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FARMOUT – HORIZONTAL WELLS For purposes of this Agreement, the Parties agree to the following definitions: 1. “Horizontal Well” shall mean an oil or gas well in which the actual or propose d horizontal component of the gross completion interval in the reservoir exceeds the vertical component of the gross completion interval. 2. “Horizontal Exploratory Well” shall mean a Horizontal Well proposed to be drille d on a Drilling Unit that is neither a direct nor a diagonal offset to a Drilling Unit upon which is located a Horizontal Well producing in paying quantities from the same formation as proposed for the well. 3. “Horizontal Development Well” shall mean a Horizontal Well proposed to be dri lled on a Drilling Unit that is either a direct or a diagonal offset to a Drilling Uni t on which is located a Horizontal Well producing in paying quantities from the same formation as proposed for the well. Should any Party elect not to participate in any Horizontal Exploratory Well, other than the Initial Well, proposed under the terms of this Agreement, the non-participating Part y agrees to farmout to the participating Parties its interest, under the Farmout Agreements attached to this Agreement as Exhibit “_____”. The Farmout shall be effective on commencement of drill ing operations and shall cover the Drilling Unit on which the proposed Horizontal Exploratory Well is located, as well as all Drilling Units which are direct or diagonal offsets to i t (except those direct or diagonal offsets which are at the time locations for Horizontal Development Wells). The Farmout will be on a drill-to-earn basis such that the participating Parties sha ll earn an assignment of the non-participating Party’s interest in the farmed out acreage on a well -by-well basis, from the surface of the ground down to the base of the objective formation drilled, and covering in each instance the Drilling Unit on which the well is located. If the well drilled by the participating Parties is completed as a producer, the non-participating Party shall re serve in such assignment the right to a reassignment of a _____ percent (_____%) working interest, proportionately reduced to the interest originally assigned, at payout. Payout shall be ca lculated on a well-by-well basis. The Farmout shall allow one (1) year between the Completion of drilling operations on one Horizontal Well and the Commencement of drilling operations on the next Horizontal Well until all of the Drilling Units farmed out have been drilled, or until the Farmout otherwise terminates. In the event a proposed Horizontal Exploratory Well is not timely commenced or is not drilled as proposed, the effect shall be as if the proposal had not been made and the Farmout shall have no further force and effect. Should any Party elect not to participate in any Horizontal-Development Well, or in any vertical well, proposed under the terms of this Agreement, the non-participating Party’s i nterest shall be subject to the non-consent provisions contained in Section VI.B.2 of this Agreement.