Fill and Sign the Gas Balancing Agreement Law and Legal Definition Form

Form 5 EXHIBIT “E” TO OPERATING AGREEMENT GAS BALANCING AGREEMENT 1. Definitions. For the purpose of this Gas Balancing Agreement, defined terms shall have the same meanings as provided for in the Operating Agreement, except for the following: (a)“Cash Settlement” shall be those payments described and required under Paragraph 4. below. (b) “Disposable Production” is each Owner’s Percentage Ownership in Gas produced from the Unit from each Formation, less the Owner’s proportionate share of Gas used in operations, vented, or lost. (c) “Formation” shall mean the perforated interval within a wellbore separately producing natural gas or casinghead gas at any given time. (d) “Gas” shall mean natural or casinghead gas from gas wells, oil wells, and primary field separation. (e) “Liquid Hydrocarbons” shall mean liquid hydrocarbons obtained from primary field mechanical separation. (f) “Liquefiable Hydrocarbons” shall mean liquid hydrocarbons and natural gas constituents converted to a liquid phase, which are obtained by means other than primary field mechanical separation. (g) “Make-Up Gas” shall be that Gas taken by an Underproduced Party from a Formation in excess of that Party’s Percentage Ownership, multiplied by the applicable MER. (h) “MER” is the total daily maximum efficient rate of sustained hydrocarbon withdrawal, attributable to 100% of the combined working interest, from each Formation, which, if exceeded for sustained period of time, would lead to underground waste in the form of reduced ultimate recovery from the reservoir. (i) “Operating Agreement” shall mean the Operating Agreement to which this Exhibit “E” is attached. (j) “One Year Imbalance” shall mean at any time the amount of Cash that can be gas balanced within a 360 day period and shall be determined by multiplying the percentage rate for Make-Up Gas set forth in Section 2(e) by the current MER of the Formation, and by the Percentage Ownership of the Overproduced Parties, and by 360. (k) “Overproduced Owner” shall mean an Owner credited with a greater volume of Gas produced from a Formation than the Percentage Ownership of that Owner in the cumulative volume of Gas produced from the Formation. (l) “Owners” shall mean the Parties to the Operating Agreement. (m) “Percentage Ownership” shall mean the percentage interest of each Owner in the Unit as set forth in the Operating Agreement, or if applicable to a Formation i n a well on the Unit other than a Joint Account Completion, then “Percentage Ownership” shall mean the percentage interest of each Owner in the Formation. (n)“Underproduced Owner” shall mean an Owner credited with a lesser volume of gas produced from a Formation than the Percentage Ownership of that owner in the cumulative volume of Gas produced from the Formation. (o) “Unit” shall mean the area covered by the Oil and Gas Lease or Leases descri bed in Exhibit “A” to the Operating Agreement; provided, however, if more than one Lease is described in Exhibit “A” and the Operating Agreement applies separatel y to each of the Leases, then this Gas Balancing Agreement shall also apply separately to each of the Leases. 2. Ownership and Sale of Production. (a) Each Owner shall own and have the right to take its Disposable Production of Gas in kind, from each Formation, and to separately utilize or market its Disposable Production. (b) If, at any time, fewer than all the Owners are utilizing or marketing their full share of their Disposable Production, the Owners who are utilizing or marketing Gas: (i) shall have the right and option, but not the obligation, to produce up to the current MER and utilize or market the Gas; and, (ii) shall be deemed to own, a ll of the Gas so produced. Gas produced and utilized or marketed by an Owner, or otherwise disposed of, shall be charged against an Owner’s share of the total recoverable reserves. (c) If, during any calendar month, an Owner does not utilize or market an amount of Gas equal to the Owner’s Disposable Production, any shortfall (which is not Make-Up Gas being deducted from an Overproduced Owner’s Disposable Production and being marketed or utilized on behalf of an Underproduced Party) shall be deemed underproduced Gas attributable to the Owner remaining in storage in the Formation, subject to later recovery in accordance with the terms of this Agreement. (d) If two or more other Owners are capable of marketing or utilizing Gas to which another Owner was entitled, but failed, to market or utilize, each may take a sha re of the underproduction in the direct proportion of their Percentage Ownership to the total Percentage Ownership of all Owners desiring to take the underproduction; provided, however, any Underproduction Owner in a Formation shall have a first priority to market and utilize underproduction over an Overproduced Party. (e) During the months of _____ through _____, any Underproduced Owner in a Formation category shall be entitled to take a quantity of Make-Up Gas from the Formation not greater than fifty percent (50%) of the Percentage Ownership of the Overproduced Parties in the Formation multiplied by the MER. Any Overproduced Owner in a Formation shall at all times be entitled to fifty perc ent (50%) of its Percentage Ownership of the MER from the Formation. During the months _____ through _____, any Underproduced Owner in a Formation category shall be entitled to take a quantity of Make-Up Gas from the Formation not greater than twenty-five percent (25%) of the Percentage Ownership of the Overproduced Parties in the Formation multiplied by the MER. Any overproduced Owner in a Formation shall, at all times, be entitled to twenty- five percent (25%) of its Percentage Ownership of the MER from the Formation. (f) In the event there is more than one Underproduced owner desiring Make-Up Gas, each Underproduced Owner shall be entitled to Make-Up Gas in the direct proportion that the cumulative underproduction of the Underproduced Owner bears to all cumulative underproduction of all Underproduced Owners than desiring Make-Up Gas from the particular Formation. In the event there is more than one Overproduced Owner required to furnish Make-Up Gas, they shall do so at the percentage stated in Subsection 2.