CHAPTER 6

Gas Sales Contracts

Before focusing on the key-provisions of gas sales agreements, the basic

economic principles of the gas industry will be discussed.

Structure of the Gas Market

In contrast to other energy related commodities which are subject of a single

world market, the gas industry is divided into three regional gas markets. A
world gas market is not likely to develop because of distance related,
extraordinary transportation costs. These depend on the nature of gas as a
generally network bound commodity Therefore, the successful development of
infant gas markets demands a long, firm and fixed supply chain connecting the
wellhead and processing plant of the producers, the transmission networks of
the pipeline operators, the distribution networks of the Local Distribution
Companies [LDC] and the final consumers. Fixation is a result of the expensive
physical links within the chain. As the whole network is easily affected by
disruptions - either downstream in terms of supply or upstream in terms of
cashflows - firm and long-term relationships are likely to occur. The
infrastructure is also responsible for large capital investments which even
exceed the high expenditure of the oil industry by four to ten times for a number
of reasons: Primarily, gas pipelines depend on the economies of scale.
Secondly, they have to be larger than comparable oil pipelines Thirdly,
expensive storage facilities are required.

Financing these investments involve banks which will intensively look for
securities. In order to cope with the risks of exploration, marketing, price and
with the infrastructure expenditure, investors seek long term relationships with
reliable sellers. The latter themselves were keen to agreeing on long-term
agreements as either the duration of the contract was a means of competition
instead of the regulated prices or they were backed up by large legal or factual
monopolies on domestic markets rather focusing on the security than the costs
of supply This situation changes if the industry is deregulated as even imperfect
competition is superior to regulation of a monopoly

Categories of Gas Sales Agreements

Traditional gas sales agreements fall into four different categories. Firstly, one
can distinguish depletion contracts which dedicate the whole capacity of small or
medium fields to a specific vendee and supply contracts which are not related to
the output of a specific field. These are suitable for vendors owning large fields
or groups of fields. Thirdly, seller's option contracts allow the vendor to
nominate the delivered amount and are chosen if the gas is a by-product of
associated oil resources whereas buyer's option contracts grant the vendee the
right to decide about the quantity within the agreed amounts. Notwithstanding
this differences, gas sales agreements share numerous key-terms.

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Non Price Determined Provisions of Traditional Gas Sales Agreements

Apart from the basic agreement of sale and purchase, the non price determined
provisions of gas sales agreements focus on the quantities, take-or-pay and the
duration.

Contract Quantities

The contractual quantity which the buyer may nominate in advance is laid down
by a series of terms. The daily contract quantity [DCQ] represents the daily
average of the annual contract quantity [ACQ]. Due to seasonal fluctuations in
demand the term of delivery capacity is introduced which denotes the maximum
daily amount which the vendor is obliged to deliver. The latter term exceeds the
DCQ. In order to avoid uneconomic small scale deliveries the terms of minimum
nomination and zero nomination are introduced. The term excess gas describes
nominated volumes beyond the daily capacity which are not subject of a
stringent seller's obligation.

TOP -Take-or-pay

The basic idea of TOP provisions is that the buyer is obliged to pay the contract
quantity of gas even if he fails to take delivery in order to guarantee a cash flow
for the seller One could argue that the legal rationale of TOP is an alternative
obligation of the buyer so that he should be always free to choose between
delivery or sole payment. The distinction between primary/secondary obligations
and alternative obligations depends on the intention of the parties As the pure
buyer's payment without taking delivery is generally not regarded as to have any
commercial value reasonable vendees, it is more persuasive to argue, that this
obligation is a secondary obligation in the terms of liquidated damages. These
contractually defined damages favour the seller to a larger extent as he is
normally obliged to reduce the claim by the amount which is saved due to the
non fulfilment of the delivery of the commodity or due to the revenue earned by
alternative sales. Furthermore, the legal feasibility of TOP was challenged by
the argument that it should be regarded as punitive damages which are not
sustained by common law In order to weaken this argument various additional
terms have been introduced in order to make the clause more flexible. First of
all, the TOP obligation only refers to a specific percentage of the ACQ Secondly,
the buyer may make up gas volumes not taken but already paid in one year in
order to get free volumes in the following years after having taken delivery of the
ACQ. Thirdly, the buyer may have a carry forward right which allows him to use
past gas deliveries exceeding the ACQ as a means to reduce his TOP
obligations of following years

Take-or-pay [TOP] obligations as an essential part of the non price-determined

terms of common gas sales agreements by questioning both the legal and the
economic logic underlying these terms. It analyses to what extent these
provisions facilitate the development of infant gas markets but takes also mature
ones into account. Consequently, it asks whether the merits of long-term TOP
contracts will outweigh their risks if the economical or regulatory framework of
gas markets changes towards deregulation. This approach is justifiable by the
difficulties that occurred in the North American gas markets of the 1980s but also

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by the risks which European marketers face as a result of the recent
liberalisation of the European gas markets. After a having given a brief account
of the gas industry structure, the categories and key-provisions of gas sales
agreements are described.

