maintain the Lease in force and effect, then within 90 days after the expiration of the primary term, Lessee shall commence to conduct a continuous drilling program allowing no more than 120 days to elapse between the completion of one well and the commencement of operations for the next succeeding well. For the purposes of this continuous development provision, "commencement of operations" shall be presumed to be the date the drill bit enters the earth for the drilling of a well. "Completion" shall be presumed to be; (a) three (3) days after a vertically, directionally or horizontally drilled well reaches total depth in the event no attempt is made to complete the well as a producer of oil, gas or coalbed methane gas (a “dry hole”); or (b) thirty (30) days after the date the last string of production casing is cemented in a vertically or directionally drilled well (as reflected by the cementing affidavit required to be filed with the Railroad Commission of Texas) in the event an attempt is made to complete such well as a producer of oil, gas or coalbed methane gas or (C) thirty (30) days after the date a horizontal drainhole well completed as a producer of oil, gas or coalbed methane gas reaches the total length of its horizontal drainhole(s).

In conducting this continuous drilling program, if Lessee commences a well prior to the time that it is otherwise required to do so, it shall be entitled to accumulate and later use any time saved in the early commencement of a well, so that all or any part of the accumulated time may be used to extend the 120 day interval between the completion of one well and the commencement of the next succeeding well. However, no more than 360 days may be accumulated. If, during the drilling or reworking of any well, Lessee loses or junks the hole or well or encounters any other mechanical or technical difficulties in drilling, and after diligent effort, is unable to complete its operations, Lessee may preserve its rights under this Lease by commencing, not later than 90 days after the date of the abandonment of the lost or junked well, the drilling of a substitute well at a location selected by Lessee on the tract on which the lost or junked well was commenced but not completed, and completing the substitute well. In that event the completion of the substitute well shall be deemed a completion of the lost or junked well in compliance with this continuous drilling obligation. On cessation of the continuous development program, this Lease shall terminate as to all lands, save and except 40 acres around each producing oil well, and 320 acres around each producing or shut-in gas well and as to all depths one hundred feet below the deepest depth drilled on said lease premises or lands pooled herewith.

SHUT-IN WELLS

THREE: (a) If at any time or from time to time there shall be any well or wells on any part or parts of this Lease then in force and effect capable of producing gas or gas and/or condensate in paying quantities but from which gas or gas and/or condensate are not sold or used for lack of an adequate market, Lessee may pay or tender to Lessor as rental a sum equal to $25.00 per year for each acre of the Leased Premises included in the gas unit on which each such well shall be situated or, if no gas unit designated shall have been made, then on the number of acres which Lessee would be entitled to retain around such gas well under the provisions of Section 6 hereof, in the event of partial termination. The first such yearly payment or tender shall be made to Lessor within ninety (90) days after the well was shut-in and succeeding payments shall be made annually thereafter on or before the day of the month upon which such well was shut-in; such payments shall be made in the depository bank herein provided; and while such rental is paid or tendered as above provided, this Lease, insofar as it covers such gas well and the acreage for which such payment is made, shall, subject to the other terms and provisions hereof, remain in force and effect as though such well were producing gas or gas and/or condensate in paying quantities, provided that the payment of shut-in gas rental as to one such unit shall have no effect upon the continuance of this lease as to any other unit or units. It is expressly provided, however, that after the expiration of the primary term, Lessee shall not have the right to continue this Lease in force as to any gas unit by payment of shut-in gas well rentals for any single period of more than one (1) year or two (2) year in the aggregate.

(b) It is agreed and provided that, notwithstanding the making of such shut-in gas well rental payments, or otherwise, Lessee shall be and remain: (i) under the continuing obligations to use all reasonable efforts to find a market for gas to be produced from any gas well on the Leased Premises; (ii) under the obligation to reasonably develop any such designated tract upon which any producing or shut-in well is situated; and (iii) under the obligation to drill all wells on any designated tract upon which any producing or shut-in well is situated as may be necessary to protect the same from drainage by wells on adjoining or adjacent land. It is further agreed and understood that no such payment of shut-in gas well rental shall be necessary or required to maintain this Lease as to any such designated tract around a well capable of producing gas or gas and/or condensate in paying quantities if such tract is otherwise maintained in force and effect.

(c) If during any year (commencing with an anniversary date of this Lease) while this Lease is in force, oil or gas shall be produced from any well on the Leased Premises, there has not been paid or accrued hereunder to Lessor at least the sum of $25.00 per acre during that year for each acre subject to this Lease at the commencement of such year, by way of shut-in gas well rental and/or royalties paid or then accrued, Lessee shall, within thirty (30) days after the end of such lease year, pay or tender to Lessor, as minimum annual royalty, the difference between the amount per acre so paid or accrued during such lease year and said sum of $25.00 per acre. The payment of minimum annual royalty provided for in this Section shall not be in lieu of actual production of oil or gas in paying quantities and Lessee shall not be entitled to continue this Lease in force by payment of such minimum royalty if, in fact, the actual production of oil or gas is not in paying quantities. It is provided, however, that nothing in this paragraph contained shall be construed as preventing or delaying the termination of this Lease under the provisions of Section 18 hereof, nor as impairing Lessee's continuing obligation to reasonably develop the Leased Premises after the discovery of oil or gas thereon in paying quantities, nor as in any manner impairing Lessee's continuing obligations to protect the Leased Premises from drainage by wells on adjoining or adjacent lands.

POOLING

FOUR: Lessee, at its option, is hereby given the right and power, to pool or unitize the leased premises, or any portion thereof, with any other lands in the immediate vicinity thereof, when, in Lessees reasonable judgment it is necessary or advisable to do so in order to properly develop and operate the leased premises so as to promote the conservation of oil, gas or other hydrocarbon in, under, and that maybe produced from the leased premises or to comply with the unitization order of any regulatory body having jurisdiction over the leased premises. However, at least ten (10) days prior to entering into any pooling or unitization agreement, Lessee shall confer with Lessor concerning its intention to do so, and divulge the reasons and geologic and/or engineering basis therefor. Consent of Lessor shall not, however, be a condition for the validity of the pooling declaration. The term "regulatory body" shall include any governmental tribunal or group (civil or military) issuing orders governing the drilling of wells or the production of minerals, irrespective of whether said orders are designed to promote conservation or to conserve materials or equipment for national defense or similar purposes. The terms "unit," "pool," "pooling," and "unitization" are used interchangeably. Said pooling shall be of tracts which will form one contiguous body of land for each unit and the unit or units shall not exceed substantially forty (40) acres surrounding each oil well, and substantially three hundred twenty (320) acres for each gas or gas distillate well, and shall be in as near a square form as practicable, unless larger drilling or producing units have been established by an order of a regulatory body in which event the unit or units may be of the size fixed by said order. At least fifty percent (50%) of any pooled unit shall be comprised of acreage from this lease. Lessee shall execute and file for record in the public records of the county in which the leased premises are situated, and furnish a copy of same to Lessor at the time of recording, an instrument identifying and describing the pooled acreage; and upon such filing the unit or units shall thereby become effective as to this lease, except that when a unit is created by order of a regulatory body, the pooling shall be effective as of the effective date of such order, and no declaration shall be required in connection therewith. In lieu of the royalties elsewhere herein specified, Lessor shall receive from production from the unit so pooled only that portion of the royalty stipulated herein as the amount of acreage leased herein and placed in the unit bears to the total acreage so pooled in the particular unit involved. Drilling or reworking operations on or production of oil, gas or other hydrocarbons from the land included in any unit so pooled shall have the effect of continuing this lease in force and effect during or after the primary term only as to the land included in said unit, whether or not said operations be on or off the land covered hereby. Any unit formed by Lessee hereunder may be created prior to, during or after the drilling of the well which is then or thereafter becomes the unit well; and separate units may be created for oil and for gas even though the surface areas thereof overlap. Lessee shall have the right to reduce the extent or area of any unit created under the terms of this paragraph so as to eliminate from said unit any acreage of lease upon which there is an adverse claim; and Lessee may also re-form any unit to conform with any order of a regulatory body issued alter said unit was originally established. Any revision of the unit shall be evidenced by an instrument in writing executed by Lessee, shall identify and describe the lands included in the unit as revised, shall be recorded in the public records of the county where the leased premises are situated, and one copy shall be sent to Lessor at the time of recordation showing the recordation data. The revised declaration shall be effective as of the date that it is filed for record.