(e) in the direct proportion that the cumulative overprotection of the Overproduced Owner bears to all cumulative overprotection of all Overproduced Owners supplying Make-Up Gas from the Formation. (g) All Gas taken by an Owner in accord with the terms of this Agreement, regardless of whether the Owner is Overproduced or Underproduced, shall be regarded as Gas taken for its own account with title to it being in the Owner, whether the Gas is being taken as Overproduction, Make-Up Gas, or the Owner’s Disposable Production, and the Owner shall be responsible for all production taxes and royalty due on that gas. (h) Except as provided in Section 4., no Cash Payment with respect to the stored Gas shall be required of an Overproduced Owner utilizing or marketing Gas. (i) Recovery from storage by an Underproduced Owner from an Overproduced Owner shall be on a first-in, first-out basis, in the order the underproduction accrued. (j) It is contemplated that any Owner may arrange to have its Gas processed in a gas processing plant for the recovery of Liquefiable Hydrocarbons. This Gas Balancing Agreement is not intended to afford a basis for balancing any Liquefiable Hydrocarbons recovered from a gas processing plant except to the extent that extraction of the Liquefiable Hydrocarbons constitutes “utilization” of Gas under the terms of this Agreement. (k) Nothing in this Agreement shall require the Operator to produce a well, reservoir, or Formation in excess of the applicable MER or maximum allowable rate established by any regulatory authority from time to time. (l) All Owners shall be entitled to own and market the Liquid Hydrocarbons, as produced, in accordance with their Percentage Ownership, irrespective of the fact that one or more Owners may not be utilizing or marketing Gas. (m) Nothing in this Agreement shall be construed as denying any Owner the right, from time to time, and with at least twenty (20) days written notice to Operat or, subject to the concurrence of all Gas purchasers, to produce and take or deliver to its purchaser its full share of the allowable Gas production to meet a deliverabil ity test required by its Gas purchaser. 3. Balancing of Production Accounts. Each Owner’s Gas production account is in balance when the Owner has utilized or marketed the same percentage of the total cumulative production marketed or util ized as the Owner’s Percentage Ownership in a Formation. (a)If Gas produced from a Unit is produced from more than one Formation, each Owner’s Gas production account may be balanced only from other completions from the same Formation as the completion which is the source for the Underproduced account. (b) Any Underproduced Owner shall have the right for a period of two (2) years after the date that Gas accounts are settled to audit an Overproduced Owner’s records as to volumes and prices received for Gas produced from a Formation, and any Overproduced Owner shall have the right for a period of two (2) years after the Gas accounts are settled to audit any Underproduced Owner’s records as to volumes. 4. Cash Settlement. (a) At the time that commercial gas production from the Formation in the Unit permanently ceases, a complete balancing in the Formation will be achieve d by a Cash Settlement between the Owners. (b)At the election of an Underproduced Owner, at any time that the Overproduction of Gas from the formation exceeds a One Year Imbalance, a balancing to a One Year Imbalance will be achieved by a Cash Settlement between that Underproduced Owner and any Overproduced Owner. (c) Under this Cash Settlement, each Overproduced Owner shall pay each Underproduced Owner, as compensation for any underproduction to be cash balanced, a sum of money equal to the net amount actually realized by the Overproduced Owner from the sale of that part of the total cumulative volume of Gas sold from the Formation which the Underproduced Owner was entitled to sell. The net amount actually received by the Overproduced Owner shall include amounts attributable to overproduced royalty interest, overproduced production payment interest, or any other overproduced interest paid by, through, or at the instruction of the Overproduced Owners. (d) Because there will be changes in the prices received by an Overproduced Owner, the Cash Settlement for Overproduced volumes shall be calculated on a “last-in, first-out” basis, in the reverse chronological order the Overproduction accrued. If a portion of an Owner’s Gas is taken for its own use and a portion of it is sold, the Gas value for accounting among Owners will be based on the price received simultaneously by the Owner for Gas sold. During periods in which an Owner is taking Gas for its own use and making no sales, Gas so taken will be valued at the maximum price which the