Contract Length

The traditional duration of gas sales agreements concentrates on the period

which is required to amortise the producer's original capital investment
Therefore, the parties usually chose 10 to 20 years U.S. Legislation even
demanded a minimum duration of 15 years

Price Determined Provisions

The terminology how to define the price determined provisions of gas sales
agreement is not consistent. However, it seems to be most appropriate to define
fixed prices either as constant prices for the whole duration or as prices bound to
escalating formulas depending on constant factors Contrarily, market based
prices should be understood as prices linked to escalator-formulas which depend
on the development of unforeseeable market based indexes and commodity
prices These formulae can be used more flexibly if several commodities are
combined or separate formulas are compared in order to choose the lower price
[Top-stop] or the higher price [bottom-stop]

Rationale of Long-term TOP Obligations in the Early Stages of Market

Development

There is nearly unanimous consent that long-term gas sales TOP agreements
play a crucial role concerning the development of gas markets TOP obligations
became a standard clause in the 1950s This development is justified by various
arguments: The terms successfully cope with the seller's demand risk for the
lifetime of the project Thereby, it also reduces the effect of cross-fuel
competition. As gas is a highly substitutable commodity this finding has
outstanding relevance. By eliminating demand risk these clauses provide secure
long-term cash flows, too. These cash flows can be used to calculate the
process of the amortisation of the equipment precisely in a very early stage.
Furthermore, long-term contractually fixed cash flows are a useful means of
project finance as banks want to secure their loans. Additionally, the buyer -
backed by transmission, distribution and supply monopolies - is regarded as an
extremely reliable debtor. Although a long-term contract may be initially
expensive because of 12- to 18-months of legal negotiations it generally
minimises expenditure as frequent re-negotiations are avoided. Another
economic argument for long-term legal relations is based on the fact that the
supply chain provides for a highly mutual dedication of the physical linked
investments This argument is backed by the fact that most gas resources are
located far away from the retail markets. Contrarily, the traditional buyer takes
advantage of these provisions by concentrating on the reliability of long-term
supply rather than by looking for the cheapest means of supply. This approach
is economically justifiable as long he is bound to supply his consumers on the
basis of a regulated, cost oriented tariff so that he is able to recover his
additional expenditure. Additionally, the so categorised buyer is able to predict

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the demand of his supply area sufficiently accurate in order to adjust the TOP
obligation properly in the long run This would be nearly impossible in
competitive environments.

A second opinion points out that this traditional doctrine of long-term TOP
obligations is no longer true, if a new field is developed which shall supply a
mature liberal gas market It may be developed on the basis of a mixture of short
term agreements as it is not feasible that the competing marketers return to long-
term obligations only to serve the interests of one capital investor.

It remains an interesting question whether this idea could be extended to the

thesis that even new gas fields in infant gas markets could be developed relying
on a mixture of short term contracts. The answer shall be positive if the initial
market framework is liberal provided that there is a third party access [TPA] to
the new networks for a large numbers of buyers and sellers as one can argue
that there is an economical analogy between the former idea and the latter
thesis.

Stages of Market Development

Four different stages of domestic gas market development may be classified by

the criteria of percentage share of large consumers, cross-fuel competition,
interdependence between producers and network operators and, lastly, the
relevance of long-term TOP contracts. Infant gas markets focus on the depletion
of few fields, large percentage shares of industrial consumers, a large impact of
cross-fuel competition, a high interdependence of few producers and one or few
domestic network operators, which are bound by long-term TOP contracts -
including high TOP percentages - in order to amortise their initial investments for
field development and transportation. Sweden represents this stage. The
second stage (childhood) is characterised by the fact that large numbers of small
consumers begin to outweigh the importance of large consumers and Spain,
Finland and Turkey fall into this category. The third/fourth stages of adolescence
and maturity are described that gas balancing becomes more important and
large interruptible users are supplied in order to avoid storage Additionally,
networks interconnectors are introduced. In the middle of the 1990s, Austria,
Belgium, France, Germany and the Netherlands are in this stage. Elements of
the maturity are amendments of the legal framework in order to liberalise the
market by unbundling of the vertically integrated utilities and allowing TPA to the
networks, emerging of spot and future markets and declining relevance of TOP
contracts. The U.K. represents this stage since the beginning of beach trades in
the 1990s. The key element of transition between the third and fourth stage is
that the concept of the natural monopoly is no longer applied for the whole
supply chain. If it is reduced to the network operation the general domestic
competition law is applicable

