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2004-110'.,j:\Our D~umefits\Ordinances\04kAixpor t Open Space Park Gas Lease Best Bid.doc ORDINANCE NO. d[~04--//~ AN ORDINANCE ALLOWING THE NEGOTIATION OF THE BEST BID FOR A CONTRACT FOR AN OIL AND GAS NON-DRILL SITE/POOLING AGREEMENT AT THE AIRPORT OPEN SPACE PARK WITH ENEXCO, INC. AND ALLOWING THE CITY MANAGER TO EXECUTE THE LEASE AS LONG AS THE LEASE IS IN SUBSTANTIALLY THE SAME FORM AS THE CITY'S STANDARD LEASE; AND PROVIDING AN EFFECTIVE DATE. WHEREAS, The City Council of the City of Denton has heretofore determined that it is advisable to lease for oil and gas purposes certain real property located at the Airport Open Space Park, Denton, Texas; and WHEREAS, in compliance with Chapter 71 of the Texas Natural Resources Code (the "Code") the City published notice of its intention to lease such real property for oil and gas purposes once a week for three consecutive weeks in a newspaper with general circulation and published in Denton County, Texas; and WHEREAS, in compliance with the Code, the City Council of the City of Denton held a public hearing under Chapter 71 of the Texas Natural Resources Code; and~ WHEREAS, Pursuant to the Code, the City of Denton desires to negotiate the lease of the property for oil and gas well development with the best bidder submitted by Enexco, Inc.; and WHEREAS, Enexco, Inc. desires to enter into lease negotiations for the land at the Airport Open Space Park for a non-drill site/pooling agreement for oil and gas well development and after negotiation, to enter into a lease for the land for oil and gas well development and to agree to pay to the City the agreed upon amounts; and WHEREAS, after negotiation the City desires to authorize the City Manager to execute the lease as long as the lease is in substantially the same form as the City's standard lease agreement for non-drill site/pooling agreements. NOW THEREFORE, THE COUNCIL OF THE CITY OF DENTON HEREBY ORDAINS: SECTION 1. Incorporation of Preamble. The above and foregoing preamble is incorporated into the body of this Ordinance as if copied herein in its entirety. SECTION 2. The City Manager or his designee are hereby authorized to negotiate a non-drill site/pooling oil and gas lease agreement between the City of Denton and Enexco, Inc. in return for the payment(s) as outlined in Attachment A for the approximately 42 acres at the Airport Open Space Park. SECTION 3. If any section, article, paragraph, sentence, clause, phrase or word in this Ordinance or application thereof to any person or circumstance is held invalid or unconstitutional by a Court of competent jurisdiction, such holding shall not affect the validity of the remaining portions of this Ordinance, and the City Council hereby declares it would have passed such remaining portions of this Ordinance despite such invalidity, which remaining portions shall remain in full 'l force and effect. SECTION 4. This ordinance shall become effective immediately upon its passage and approval. PASSED AND APPROVED this the 3~ day of /~./ , 2004. EULINE BROCK, MAYOR ATTEST: JENNIFER WALTERS, CITY SECRETARY APPROVED AS TO LEGAL FORM: HERBERT L. PROUTY, CITY ATTORNEY 2 EXHIBIT "A" CITY OF DENTON BID FORM GAS WELL DEVELOPMENT ON AIRPORT PARK PROPERTY , NON-DRILL. IN GfPO OLING AGREEMENT Description of property and lease: The lease will be a non-drilling/pooling agreement for the following Parks Airport Park An alternate bid of a portion of the Park may be considered. Minimum Standards of thc Bid: Please check each item that will be included in thc lease. primary term 0fnot more than three (3) years fi.om date of execution. · ,,~ A Commencement of Dfilling Clause to drill within the first 6 months. Include a proposal for a continuous development after initial well establishes production rate.. 7c~ A.royalty to lessor 1/5 oil and gas produced from said land. The royalty to be paid at the highest price in the area. A statement by the Lessee that the royalty to be paid the City is equal to the highest price paid by the Lessee tq any mineral owner in Denton, County; and that if the Lessee pays a mineral owner in Denton County, Texas a higher royalty percentage during thc term of this lease, the Lessee shall increase the royalty paid to 'the City so as t0 equal this higher amount. X~ An annual delay rental of $ 10. O0 per acre..(This is a 3 year Paid Up Lease) Shut-in payment of $20.00 per acre· Bonus money as specified by bidder. 42 acres X $ 200.00 = total bonus money bonus money as specified in the bid. $8,400.00 For A Development P lat'o r other drawing showing a d rill p lan and d rill sites t hat are not located on AIRPORT Pa~k must be submitted with this bid. The City reserves the right to award this bid based on both price and the most advantageous location of the drilhng locations and sites for pooling purposes. The successful bidder shall pay thc cost of the advertisement of the bid. -5- Bidders shall submit information of the bidder's reputation and quality of the bidder's oil and gas services including but not limited to the bidder's financial ability to provide the oil and gas servicesi safety record, compliance history and any other relevant information that the bidder submits to the city for the determination of best value. A letter from the Railroad Commission that the company is in good standing will .suffice. (see attached letter) The successful bidder shall comply with all requirements in the Code of Ordinances for the City of Denton, Texas. A copy may be obtained in the City Secretary's office or on the City ofDenton's website, www.cityofdenton.com. A bidder's conference will be held onFebruary25, 2004 at 10:00 a.m. at the City of- Denton Service Center Conference Room, 901-B Texas Street, Denton, Texas 76209. l~v~ An Oil and Gas lease will be negotiated within thirty (30) days after the successful bidder is selected. City shall allow the successful bidder to pool the lease, the land or minerals included in the lease, or any part of these with any other land, leases, minerals estates or parts of any of these to form a drilling or spacing unit for the 'exploration, development, and production ofoil and gas. The City will consider alternative bids on a portion of the Park lands, described, herein. By submitting a bid, each bidder agrees to waive and does hereby waive any claim the bidder has or. may have against the City of Denton, Texas, and the City's respective employees and representatives for the award of attorney fees, arising out of or in connection with the administration, evaluation; Or recommendation of any bid, waiver of any requirements under the Bid Documents, or the Contract Documents, acceptance or rejection of any bids, and award of the Bid. By submitting a bid, the bidder specifically waives any right to recover or be paid attorney's fees from the City of Denton, Texas, or any of the City's empIoyees and representatives under any of the provisions of the Texas Uniform Declaratory Judgments Act (Texas Civil Practice and Remedies Code, Section 37.001, et. seq., as amended). The bidder agrees that th/s is the intentional relinquishment of a presently existing known right. By execution and submission of this Bid, the Bidder hereby represents and warrants to the City of Denton that the Bidder I/as read and understands the Bid Documents and the Contract Documents and this Bid is made in accordance with the Bid Documents. Bidder acknowledges that it Understands all terms within the bid documents, which include the waiver provisions, and that it had the right to consult, with counsel regarding all of the above documents. -6- By submitting a bid, each bidde~ agrees to waive and does hereby waive any claim the bidder has or may have against the City of Denton, Texas and the City's employees, agents and officers, arising out of or in any way connected with the following: 1. the administration, evaluation or recommendation of any bid; waiver or deletion of any o f thc requirements under the B id Documents or the Contract