Nothing in the foregoing pooling provision shall be construed or interpreted as Lessors giving approval herein for a field wide unitization.

PUGH CLAUSE

FIVE: Anything to the contrary herein not withstanding, it is provided that if any portion of the lands held hereunder should be unitized in any manner with other lands, then unit drilling or reworking operations on or unit production from any unit shall only maintain this lease as to the land included in such unit. Lessee may continue to maintain the rights granted as to any land included in a unit in any manner herein elsewhere provided, including shut-in payments, by payment of that proportion of the shut-in payment attributable on an acreage basis to such land. When this lease is being maintained by operations or production as above provided for as to the land in a unit or units, the lease may also be maintained as to all or any part of the land not included in any such unit or units in any manner herein elsewhere provided. If the lease is maintained as to all or any part of the land not included in any such unit or units by a shut-in payment, the payment may be reduced by that proportion of the shut-in payment attributable on a surface acreage basis to such non-unitized lands. Non-unit drilling or reworking operations or non-unitized production (whether such non-unit operations or production shall be within or without the boundaries of a unit) shall maintain Lessee's rights hereunder as to all of the lands affected by this lease, including any portion thereof embraced in any unit, all in the same manner as is herein elsewhere provided for maintaining lessee's rights hereunder. In connection with the foregoing, it is also provided that if Lessee's rights are not being maintained as to all or any portion of the acreage outside of such unit or units on the date of the commencement of the unit operations or the unit production, whichever occurs first, then such commencement date shall be considered equivalent to a date of cessation of operations or of production from such outside lands for the purpose of fixing the delay for the beginning of operations or production to maintain the lease as to such outside acreage. It is further provided that unitization of any portion of the lands held hereunder shall not affect Lessee's rights to maintain this lease by commencement or resumption of shut-in payments as herein elsewhere provided for; and any such shut-in payment which lessee elects to make, shall maintain Lessee's rights in all the land then covered hereby, or shall be that proportion of the shut-in payment attributable on an acreage basis to, and shall maintain Lessee's rights in, any part of the land held hereunder as to which this lease is not being otherwise maintained by operations or production as herein elsewhere provided.

OFFSET OBLIGATIONS

SIX: If during or after the primary term, there shall be drilled on other property (whether or not owned by Lessor) a well or wells producing oil, gas or other hydrocarbon, that is within four hundred sixty seven (467) feet as to an oil well and eight hundred (800) feet as to a gas well of any exterior line of the acreage held hereunder and such well or wells is not included in a pooled unit containing all or a portion of the lands herein described, Lessee agrees within sixty (60) days after such well shall have been completed on such other land, (or in case of a gas or gas condensate well, within sixty (60) days after commencement of actual production of gas therefrom) to commence operations for, and shall thereafter diligently prosecute the drilling of an offset well (which offset well shall be on the leased premises and within four hundred sixty seven (467) feet in case the well to be offset is an oil well, or within six hundred sixty (660) feet in case the well to be offset is a gas or gas condensate well, of the common boundary between the leased premises and the land on which said well to be offset is located or at such location as approved operating practices may require, in the light of then available sub surface information for the proper protection from drainage of the leased premises). Upon failure to drill such offset and on demand of Lessor, Lessee shall surrender this lease as to that portion limited to the geological horizon producing in such offset well of the leased premises located within the forty (40) acre tract, if the well to be offset is an oil well, or within the three hundred twenty (320) acre tract, if the well to be offset is a gas or condensate well, which forty (40) acre or three hundred twenty (320) acre tract shall be, as nearly as practicable, in the form of a square with the offset location at the center thereof. The offset distances above mentioned and the acreage to be surrendered as above provided are computed on the basis of a hypothetical pattern of forty (40) acres in case of an oil well and three hundred twenty (320) acres in case of a gas or gas condensate well. In the event the leased premises should be in any field where a drilling pattern has been established by any regulatory body having control of such matters, where under said field is being drilled or developed according to a smaller or larger drilling pattern than forty (40) acres for an oil well or three hundred twenty (320) acres for a gas or gas condensate well, then the offset distances above mentioned and the acreage to be surrendered as above provided shall be diminished or enlarged accordingly. If Lessee surrenders this lease in accord with Lessor's request, Lessee will be relieved of all obligations of every kind and nature associated with such offset well. Any offset well drilled by Lessee hereunder shall be drilled into the same producing zone or zones as the producing zone or zones of the well to be offset and shall thereafter be operated in such manner as to provide proper protection from drainage to the leased premises. Lessee shall also drill such other wells and take such other action as may be necessary to prevent the drainage of hydrocarbons beneath the leased premises from wells on adjacent or nearby lands, whether or not Lessor has an interest in such well or wells. Notwithstanding anything herein to the contrary to this paragraph SEVEN, Lessee, in lieu of drilling an offset well or wells pursuant to this paragraph or paying compensatory royalty as provided for in paragraph NINE, may commence unitization proceedings through the proper regulatory body in an effort to have a portion or portions of the leased premises included in a unit or units for such well or wells. In the event Lessee is successful in including a portion or portions of the leased premises in such unit or units or, if such regulatory body concludes that the evidence presented in the unitization proceedings show that the leased premises in not being drained by any such well or wells, then Lessee shall be relieved of drilling an offset well or wells pursuant to this paragraph. This offset obligation shall not apply to wells already in existence in the field.

ROYALTIES

SEVEN: The royalties to be paid by Lessee are:

A. Oil:

On oil, twenty-five percent (25%) of that produced and saved from said land, the same to be delivered, free of cost, to Lessor, or Lessor’s credit into the pipeline, or other receptacle to which the Lessee may connect Lessee's wells; or, at Lessor's option, such oil shall be sold by Lessee with Lessee's oil, produced and saved from such land, and at the same price received by Lessee for Lessee's oil, but not less than the market price thereof prevailing in the area for oil;

B. Gas:

(1) On all gas, including casinghead gas and other gaseous substances, produced from the Leased Premises and sold or used by Lessee for operations hereunder or for any other purpose, for which no royalty is otherwise specified herein, Lessor shall be paid, as royalty, twenty-five percent (25%) of the market value of all such gas so sold or used.

(2) If gas (which term "gas" includes casinghead gas and all other gaseous substances produced under the terms hereof) produced from the Leased Premises is processed in a plant or plants (as hereinafter defined) owned in whole or in part by Lessee or by any partner, parent, subsidiary or affiliate of Lessee, or in which Lessee or any partner, parent, subsidiary or affiliate of Lessee owns any interest of any kind, directly or indirectly (and stock ownership shall be considered as owning an interest in part), or as to which plant ownership Lessee is a partner, parent, subsidiary or affiliate (all hereinafter in this subparagraph B for convenience referred to as "subsidiary or affiliate of Lessee") for the recovery of the liquid or liquefiable hydrocarbons or other products therefrom, Lessor shall have and be entitled to a royalty of twenty-five percent (25%) of all such plant products of whatever nature, derived from or attributable to gas produced from the Leased Premises, the same to be delivered free of all costs, at Lessor's election, either at the plant or plants or to the credit of Lessor into the pipeline to which the plant or plants may be connected; and, in addition thereto, Lessor shall be paid as royalty, the market value of twenty-five percent (25%) of all residue gas derived from or attributable to the Leased Premises, and sold or used, which residue gas is understood to be the gas at the outlet side of the plant or plants after the same has been processed for the extraction of the liquid or liquefiable hydrocarbons therefrom. It is provided and agreed that, as used in this Lease and for all purposes hereof, the term "plant" shall mean an absorption plant, extraction or recycling plant, or any other plant or plants.

