This is an expanding play with potential especially good in the areas of Wayne County along the Ohio River &  south to at least the area across from Fallsburg/Louisa Ky

 

The Participation agreement establishes a nice baseline for future deals.

 

"It Covers The Berea Interval Only"

 

 From the Latest Carbon/Nytis Sec Filing

 

 

PARTICIPATION AGREEMENT

BEREA SANDSTONE PROGRAM

BOYD, CARTER, GREENUP AND LAWRENCE COUNTIES, KENTUCKY

This Participation Agreement (“Agreement”) is entered into as of September 17, 2012 (the “Effective Date”), by and among

NYTIS EXPLORATION COMPANY LLC, a Delaware limited liability company (“Nytis”), CARBON NATURAL GAS COMPANY,

a

Delaware corporation (“Carbon”) (for purposes of Article X only), and LIBERTY ENERGY, LLC, a Massachusetts limited

liability company (“Liberty”).

RECITALS

WHEREAS, Nytis has leased, or obtained leases of, certain oil and gas interests in the Contract Area (as defined below)

covering approximately 26,000 net mineral acres (the “Berea Sandstone Program”);

WHEREAS, Liberty desires to participate in the development of the Berea Sandstone Program by paying a portion of the

costs incurred by Nytis (subject to the provisions of Section 3.2 below) associated with the drilling, completion and equipping of oil and

gas wells in the Berea Sandstone Geologic Interval (collectively, the “Wells”) in exchange for forty percent (40%) of Nytis’ undivided

working interest in the leases underlying the oil and gas interests which constitute the Berea Sandstone Program (the “Liberty Working

Interest”), which leases are more particularly described on Exhibit A attached hereto and incorporated herein (the “Leases”); and

WHEREAS, Liberty, as consideration for the right to participate in the development of the Berea Sandstone Program and

other rights set forth herein, has agreed to carry a portion of Nytis’ costs in the Wells as set forth herein.

NOW, THEREFORE, for a good and valuable consideration, it is agreed between the parties as follows:

ARTICLE I

DEFINITIONS

1.1 In addition to definitions set forth elsewhere herein, the following definitions shall apply in this Agreement:

“AFE” means an authorization for expenditure representing an estimate of work to be performed for a specific drilling,

completion or other operation.

“Approved Spacing Unit” means the unit described in the as-built plat that is used for division order purposes and submitted

to the Kentucky Division of Oil and Gas.

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“Berea Sandstone Geologic Interval” means the geologic interval below the Sunbury Shale and above the Devonian Shale as

located in Brice Shepherd #1 from 1007 feet to 1162 feet.

“Contract Area” means the area extending one mile beyond the boundaries of the Leases in Boyd, Carter, Greenup and

Lawrence Counties, Kentucky, a general outline of which is attached for illustrative purposes only on Exhibit B attached hereto.

“Drilling and Completion Activities” means all activities and operations carried out by or on behalf of the parties related to

the Wells and under the terms and conditions of this Agreement, including, but not limited to, drilling, sidetracking, well control,

acquisition, transportation and installation of tubular goods, materials and equipment; surveying, constructing roads and surface

location.

“Drilling and Completion Costs” means all costs incurred in connection with Drilling and Completion Activities, all of which

will be determined, and billed to the parties participating in such activities, pursuant to the Operating Agreement.

“Horizontal Well” means a well permitted and spudded with the intent to drill with at least 1500 feet of horizontal

displacement from the surface location. If at any time the parties mutually agree to drill a well not intended to have significant

horizontal displacement under this Agreement, that well shall be counted as 1/3 of a Horizontal Well for the purpose of this Agreement.

“Operating Agreement” means the Operating Agreement in substantially the form of that attached hereto as Exhibit C,

together with the COPAS Accounting Procedure annexed thereto, and together with all Exhibits thereto.

“Operator” means Nytis or its assigns.

“Proportionately Reduced” means the pro rata reduction of the amount to be paid by Liberty and/or Nytis, as the case may be,

with respect to any Well and/or Lease in which Liberty and Nytis do not collectively own a 100% working interest, based on the actual

working interest owned by Liberty and Nytis, collectively, in such Well and/or Lease.

1.2 The following Exhibits are attached to and made a part of this Agreement:

Exhibit “A” Description of Leases

Exhibit “B” General Outline of Contract Area

Exhibit “C” Operating Agreement

Exhibit “D” Form of Well AFEs

Exhibit “E” Form of Assignment

Exhibit “F” Existing Wells

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ARTICLE III

PURCHASE OF WORKING INTEREST; ASSIGNMENT

3.1 Purchase of Working Interest.

(a) Upfront Payment.

(i) Upon execution of this Agreement, Liberty will pay to Nytis an amount equal to $350.00 per net

mineral acre for forty percent (40%) of Nytis’ undivided working interest in the Berea Sandstone Program, which

amount is $3,655,552.60 (the “Initial Payment”). The Initial Payment shall be made by wire transfer of immediately

available funds to an account designated by Nytis no later than two Business Days prior to Closing.