Documents; 3. acceptance or rejection of any bids; and 4. award of the Bid or Lease. By submitting a bid, the bidder aCknoWledges that the bidder understands all terms of the bidding documents and consents to the bidding process and the possibility of a negative assessment. By submitting a bid, the bidder acknowledges and agrees that there was and is no disparity of bargaining power between the bidder and the City of Denton, Texas. The bidder agrees that this is the intentional relinquishment of the above listed presently existing rights. The City reserves the right to waive, delete or amend any of the requirem~th this bid and to reject any and ail bids. ~/~' ~c~'~~ c. ' Title: PRESIDENT ENEXCO, INC. Company 3131 TURTLE CREEK #1210 DALLAS, TX 75219 OILAiND GAS.LEASE BID INSTRUCTIONS The City of Denton intends to lease property for oil and gas development only, as described below: Airport Open Space Airport Park This lease is for a non-drill site/pooling agreement for Airport Open Space Property or Airport Park Said lease shall be awarded, at the discretion of the City Council, to the highest and best bidder submitting a bid in accordance with terms as outlined below: It is. the intention of the Council to award the lease to the highest and best bidder submitting a bid at such public hearing on March 23, 2004; provided that, if in the judgment of the Council the bids submitted' do not represent the fair value of such lease, :the Council will reject all bids, No bids will be considered unless submitted at said hearing. The Council reserves the right to reject any and all bids for such lease. However, should any bid 'be accepted, such lease Shall be executed upon a form acceptable to the Council and the Lessee-therein and shall provide: The Council shall determine the highest and best bidder according to the terms submitted for the mineral lease, the reputation and quality Of the bidder's oil and gas' services including but not limited to the bidder's financial ability to provide the oil and gas services, safety record, compliance history and any other relevant information that the bidder submits to the city for consideration. for a primary term of not more than three (3) years from date of execution. Drilling shall commence in 6 months. Continuous drilling shall be required. 2. for a royalty to be paid Lessor 1/5 said land; of all oil and gas produced from o a statement by the Lessee that the royalty to be paid the City is equal to the highest p~ce paid by the Lessee to any mineral owner in Denton, County; and that if the Lessee pays a mineral owner in Denton County, Texas a higher royalty percentage during the term of this lease, the Lessee shall increase the royalty paid to the City so as to equal this higher amount. for an annual delay rental of not less than Paid Up Lease); $10.00 per acre. (This is a 3 year $20.00 for a shut-in payment of not less than per acre; for bonus money as specified in the bid.and with the minimum to be $ 200.OOper acre; and the following provisions: 'Lessee agrees and obligates itself to restore the surface of ail land that might be damaged by its operation hereunder as nearly as possible to its original conditions as s eon a s it has fin/shed with t he u se o f t he a rea w here such damages occur. Lessee must further agree to indemnify Lessor against any and all claims upon the part of third persons for damages or injuries of any kind or character that might arise fi:om the Lessee's operations hereunder, Bo Lessor 'prohibits the surface disPosal of salt water or oil field waste on the hereinabove described tract of land. The use Of potable water from the leased:premises for water flooding or 'secondary recovery is expressly prohibited and the use of such water is restricted solely to ordinary exploration and production activities. Lessee must conform to all ordinances regulating oil and gas drilling contained in the Code of the City of Denton, Texas. Ingress and egress to drill sites shall not b e allowed through the Airport Open Space. Lessee must satisfy themselves as to title and acquire all necessary abstracts and other title information solely at their own expense; the lease form shall Contain no general warranty of title by Lessor. A Development Plat or other drawing showing the drill plan and drill sites must be submitted with the bid. Additional gas well sites may be available on the west side of the airport property subject to the approval by ttie City. The City reserves the right to award this bid based on both price and the most advantageous location of the drilling locations and sites. An Oil and Gas Non-Drill Site/Pooling Agreement will be negotiated within thirty (30) days after the successful bidder is selected. The oil and gas lease must be approved by thc City Council. I. The successful bidder shall pay the bid advertisement cost. K. The City shall allow the successful bidder to pool the lease, the land or minerals -9- included in thp lease, or any part of these with any other land, leases, minerals estates or parts of any of these to form a drilling or spacing unit for the exploration, development, and production of oil and ga~. Any such arrangement will prohibit surface use of the Airport Open Space. By submitting a bid, each bidder agrees to waive and does hereby waive any claim the bidder has or may have against the City of Denton, Texas, and the City's respective employees and representatives for the award o f attorney fees, arising out of or in connection with the admin/stration, evaluation, or recommendation of any bid, waiver of any requirements under the Bid Documents, or the Contract Documents; acceptance or rejection of any bids, and award of the Bid. By submitting a bid, the bidder specifically waives any right to recover or be paid attomey's fees from the City of Denton, Texas, or any of the City's employees and representatives under any of the p revisions o fthe Texas Unifonn Declaratory Judgments Act (Texas Civil Practice and Kemedies Code, Section 37.001, et. seq., as amended). Th6 bidder agrees that this is the intentional relinquishment of a presently existing known right. By execution and submission Of this Bid, the. Bidder hereby represents and warrants to the City of Denton' that the Bidder has read and understands the Bid Documents and the Contract Documents and this Bid is made in accordance with the Bid D0cuments~ Bidder acknowledges that it understands all terms within the bid documents, which include the waiver provisions, and that it had the right to consult with counsel regarding all of the above documents. By submitting a bid, each bidder, agrees to waive and does hereby waive any claim the bidder has or may have against the City ofDentqn, Texas and the City's employees, agents and officers, arising out of or in any way connected with the following: I. the administration, evaluation or recommendation of any bid; waiver or deletion of any of the requirements under the Bid Documents or the Cent/act Documents; 3. acceptance or rejection of any bids; and 4. award of the Bid or Lease. By submitting a bid, the bidder acknowledges that the bidder understands ail terms of the bidding documents and consents to the bidding process and the -10- possibility of a negative assessment. By submitting a bid, the bidder acknowledges and agrees that there was and is no disparity of bargaining power between the bidder and the City of Denton, Texas. The bidder agrees that this is the intentional relinquishment of the above listed presently existing rights. N. The City reserves the right to waive, delete or amend any of the requirements connected with this bid. O. Bids shall be received by the Purchasing Agent, City of Denton Service Center, 90lB Texas Street, Denton, Texas 76209 on March 9, 2004 at 2:00 p.m.. Any bid received after the specified time of 2:00 p.m. will not be considered. P. Bids shall be submitted on the City of Denton Bid Form. The bidder may attach as many additional pages as they deem necessary. Bidders may contact the City of Denton, Tom Shaw, Director of Purchasing Agent, City of Denton Service Center, 901-B Texas Street, Denton, Texas .76209 at (940) 349-7100, for clarifications and questions. A bidder's conference will be held onFebmary 25, 2004 at 10:00 p.m. at the City of Denton Service Center · Conference Room, 901-A Texas Street, Denton, Texas 76209. ~:\Our Documents\Gas Well Documents\04~Enexco Gas Well Bid Pooling Agreement.doc OIL, GAS AND MINERAL LEASE NON-DRILL SITE/POOLING AGREEMENT THIS OIL, GAS AND MINERAL LEASE (the "Lease") is made this ~,,c~ day of .