(3) Lessee agrees that all gas, including casinghead gas produced from the Leased Premises and not either sold for a specified price per BTU (or equivalent heating value basis) or processed in a plant or plants for the removal of liquid or liquefiable hydrocarbons as provided above, shall, before the same is sold or used for any purpose or transported from the Leased Premises, be passed through a low temperature extraction unit, or equivalent (herein sometimes called "LTX Unit"), provided, if the installation of an LTX Unit is not economically feasible, such gas shall be passed through a separator system situated on the Leased Premises. Such LTX Unit or separator system, as the case may be, shall be designed and operated to effect the maximum economical recovery of liquid and liquefiable hydrocarbons therefrom; and on all condensate, distillate, natural gasoline, kerosene, and all other hydrocarbons and products and any mixture of liquid and liquefiable hydrocarbons produced with gas from the Leased Premises and saved by being condensed or absorbed from or separated from such gas by means of such LTX Unit or separator system above mentioned, Lessor shall have and be entitled to a royalty of twenty-five percent (25%) of that so produced and saved, the same to be delivered free of costs, at Lessor's election, either at the well or to the credit of Lessor into the pipeline to which the well or wells may be connected; and in addition thereto, if such gas is not thereafter processed and if the same is sold or used, Lessor shall be paid as royalty, the market value of twenty-five percent (25%) of all such gas sold or used; but if such gas after having passed through such LTX Unit or separator system is thereafter processed, the royalty provisions of subparagraphs B(2) or B(4) hereof, whichever shall be applicable, shall also apply to such gas, and royalties shall be paid to Lessor in accordance with such provisions. It is provided that the requirements concerning the LTX Unit or other separator or extraction system contemplated by this subparagraph shall be required only if a reasonable and prudent operator would utilize an LTX Unit or similar separator or extraction system under the same or similar circumstances as those encountered by Lessee in operating the Leased Premises.

(4) If Lessee enters into a bona fide contract or arrangement with any person, firm, corporation, not an "affiliate or subsidiary of Lessee" (hereinabove defined), for the sale or delivery of gas from the Leased Premises for processing in a plant or plants for the extraction, absorption, separation or recovery of liquids and/or liquefiable hydrocarbons therefrom, Lessor shall have and be entitled to a royalty of twenty-five percent (25%) of all such plant products of whatever nature, derived from or attributable to gas produced from the Leased Premises, the same to be delivered free of all costs, at Lessor's election, either at the plant or plants or to the credit of Lessor into the pipeline to which the plant or plants may be connected; and, in addition thereto, Lessor shall be paid as royalty, the market value of twenty-five percent (25%) of all residue gas derived from or attributable to the Leased Premises, and sold or used, which residue gas is understood to be the gas at the outlet side of the plant or plants after the same has been processed for the extraction of the liquified or liquefiable hydrocarbons therefrom.

(5) For the purpose of computing Lessor's royalty on gas under subparagraphs B(1), B(2), B(3) and B(4) hereof, "market value" of gas shall be computed at the point of delivery to the purchaser, if sold or, at the point of use, if used, and "market value" is defined as follows:

(a) If Lessee shall enter into a bona fide arms-length gas sales contract for the sale of gas to a purchaser which is not an "affiliate or subsidiary of Lessee" (hereinabove defined), and if such contract shall contain adequate provisions for the redetermination, at least annually, of the price for which the gas is sold, to insure that the price for such gas will always be reasonably equivalent to the current market value of gas, when produced, in Texas Railroad Commission District No. 2, the market value of the gas sold under such contract shall be considered to be the price received by Lessee therefore. It is further provided, however, that if such contract makes any deductions, either directly or indirectly, for the expenses of producing, gathering, dehydrating, compressing, transporting, manufacturing, processing, treating, or marketing of such gas, then such deductions shall be added to the price received by Lessee for such gas for the purpose of the payment of royalties, so that Lessor's royalty shall not bear, directly or indirectly, any of such expenses.

(b) On all gas which is used by Lessee or which is sold by Lessee to an "affiliate or subsidiary of Lessee" (hereinabove defined), or which is sold under a contract which does not meet the requirements of subparagraph (a) immediately above, the market value of such gas shall be considered to be the higher of:

(i) the price received by Lessee therefor, or (ii) the arithmetical average of the three highest prices paid by purchasers (including Lessee or any subsidiary or affiliate or parent company of Lessee) for gas produced in Texas Railroad Commission District No. 2, during the calendar quarter year in which such gas production from the Leased Premises occurs, with no consideration being given to the time or type of contract, quality, quantity or prospective use of the gas involved. If such gas purchase contracts used in determining the three highest prices provide for an increase in price if the hydrocarbon content of the gas exceeds 1,000 BTU per cubic foot (BTU provision), and if the gas from the Leased Premises has a hydrocarbon content in excess of 1,000 BTU per cubic foot, then such increase shall be added to the prices paid under such gas purchase contracts for the purpose of determining the arithmetical average of the three highest prices paid under such contracts. Adjustments made by way of reimbursement for taxes shall likewise be considered as part of the purchase price in such contracts. If such contracts shall include, directly or indirectly, any reduction for the expense of producing, gathering, dehydrating, compressing, transporting, manufacturing, processing, treating or marketing of the gas, then such deductions shall be added to the prices in such contracts for the purpose of determining the market value of such gas, so that Lessor's royalty shall not be chargeable, directly or indirectly, with any such expense.

(c) In the event the maximum price for which oil and/or gas (including its constituents and/or products) produced from the Leased Premises may be sold is at any time lawfully limited by governmental authority (which limitation is of general applicability, not related to the identity or nature of the producer of oil and/or gas under this lease), then in such event the terms hereof shall never be construed as requiring Lessee to market oil and/or gas produced under this lease and/or to pay royalties hereunder, at or based upon a price exceeding the maximum lawful price which is allowed or approved by the regulatory authority having jurisdiction.

(d) Lessor shall always have the right, upon reasonable written notice to Lessee, to take Lessor's royalty share of the gas in kind, in which event Lessor shall comply with all applicable laws, orders, rules and regulations of the Railroad Commission of Texas, or other governmental authority having jurisdiction thereof and applicable thereto; and provided that such operations shall be at Lessor's sole cost and expense.

(6) Sulphur:

This Lease is intended to cover only oil and gas, as hereinabove defined, but it is contemplated that some sulphur may be produced necessarily with and incidental to the production of oil or gas from the Leased Premises and in such event, this lease shall cover such sulphur so produced, and on all such sulphur so produced under and by virtue of the terms of this lease, Lessor shall have and be entitled to a royalty of twenty-five percent (25%) of all of such sulphur so produced and saved, same to be delivered to Lessor as royalty, free of all costs, or at Lessor's election, said twenty-five percent (25%) sulphur royalty shall be sold by Lessee with Lessee's portion of such sulphur so produced and saved from the Leased Premises and at the same prices received for Lessee's portion of said sulphur, and promptly remitted to Lessor.

(7) General Royalty Provisions:

(a) Accounting and payment to Lessor of royalties from the production of oil and gas from any well shall commence no later than sixty (60) days after the commencement of production. Thereafter, unless otherwise specifically provided herein, all accountings and payments of royalties shall be made on or before the 25th day of the second calendar month following the calendar month in which the production occurred. Should Lessee at any time fail to make royalty payments to Lessor on or before the last day of the third calendar month following the calendar month in which the production occurred, Lessor shall provide Lessee written notification by certified mail, return receipt requested, to Lessee of such failure and should such failure continue for a period of thirty (30) days after receipt of such written notification by Lessee, absent bona fide disputes as to Lessor's title to such royalties, this Lease shall automatically terminate. Unless otherwise herein expressly provided, any royalties or other payments provided for in this Lease which are suspended or not paid to Lessor within the time period specified therefore shall accrue interest, compounded annually, at the highest rate which may be legally contracted for by parties in the position of Lessor and Lessee from the due date until paid. Acceptance by Lessor of royalties which are past due shall not act as a waiver or estoppel of their right to receive or recover any and all interest due thereon under the provisions hereof unless the written acceptance or acknowledgment by Lessor to Lessee expressly so provides. Any tender of payment to Lessor of a sum less than the total amount due to Lessor hereunder which is made or intended to be made as an offer of settlement or accord and satisfaction by or on behalf of Lessee must be accompanied by a Notice of Settlement Offer, so denominated, addressed to each Lessor. Any such offer of settlement submitted solely by the tender of a check containing language of settlement or accord and satisfaction printed or otherwise inserted thereon shall not be deemed an offer of settlement or accord and satisfaction, unless preceded by such a Notice of Settlement Offer. Lessee shall pay all reasonable attorney's fees incurred by Lessor in connection with any lawsuit in which Lessor is successful in recovering any royalties or interest or in terminating this Lease due to Lessee's failure to pay royalties within the period set forth herein.

(b) Lessor's royalty interest shall, in all cases, bear its proportionate part of all production, windfall profit, severance and ad valorem taxes attributable thereto.