Short-term Contracts

Firstly, short-term gas sales agreements among producers and consumers,

producers and shippers with a duration of up to 3 years and flexible spot market
based pricing will be a valuable tool.

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Spot Markets

Liberalising and granting third party access meet the key-criterion of spot market
development: a large number of liquid buyers and sellers in order to create
sufficient market volume The other criteria are deregulated prices, transparency
by published bids so that a market occurs for gas contracts concerning physical
deliveries of one week or a few months in advance These markets will evolve
from unregulated OTC trades via semi-regulated NBP-trades to stock exchanges
including standard contracts and involving financial intermediaries which reduces
party risks and negotiations

Markets for Derivatives

On the basis of an established gas spot market, markets for derivatives will
evolve This establishes the trading of OTC-Forward contracts of futures options
and swaps which are usually settled by cash. By carefully hedging and position-
taking, the marketers can reduce financial, demand and price risks similar to
long-term TOP obligations without causing in-competitive, inflexible and distorted
gas markets.

GAS SALES AGREEMENT

This Gas Sales Agreement (this “Contract”) is made and entered into effective
for all purposes as of _______________ (the “Effective Date”), by and between
__________________________, a _________________corporation ("Buyer"),
and the BOARD FOR LEASE OF UNIVERSITY LANDS ("Seller").

A. Seller is authorized by the Texas Education Code to execute sales contracts

necessary for the disposition of royalty taken in kind.
B. Seller takes its royalty gas in kind from those certain University leases
located in Ward County, Texas, described in Exhibit “A” (the “Leases”).
C. Buyer desires to purchase from Seller, and Seller wishes to sell to Buyer, the
royalty gas Seller takes in kind from the Leases (the “Royalty Gas”).

NOW THEREFORE, for and in consideration of the premises and the payment of
amounts due hereunder, Seller agrees to sell to Buyer and Buyer agrees to
purchase the Royalty Gas on the following terms and conditions:

1. POINTS OF DELIVERY AND TITLE. The Points of Delivery for the Royalty
Gas shall be at the Koch Waha Header as specially described in Exhibit “B”. As
between Buyer and Seller, Seller or its lessee shall be responsible for any
damage or injury caused thereby until the same shall have been delivered to
Buyer at the Points of Delivery. Seller represents and, to the extent authorized
under the laws and Constitution of the State of Texas, warrants that Seller holds
a valid royalty interest and title to the gas produced from such interest, free of
claims, in the properties subject to this Contract; is authorized to take Seller’s
gas royalty from such properties in kind; and has taken all actions necessary to
cause Seller’s gas royalty from such properties to be delivered in kind. Title to,
risk of loss from any cause, and liability with respect to the gas royalty production
tendered for delivery to Buyer shall pass to Buyer at the point of delivery. Seller

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shall not be responsible for transportation or any other costs that may be
incurred beyond the delivery point with respect to the gas sold under this
Agreement.

2. PRICE. Subject to all applicable provisions of this Contract, Buyer shall pay
to Seller for each MMBtu of Royalty Gas delivered hereunder a price based on
the index price published in the __________________ effective for the month in
which the gas is delivered. The index price shall be effective immediately upon
publication. The price shall be equal to one hundred percent (100%) of the index
price referenced above, ________________________ per MMBtu.

3. TERM. The term of this Contract shall commence on the Effective Date and
continue for a period of ______________ (the “initial term”) and from month-to-
month thereafter, unless and until terminated as provided herein. Either party
may terminate this Contract on or after the expiration of the initial term by giving
the other party thirty (30) days' advance written notice.

4. QUALITY. All Royalty Gas delivered by Seller to Buyer hereunder shall be

merchantable gas of pipeline quality.

5. PRESSURE. All Royalty Gas delivered by Seller to Buyer hereunder shall

be at a pressure sufficient to overcome the operating pressure in Buyer's or its
designee's pipeline system.

6. DEDICATION. For the term of this Contract, Seller dedicates to the

performance of this Contract any and all royalty interest taken in-kind by Seller in
all recoverable gas reserves attributable to or produced from the Leases.