~. _~.o 2004 (the "Effective Date"), between The City of Denton, Denton, Texas, acting herein by and through its City Manager, Michael A. Conduff, duly authorized by resolution to execute this Lease ("LESSOR"), whose address is: 215 East McKinney, Denton, Texas 76201 and Enexco, Inc. ("LESSEE"), whose address is: 3131 Turtle Creek, Suite 1210, Dallas, Texas .Zip Code 75219 WITNESSETH: 1. Lease of Land. LESSOR in consideration of Eight thousand Four hundred and 00/100 Dollars ($ 8,400.00 ), in hand paid, of the royalties herein provided, and of the agreements of LESSEE herein contained, hereby leases and lets exclusively unto LESSEE for the purpose of a non-drill site/pooling agreement for investigating, exploring, prospecting, drilling and mining for and producing oil, gas and all associated minerals, to produce, save, take care of, treat, transport and own said products, the following described land in Denton County, Texas, to-wit: Airport Open Space Legal Description: BEGINNING 300.0 feet North 2 degrees 12 minutes west and 100.0 feet north 22 degrees 40 minutes west of the northwest comer of a 10.154 acre tract conveyed to Floyd Cook by J. Newton Rayzor in deed recorded in Volume 475, Page 530 of the Deed Records of Denton County, Texas, said comer being in the east line of paved County Airport Road. THENCE along the east line of said road north 22 degrees 40 minutes west a distance of 912.50 feet to iron pin for comer; THENCE south 86 degrees 10 minutes east a distance of 730.00 feet to iron pin for comer; THENCE south 3 degrees 50 minutes west a distance of 117.00 feet to iron pin for comer; THENCE south 63 degrees 36 minutes east a distance of 1695.75 feet to iron pin for P.C. of curve to right; THENCE along arc of curve (having a central angle of 64 degrees 22 minutes; a radius of 346.40 feet, a tangent of 218.00 feet and a long chord of 369.01 feet) a distance of 409.35 feet to iron pin for P.T. of curve; THENCE south 0 degrees 46 minutes west a distance of 671.81 feet to iron pin for comer in the North line of Farm Road No. 1515; THENCE north 89 degrees 14 minutes west along said Farm Road a distance of 597.00 feet to iron pin for comer; THENCE north 0 degrees 46 minutes east a distance of 350.00 feet to iron pin for P.C. of curve to left; THENCE along arc of curve (having a central angle of 76 degrees 14 minutes, a radius of 318.65 feet, tangent of 250.00 feet, and a long chord of 393.36 feet) a distance of 423.97 feet to iron pin P.T. of curve; THENCE north 75 degrees 28 minutes west a distance of 559.60 feet to iron pin for comer; THENCE north 60 degrees 59 minutes west a distance of 640.00 feet to iron pin for comer; THENCE south 67 degrees 24 minutes west a distance of 150.00 feet to iron pin for comer, the place of beginning, containing 41.629 acres of land. For all purposes of this Lease, said land is estimated to comprise 41.629 acres, whether it actually comprises more or less. See drawing (Attachment A). However, there is expressly excepted from this Lease and reserved to LESSOR, its successors and assigns, all vanadium, uranium, plutonium, thorium, fissionable minerals and all other minerals of every kind and character in, on and under the land, except only oil, gas, casinghead gas and their byproducts and such other hydrocarbon substances, carbon dioxide and sulfur as are necessarily produced with and incidental to the production of oil and gas, or either of them. 2. Reservation and Surface Use Prohibition. There is hereby excepted and reserved to LESSOR the full use of the land covered hereby and all rights with respect to the surface and subsurface thereof for any and all purposes and all minerals except those expressly leased for pooling purposes and only to the extent herein leased to LESSEE. LESSOR reserves and excepts from this Lease all of the surface of the land described in paragraph 1, and LESSEE agrees that it will not conduct drilling operations or any other operations or activities of any nature on the surface of such land. 3. Primary Term: This is a paid up lease and subject to the other provisions here contained, this Lease shall be for a term of three (3) years from the Effective Date (the "Primary Term") and as long thereafter as oil, gas and other minerals are produced in paying quantities from said land or land with which said land is pooled hereunder. Lessee agrees to commence operations on an initial well within one hundred eighty (180) days from the effective date of this lease. 4. Royalt,y: As royalty, LESSEE covenants and agrees to pay: a. As a royalty on oil (including all hydrocarbons produced in liquid form at the mouth of the well and also condensate, distillate, and other liquid hydrocarbons recovered from oil or gas mn through a separator or similar equipment)__l/5 of the gross production or the market value thereof, at the option of LESSOR, the value to be gravity for the field where produced and when run, or (ii) the highest market price offered or paid for the field where produced and when run, or (iii) the gross proceeds of the sale whichever is greater. LESSEE agrees that before any gas produced from the land is sold, used or processed in a plant, it will be run, free or cost to the parties entitled to royalties, through an adequate oil and gas separator of conventional type or other equipment at least as efficient to the end that all liquid hydrocarbons recoverable from the gas by such means will be recovered. Upon written consent of the royalty owners, the requirement that gas be run through a separator or other equipment may be waived upon terms and conditions as prescribed by them. b. As a royalty on any gas, which is defined as ail hydrocarbons and gaseous substances not defined as oil in subparagraph 4.b. above, produced from any well on the land (except as provided in this Lease with respect to gas processed in a plant), 1/5 of the gross production or the market value thereof, at the option of LESSOR, the value to be based on the highest market price paid or offered to a third party LESSEE under a gas purchase agreement negotiated at arms' length for gas of comparable quality and quantity in the general area where produced and when run, or the gross price paid or offered to the producer, whichever is greater. c. As a royalty on any gas processed in a plant, 1/5 of the residue gas and the liquid hydrocarbons extracted or the market value thereof, at the option of LESSOR. The royalty percentage shall be applied to 100% of the total plant production of residue gas attributable to gas produced from this Lease, and on 50% or that percent accruing to LESSEE, whichever is greater, of the total plant production of liquid hydrocarbons attributable to the gas produced from this Lease; except if liquid hydrocarbons are recovered from gas processed in a plant in which LESSEE or an affiliate owns an interest, then the royalty percentage for liquid hydrocarbons shall be 50% or the highest percent accruing to a third party processing gas through the plant under a processing agreement negotiated at arms' length. The respective royalties on residue gas and on liquid hydrocarbons shall be determined by (i) the highest market price paid or offered for any gas (or liquid hydrocarbons) of a comparable quality in the general area or (ii) the gross price paid or offered for such residual gas, or the weighted average gross selling price for the respective grades of liquid hydrocarbons, F.O.B. the plant in which the gas is processed, whichever is greater. d. On ail