(c) Until receipt from Lessor of written notice to the contrary, Lessee shall handle and market Lessor's royalty oil, gas and hydrocarbons, sulphur and products extracted, separated or saved from the gas or residue gas from the Leased Premises, free of costs to Lessor and in the same manner as Lessee shall handle its portion of the same. It is further agreed that, except as to costs and expenses of Lessor's taking royalty gas in kind (as hereinabove provided), Lessor's royalty shall never bear, either directly or indirectly, any part of the costs or expenses of producing, gathering, dehydrating, compressing, heating, transporting, manufacturing, processing, treating or marketing of the oil or gas (as herein defined) from the Leased Premises, nor any part of the costs of the constructing, operating or depreciating of any plant or other facilities or equipment for processing or treating said oil or gas produced from the herein Leased Premises.

(d) Upon Lessor’s written request, Lessor shall have the right at all reasonable times, personally or by representative, to inspect the books, accounts, contracts, records and data of Lessee pertaining to the developing, producing, saving, transporting, selling and marketing of the oil, gas and sulphur from the Leased Premises. Lessee, upon request by Lessor, shall furnish Lessor with a copy of all Gas Sales Contracts covering the sale of gas from the Leased Premises, as well as all monthly adjustments in the price therefor.

(e) Notwithstanding anything contained herein to the contrary and regardless of any assignments of any of Lessee's interest in the Leased Premises, as to each well drilled on the Leased Premises, all oil royalty payments which accrue hereunder shall be paid by one entity and all gas royalty payments which accrue hereunder shall be paid by one entity. That is to say that no assignment of the Leased Premises by the Lessee or its successors and assigns shall permit the payment of a portion of the royalties accruing hereunder but rather all oil royalty payments shall be the responsibility of one entity and all gas royalty payments shall be the responsibility of one entity. It is further agreed that the entity responsible for the payment of all oil and gas royalty to Lessor shall be the Lessee named herein, regardless of the assignment of any fractional portion of the working interest in and to a portion of the mineral estate leased hereby.

(f) It is expressly agreed that all reference to Lessee in the foregoing portions of this Section. shall mean, include and apply to the named Lessee and all parties claiming any interest or interests in this Lease under such name "Lessee".

FORCE MAJEURE AND COMPENSATORY ROYALTY

EIGHT: The term "Force Majeure" as used herein shall mean and include requisition, order, regulation, or control by governmental authority for national defense or war purposes resulting in delay in obtaining or inability to obtain either material, equipment or means of transportation normally necessary in prospecting or drilling for oil, gas or other liquid or gaseous hydrocarbon, or in producing handling or transporting same from leased premises; war; scarcity of or delay in obtaining materials or equipment; lack of labor or means of transportation of labor or materials; acts of God; insurrection; flood; strike; or other things beyond the control of Lessee.

Notwithstanding any other provisions of this lease, but subject to the conditions hereinafter set forth in this paragraph, should Lessee be prevented by "Force Majeure," as defined above, from conducting drilling or reworking operations on, or producing oil or gas from the leased premises, such failures shall not constitute a ground for the termination of this lease or subject Lessee to damages therefor, and the period of time during which Lessee is so prevented shall not be counted against Lessee, but this lease shall be extended for a period of time equal to that during which Lessee is so prevented from conducting such drilling or reworking operations on or producing oil or gas from the leased premises. No such period of time, however, shall extend beyond the period hereinafter provided for in subparagraph (A) below. All of the provisions of this paragraph are subject to each of the following express conditions:

(A) The terms and conditions of this paragraph shall not extend beyond the expiration date of any law, order, rule or regulation involved, plus a reasonable time to complete operations at the end of the suspended period, and shall be applicable and effective only during the following period: (1) if the force majeure shall occur during the primary term of this lease, it shall not operate to extend this lease more than two (2) successive years beyond or immediately following the expiration of the primary term; and (2) if the force majeure shall occur during a drilling or reworking ninety (90) day period, provided for herein, after the primary term has expired, then it shall not operate to extend this lease more than two (2) successive years beyond or immediately following the expiration of such ninety (90) day period.

(B) None of the provisions of this paragraph shall ever be or become effective and applicable unless and until Lessee shall, within a reasonable time after such occurrence of such event above referred to, notify Lessor, in writing, or by telegraph, of such occurrence with full particulars thereof.

(C) If Lessee is prevented or delayed by any of the causes mentioned in this paragraph from drilling an offset well to any oil or gas well or wells drilled on adjoining land which Lessee is obligated to offset under the provisions of this lease to prevent drainage, Lessee, subject to the provisions hereinafter set out, shall be obligated to pay Lessor compensatory royalty based on the following schedule, to-wit:

If any well required to be offset shall be completed within a distance of four hundred sixty seven (467) feet, if an oil well, or six hundred sixty (660) feet, if a gas well, of any outside boundary of the land of Lessor then covered by this lease, the compensatory royalty to which Lessor shall be entitled to is one-half (1/2) of the royalties on oil and gas which would have been payable to Lessor under this lease if that well had been drilled by Lessee on land covered hereby, based upon what value Lessee could get for such production.

It is specifically understood that the right of Lessor to receive compensatory royalty shall not be effective until sixty (60) days after any such offset well begins producing in paying quantities and shall immediately terminate in the event such well ceases to produce in paying quantities. It is further specifically understood and agreed that Lessee shall, at the end of any such period of interruption or delay, begin the drilling of an offset well or wells which had not been drilled because of such period of interruption or delay and which Lessee is required to drill hereunder, and shall complete same in the manner as in this lease required, provided that the Lessee shall not be required to drill an offset well for any well which has ceased to produce in paying quantities as provided in the above and foregoing sentence. From the date of the commencement of operations by the Lessee for the drilling of any such offset well or wells, the compensatory royalty herein provided to be paid on account of that particular well or those particular wells shall terminate, provided Lessee continues the drilling of and completes such offset well with reasonable diligence whether such well is brought in as a producing well or dry hole. Nothing herein, however, shall ever be construed as obligating Lessee to commence paying such compensatory royalty or to continue such payments after they are so commenced because of any well drilled by Lessee or others on adjoining land which under the provisions of this lease Lessee is not at such time obligated to offset. The compensatory royalty paid hereunder shall be considered as royalty on production from the land leased within the meaning of subparagraph (C) of this paragraph.

RIGHTS RETAINED AFTER TERMINATION

NINE: In the event of cancellation, termination or forfeiture of this Lease for any cause other than Lessee’s failure to comply with paragraph EIGHT, this Lease shall terminate as to all lands, save and except 40 acres around each producing oil well, and 320 acres around each producing or shut-in gas well and as to all depths one hundred feet below the deepest depth drilled on said lease premises or lands pooled herewith. The amount of acreage included in each producing or proration unit shall increase in the event field rules formulated by the appropriate governmental authority requires or permits producing or proration units of a larger size. If at any time, after the expiration of the primary term or the conclusion of the continuous drilling program, the applicable field rules are changed or the well or wells are reclassified as oil or gas wells so that less acreage is then allocated to a well or wells for production purposes, this Lease shall terminate as to all acreage not then allocated to a well or wells for production purposes. Within 90 days after a partial termination of this Lease, Lessee shall execute and deliver to Lessor a recorded release of this Lease as to all lands, save and except the acreage allocated to each producing or proration unit. Upon termination of this Lease except as to each oil well and each gas well and the number of acres hereinabove specified around each such well, each separate tract around an oil well and each separate tract around a gas well shall be treated as a separate lease containing the same terms and provisions as this Lease, and the continuation shall be determined by the provisions of this Lease applied separately to each such lease tract. Notwithstanding the termination of this Lease as to a portion of the lands, Lessee shall nevertheless continue to have the right of ingress and egress from the lands still subject to this Lease for all purposes allowed under the terms of this Lease, together with easements and rights of ways for roads, pipelines, and other facilities on, over, and across all of the lands originally covered by this Lease, for access to and from the lands still subject to this Lease, for the gathering of transportation of oil, gas, and other minerals produced from the retained lands.

GEOPHYSICAL WORK

TEN: Lessee shall have the right to operate upon the leased premises seismograph and other instruments appropriate for conducting a geophysical examination on the leased premises. Lessee agrees to pay surface owner for actual surface damage caused by Lessee in the conduct of any of the aforesaid operations and to conduct all such examinations with reasonable care and in workmanlike manner, Including but not limited to:

(A) All survey tags, ribbons, and markers and all receiver and source pin flags, stakes or markers utilized by Lessee in its operations shall be removed from the Leased Premises within fifteen (15) days following the completion of the survey by the Lessee.