7. REPRESENTATIONS. Except as to the quality of the Royalty Gas delivered

to Buyer, the sale of the Royalty Gas is made, and Buyer accepts the Royalty
Gas “AS IS” and SELLER MAKES NO WARRANTIES, EXPRESS OR IMPLIED,
WITH REGARD TO THE MERCHANTABILITY OR FITNESS FOR
PARTICULAR PURPOSE WITH RESPECT TO THE GAS.

8. PAYMENTS. Buyer shall timely pay to the Board of Regents of The

University of Texas System, c/o University Lands Accounting Office (“UT”), any
and all amounts due under this Contract. Buyer shall pay to UT on or before the
last day of each calendar month or fifteen (15) days after Seller provides the
preliminary allocation statement to Buyer pursuant to Paragraph 9, whichever is
later, amounts payable for Royalty Gas delivered by Seller to Buyer pursuant to
this Contract during the preceding month. Together with each such payment,
Buyer shall provide to UT a statement showing the total quantity of Royalty Gas
in MMBtu's delivered to Buyer at the Points of Delivery and any other information
or documentation deemed necessary and requested by UT to verify the accuracy
of payment amounts or for other accounting purposes. If the term of this Contract
is more than three (3) months, Buyer shall pay amounts due hereunder to UT by
electronic funds transfer. If the term of this Contract is three (3) months or less,
Buyer may make payments to UT by any method accepted by the Texas State
Treasury and in accordance with applicable law.

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9. ALLOCATION STATEMENTS. Seller will make reasonable efforts to
provide to Buyer on or before the twenty-fifth (25th) day of each calendar month
a preliminary allocation statement setting forth the quantities of Royalty Gas
attributable to each well from which Buyer purchases gas hereunder. Buyer shall
be entitled to rely upon the accuracy of such preliminary allocation statement for
the purpose of making payment pursuant to Paragraph 8. Buyer and Seller will
promptly notify each other of any adjustments to a preliminary or other allocation
statement and in any event no later than thirty (30) days after the need for the
adjustment was discovered. If an adjusted allocation statement indicates an
amount due to Buyer or Seller, such amount shall be taken by Buyer as a credit
against amounts owed to Seller in the next payment period. If the adjusted
allocation statement indicates an amount due to Seller from Buyer, Buyer shall
add such amount to the amount due on the next payment due date that is at
least fifteen (15) days after Buyer’s receipt of the adjusted allocation statement.
Payment for any adjustments not accounted for on or before the last date a
payment is due pursuant to Paragraph 8 shall be made no later than sixty (60)
days after receipt of the adjusted allocation statement by the party from whom an
amount is due. Payment may be made or a credit applied in any manner
acceptable to the party to whom the amount is payable.

10. AUDIT. Seller shall have the right to reasonable access to any and all
metering devices, records, and any other information relevant to any sale or
delivery made pursuant to this Contract for purposes of auditing the same to
verify the quantity and quality of Royalty Gas delivered to Buyer.

11. TAXES. Seller is currently exempt from the payment of all production,
severance and other taxes. Seller is responsible for the payment of any such
taxes lawfully levied against Seller with respect to the Royalty Gas purchased by
Buyer under this Contract. Seller’s tax I.D. No. is 1-74-6000203-7 .

12. DEFAULT AND REMEDIES. The following shall be deemed to be an Event

of Default:

a. Buyer ceases to continue the business of purchasing gas, is insolvent,

or files for protection under any bankruptcy law;

b. If Buyer is a partnership, Buyer is dissolved;

c. Failure of Buyer to maintain financial assurance as required by UT as

of the effective date of this Agreement;

d. If Buyer is required to maintain a letter of credit, if a circumstance

exists that allows UT to draw on the letter of credit;

e. Failure of Buyer to pay any amount due hereunder within five (5)
business days after it is due; or

f. Failure of Buyer to perform any other obligation under this Agreement

within fifteen (15) business days after notice from Seller specifying such failure.