substances, including, but not limited to carbon dioxide and sulfur, permitted to be produced from the land by virtue of this Lease, and products, except liquid hydrocarbons, produced or manufactured from gas, and for which no royalty is otherwise specified in this Lease, LESSOR shall have and be entitled to the royalty percentage of that produced or saved to be delivered to LESSOR, free of all costs, or, at the option of LESSOR, which may be exercised from time to time, LESSEE shall account to LESSOR for the royalty percentage of the market value thereof, which market value shall be deemed to be the greater of (i) the highest market price of each product for the same month in which the product is produced, or (ii) the average gross sale price of each product for the same m e. Accounting and payment to LESSOR of royalties from the production of oil and gas from any well shall commence no later than ninety (90) days after the date the well commences first production. Thereafter, ail accountings and payments of royalties shail be made on or before the last day of the caiendar month following the calendar month in which the production occurred. Should LESSEE at any time fail to make royaity payments to LESSOR on or before the last day of the third calendar month following the caiendar month in which the production occurred, this Lease shail automaticaily terminate unless the payments are made within thirty (30) days after written notice is given to LESSEE. Any royalties provided for in this Lease which are not paid to LESSOR within the applicable time periods specified in this paragraph shail accrue interest at the same rate as judgments under the laws of the State of Texas from due date until paid. Acceptance by LESSOR of royalties which are past due shall not act as a waiver or estoppel of LESSOR'S right to receive or recover any and ail interest due under the provisions of this paragraph unless the written acceptance or acknowledgment by LESSOR to LESSEE expressly so provides. LESSEE shall pay ail reasonable attorney's fees incurred by LESSOR in connection with any lawsuit in which LESSOR is successful in recovering royaities or interest or in terminating this Lease due to LESSEE'S failure to pay royaities within the periods set forth above. LESSOR'S royalty shail never bear, either directly or indirectly, any part of the costs or expenses of producing, gathering, dehydrating, compressing, transporting, manufacturing, processing, treating or marketing of the oil or gas from the land, nor any part of the costs of constructing, operating or depreciating any plant or other facilities or equipment for processing or treating oil or gas produced from the land. 5. Shut-In Gas. If LESSEE drills a well on land which the LESSOR has permitted to be pooled herewith, which well is capable of producing gas but such well is not being produced, and this Lease is not being maintained otherwise as provided herein, this Lease shall not terminate, whether it being during or after the Primary Term (unless released by LESSEE) and it nevertheless shail be considered that oil and gas is being produced from the land covered by this Lease. When, at the expiration of the Primary Term or any time or times thereafter, the Lease is continued in force in this matter, LESSEE shail pay or tender as royalty to the parties who at the time of such payment would be entitled to receive royaity hereunder if the well is producing, or deposit directly with LESSOR at its address shown herein, a sum equal to $20.00 for each gross acre of land subject to this Lease at the time such payment is made. The first payment of such sum shail be on or before the first day of the caiendar month at the expiration of ninety (90) days from the date the Lease is not otherwise maintained, and thereafter subsequent payments may be made at annual intervais. LESSEE'S failure to pay or tender or properly or timely pay or tender such sum as royaity shail render LESSEE liable for the amount due and shail operate to terminate this Lease automaticaily. 6. Limit of Shut-In: Notwithstanding anything to the contrary in this Lease, it is expressly agreed and provided that this Lease cannot and shail not be extended beyond the Primary Term by reason of the shut-in well provisions of Paragraph 5 for any single period of more than two (2) consecutive years or more than three (3) years in the aggregate. 7. Pooling: Subject To the reservations and surface use prohibitions of paragraph 2 of this Lease, LESSEE, at its option, is hereby given the right and Power to pool or combine the acreage covered by this lease or any portion thereof as to oil and gas, or either of them, with any other land covered by this lease, and/or with any other land, lease or leases in the immediate vicinity thereof to the extent hereinafter stipulated, when in LESSEE'S judgment it is necessary or advisable to do so in order to properly to explore, or to develop and operate said leased premises in compliance with the spacing rules of the Railroad Commission of Texas, or other lawful authority, or when to do so would, in the judgment of LESSEE, promote the conservation of oil and gas in and under and that may be produced from said premises. Units pooled for oil hereunder shall not exceed forty (40) acres, plus a tolerance of 10 percent (10%) thereof, each in area, and units pooled for gas hereunder shall not exceed in area 640 acres each plus a tolerance of ten percent (10%) thereof, provided that should governmental authority having jurisdiction proscribe the creation of units larger than those specified, for the drilling or operation of a well at a regular location or for obtaining maximum allowable from any well to be drilled, drilling or already drilled, units thereafter created may conform in size with those prescribed by governmental regulations. LESSEE under the provisions hereof, may pool or combine acreage covered by this lease or any portion thereof as above provided as to oil in any one or more strata and as to gas in any one or more strata. The units formed by pooling as to any stratum or strata need not conform in size or area with the unit or units in to which the lease is pooled or combined as to any other stratum or strata, and oil units need not conform as to area with gas units. The pooling in one or more instances shall not exhaust the rights of the LESSEE hereunder to pool this lease or portions thereof into other units. LESSEE shall file for record in the appropriate records of the county in which the leased premises are situated an instrument describing and designating the pooled acreage as a pooled unit; and upon such recordation of the unit shall be effective as to all parties hereto, their heirs, successors, and assigns, irrespective of whether or not the unit is likewise effective as to all other owners of surface mineral, royalty or other rights in land included in such unit. LESSEE may at its election exercise its pooling option before or after commencing operations for or completing an oil or gas well on the leased premises, and the pooled unit may include but is not required to include, land or leases upon which a well capable of producing oil or gas in paying quantities has theretofore been completed or upon which operations for the drilling of a well for oil and gas have theretofore been commenced. In the event of operations for drilling on or production of oil or gas from any part of a pooled unit which includes all or a portion of the land covered by this lease, regardless of whether such operations for drilling were commenced or such production was secured before or after the execution of this instrument or the instrument designating the pooled unit, such operations shall be considered as operations for drilling on or production of oil or gas from land covered by this lease whether or not the well or wells be located on the premises covered by this lease and such event operations for drilling shall be deemed to have been commenced on said land within the meaning of paragraph 8 of this lease; and