(B) Within thirty (30) days from completion of the survey, Lessee shall restore the surface of the Leased Premises to as near its original condition as may be practicable. Senderos may remain.

DUE DILIGENCE

ELEVEN: After the discovery of oil, gas or other hydrocarbon upon the leased premises, Lessee shall be bound to proceed with reasonable diligence to develop and explore all of the property leased, both horizontally and vertically, as a reasonably prudent operator, with due regard to the objects of this lease and the interests, rights and obligations of Lessor and Lessee hereunder in those capacities.

DAMAGES, RETAINED RIGHTS

SURFACE AND SUBSURFACE USES

TWELVE: Lessee agrees to pay to surface owner and/or to surface owner’s tenants, if any, for any and all damages which may occur on or to the leased premises as a result of Lessee’s operations. No well shall be drilled within five hundred (500) feet of any building now located on said leased premises without Lessor’s prior written consent.

Lessor reserves the full enjoyment of the surface and subsurface of the property covered hereby for all purposes except for those granted and to the extent granted herein to Lessee. Included among Lessor's reserved rights are, without limitation, the right to use any of the roads constructed by Lessee at Lessor's sole risk, all underground oil and gas storage rights, all rights relating to geothermal resources (except only such resources when produced as a normal and necessary incident to the ordinary production of oil or gas during the term of this lease), all rights relating to salt, and other minerals not covered hereby and all rights relating to sand and/or gravel and caliche.

The rights retained by Lessor and the rights granted to Lessee shall be exercised in such manner that neither shall unduly interfere with the operations of the other upon the leased premises.

Lessee agrees to use reasonable care at all times in all of Lessee's operations on the Leased Premises to prevent injury or damage to livestock, buildings or other property of the Surface Owner or tenant situated on the surface of said land or water wells and tanks located thereon; and Lessee agrees to pay the Surface Owner for all damages to buildings, livestock, fences, tanks, water, water wells and, without limitation, all other property of the Surface Owner situated on the surface of the Leased Premises resulting from Lessee's operations on the Leased Premises; and Lessee agrees to pay the surface tenant for all damages to cattle, livestock, crops and improved pasturage and other property of the tenant situated on the Leased Premises and resulting from Lessee's operations on the Leased Premises.

Lessor shall have the right, personally or by representative, at Lessor's risk, to have access to the derrick floor with the right to observe all operations and the right to witness the taking of electrical logs and drill stem tests.

Lessee shall have the right to inject gas, salt water, brine or other fluids into subsurface strata only in connection with a well actually located on the leased premises or in connection with wells unitized with the leased premises.

Lessee agrees to conduct its operations hereunder in such a manner as to cause minimal interference with the present and future uses of the surface for residential, commercial, industrial, agricultural, grazing, mining, or other such usual purposes; and in the location of Lessee's operations and facilities on said land, Lessee shall take all reasonable precautions to least interfere with the present or future use of the surface of the lands by Lessor for such purposes. All presently existing roads which are used by Lessee in connection with its operations shall be maintained by Lessee during its use thereof; and at the conclusion of Lessee's operations, said roads shall be left by Lessee in a useful condition, equal or superior to their condition at the present time. Lessee shall promptly repair all damages to said roads which are caused by Lessee's operations.

In the conduct of Leesee operations, Lessee shall keep the Leased Premises in a safe and clean condition and will not scatter, or allow the scattering, of any type of waste, broken equipment, used cans or containers, but shall keep the Leased Premises free and clear of all of such refuse.

All reserve pits, mud pits or storage pits shall be lined so as to prevent seepage of liquids, water or mud onto or into surface of the lease premises. All fluids and liners shall be removed as soon as practical.

Any existing drainage ditches and/or canals used by the Lessee in its operations shall be used by it in such a manner as to not interfere with the present normal method of drainage. No additional drainage facilities shall be constructed by Lessee without prior approval of Lessor.

When Lessee has disturbed the surface of any land, Lessee shall at all times, as near as is then practicable considering operations then underway or immediately completed, fill all holes and ditches dug by it and otherwise promptly restore the surface of the land to its original contour and condition as near as reasonably practical.

Any rigs and all other equipment fixtures, appliances, and facilities used by or for Lessee in the drilling of and/or production from wells or in connection with any other activities permitted under the provisions hereof shall be removed as soon as practicable after the completion or abandonment of the particular well, and, except for marsh lands, the area upon which said rig, equipment fixtures appliances and fixtures were located or were erected shall be left in as nearly as practicable the same condition as was said area prior to the erection of said rig and equipment.

In the event any location made should result in the discovery and production of oil, gas or other hydrocarbons, then and in that event Lessee shall have the right to construct permanent roads of caliche or other similar material to the well or wells involved; and in considering the locations of such permanent roads to be constructed, due regard shall be given for Lessor's use of the property and the roads shall be located, constructed and maintained in such manner as to least interfere with that use. Any such road which is not required for purposes incidental to production and/or drilling or reworking operations on the leased premises for a period of six (6) consecutive months shall be considered as having been abandoned by Lessee, and, upon written request by Lessor, the roadway shall be removed, and the area upon which it was located shall be restored by Lessee to as near its original condition as practicable. Lessor may, however, designate other existing roadways, or designate the particular routes to be used for new roadways to gain access by Lessee to its well locations.

Lessee shall fence production facilities with fencing capable of turning livestock and shall maintain such fence or fencing in good repair and condition.

Neither Lessee, nor its agents, employees, contractors, and subcontractors, nor their agents or employees, shall have any right or privilege whatsoever to hunt or fish or camp on the Leased Premises, nor shall it, or any of its agents, employees, contractors or subcontractors, carry on to the Leased Premises, fire arms, dogs, fishing equipment or other articles ordinarily used for hunting or fishing.

Neither Lessee, its agents, employees, contractors, or subcontractors shall be allowed to go upon said Leased Premises for any purpose other than in pursuit of the purposes set forth in this Lease Agreement, and specifically, said persons shall not be authorized to go upon said Leased Premises for the purpose of taking pictures of game or improvements located upon the adjoining property nor for the purpose of "sight seeing".

Surface Owner or Surface Owner's duly authorized representatives and or the heretofore mentioned watchman, shall have the right at all times to inspect vehicles entering the Leased Premises for the purpose of ascertaining that no such articles are being brought onto the right of way and easement. If any such person or persons shall violate the provisions of this subsection, Lessee agrees to instruct such person or persons not to enter thereafter upon the Leased Premises and that, should they so enter, they shall then and thereafter be trespassers thereon and be subject to the penalties of the trespass laws of the State of Texas. If any of the provisions of this subsection are violated, it is agreed that Lessee shall pay to the Surface Owner the sum of One Thousand and No/100 Dollars ($1,000.00) for each violation, such sum being agreed to as liquidated damages because of the difficulty of ascertaining the actual damages and uncertainty thereof.

Lessee shall at Surface Owners request and at the expense and cost of the Lessee shall provide a watchman at the points where Lessee enters the Lease Premises during drilling or reworking operations.

Trucks or other heavy equipment shall not be moved upon or utilized within the Leased Premises during periods of wet weather when such utilization or movement would result in the creation of ruts or other appreciable damage to the surface of the Leased Premises.

All vehicles will be operated in a manner designated to minimize damage to the surface of the Leased Premises.

Lessee agrees that no motorized vehicle brought on the Leased Premises shall exceed the speed of ten (25) mph.

Lessee agrees to promptly close all gates and properly maintain all cattleguards with metal gates which Lessee and Lessee's agents, servants and/or employees may use in Lessee's operations on the Leased Premises to prevent the escape of cattle or stock of the Surface Owner or tenant through any open gates.