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If an Event of Default occurs, Seller may, at Seller’s option, immediately
terminate this Agreement by giving written notice of such termination to Buyer.
The parties acknowledge that UT may insure payment of amounts payable to UT
hereunder. If such insurance is required by UT as of the effective date of this
Agreement and should such insurance be canceled for any reason relating to the
performance or insurability of Buyer, UT may demand that Buyer provide
additional financial assurance to UT for the remainder of the term of this
Agreement. Buyer agrees to immediately provide a letter of credit in favor of UT
in a form and with a bank acceptable to UT upon receipt of notice from UT of
such cancellation of insurance. Such letter of credit shall be in an amount
deemed satisfactory by UT, but in no event less than the amount paid (or
payable) hereunder for the immediately preceding 2-month period. If Buyer fails
to provide the letter of credit within ten (10) business days, this Agreement shall
terminate at the option of UT. Seller hereby authorizes UT or its authorized agent
to terminate this Agreement under the above-specified conditions.

13. INDEMNITY. Except monetary damages for injury, death, or property

damage directly and proximately caused solely by the negligence of Seller,
Buyer hereby agrees to indemnify Seller and UT and hold Seller and UT
harmless from and against any and all claims, liabilities, demands, causes
of action, and any related expenses, including without limitation attorneys’
fees, of any type and nature, specifically including but not limited to claims
of strict liability, arising out of or pertaining to this Contract after delivery
of the Royalty Gas, or a portion thereof, to Buyer.

14. NOTICE. Any notice, request, demand, or statement provided for in this
Contract shall be given or made in writing and shall be deemed delivered when
deposited in the United States mail and addressed as follows:

BUYER: __________________________________
__________________________________
__________________________________
Attn: _______________________
Phone: _______________________
Fax: _______________________

SELLER AND UT:

University Lands Accounting Office
P. O. Box 579
Austin, Texas 78767-0579
Attn: Tenzy Rambo Bradley
Phone: (512) 499-4751
Fax: (512) 494-3528
or at such address as Seller or Buyer shall from time to time designate by letter
properly addressed.

15. MISCELLANEOUS.

A. Applicable Law. This Contract shall be governed by and construed

under the laws of the State of Texas. Venue for any cause of action hereunder
shall be in Travis County, Texas.

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B. Standards of Practice. Buyer shall conduct its business hereunder in
a manner consistent with the highest applicable standard of industry practice.

C. Severability. In case any one or more of the provisions contained in

this Contract shall for any reason be held to be invalid, illegal, or unenforceable
in any respect, such invalidity, illegality, or unenforceability shall not affect any
other provision hereof, and this Contract shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.

D. Entire Agreement. This Contract constitutes the sole and entire

agreement between the parties and cannot be amended except by written
instrument signed by both parties.

E. Authority to Enter into this Contract. If Buyer is a corporation,

partnership, or other entity, each individual executing this Contract on behalf of
Buyer represents that he has full power and authority to enter into this Contract.

F. Captions. The captions used herein are for convenience only and do
not limit or amplify the provisions hereof.

G. Gender. Words of any gender used in this Contract shall be held and
construed to include any other gender and words in the singular number shall be
held to include the plural, unless the context otherwise requires.

H. Actions of Seller. Whenever an action is required to be taken hereunder by

Seller, an action taken by an authorized employee of UT shall be sufficient.

I. Assignment. Buyer shall not assign any or all of its rights under this
Contract without the prior written consent of Seller.

J. Force Majeure. Any failure of either party hereto to perform any of the
obligations hereunder other than to make payments due shall be excused if such
failure is due to fires, strikes, floods, lack of water, winds, lightning, or accidents
beyond the control of the party failing to perform. Executed by the parties hereto
to be effective for all purposes on the date written above.

SELLER:
BOARD FOR LEASE OF UNIVERSITY LANDS
By: ________________________________
David Dewhurst, Chairman

BUYER:
___________________________________
[TYPED OFFICIAL COMPANY NAME]
By: ________________________________
[authorized representative signature]
Typed Name: _______________________
Title: ______________________________
EXHIBIT A
Description of Leases Operated by Exxon Corporation

442
443
444
OIL AND GAS LEASE

This Agreement is made and entered into this_____ day of __________, 200__,
by and between:
___________________________ , whose address is ____________________ ,
hereinafter called Lessor (whether one or more), and Vista Exploration
Corporation, whose address is _________________________ ,hereinafter
called Lessee.