the entire acreage constituting such unit or units, as to oil and gas, or either of them, as herein provided, shall be treated for all purposes, except the payment of royalties on production from the pooled unit, as if the same were included in this lease. For the purpose of computing the royalties to which owners of royalties and payments out of production and each of them shall be entitled on production of oil and gas, or either of them, from the pooled unit, there shall be allocated to the land covered by this lease and included in said unit (or to each separate tract within the unit if this lease covers separate tracts within the unit) a pro rata portion of the oil and gas, or either of them, produced from the pooled unit after deducting that used for operations on the pooled unit. Such allocations shall be on an acreage basis--that is to say, there shall be allocated to the acreage covered by this lease and included in the pooled unit (or to each separate tract within the unit if this lease covers separate tracts within the unit) that pro rata portion of the oil and gas, or either of them, produced from the pooled unit which the number of surface acres covered by this lease (or in each such separate tract) and included in the pooled unit bears to the total number of surface acres included in the pooled unit. Royalties hereunder shall be computed on the portion of such production, whether it be oil and gas, or either of them, so allocated to the land covered by this lease and included in the unit just as though such production was from such land. The production from an oil well will be considered as production from the lease or oil pooled unit from which it is producing and not as production from a gas pooled unit; and production from a gas well will be considered as production from the lease or gas pooled unit from which it is producing and not from an oil pooled unit. The formation of any unit hereunder shall not have the effect of changing the ownership of any shut-in production royalty which may become payable under this lease. If this lease now or hereafter covers separate tracts, no pooling or unitization of royalty interest as between any such separate tracts is intended or shall be implied or result merely from the inclusion of such separate tracts within this lease, but LESSEE shall nevertheless have the right to pool as provided above with consequent allocation of production as above provided. As used in this paragraph 7, the words "separate tract" mean any tract with royalty ownership differing, now or hereinafter, either as to parties or amounts from that as to any other part of the leased premises. 8. Termination. a. If, at the expiration of the Primary Term, LESSEE is not engaged in the actual drilling of a well under the terms of this Lease or if LESSEE has completed or abandoned a well on the land within thirty (30) days prior to expiration of the Primary Term and is not, at the expiration of ninety (90) days after the date or completion or abandonment of the well, engaged in the actual chilling of another well under the terms of this Lease, this Lease shall then terminate as to all of the land, save and except the following: Each well producing oil or being reworked, and classified as an oil well under the roles and regulations of the Railroad Commission of Texas, together with forty (40) acres around each such well (an "Oil Unit"). Each well producing gas (or capable of producing gas with all shut-in royalty having been paid thereon) or being reworked, and classified as a gas well under the roles and regulations of the Railroad Commission of Texas, together with the one hundred sixty (160) acres around each such well (a "Gas Unit"). b. Each Oil Unit or Gas Unit shall be in as near the form of a square as reasonably practicable considering the boundary of the land and the necessity of a legal location of the well on the unit. Notwithstanding the foregoing, if the Railroad Commission of Texas or other authority having jurisdiction, by role or order prescribes a larger or a smaller number of acres for the purposes of securing the maximum allowable production, each unit shall be increased or decreased in size as necessary to conform to the number of acres prescribed by the rule or order, but if the role or order provides for or permits optional sized tracts or spacing, the unit shall be the smallest tract permitted by the rule or order. c. If, at the expiration of the Primary Term, LESSEE is engaged in the actual drilling of a well under the terms of this Lease or if LESSEE has completed or abandoned a well on the land within thirty (30) days prior to expiration of the Primary Term and is, at the expiration of ninety (90) days after completion or abandonment of the well, engaged in the actual drilling of another well under the terms of this Lease this Lease shall not terminate so long as LESSEE pursues the drilling of the well with reasonable diligence to completion or abandonment and so long as LESSEE commences the actual drilling of additional and successive wells under the terms of this Lease at intervals not exceeding ninety (90) days between completion of a well as a producer or dry hole and commencement of actual drilling of the next well under the terms of this Lease. If and when LESSEE fails to commence the actual drilling of a well within the applicable interval (or within the extended time provided in subparagraph 8.d. below, this Lease shall then terminate to all of the land, save and except the Oil Units and Gas Units provided in subparagraph 8.a. above. Upon expiration of the Primary Term or the cessation of the continuous drilling program set forth herein, whichever is later, this Lease shall also terminate as to all depths below each unit retained as to depths below a depth of one hundred feet (100') beneath the deepest producing horizon or zone for each unit. d. If LESSEE, in the conduct of actual drilling operations under this Lease after the expiration of the Primary Term, commences the actual drilling of any next succeeding well within less than the ninety (90) day time interval specified in subparagraph 8.c. and thus speeds up the development of the land, LESSEE shall have credit in time for the accelerated development and may, in the conduct of subsequent actual drilling operations, take advantage of the credit in time on a cumulative basis and thus extend the time for the commencement of actual drilling of any subsequent well or wells required to be drilled under the provisions of this Lease in order to prevent termination of this Lease. Within ten (10) days of the commencement of the actual drilling of each well under the terms of this Lease, LESSEE shall give LESSOR written notice of the date of commencement. Within ten (10) days after the completion or abandonment of each well under the terms of this Lease, LESSEE shall give LESSOR written notice of the date of completion or abandonment and also of the time credit, if any claimed by LESSEE as a result of having commenced the actual drilling of the well within less than the required interval. If LESSEE falls to timely so notify LESSOR in any of these respects, LESSEE shall not be entitled to any credit in time for accelerated development. Nothing contained in this paragraph shall relieve LESSEE of any offset obligation arising by implication or under the terms of this Lease, but any well drilled by LESSEE to satisfy an offset obligation will entitle LESSEE to the privileges of this paragraph. 