Lessee agrees that Lessee will not cut or go over any fence or fences at any time or in connection with any operations on the Leased Premises without first obtaining the express consent of the Surface Owner. It is understood and agreed that, not withstanding anything contained herein to the contrary, Lessee shall have no right to, nor shall Lessee be entitled to, make any cut in any common boundary fence between the Leased Premises and any adjoining or adjacent landowner. If the Surface Owner consents to the cutting of a fence, the cut must be made at the place designated by the Surface Owner and Lessee agrees before cutting any such fence to install three (3) 10-inch top, 10 foot corner-type posts buried five (5) feet into the ground at each point where such fence is to be cut and separately "H" brace the same and attach the wire thereto in such a manner as to prevent the fence's sagging. If the cut in such fence is an outside fence, Lessee agrees, promptly after making such cut, to install or maintain an adequate cattleguard with a metal gate in such opening, which Lessee shall keep locked at all times when not in use. If the cut in the fence is an inside fence, Lessee agrees to install a substantial cattleguard with a metal gate in such opening. At the termination of this Lease Agreement, all such cattleguards with metal gates shall not be removed but shall become the property of the Surface Owner.

Lessee shall insure that no solicitation by well service or supply companies is conducted upon the Leased Premises. Only those companies with whom Lessee has a contract in support of operations on the Leased Premises shall be authorized to enter onto the Leased Premises.

If any well drilled hereunder is completed as a producer of and/or gas, as a part of Lessee's surface restoration obligation, Lessee shall reduce the area of the pad constructed for drilling such well to a size reasonably necessary to accommodate producing and reworking operations, so that the excess may be restored to agricultural use. Within a reasonable time after any such well has been plugged and abandoned (but not to exceed sixty (60) days thereafter), Lessee shall restore the surface utilized in the production and operation of such well.

Lessee shall have no right to construct camps or houses for employees, or any other structures except those necessary or convenient to the drilling, completion and production of wells physically located on Lessor's land covered hereby, and in the case of such structures, including the necessary tank batteries for the drilling, completion and production of such wells, the same will be located in such a manner so that the utilized area around each completed well will be held to a minimum and provide the least interference with the use of the surface.

Lessee agrees to pay Surface Owner the sum of Two Thousand Five Hundred and No/100 Dollars ($2,500.00) per acre for each acre, or any fraction thereof, of the Leased Premises utilized either temporarily, incidentally or throughout the operations of Lessee, for drill site, roads, including existing roads, and location of tank batteries and other surface equipment, and each acre of Surface Owners adjoining, or adjacent lands, which may be utilized, which payment shall cover the usual and ordinary damages occurring to such lands from the Lessees use thereof in drilling and producing operations conducted in a reasonable and prudent manner and which payment for drill site and roads shall be made to Surface Owner prior to the commencement of drilling and which payment for the location of tank batteries and other surface equipment shall be made to the Surface Owner prior to the commencement of production operations. The above payment shall not be deemed compensation for damage resulting to the Leased Premises from blowout, spillage of oil, salt water or chemicals, or damages resulting from an unreasonable extraordinary or negligent use of the Leased Premises by Lessee, and Lessee agrees to pay the Surface Owner reasonable compensation for any such damage.

Prior to the commencement of operations on said lands for drilling any new well or for reworking or plugging an existing well, Lessee shall give Lessor written notice of Lessee’s intentions to commence construction or alteration to the surface of the leased premises (whether road, wellsite, right-of-way, tank battery, etc.) with the approximate date of such commencement and location of same; such notice shall be given at least fifteen (15) days prior to commencement of such construction or operation and shall include:

1. Lessee’s proposed access route to such location;
2. Proposed location of tank battery for each well site or central tank battery for the proposed site;
3. Proposed location of flow lines from well site to tank battery or gas sales point;

Lessee agrees to keep any surface equipment or facilities in good condition, well maintained, attractive in appearance and painted periodically.

Lessee shall not intentionally dump, spill or discharge gasoline or hydraulic fluid, fuel, paint or any other foreign substance on the Leased Premises. Any accidental spill will be cleaned up immediately and reported to Lessor.

Lessee agrees not to allow any waste oil, salt water or other contaminating substance to flow over the surface of the Leased Premises, and not to allow same to drain down any draws, drains, creeks, or ravines on the Leased Premises.

Lessee agrees to dispose of all salt water and other wastes off of the Leased Premises and in accordance with the Rules and Regulations of the Railroad Commission of Texas.

Lessee agrees to promptly repair any leaks in tanks, pits, pipelines, engines or from other facilities of Lessee, and to clean up any leaks or spills on the Leased Premises within fifteen (15) days from receipt of notice by Surface Owner.

Lessee agrees to bury all pipelines with a cover of at least thirty-six inches (36") from the top of the pipe to the surface of the ground and to place all pipeline improvements below the surface except for necessary meter runs and valve sites adjoining well locations. In excavating the pipeline ditch, Lessee agrees to "double ditch" Lessee's trench. In that regard Lessee agrees in digging the pipeline ditch in which to lay the pipeline, to separate the topsoil from the subsoil, caliche, or rocks, and in refilling the ditch, to refill first with rocks, caliche and subsoil, and to refill with topsoil last so that the topsoil will be restored to its former location. In refilling the ditch, Lessee agrees to leave a slight mound over the ditch, so that when the soil settles, the land over the ditch will be substantially the same level as the surrounding lands; but if it shall, thereafter, at any time during the existence of this lease, settle, wash or erode, causing a depression over the ditch, Lessee agrees to backfill the ditch and smooth the surface of the land to its former level. In connection therewith Lessee agrees to pay the Surface Owner reasonable damages in the sum of $50.00 per rod covered by pipelines installed during the primary term of this lease, for all pipelines installed after the primary term the amount of damages shall be adjusted in., hereof, but in no event shall said damages be less than $50.00 per rod. Lessee agrees to remove all debris and trash from the Leased Premises, to level the construction site and to construct terraces to comply with the other provisions of this Agreement across the right-of-way in such manner as may be necessary to prevent erosion. All travel and construction vehicles will remain on a designated pipeline route and/or the road. Lessee will obtain written consent from Surface Owner as to the location prior to the construction of any pipeline. The advance damages to be paid the Surface Owner shall be paid to the Surface Owner by the Lessee prior to the beginning of construction of said pipeline. Said pipeline route is to be of the width of Fifty (50) feet during the period that such pipeline is being constructed, and no longer, and after such pipeline is constructed, said pipeline route shall be only Twenty Five (25) feet in width, extending Twelve and one-half (12½) feet on either side of the centerline of said pipeline route. Lessee shall confine all operations for the construction, operation, maintenance or repair of said pipeline to the Fifty (50) foot width during construction or Twenty Five (25) foot width after construction, respectively, as the case may be. The advance damages paid to the Surface Owner cover and include the damages or destruction of crops and grasses now growing on the Fifty (50) foot pipeline route, together with the normal damages sustained to the land by reason of the building and construction of said original pipeline, but such payment does not cover or include damages to said land or the personal property of the Surface Owner, resulting from negligence or carelessness or the failure to construct said line in a good and workmanlike manner, or for damages to land or personal property of Surface Owner lying outside of the boundaries of said pipeline route, which said normal damages sustained to said land shall be computed in the amount of $2,500.00 per acre or any fraction thereof. Upon completion of the pipeline, Lessee shall promptly pay to the Surface Owner, damages for the additional work area used. Such payment to be made no later than thirty (30) days after the completion of the pipeline.

DRILLING OBLIGATION

THIRTEEN: Notwithstanding any of the provisions contained in this Lease to the contrary, Lessee is obligated to commence, or cause to be commenced, drilling operations, as herein defined, on a well (the “Test Well”) under the terms of this Lease on or before two (2) year from the date hereof. The Test Well must be drilled in a good and workmanlike manner to a depth sufficient to adequately test the Eagleford formation. Failure by Lessee to drill the Test Well as required herein shall result in Lessee being obligated to pay to Lessor as liquidated damages the cash sum of $_____________, which sum will be paid to Lessor within 15 days of receipt of written notice by Lessor.

INFORMATION

FOURTEEN: Upon written request, Lessor, or Lessor's authorized representative, shall be promptly furnished with copies of all information concerning wells, and other operations (including geophysical operations), including, without limitation, the following:

(A) The application for a permit to drill that is filed with any regulatory body, on the leased lands or adjacent lands by delivering a copy of the application with survey attached at the time it is forwarded for approval by such regulatory body.

(B) Release of drilling rig from the location after completion of the drilling of the well to the maximum depth, showing spud date, date drilling actually ceased and completion date as reported to any regulatory body.

(C) Any suspension of drilling operations for a period of more than twenty (20) days while the rig is on location.

(D) Copies of all logs, reports, core analyses or tests that are made or run on any well drilled on the leased lands.