WITNESSETH, that the Lessor, for and in consideration of TEN DOLLARS

($10.00), cash in hand paid, the receipt and sufficiency of which are hereby
acknowledged, and the covenants and agreements hereinafter contained, has
granted, demised, leased and let, and by these presents does grant, demise,
lease and let exclusively unto Lessee, the land hereinafter described, with the
exclusive right for the purpose of exploring by geophysical and other methods,
and operating for and producing therefrom oil, gas, and other hydrocarbons and
all other minerals or substances, whether similar or dissimilar, including, but not
limited to, coalbed methane, helium, nitrogen, carbon dioxide, condensate,
distillate, casinghead gas, casinghead gasoline and all substances produced in
association therewith from coal bearing formations or elsewhere, that may be
produced from any well drilled under the terms of this lease, with rights-of-way
and easements for laying pipe lines and servicing or drilling other wells in the
vicinity of said lands, and erection of structures thereon to produce, save and
take care of said products, including the right to inject salt water, production
fluids, gases and other fluids into strata below those providing fresh water from
wells located on the herein leased lands or on adjacent lands, all that certain
tract of land, together with any reversionary, remainder and executor rights
therein, situated in _______ County, State of KANSAS, described as follows:

____________________________________________

and containing ___ acres, more or less, together with all strips or parcels of land
(not, however, to be construed to include parcels comprising a regular 40-acre
legal subdivision or lot of approximately corresponding size) adjoining or
contiguous to the above described land and owned or claimed by Lessor.

1. It is agreed that this lease shall remain in force for a term of FIVE (5) YEARS
from the date of this lease and as long thereafter as oil or gas of whatsoever
nature or kind is produced from said leased premises or on acreage pooled
therewith, or drilling operations are continued as hereinafter provided. If, at the
expiration of the primary term of this lease, oil or gas is not being produced on
the leased premises or on acreage pooled therewith but Lessee is then engaged
in drilling or re-working operations thereon, then this lease shall continue in force
so long as operations are being continuously prosecuted on the leased premises
or on acreage pooled therewith; and operations shall be considered to be
continuously prosecuted if not more than One Hundred Twenty (120) days shall
elapse between the completion or abandonment of one well and the beginning of
operations for the drilling or a subsequent well. If, after discovery, of oil or gas on
said land or on acreage pooled therewith, the production thereof should cease
from any cause after the primary term, this lease shall not terminate if Lessee
commences additional drilling or re-working operations within One Hundred

445
Twenty (120) days from date of cessation of production or from date of
completion of dry hole. If oil or gas shall be discovered and produced as a result
of such operations at or after the expiration of the primary term of this lease, this
lease shall continue in force so long as oil or gas is produced from the leased
premises or on acreage pooled therewith.

2. This is a PAID-UP LEASE. In consideration of the cash payment, Lessor

agrees that Lessee shall not be obligated, except as otherwise provided herein,
to commence or continue any operations or to make any rental payments during
the primary term. Lessee may at any time or times during or after the primary
term surrender this lease as to all or any portion of said land and as to any strata
or stratum by delivering to Lessor or by filing for record a release or releases,
and be relieved of all obligation thereafter accruing as to the acreage
surrendered.

3. In consideration of the premises Lessee covenants and agrees:

A. To deliver to the credit of Lessor, free of cost, in the pipe line to

which Lessee may connect wells on said land, equal to one-eighth (1/8)
part of all oil produced and saved from the leased premises.

B. To pay Lessor one-eighth (1/8) of the net proceeds at the well from
the proceeds received for gas sold from each well where gas only is
found, or the market value at the well of such gas used off the premises.

C. To pay Lessor one-eighth (1/8) of the market value at the well for gas
produced from any oil well and used off the premises, or for the
manufacture of casinghead gasoline or dry commercial gas.

D. To pay Lessor one-eighth (1/8) of the proceeds received from the sale
of any substance covered by this lease, other than oil and gas and the
products thereof, which Lessee may elect to produce, save, and market
from the leased premises.

4. Where gas from a well capable of producing gas is not sold or used, Lessee
may pay or tender to Lessor, as a royalty payment, One Dollar per year per net
royalty acre retained hereunder, such payment or tender to be made on or
before the anniversary date of this lease next ensuing after the expiration of 90
days from the date such well is shut-in and thereafter on or before the
anniversary date of this lease during the period such well is shut-in. If such
payment or tender is made, it will be considered that gas is being produced
within the meaning of this lease.

5. If Lessor owns a less interest in the above described land than the entire and
undivided fee simple estate therein, then the royalties (including any shut-in gas
royalty) herein provided for shall be paid to Lessor only in the proportion which
Lessor's interest bears to the whole and undivided fee.

6. Lessee shall have the right to use, free of cost, gas, oil and water produced on
said land for Lessee's operation thereon, except water from the wells of Lessor.

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7. When requested by Lessor, Lessee shall bury Lessee's pipeline below plow
depth.

8. No well shall be drilled closer than 200 feet from the house or barn now on
said premises without written consent of Lessor.