9. Removal of Equipment. Subject to the surface use prohibitions of paragraph 2, LESSEE shall have the right at any time during and for one hundred eighty (180) days after the expiration of this Lease to remove all casing. Thereafter, it shall be deemed abandoned to LESSOR. If LESSEE falls to remove such property, casing and fixtures within such 180 day period, at Lessor's option, ownership of the same will vest in LESSOR, LESSOR'S successors and assigns or LESSOR, at its option, may require the removal of said equipment in addition to all other remedies to which LESSOR is entitled under law. 10. Assignment. LESSEE shall not assign this lease without the written consent of LESSOR. The assignment of this Lease by LESSEE, or any successor LESSEE, shall not relieve LESSEE, or any such successor, from its obligations hereunder. LESSOR may, unless it agrees to the contrary, look to LESSEE and/or any successor of LESSEE for performance of any one or more of such obligations 11. Title. LESSOR does not warrant or agree to defend the title of the lands covered hereby. LESSEE takes this Lease without warranty of title either express or implied. If LESSOR owns an interest in the oil, gas and minerals leased hereby less than the entire fee simple estate, then the royalties, or other monies accruing from any part of the land to which this Lease covers less than such full interest shall be paid to LESSOR only in the proportion which LESSOR'S interest therein, if any, bears to the whole and undivided fee simple mineral estate therein. It is the sole responsibility of LESSEE to determine the LESSOR's mineral interest. The bonus payment paid for this Lease shall be deemed to be final if no title problems are submitted for resolution within ninety (90) days of the Effective Date. 12. Force Majeure: When drilling, production or other operations under the terms of this Lease or land pooled with such land, or any part thereof are prevented, delayed or interrupted by fire, storm, flood, war, rebellion, insurrection, sabotage, riot, strike, or as a result of some law, order, role, regulation or necessity of governmental authority, either State or Federal, the Lease shall nevertheless continue in full force and effect and be extended for the period such drilling, production and other operations are so prevented, delayed or interrupted. LESSEE shall not be liable for breach of any express or implied covenants of this Lease when drilling, production or other operations are so prevented, delayed or interrupted, except that nothing in this paragraph 12 shall be construed to suspend the payment of delay rentals, shut-in royalty or any other amount otherwise required to maintain this Lease in effect. 13. Designation of Gas Unit. a. Upon completion of the first well as a producer of oil and/or gas in paying quantities (whether the first or a subsequent well drilled), LESSEE shall designate an approximately sized drilling unit around said first producing well, all out of the above described property, by filing a written designation in the Deed Records of Denton County Texas and shall provide LESSOR with a copy of such unit designation. b.. If a second well is completed as a producer of gas in paying quantities, LESSEE shall again designate an approximately sized drilling unit around said second producing well, all out of the above described property, by filing a written designation in the Deed Records of Denton County, Texas and shall provide LESSOR with a copy of such unit designation. LESSEE shall designate all drilling units in a fair and reasonable manner so that the remaining acreage not included in the drilling units is capable of being drilled or pooled with other lands. All designations of units as provided in this paragraph 13 shall be in accordance with and subject to the provisions of paragraph 8 above. 14. Indemnifications and Insurance. LESSEE shall provide or cause to be provided the insurance described below for each well drilled under the terms of this Lease, such insurance to continue until the well is abandoned and the site restored. Such insurance shall provide that LESSOR shall be a co-insured, without cost, and that said insurance can not be canceled or terminated without thirty (30) days prior notice to LESSOR and ten (10) days notice to LESSOR for nonpayment of premiums. a. General Requirements. Indemnification and Express Negligence Provisions. LESSEE shall expressly release and discharge, all claims, demands, actions, judgments, and executions which it ever had, or now have or may have, or assigns may have, or claim to have, against the LESSOR, it agents, officers, servants, successors, assigns, sponsors, volunteers, or employees, created by, or arising out of personal injuries, known or unknown, and injuries to property, real or personal, or in any way incidental to or in connection with the performance of the oil and gas drilling and production performed by the LESSEE under this lease and the LESSEE shall fully defend, protect, indemnify, and hold harmless the LESSOR, and/or its departments, agents, officers, servants, employees, successors, assigns, sponsors, or volunteers from and against each and every claim, demand, or cause of action and any and all liability, damages, obligations, judgments, losses, fines, penalties, costs, fees, and expenses incurred in defense of the LESSOR, and/or its departments, agents, officers, servants, or employees, including, without limitation, personal injuries and death in connection therewith which may be made or asserted by LESSEE, its agents, assigns, or any third parties on account of, arising out of, or in any way incidental to or in connection with the performance of the oil and gas well drilling and production performed by the LESSEE under this lease and, the LESSEE agrees to indemnify and hold harmless the LESSOR, and/or its departments, and/or its officers, agents, servants, employees, successors, assigns, sponsors, or volunteers from any liabilities or damages suffered as a result of claims, demands, costs, or judgments against the LESSOR and/or, its departments, it's officers, agents, servants, or employees, created by, or arising out of the acts or omissions of the LESSOR occurring on the drill site or operation site in the course and scope of inspecting and permitting the gas wells INCLUDING, BUT NOT LIMITED TO, CLAIMS AND DAMAGES ARISING 1N WHOLE OR IN PART FROM THE NEGLIGENCE OF THE LESSOR OCCURRING ON THE DRILL SITE OR OPERATION SITE IN THE COURSE AND SCOPE OF ITS DUTIES UNDER THIS LEASE.. IT IS UNDERSTOOD AND AGREED THAT THE INDEMNITY PROVIDED FOR IN THIS SECTION IS AN INDEMNITY EXTENDED BY THE LESSEE TO INDEMNIFY AND PROTECT THE LESSOR AND/OR ITS DEPARMENTS, AGENTS, OFFICERS, SERVANTS, OR EMPLOYEES FROM THE CONSEQUENCES OF THE NEGLIGENCE OF THE CITY OF DENTON, TEXAS AND/OR ITS DEPARTMENTS, AGENTS, OFFICERS, SERVANTS, OR EMPLOYEES, WHETHER THAT NEGLIGENCE IS THE SOLE OR CONTRIBUTING CAUSE OF THE RESULTANTANT INJURY, DEATH, AND/OR DAMAGE. b. All policies shall be endorsed to read "THIS POLICY WILL NOT BE CANCELLED OR NON-RENEWED WITHOUT 30 DAYS ADVANCED WRITTEN NOTICE TO THE OWNER AND THE C1TY EXCEPT WHEN THIS POLICY IS BEING CANCELLED FOR NONPAYMENT OF PREMIUM, IN WHICH CASE 10 DAYS ADVANCE WRITTEN NOTICE IS REQUIRED". c. Liability policies shall be written by carders licensed to do business in Texas and with companies with A: VIII or better rating in accordance with the current Best Key Rating Guide, or with nonadmitted carriers that have a financial rating comparable to carders licensed to do business in Texas approved by the City. d. Liability policies shall name as "Additional Insured" the city and its officials, agents, employees, and volunteers. e. Certificates of insurance must be presented to the City evidencing all coverages and endorsements required by this Section 35-508,~and the acceptance of a certificate without the required limits and/or coverages shall not be deemed a waiver of these requirements. f. Claims made policies will not be accepted except for excess policies or unless otherwise provided by this Article. g. Required Insurance Coverages 1. Commercial General Liability Insurance. Coverage should be a minimum Combined Single Limit of $1,000,000 per occurrence for Bodily Injury and Property Damage. This coverage must include premises, operations, blowout or explosion, products, completed operations, blanket contractual liability, underground property damage, broad form property damage, independent contractors protective liability and personal injury. 