(E) Copy of completion or abandonment report that is filed with any regulatory body.

(F) Copy of all raw geophysical data, including the final processed data, obtained during the term of this lease by Lessee and pertaining to the leased premises.

(G) Copies of all contracts of sale for oil, gas, similar hydrocarbons and/or their related products which may be produced and sold under the terms of this lease. Lessor or Lessor's authorized representative shall be entitled, upon request, to inspect adequate portions of cores, samples and cuttings as taken from all wells drilled on the leased premises. Lessor or Lessor's authorized representatives shall at all reasonable times have the right to inspect Lessee's operations and, at Lessor's risk, shall have access to the derrick floor and the right to witness the gauging of all tanks and to gauge the tanks, as well as to observe logging and testing operations.

In the event of production hereunder, Lessee shall furnish Lessor one copy of the following...

(A) All production and transportation reports filed with any regulatory body - at the time filed.

(B) The posted field price chart applicable to any production obtained under this lease - on the first payment of royalty.

(C) Any revised posted field price chart at any time the price may be changed.

It is understood and agreed and Lessor covenants with Lessee that any information, data, analyses, compilations, interpretations and other materials derived from such data that is furnished to Lessor, shall be kept confidential by Lessor until the expiration of this lease. Upon the expiration of the lease, Lessor shall be free to make whatever use of the data that they deem appropriate. All data and any compilations, analyses or interpretations based upon such data shall be furnished by Lessee to Lessor for Lessor’s information and advisory purposes as a consideration to Lessor under the terms of this lease. Lessee makes no representations or warranties, express or implied, concerning the accuracy or reliability of data submitted to Lessor, and any reliance upon same shall be at the sole risk of Lessor.

SURVEYS

FIFTEEN: If Lessee shall cause any of the exterior or interior lines of the property covered by this lease to be surveyed, Lessee shall furnish Lessor one copy of said survey. Lessee shall similarly furnish Lessor copies of all maps submitted to the Texas Railroad Commission or other governmental or official agency or department having jurisdiction, showing the proposed location and/or description of all roads, power lines, facilities, and/or well sites to be installed or built on the leased premises.

NOTICE

SIXTEEN: If, while this lease is in force, Lessee should default in the performance of any obligation hereunder, as a condition precedent to Lessor bringing suit, Lessee shall be notified in writing of the facts relied upon as constituting a breach, and Lessee, if in default, shall have thirty (30) days after receipt of such notice to comply with the obligations imposed by virtue of this lease.

REMOVAL OF EQUIPMENT

SEVENTEEN: Lessee shall have the right at any time during, or within one hundred twenty (120) days after the expiration of this lease, to remove all property and fixtures placed by it upon the leased premises, including the right to draw and remove all casing; provided, however, that prior to the plugging or removal of any water well placed on the leased premises by Lessee, Lessee shall give Lessor thirty (30), days written notice of its intent to plug or remove such water well and Lessor shall have the option to elect by giving written notice to Lessee within such thirty (30) day period to acquire such water well free of charge except Lessor's assumption of responsibility for such well. Should Lessee fail to remove any such casing, pipeline, building, structure, machinery, equipment, work or other thing within said period of one hundred twenty (120) days, the Lessor shall have the right at its option: (a) to keep and retain the same without compensation to Lessee therefor; or (b) to remove or cause the same to be removed at the cost and expense of Lessee with interest thereon at the rate of fifteen percent (15%) per annum and together with reasonable attorney fees. Lessee shall, however, plug and abandon all wells abandoned as non-productive in accordance with the rules and regulations of any governmental agency, official or department have jurisdiction within such one hundred twenty (120) day period.

PARTIAL RELEASE

EIGHTEEN: Lessee shall have the right and privilege, from time to time; to surrender this lease as to all or any part of the leased premises and thereupon this lease shall become void and of no effect as to the property affected by such surrender. Lessee shall give prompt notice to Lessor of each release or surrender of acreage and shall execute and deliver to Lessor, within ninety (90) days of such release or surrender, a copy of a recorded instrument releasing such surrendered portion or portions. Such surrenders or releases shall not require Lessor to refund any part of any payment theretofore paid by Lessee hereunder and shall not relieve Lessee from any obligations regarding surface damages and restorations. Upon termination of this lease, in whole or in part, Lessor shall be furnished an appropriate recorded release of this lease within ninety (90) days of such termination.

ASSIGNABILITY

NINETEEN: (A) Lessor's interest hereunder may be assigned in whole or in part and this lease shall extend to the successors and assigns of Lessor; but no change of ownership of the leased premises or minerals therein or part thereof shall diminish the rights or increase the obligations of Lessee. Lessee shall not be held responsible for the payment of shut-in payment or royalty to such new owners unless and until Lessee shall be furnished with the instrument of transfer or duly certified recorded copy thereof at least thirty (30) days before such rental, payment or royalty becomes due. Evidence of change in ownership shall not affect or invalidate any payments made by Lessee in advance.

(B) The rights of Lessee and any assignee of Lessee may be assigned or subleased or made the subject of a "farm­out" or other agreement looking to any assignment, sublease or joint operation, in whole or in part, with Lessor's prior written consent, which consent shall not be unreasonably withheld. Lessee shall furnish Lessor with a copy of any such proposed assignment and Lessor shall have fifteen (15) days to object to such assignment. No response within said fifteen (15) days shall be deemed as consent to assign. Without Lessor's express agreement to the contrary, such assignment, sublease or agreement shall not be deemed to modify any of the terms of this lease or to relieve Lessee, or its assigns from any of the obligations hereunder. Any assignment of this lease by Lessee shall be made subject to the terms and conditions of this lease.

NO WARRANTY

TWENTY: This Lease is granted and accepted without any warranty of title and without any recourse against Lessor whatsoever by Lessee, either expressed or implied. It is expressly agreed that the Lessor shall not be required to return any payments (i.e., bonus, shut-in payments and royalties, if any), received hereunder or be otherwise responsible to Lessee.

ABSTRACTS, TITLE OPINIONS & TITLE CURATIVE WORK

TWENTY-ONE: In the event Lessee causes an abstract of title to be made covering the property herein leased, or any portion thereof; Lessor shall have access to said abstract which shall become the property of Lessor. In the event Lessee shall cause the title to be examined or should obtain a title opinion or title certificate upon the property herein leased, Lessor shall be furnished a copy thereof with the understanding that neither Lessee nor the attorney or firm of attorneys rendering the opinion or certificate shall be responsible for its correctness, the said opinion, or certificate, being furnished to Lessor simply for his own convenience, information and personal use. If Lessee obtains any title curative data, a copy of same shall be furnished to Lessor.

RESTRICTIONS ON DEDICATION OF RESERVES

TWENTY-TWO: Notwithstanding any other provisions of this lease, Lessee is obligated hereby not to sell, agree to sell or otherwise dispose of any production from or attributable to land covered by this lease except from a zone, reservoir or horizon known to be capable of production from the leased premises at the time of such sale, agreement to sell or other disposition; and no such sale, agreement to sell or other disposition shall apply to any production which may occur beyond the date that this lease and such land covered by it terminates. Lessee shall not apply for, nor accept, any state or federal certificate, permit or other authority which purports to authorize Lessee to do anything different for the foregoing. Upon the surrender, termination or cancellation of this lease as to all or any part of the leased premises, for any cause, Lessee is obligated to promptly obtain and deliver to Lessor all state and federal certificates, permits or other authority which may be required by law, order, rule or regulation, in order to release and relieve Lessor and Lessor’s said lands from any obligation, duty, responsibility, encumbrance or dedication of any nature or kind resulting from any actions or transactions of Lessee under this lease or in respect to that part of the leased premises as to which this lease is so surrendered, terminated or cancelled.

INDEMNITY

TWENTY-THREE: Lessee agrees to hold Lessor harmless from any and all claims, whether civil or criminal, for injuries (including death of) to persons or damage to property in connection with Lessee's operations hereunder, and to defend any suit or proceeding brought against Lessor on account of such claims, and to pay any judgment (including attorney's fees) or fine against Lessor resulting from any such suit or proceeding.

DEFINITIONS

TWENTY-FOUR: As used herein, "actual drilling" means (i) "spudding-in" with respect to a new well, (ii) actual entry of the existing well bore where the Lessee intends to deepen or sidetrack an existing well, and (iii) any subsequent drilling or deepening of a well. "Reworking" and "reworking operations" means other activities in a well designed to increase or restore production therefrom. None of said terms, nor any similar term, includes activities preparatory to beginning the above defined operations.