(ii) In exchange for the Initial Payment at the Closing, Nytis shall make at Closing the assignments to

Liberty set forth in Section 3.4 and grant Liberty the right to participate for a forty percent (40%) working interest in

the drilling, development and production of oil and gas from the Leases in accordance with the terms and conditions

of this Agreement.

(b) Subject to the limitation set forth in Section 3.2 below and in accordance with the payment terms of the

applicable Operating Agreement, unless otherwise set forth herein, Liberty agrees to be responsible for and pay the Drilling

and Completion Costs of the Wells as follows:

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(i) With respect to the twenty (20) Carry Wells, Liberty shall bear eighty percent (80%), Proportionately

Reduced, of the Drilling and Completion Costs for such Wells (the “Carry Costs”).

(ii) In the event that Liberty elects to drill any Wells subsequent to the completion of the Carry Wells,

Liberty shall bear forty percent (40%), Proportionately Reduced, of the Drilling and Completion Costs for such

Wells.

3.2 Well Costs Cap.

(a) Notwithstanding anything to the contrary in this Agreement, if the Drilling and Completion Costs (or plugging

and abandoning, if not completed):

(i) associated with any particular Carry Well to be drilled pursuant to Section 2.1 above exceed Six

Hundred Fifty Thousand Dollars ($650,000.00) (the “Single Well Cost Cap”), Liberty only shall be required to pay

forty percent (40%), Proportionately Reduced, of Drilling and Completion Costs in excess of the Single Well Cost

Cap for such Carry Well, and Nytis shall be required to pay sixty percent (60%), Proportionately Reduced, of Drilling

and Completion Costs in excess of the Single Well Cost Cap for such Carry Well; or

(ii) associated with all Carry Wells to be drilled pursuant to Section 2.1 above exceed Twelve Million

Dollars ($12,000,000.00) in the aggregate (the “Aggregate Well Cost Cap”), Liberty only shall be required to pay

forty percent (40%), Proportionately Reduced, of Drilling and Completion Costs in excess of the Aggregate Well

Cost Cap for the Carry Wells, and Nytis shall be required to pay sixty percent (60%), Proportionately Reduced, of

Drilling and Completion Costs in excess of the Aggregate Well Cost Cap for the Carry Wells.

(b) Nytis shall use its reasonable best efforts to obtain competitive, market standard rates and costs with respect to

the Drilling and Completion Costs.

3.3 Spud Fee. In addition to the amounts Liberty is required to pay pursuant to Section 3.1, Liberty shall pay to Nytis a

spud fee for each Well drilled pursuant to this Agreement equal to $10,000.00, proportionately reduced to Nytis’ initial working interest

in such Well (the “Spud Fee”). The Spud Fee shall be paid by wire transfer of immediately available funds in accordance with the

invoicing provisions set forth in Section 4.2.

3.4 Assignment. Simultaneously with Liberty’s payment of the Initial Payment, Nytis shall deliver to Liberty a

recordable assignment, in substantially the form attached hereto as Exhibit E (the “Assignment”), assigning Liberty forty percent (40%)

of all of Nytis’ undivided right, title and interest in and to the Leases. Each and every Assignment contemplated herein shall be made

with a warranty of title, by, through and under Nytis, but not otherwise, and such assignment(s) shall be subject to the terms contained

in this Agreement and the applicable operating agreements and/or pooling orders, if any. Liberty agrees that if it elects not to

participate in either the Initial Uncommitted Carry Wells or the Remaining Uncommitted Carry Wells as contemplated by Section

2.1(b), Liberty shall promptly re-assign to Nytis, without further consideration, the identical leasehold and net revenue interest assigned

to Liberty pursuant to Section 3.1 using the form of Assignment; provided, however, that Liberty shall retain its rights and interest in

any Approved Spacing Unit surrounding a Carry Well in which Liberty has previously participated.

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3.5 Overriding Royalty. The parties acknowledge that all Assignments shall include a reservation by Nytis of a two

percent (2%) overriding royalty interest on all Leases.

3.6 Existing Wells. Nytis shall retain the wellbores and Approved Spacing Units of all existing Wells spudded prior to

the Effective Date in the Contract Area, all of which are identified on Exhibit F attached hereto (the “Existing Wells”), the production

therefrom, and all equipment and facilities exclusively associated therewith. Nytis will assume all liabilities associated therewith and

indemnify Liberty therefrom.