2. Environmental Impairment (or Seepage and Pollution) shall be either included in the coverage or written as separate coverage. Such coverage shall not exclude damage to the lease site. If Environmental Impairment (or Seepage and Pollution) Coverage is written on a "claims made" basis, the policy must provide that any retroactive date applicable precedes the effective date of the issuance of the permit. Coverage shall apply to sudden and non-sudden pollution conditions resulting from the escape or release of smoke, vapors, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste material or other irritants, contaminants or pollutants. 3. Automobile Liability Insurance. Minimum Combined Single Limit of $500,000 per occurrence for Bodily Injury and Property Damage. Such coverage shall include owned, non-owned, and hired vehicles. 4. Worker's Compensation Insurance. In addition to the minimum statutory requirements, coverage shall include Employer's Liability limits of at least $100,000 for each accident, $100,000 for each employee, and a $500,000 policy limit for occupational disease, and the insurer agrees to waive rights of subrogation against the city, its officials, agents, employees, and volunteers for any work performed for the city by the LESSEE. 5. Excess (or Umbrella) Liability Insurance. Minimum limit of $10,000,000 covering in excess of the preceding insurance policies. 6. Control of Well Insurance. a. Minimum limit of $5,000,000 per occurrence. b. Policy shall cover the Cost of controlling a well that is out of control, Redrilling or Restoration expenses, Seepage and Pollution Damage. Damage to Property in the LESSEE's Care, Custody, and Control with a sub-limit of $500,000 may be added. 15. Offset Well Requirement. In the event a well or wells producing oil and gas in any quantities that should be brought in by LESSEE or any other LESSEE on adjacent lands and within 330 feet of the land or lands pooled, by permission of LESSOR, with such lands, LESSEE agrees to drill such offset wells as a reasonably prudent LESSEE would drill under the same or similar circumstances. 16. Location of Drilling Activit¥~ Pipelines and Equipment: No drilling activity shall be conducted on and no pipelines, equipment or other structures shall be placed on or under any pavement, concrete or asphalt or any other improved surface area situated on the above described land. The location of any pipelines installed by LESSEE shall be approved in advance by LESSOR, shall not be located on the lands covered by this Lease, and shall be situated along routes that least interfere with LESSOR's existing or future use of the surface. No equipment or roads shall be built on city property. When required by LESSOR, LESSEE will bury all pipelines at a depth of six feet (6'), and the location of wells shall comply with Chapter 29, Fire Code, of the Code of Ordinances of the City of Denton, as amended, and all other applicable laws; provided, however, in no event will any such activities or operations be conducted on the surface of the lands covered by this Lease. 17. Compliance with Laws: LESSEE shall comply with all applicable roles, regulations, ordinances, statutes and other laws in connection with any drilling, producing or other operations under the terms of this Lease, including, without limitation, the oil and gas well regulations of the City of Denton. 18. Lease Assignment: The assignment of this Lease by LESSEE, or any successor LESSEE, shall not relieve LESSEE, or any such successor, from its obligations hereunder. LESSOR may, unless it agrees to the contrary, look to the LESSEE and/or any successor of LESSEE for performance of any one or more of such obligations. 19. Water: LESSEE shall not use any water in, on, or under the above-described land. 20. Diligent~ Good Faith Operations. Each well drilled under this Lease shall be drilled with reasonable diligence and in good faith and in a good and workmanlike manner in a bona fide attempt to product oil, gas and associated minerals therefrom. 21. Captions and Headings: The captions and headings in this Lease are for convenience only and shall not modify, change, amend, alter, or affect the tree meaning of any paragraph, sentence, clause, phrase, or words herein. 22. Memorandum of Lease. LESSOR and LESSEE agree that a memorandum of lease shall be filed of record in the Official Records of Denton County, Texas, evidencing this Lease and the provisions contained in such memorandum to the parties hereto, the land covered by the Lease, the term of the Lease and notice provisions informing the public of the existence of the Lease. 23. FAA Rules and Regulations. No drilling activity or any other activity shall be conducted on any portion of the above described land in contravention of any Federal Aviation Administration ("FAA") role or regulation or which interferes with any future expansion plan for runways or taxiways. LESSEE shall make inquiry with the proper officials of the FAA and obtain all necessary approvals, consents or waivers prior to the location of any drill site on the subject property to verify compliance with all applicable FAA roles or regulations. LESSEE shall provide LESSOR with copies of all waivers or other documentation issued by the FAA indicating approval of well site locations or any other operations prior to the commencement of operations. 24. Subordination and Stipulations Required by FAA. This Lease recognizes that the Denton Municipal Airport was acquired and developed with aid and/or grant of land from the United States. Copies of such grants are available for review at the office of the City Manager in Denton. These grants include a number of obligations and commitments to the general and flying public, to the State of Texas, and to the United States. In addition to the above general obligations and commitments, this Lease is subject and subordinate to and is controlled by all the provisions, stipulations, covenants, and agreements in that certain indenture by and between the United States of America and the LESSOR and it is understood that the LESSEE agrees to abide by and enforce all of the provisions, stipulations, covenants, and agreements incorporated in the foregoing instrument the same as if set out in full herein. This Lease is subject to approval by the FAA and shall be effective only as of the date of such approval. The following agreements and understandings are specifically enumerated to comply with FAA stipulations: a. It is further especially agreed by the parties hereto that no structures or obstructions, temporary or otherwise, shall be erected which will be in violation of the Federal Aviation Regulations Part 77 (Criteria for Determining Obstructions to Air Navigation), unless otherwise approved in writing by the FAA. b. Without the prior specific approval of the FAA no surface operations shall be conducted upon any of the lands covered by this Lease closer than the distances set forth in the sub- paragraph above, or within the safety areas of said improvements, including ingress and egress of vehicular traffic. c. It is specifically understood and agreed that the LESSEE and its successors and assigns shall give to the City of Denton and the FAA, notice in writing of the location of any contemplated well and the route of ingress and egress to such well adjacent to the Airport Open Space and that if neither the FAA nor the City of Denton objects to said location within a period of thirty (30) days from the receipt of written notice thereof, the said LESSEE and its successors and assigns may proceed to drill the well at the location specified in said notice, provided same does not contravene other provisions of this Lease or the further restrictions and obligations imposed by the City of Denton. d. This written notice shall not relieve the LESSEE from obligation for filing a Notice of Proposed Construction or Alteration, FAA Form 7460-1, if required by Federal Aviation Regulations, Part 77, Subpart B. e. Also it is agreed, that in the event a well is drilled on the land within the Pooling Unit, then