SOLIDARY OBLIGATIONS

TWENTY-FIVE: In the event that the Lessee herein is composed of more than one party, it is understood and agreed that all obligations due by Lessee to Lessor hereunder, are incurred by the parties comprising the Lessee jointly, severally and in solido.

INFORMATION

TWENTY-SIX: Should Lessee desire to apply to any regulatory body having jurisdiction, for the creation of any unit or units which would include all or any portion of the leased premises, or for any hearing involved, concerning or affecting the leased premises, Lessee agrees:

(A) At least fifteen (15) days prior to the submission of any such application, to notify Lessor's representatives, in writing, of the proposed plan, setting forth the details, the results to be achieved, and reasons therefor. And, at least five (5) days prior to the submission of any application, confer with Lessor regarding the advisability for the application, the size or shape of any unit or units proposed, and all other applicable matters.

(B) Furnish Lessor's representative, at least fifteen (15) days prior to the time of any pre-hearing conference, with three copies of all exhibits which Lessee intends to file with the regulatory body at the pre-hearing conference or to otherwise present for discussion. In the event any exhibit is not completed within fifteen (15) days of the pre-hearing conference, then as soon as it or they may be completed.

(C) Make available to Lessor's representative at least fifteen (I5) days prior to the time of the pre-hearing conference, such non-interpretative geological, core analysis, seismic, and other data as maybe pertinent to or have influence upon a decision as to whether or not the application should be granted or denied.

(9) Simultaneously with the filing of an application for a hearing, furnish Lessor's representative with copy of the application and with copy of each unit plat or other exhibit filed therewith.

(E) If a unit or units including all or any portion of the leased premises is created by the regulatory body, furnish Lessor's representative a copy of the survey plat of each of the unit or units so created immediately upon Lessees receipt or completion of the same.

VITALITY OF TERMS

TWENTY-SEVEN: In the event litigation is initiated in order to determine whether or not Lessee has breached any of the terms or provisions of this lease, if a final judgment of court finds Lessee to have breached any term or provision hereof, Lessee shall be responsible for all reasonable attorney fees incurred by Lessor, to be fixed by the court.

COUNTERPART EXECUTION

TWENTY-EIGHT: This lease may be executed in any number of counterparts or may be ratified by separate instruments and shall be binding on all parties who so execute or ratify it, whether or not it is executed by all the parties herein named. If signed in counterpart, the signature and acknowledgment pages of counterparts may be accumulated on one instrument for recordation purposes.

CAPTIONS

TWENTY-NINE: The captions to the various paragraphs of this lease are for convenience only, to be used primarily in more readily locating specific provisions. They shall not be considered a part of the lease, nor shall they be used to interpret any of the lease provisions.

PRESERVATION OF ECOLOGY OF LEASED PREMISES

THIRTY: Lessee agrees to operate the leased premises in as neat and orderly fashion as possible, with particular care for the ecology of the entire premises. Without limiting or diminishing the generality of this commitment, Lessee agrees to line all slush or mud pits and to not permit said pits to overflow, and after termination of their use to remove all liquids and liners and to cover them with earth, sand or other appropriate material, so that they can be walked over by cattle and so that vegetation may grow thereon. Any overflows, including salt water, mud, chemical, or oil shall be reported immediately to Lessor.

COMPLIANCE WITH ENVIRONMENTAL LAWS

THIRTY-ONE: Lessee shall at all times and in all respects comply with any local, state, and federal law, ordinance, regulation, and order (i.e., any "Environmental Law", which specifically includes but is not limited to the Occupational Safety and Health Act, 29 U.S.C.A. § 651 et seq.; the Resource Conservation and Recovery Act, 42 U.S.C.A. § 6901 et. seq.; the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C.A. § 9601 et seq.; the Clean Water Act, 33 U.S.C.A. § 1251 et seq.; the Clean Air Act 42 U.S.C.A. § 7401 et seq.; the Safe Drinking Water Act 42 U.S.C.A. 300f et seq.; the Toxic Substances Control Act, 15 U.S.C.A. § 2601 et seq.; the Oil Pollution Act of 1990, 33 U.S.C.A. § 2701 et seq.; and any other state or federal regulation, law or provision which concerns in any way industrial health standards, environmental protection, wetland protection, coastal restoration, or, as such terms are defined in or regulated by the above-referenced statutes and regulations, the use, handling, analysis, generation, manufacture, storage, dischar₈e, emission, disposal, or transportation of any hazardous material, hazardous substance, toxic substance, hazardous waste, naturally occurring radioactive material, pollutant, solid waste, dredge and fill material, or non-hazardous oilfield waste.

Lessee shall defend, indemnify, and hold harmless Lessor from: any and all liabilities (including strict liability); actions, suits, demands, penalties, or losses (including, without limitation, claims for property damages, property value diminution, personal injuries, remedial costs, natural resource drainages, restoration costs, and non-compliance penalties); costs or expenses (including, without limitation, court costs, administrative appeal costs, and reasonable attorneys' fees); costs of any settlement or judgment regarding any of the foregoing; and, any other claims of any and every kind whatsoever, which may now or in the future (whether during or after the date of this Lease) be paid, incurred, suffered by, or asserted against Lessor by any person or entity or governmental agency for, with respect to, or as a direct or indirect result of (1) the presence on or under, or the escape, seepage, leakage, spillage, emission, or discharge onto or off the leased premised, or the exposure of any person to, any substance, waste, or material defined in or regulated by any Environmental Law, or (2) any other condition of the leased premises which would concern the applicability of any Environmental Law.

WAIVERS LIMITED

THIRTY-TWO: The waiver of any breach of any of the terms or conditions hereof shall be limited to that particular breach and shall never be construed as a continuing or permanent waiver of the term or terms breached nor as a waiver of any other terms, all of which shall be and remain in force and effect notwithstanding said waiver.

NOTICES

THIRTY-THREE: All notices and information required or permitted to be sent hereunder may be made as follows:

(a) To the Lessor:

_______________________

(b) To the Lessee:

All notices and information shall be sent by Certified Mail and shall be binding on the parties hereto and their successors and assigns; except that either party hereto, and their successors and assigns, shall have the right by written notice to change the name and address to which any such notices and information shall be directed.

REDUCTION OF INTEREST

THIRTY-FOUR: If Lessor owns less than the entire undivided interest in all or any portion of the lands or mineral rights relating thereto (whether such interest is herein specified or not) rentals and royalties as to the land in which an interest is outstanding in others shall be reduced proportionately to the interest of the Lessor therein, but the failure of Lessee to reduce any payments shall not affect Lessee's rights to reduce royalties; and all outstanding royalty rights shall be deducted from the royalties herein provided for. Lessee shall have the right to purchase a lease or leases from others to protect its leasehold rights and shall not thereby be held to have disputed Lessor's title; and in the event Lessor's title or an interest therein is claimed by others, Lessee shall have the right to withhold payment of royalties or to deposit such royalties in the registry of the Court until final determination of Lessor's rights.

MEMORANDUM OF LEASE

THIRTY-FIVE: In lieu of filing this lease for record in the County where the leased premises are located, Lessor and Lessee agree that a memorandum of this lease, making appropriate reference hereto, may be filed for record in such County, and that the filing of such memorandum shall fully bind Lessor and Lessee under the terms of this lease the same as if this lease was recorded in full.

IN WITNESS WHEREOF, this instrument is executed on the date first above written.

LESSOR:

__________________________________

.

_________________________________

LESSEE:

__________________________________

ACKNOWLEDGMENT PAGE

STATE OF TEXAS §

COUNTYOF ____________ §

This instrument was acknowledged before me on this _____ day of _____________, 2009, by __________________________

(Seal) ________________________________

Notary Public, State of Texas

STATE OF TEXAS §

COUNTYOF ____________ §

This instrument was acknowledged before me on this _____ day of _____________, 2009, by __________________________

(Seal) ________________________________

Notary Public, State of Texas

STATE OF TEXAS §

COUNTY OF___________ §

This instrument was acknowledged before me on the ___ day of ___________, 2009, by _____________________________.

(Seal)

_______________________________

Notary Public, State of Texas

EXHIBIT "A”

DESCRIPTION OF LEASED PREMISES