3.7 Accelerated Payment of Carry Costs. Liberty shall have the option, and Nytis hereby grants Liberty the option, to

accelerate its payment of the Carry Costs and secure its full Liberty Working Interest in the Berea Sandstone Program (the

“Acceleration Option”) if Nytis elects to sell the majority of its working interests in the Berea Sandstone Program to a third party at any

point before Liberty has paid Carry Costs equal to the Aggregate Wells Costs Cap. If Liberty elects to exercise the Acceleration

Option, then Liberty shall immediately pay to Nytis an amount equal to the Aggregate Well Costs Cap minus any Carry Costs actually

paid by Liberty as of the date of Liberty’s exercise of the Acceleration Option (the “Accelerated Amount”). Upon Liberty’s payment of

the Accelerated Amount, Liberty (i) shall have satisfied its obligation to pay the Carry Costs in its entirety, and shall have no further

obligation to Nytis or any third party that acquires an interest in the Berea Sandstone Program for any Carry Costs, (ii) shall own the

Liberty Working Interest in the Berea Sandstone Program and neither Nytis nor any third party shall not be entitled to any reassignment

of the same.

ARTICLE VII

AREA OF MUTUAL INTEREST

7.1 Subsequent Acquisitions. If during the Term of this Agreement, either Liberty or Nytis, or any of their respective

affiliates, acquires any oil and gas leasehold interest, whether by purchase, farm-in, contribution, forced pooling or otherwise, covering

lands lying within the Contract Area, the acquiring party shall promptly notify the non-acquiring party of such acquisition, describing

the oil and gas leasehold interest acquired and detailing the actual, third-party out-of-pocket costs incurred and the value of any rights,

leases, oil and gas interests or other property exchanged in connection with the acquisition of the acquired interest. Such acquired

interest shall be offered to the non-acquiring party on a heads up basis: sixty percent (60%) to Nytis and forty percent (40%) to Liberty.

7.2 Election to Participate. The non-acquiring party shall have a period of twenty (20) days after receipt of such notice to

notify the acquiring party of the non-acquiring party’s election to participate or not in the ownership of the acquired oil and gas

leasehold interest, with the failure of the non-acquiring party to notify the acquiring party within such twenty (20) day period to

constitute an election not to participate.

7.3 Payment and Assignment of Interest. In the event the non-acquiring party timely elects to participate in the acquired

oil and gas leasehold interest, and unless any such working interests have previously been conveyed to such non-acquiring party, the

acquired oil and gas leasehold interest shall become subject to this Agreement and the acquiring party shall promptly assign to the nonacquiring

party its undivided percentage of the working interest acquired by the acquiring party in such oil and gas leasehold interest,

subject only to the burdens in effect at the time the subject oil and gas leasehold interest was acquired. Such assignment shall be

substantially in the same form as Exhibit E attached hereto. Upon receipt of such assignment, the non-acquiring party will pay to the

acquiring party, in immediately available funds, the non-acquiring party’s share of the costs incurred in acquiring the acquired oil and

gas leasehold interest (limited to actual, third-party out-of-pocket costs and the value of any rights, leases, oil and gas interests or other

property exchanged therefor), in accordance with such party’s undivided percentage working interest. For purposes of this Article VII,

Liberty’s undivided percentage working interest shall be forty percent (40%) and Nytis’ undivided percentage working interest shall be

sixty percent (60%).

7.4 Non-Participation. In the event a non-acquiring party fails to timely elect to participate in acquired leasehold interest

pursuant to Section 7.2, then such oil and gas leasehold interest shall not become subject to this Agreement, shall be held solely by the

acquiring party and shall not in any manner be subject to the terms of this Agreement.

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ARTICLE VIII

CONFIDENTIAL DATA AND INFORMATION

8.1 Confidential Information. Nytis has provided Liberty with certain information, reports and data used in the evaluation

of the Berea Sandstone Program as contemplated by this Agreement. Subject to the terms of Section 8.2, any party hereto may at any

time utilize, and show and provide to third parties, copies of such information.

8.2 Limitations. Except to the extent that such data may legally become a part of the public domain, all data and

information acquired by the parties pursuant to this Agreement or supplied by one party to the other pursuant to this Agreement will be

kept confidential and will be for the sole and exclusive use and benefit of the parties hereto; provided, however, the parties may disclose

such data and information to their respective consultants and parties providing, or proposing to provide, financial accommodations to

the disclosing party where each such recipient has (a) been advised of the confidential nature of such data and information and the

obligations of the disclosing party with respect thereto hereunder, and (b) agreed to be bound by the terms of this Article VIII, it being

understood and agreed that the disclosing party shall remain liable for any breach by any such recipient of the obligations of the

disclosing party under this Article VIII. Notwithstanding anything to the contrary herein, any party may disclose Confidential

Information (i) to other working interest owners in the Berea Sandstone Program, if any, (ii) to third parties to the extent such

information is required to be disclosed under applicable law, rule, order or regulation of any governmental entity having jurisdiction

over such matters, (iii) to the extent requested by regulatory or self-regulatory authority, (iv) in connection with the exercise of any

remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, or (v) to an

equity owner, director, officer, employee or agent of such party, including legal counsel, accountants and other advisors where each

such recipient has (y) been advised of the confidential nature of such data and information and the obligations of the disclosing party

with respect thereto hereunder and (z) such recipient is subject to enforceable obligations to keep such data and information

confidential.