such drilling operations shall be prosecuted continuously, with due diligence, until same results in production or a dry hole. All temporary structures used in such drilling operations shall be painted and lighted in such a manner as proscribed by the FAA, and further provided that no permanent structures of any kind used in the development, production or transportation of oil, gas and other minerals shall be placed on the above described land in such manner as to interfere with or introduce hazard to the operation of the aircraft. f. Further, it is agreed that in the event any drilling operations for oil, gas, or other minerals result in production, LESSEE at its own expense shall immediately remove all temporary structures and place all semi-permanent or permanent equipment in such manner as will not interfere with or introduce any hazard to the operation of the aircraft. In event such drilling operations result in a dry hole, then LESSEE shall at its own expense immediately remove all temporary structures used in such landing operation and level the area so that it may be safely used for landing or taxiing aircraft. g. LESSEE shall not interfere with the access roads to the City of Denton Airport, and shall not interfere with any other person or agency having a lawful right to use the above-described land. h. During time of war or national emergency, LESSOR shall have the right to use the airport open space or any part thereof to the United States Government for military or naval use, and if a lease is executed with the United States Government, the provisions of this Lease insofar as they are inconsistent with the provisions of the Lease to the Government, shall be suspended. 25. Entire Agreement. This Lease states the entire contract between the parties, and no representation or promise, verbal or written, on behalf of either party shall be binding unless contained herein; and this Lease shall be binding upon each party executing the same, regardless of whether or not executed by all owners of the above described land or by all persons above named as "LESSOR", and, notwithstanding the inclusion above of other names as "LESSOR", this term as used in this Lease shall mean and refer only to such parties as execute this Lease and their successors in interest. IN WITNESS WHEREOF, this instrument is executed on the date first above written. CITY OF DENTON, TEXAS - LESSOR ATTEST: JENNIFER WALTERS, CITY SECRETARY APPROVED AS TO LEGAL FORM: HERBERT L. PROUTY, CITY ATTORNEY CORPORATION BY: ~//~ ~ C. I~oell Rat~er, President ENEXCO, INC. 3131 Turtle Creek #1210 Dallas, TX 75219 STATE OF TEXAS § COUNTYOF DENTON § Before me, the undersigned notary public, on this day personally appeared C. Noel Rather, the President of Enexco, Inc. who is known to me to be the person whose name is subscribed to the foregoing instrument, and acknowledged to me that he/she executed that instrument for the purposes and consideration therein expressed. Given under my hand and seal of office this ~q~day of t~t ,.m~'J .2004. Notary Public ATTACHMENT "A" -A-IB~-I'-. LZ85 ;._T. -T'OB¥ SI_IR. I - ~roo 70 2D04 00089317 Denton County Cynthia Mitchell County Clerk Denton, TX 76202 Recorded On: July 07, 2004 Parties: CITY OF DENTON To Instrument Number: 2004-89317 As Memorandum Billable Pages: 3 Number of Pages: 3 Comment: Memorandum 1~,00 Total Recording: t8.00 ** Examined and Charged as Follows: ** ************ THIS PAGE IS PART OF THE INSTRUMENT ************ Any provision herein which restricts the Sale, Rental or use of the described REAL PROPERTY because of color or race is invalid and unenforceable under federal law, File Information: Document Number: 2004-89317 Receipt Number: 122571 Recorded Date/Time: July 07, 2004 02:18P User / Station: B Gibbs - Cash Station 1 Record and Return To: CITY OF DENTON 215 E MCKINNEY DENTON TX 76201 THE STATE OF TEXAS } COUNTY OF DENTON } County Clerk Denton County, Texas City pf Denton City A~torney's Office 215 E. McKinney Denton, TX 76201 MEMORANDUM OF OIL, GAS AND MINERAL LEASE THE STATE OF TEXAS § COUNTY OF DENTON § KNOW ALL MEN BY THESE PRESENTS: That on the 8th, day of June, 2004, being the effective date hereof, The City of Denton, Denton, Texas (hereinafter referred to as "Lessor") and Enexco, Inc.., whose address is 3131 Turtle Creek, Suite 1210, Dallas, Texas 75219 (hereinafter referred to as "Lessee"), entered into an Oil, Gas and Mineral Lease (hereinafter referenced as "Said Lease") covering the following described land (hereinafter referred to as "Subject Land") situated in Denton County, Texas, to-wit: BEGINNING 300.0 feet North 2 degrees 12 minutes west and 100.0 feet north 22 degrees 40 minutes west of the northwest comer of a 10.154 acre tract conveyed to Floyd Cook by J. Newton Rayzor in deed recorded in Volume 475, Page 530 of the Deed Records of Denton County, Texas, said comer being in the east line of paved County Airport Road. THENCE along the east line of said road north 22 degrees 40 minutes west a distance of 912.50 feet to iron pin for comer; THENCE south 86 degrees 10 minutes east a distance of 730.00 feet to iron pin for comer; THENCE south 3 degrees 50 minutes west a distance of 117.00 feet to iron pin for comer; THENCE south 63 degrees 36 minutes east a distance of 1695.75 feet to iron pin for P.C. of curve to right; THENCE along arc of curve (having a central angle of 64 degrees 22 minutes; a radius of 346.40 feet, a tangent of 218.00 feet and a long chord of 369.01 feet) a distance of 409.35 feet to iron pin for P.T. of curve; THENCE south 0 degrees 46 minutes west a distance of 671.81 feet to iron pin for comer in the North line of Farm Road No. 1515; comer; THENCE north 89 degrees 14 minutes west along said Farm Road a distance of 597.00 feet to iron pin for THENCE noFth 0 degrees 46 minutes east a distance of 350.00 feet to iron pin for P.C. of curve to left; THENCE along arc of curve (having a central angle of 76 degrees 14 minutes, a radius of 318.65 feet, tangent of 250.00 feet, and a long chord of 393.36 feet) a distance of 423.97 feet to iron pin P.T. of curve; THENCE north 75 degrees 28 minutes west a distance of 559.60 feet to iron pin for comer; THENCE north 60 degrees 59 minutes west a distance of 640.00 feet to iron pin for comer; THENCE south 67 degrees 24 minutes west a distance of 150.00 feet to iron pin for comer, the place of beginning, containing 41.629 acres of land. Reference to said deed is hereby made for a complete description of the lands covered hereby and for all purposes. For the exclusive right for investigating, exploring, prospecting, drilling and mining for and producing oil, gas and all other minerals, conducting exploration, geologic and geophysical surveys and other related oil and gas operations on and under Subject Land. The Said Lease shall extend until June 8, 2007 and as long thereafter as oil, gas or other minerals is produced from Subject Land or lands with which Subject Land are pooled therewith. The execution of this Memorandum of Oil, Gas and Mineral Lease, shall serve as notice of execution and existence of a Said Lease and be incorporated herein, and made a part hereof in ail respects. This memorandum shall be subject to all term and provisions as set forth in Said Lease. A copy of Said Lease can be found in the business files of Enexco, Inc., at the address above. WITNESS THE EXECUTION HEREOF as of the respective acknowledgment date below. CITY OF DENTON, TEXAS-LESSOR ~. Cond~ff ~'~ City Manager ATTEST: JENNIFER WALTERS, CITY SECRETARY APPROVED AS TO LEGAL FO~: HE~ERT L. PROUTY, CITY ATTO~Y STATE OF TEXAS § COUNTY OF DENTON § Before me, the undersigned notary public, on this day personally appeared ~t~hca, [ I~. O..t~ndo'f"te th~ C i ~"-~ I-Y~a_na a,,.f of the City of Denton, Texas, who is know to me to be the person whose name is subscribed to~ the foregoing instrument, and acknowledged to me that he/she executed that ins~a'ument for the purposes and consideration therein expressed. N~.t.t~,Public , ~/ ~ "' / ~ Printed Name of Not~ry Public d