9. Lessee shall pay for damages caused by Lessee's operations to growing

crops on said land.

10. Lessee shall have the right at any time to remove all machinery and fixtures
placed on said premises, including the right to draw and remove casing.

11. The rights of Lessor and Lessee hereunder may be assigned in whole or
part. No change in ownership of Lessor's interest (by assignment or otherwise)
shall be binding on Lessee until Lessee has been furnished with notice,
consisting of certified copies of all recorded instruments or documents and other
information necessary to establish a complete chain of record title from Lessor,
and then only with respect to payments thereafter made. No other kind of notice,
whether actual or constructive, shall be binding on Lessee. No present or future
division of Lessor's ownership as to different portions or parcels of said land
shall operate to enlarge the obligations or diminish the rights of Lessee, and all
Lessee's operations may be conducted without regard to any such division. If all
or any part of this lease is assigned, no leasehold owner shall be liable for any
act or omission of any other leasehold owner.

12. Lessee at its option, is hereby given the right and power at any time and from
time to time as a recurring right, either before or after production, as to all or any
part of the land described herein and as to any one or more of the formations
hereunder, to pool or unitize the leasehold estate and the mineral estate covered
by this lease with other land, lease or leases in the immediate vicinity for the
production of oil and gas, or separately for the production of either, when in
Lessee's judgment it is necessary or advisable to do so, and irrespective of
whether authority similar to this exists with respect to such other land, lease or
leases. Likewise, units previously formed to include formations not producing oil
or gas may be reformed to exclude such non-producing formations. The forming
or reforming of any unit shall be accomplished by Lessee executing and filing a
record of declaration of such unitization or reformation, which declaration shall
describe the unit. Any unit may include land upon which a well has theretofore
been completed or upon which operations for drilling have theretofore been
commenced. Production, drilling or re-working operations or a well shut-in for
want of a market anywhere on a unit which includes all or a part of this lease
shall be treated as if it were production, drilling, or re-working operations or a
well shut-in for want of a market under this lease. In lieu of the royalties
elsewhere herein specified, including shut-in gas royalties, Lessor shall receive
on production from the unit so pooled royalties only on the portion of such
production allocated to this lease; such allocation shall be that proportion of the
unit production that the total number of surface acres covered by this lease and
included in the unit bears to the total number of surface acres in such unit. In
addition to the foregoing, Lessee shall have the right to unitize, pool, or combine
all or any part of the above described lands as to one or more of the formations

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there under with other lands in the same general area by entering into a
cooperative or unit plan of development or operation approved by any
governmental authority, and, from time to time, with like approval, modify,
change or terminate any such plan or agreement; and, in such event, the terms,
conditions and provisions of this lease shall be deemed modified to conform to
the terms, conditions, and provisions of such approved cooperative or unit plan
of development or operation; and, particularly, all drilling and development
requirements of this lease, express or implied, shall be satisfied by compliance
with the drilling and development requirements of such plan or agreement. This
lease shall not terminate or expire during the life of such plan or agreement. In
the event that said above described lands, or any part thereof, shall hereafter be
operated under any such cooperative or unit plan of development or operation
whereby the production therefrom is allocated to different portions of the land
covered by said plan, then the production allocated to any particular tract of land
shall, for the purpose of computing the royalties to be paid hereunder to Lessor,
be regarded as having been produced from the particular tract of land to which it
is allocated and not to any other tract of land; and the royalty payments to be
made hereunder to Lessor shall be based upon production only as so allocated.
Lessor shall formally express Lessor's consent to any cooperative or unit plan of
development or operation adopted by Lessee and approved by any
governmental agency by executing the same upon request of Lessee.

13. For purposes of promoting the development of shallow gas and associated
hydrocarbons produced in conjunction therewith, Lessee is granted the power to
pool and unitize all or portions of this lease into a development unit containing
not more than 3,000 acres. This grant shall only be effective if Lessee drills or
has drilled at least Two (2) wells within the pooled unit no later than one (1) year
from declaration of pooling and in no event later than one (1) year after the
expiration of the primary term hereof. This special pooling grant is only effective
as to formations hereby defines as geologic formations located from the surface
of the earth to one hundred feet (100') below the top of the Pre-Cambrian
formation. The pooled unit must consist of all contiguous acreage with at least
one common corner. To utilize this pooling grant, Lessee shall file with the Office
of the Register of Deeds of the relevant county or counties a declaration of the
exact description of the unit formed pursuant to this clause. Subject to fulfilling
the above described drilling requirements, such declaration is all that is required
to establish the pooled unit. If such gas well or wells as contemplated by this
clause shall not be drilled on the premises herein leased it shall nevertheless be
deemed to be upon the leased premises within the meaning of all covenants,
expressed or implied, in this lease. Lessor shall receive on hydrocarbon
production thus pooled the same proportion of the royalty stipulation herein
reserved as the proportion that the Lessor's acreage placed in the unit bears to
the total acreage so pooled in the particular declared unit, regardless of which
wells the production actually comes from. After one such unit has been declared,
Lessee may add other lands to such unit up to the limit of 3,000 acres.