Owner could have received for the Gas if actually delivered under the Owner’s contract, or, if none, the weighted average price received simultaneously by all other Owners for Gas sold from the Formation. In either instance the value so determined for Gas so used will be deemed to have been constructively received by the using Owner. In the event refunds are later required by any governmental authority, each Owner shall be accountable for the refunds on the basis of its share of Gas produced and finally balanced under this Agreement, unless other provisions have been made pursuant to Subsection 5(i). (e) The Operator will maintain a separate running account of the quantities of Gas each Owner is entitled to, and the quantities of Gas utilized or marketed by e ach Owner. The Operator will also furnish each Owner monthly statements showing the total quantity of Gas produced by each Formation, the amount of Gas from each Formation used in the Unit operations, vented, or lost, the volume of Gas, by Formation, delivered to pipelines and purchasers for the account of each Owner, and the cumulative Overproduction and Underproduction status of each Owner by each Formation. (f) For purposes of balancing, the measurement point of the Gas taken (both quantity and quality) shall be the Owner’s discharge measurement point at or near the well from which Gas is produced. Accounting of Disposable Production overproduction, underproduction, or One Year Imbalance shall be settled and accounted for on a calendar month basis. (g) Each Owner shall provide, or cause to be provided, monthly, to the Operator, a statement of the quantities taken by the Owner or its pipeline purchaser. Each Owner is responsible for maintaining records of prices received for overproduction and providing those records within sixty (60) days of request by either the Operator or an Underproduced Party when a Cash Settlement is required under this Agreement. (h) Sums owed pursuant to a Cash Settlement shall be due and payable not later than four (4) months following the event giving rise to the Cash Settlement. (i) If any portion of a Cash Settlement shall be based on prices subject to refund on order of the Federal Energy Regulatory Commission or any authority having jurisdiction, the paying Owner may withhold the amounts subject to refund until prices are fully approved by the Federal Energy Regulatory Commission, unless Owner receiving payments furnishes security satisfactory to the paying Owner. (j)Nothing in this Agreement shall be construed as precluding a cash balancing at any time as negotiated among Owners. 5. Payment of Royalty. All burdens and obligations shall be borne and paid by the Owner having the burden or obligation, except as otherwise provided by law. Notwithstanding the above, each Owner marketing or utilizing Gas shall: (a)Pay or cause to be paid to the Operator, all landowners’ royalties due on Gas in the manner required by the statutes and regulations of the state of _____, or the federal government, and the Operator shall distribute the landowners’ royalties in the manner prescribed by those laws and regulations; (b) be responsible for payment of any other overriding royalty, excess royalty, production payment, or any other encumbrance due on their interest; and, (c) pay or cause to be paid all severance and production taxes due on the Gas. Each Owner agrees to indemnify and hold each and every other Owner harmless from any and all claims for royalty payments asserted by royalty owners to whom each indemnifying Owner is accountable except as otherwise provided by statute. 6. Operating Expenses. The operating expenses are to be borne as provided in the Operating Agreement, regardless of whether all Owners are marketing or utilizing Gas or whether the sales a nd use of each are in proportion to their respective Percentage Ownership. 7. Operator’s Liability. The Operator under the Operating Agreement is authorized to carry out the provisions of this Balancing Agreement, but shall not be liable for its failure to do so as long as it acts in good faith and as would a reasonably prudent Operator in the same or similar circumstances. 8. Successors and Assigns. This Balancing Agreement shall inure to the benefit of and be binding on all Owners and their successors, legal representatives, and assigns. In the event any Owner makes a transfer of any lease, interest, in whole or in part, this Balancing Agreement shall, effective as of the date of the transfer, be construed as a separate agreement as to the lease or interest transferred. To the extent that the transferring Owner is an Overproduced Owner, as of the effective date of the transfer there shall be a Cash Settlement between that interest and any Underproduc ed Owners pursuant to the provisions of Section 4. 9. Intention of the Parties. (a) It is the express intent of all parties to this Agreement that best efforts wil l be made to gas balance rather cash balance. The Operator is authorized to ta ke all appropriate steps, other than curtailing production below the MER, to maintain a balance in production be tween the Owners. To the extent that an Underproduced Owner demonstrates that insufficient reserves exist in a Formation to permit gas balancing with Make-Up Gas, the Operator may perm it the Underproduced Owner to utilize or market Make-Up Gas at a percentage rate greater than se t forth in Subsection 2(e) above. The parties agree that this Gas Balancing Agreement shal l be the sole agreement between them concerning its subject matter.