14. All express or implied covenants of this lease shall be subject to all Federal
and State laws, executive orders, rules or regulations; and this lease shall not be
terminated, in whole or in part, nor Lessee held liable for damages, or for failure
to comply therewith, if compliance is prevented by, or if such failure is the result
of, any such law, order, rule or regulation.

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15. Lessor hereby warrants and agrees to defend the title to the lands herein
described, and agrees that Lessee shall have the right at any time to redeem for
Lessor, by payment, any mortgages, taxes or other liens on the above described
lands, in the event of default of payment by Lessor and be subrogated to the
rights of the holder thereof; and Lessor hereby agrees that any such payments
made by Lessee for Lessor may be deducted from any amounts of money which
may become due to Lessor under the terms of this lease. The undersigned
Lessors, for themselves and their heirs, successors and assigns, hereby
surrender and release all right of dower and homestead in the premises
described herein, insofar as said right of dower and homestead may in any way
affect the purposes for which this lease is made, as recited herein.

16. Should any one or more of the parties hereinabove named as Lessor fail to
execute this Lease, it shall nevertheless be binding upon all such parties who
do execute it as Lessor. The word "Lessor", as used in this lease, shall mean
any one or more or all of the parties who execute this lease as Lessor. All the
provisions of this lease shall be binding on the heirs, successors and assigns of
Lessor and Lessee.

17. Lessee has the option to extend this lease for an additional term of THREE
(3) YEARS from the expiration of the primary term of this lease, and as long
thereafter as oil or gas, or either of them, is produced from said land by the
Lessee, its successors and assigns, said renewal to be under the same terms
and conditions as contained in this lease. Lessee, its successors or assigns,
may exercise this option to renew if on or before the expiration date of the
primary term of this lease, Lessee pays or tenders to Lessor or to Lessor's
credit, the sum of TEN (10) DOLLARS per net mineral acre.

18. Bonuses may be paid by check or draft and may be remitted by mail. Mailing
of bonuses on or before the bonus paying date shall be deemed a timely tender
thereof and shall preclude termination of this lease.

IN WITNESS WHEREOF, this instrument is executed as of the date first above

written.

________________________________
________________________________

SS/Tax ID# _____________________ SS/Tax ID#

________________________________

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 EXHIBIT "A"

This Exhibit "A" is attached to and made a part thereof that certain Oil and
Gas Lease dated this _____ day of _____________________, 200__.

Notwithstanding anything to the contrary contained in the Oil and Gas Lease to
which this Exhibit is attached and made a part of, the provisions of this Exhibit
shall prevail whenever in conflict with the provisions of the Oil and Gas Lease.

1. Lessee and Lessor agree that any access roads, well sites, or pipelines to be
constructed under the terms of this lease shall be located after consultation with
and consent of Lessor, provided however, that Lessor shall not attempt to
prohibit said construction or make unreasonable requests of Lessee.

2. Lessee agrees that as soon as is reasonably possible, following completion of

its operations, Lessee shall restore its well site, as nearly as possible, to its
original condition and land contour.

3. Lessee agrees to be a prudent operator and will keep all surface disturbances
to the minimum area necessary to conduct its operations.

4. Lessee shall indemnify and hold Lessor harmless from any and all liability,
liens, claims and environmental liability arising out of Lessee's operations under
the terms of this lease.

5. This lease shall terminate on the first anniversary date, unless Lessee pays or
tenders to Lessor, in the same manner provided for payment of shut-in loyalties,
TEN DOLLARS ($10.00) per net mineral acre covered by this lease. If said
payment is not made, Lessee agrees to record a Release of Lease within
THIRTY (30) DAYS of said termination.

6. Lessee agrees to pay Lessor a one-time payment of FIVE HUNDRED

DOLLARS ($500.00) per acre for all property which is damaged as a direct result
of Lessee's operations under the terms of this lease.

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