Exhibit 10.3
 
Burke Ranch Unit Purchase and
Participation Agreement

Between:

HOT SPRINGS RESOURCES LTD.
(”Seller” or “HSR")

and

PIN PARTNERS PETROLEUM LTD.
(”Buyer" or "PIN")

Made as of the 6th day of February, 2006

 

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BURKE RANCH UNIT PURCHASE AND PARTICIPATION AGREEMENT

THIS AGREEMENT made as of the  6th day of February 2006 between HOT SPRINGS
RESOURCES LTD. ("Seller” or HSR") and PIN PARTNERS PETROLEUM LTD. ("Buyer” or
“PIN").
 
RECITALS:
 
A. Whereas HSR owns the interests in lands and oil and gas leasehold interests
comprising the Burke Ranch Unit, a Federal Unit, that is subject to the terms of
the Burke Ranch Unit Agreement and Unit Operating Agreements, and to the
supervision of such unit and the activities and operations thereon by the Bureau
of Land Management (BLM) of the United States Department of the Interior; such
lands and leasehold interests are hereinafter included in the definition of
Subject Property in Section 1.1, and are subject only to those encumbrances, if
any, set forth in in Schedule "A";
 
B. Whereas PIN is interested in acquiring an interest in the Subject Property
and otherwise participating in development of the Subject Property on the terms
and conditions set forth in this Agreement;
NOW THEREFORE, in consideration of the mutual promises and covenants contained
herein, the receipt and sufficiency of which are acknowledged by the Parties,
the Parties agree as follows:
 
ARTICLE 1
INTERPRETATION
 
 
1.1
DEFINITIONS

 
In this Agreement, unless the context otherwise requires:
 

 
(a)
"Affiliate" means, with respect to a Party to this Agreement, a company or other
entity which controls that Party, is controlled by that Party or is under common
control with that Party. "Control" means (i) the direct or indirect ownership of
sufficient shares or other interests having the right to vote to elect the
senior management or a majority of the board of directors or other governing
board or committee, or otherwise control, the company or entity, or (ii) actual
control of the company or entity by any means.

 
(b)
"Area of Mutual Interest" or "AMI" means the area of mutual interest established
in respect of the AMI Lands;

 
(c)
"AMI Lands" means the lands within the area described in Schedule "B";

 
(d)
"AMI Term" means the period following the Effective Date and continuing for a
period of three (3) years thereafter;
 

 
(e)
"Business Day" means a day other than a Saturday, a Sunday or a statutory
holiday in Wyoming;

 

 
(e)
"Engineering Report" has the meaning ascribed to that term in Clause 3.2(a).

 

 
(f)
"Effective Date" means February 6, 2006.

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(g)
"Engineering Report" has the meaning ascribed to that term in Clause 3.2(a).

 
(h)
"Subject Assets" means the Subject Property, the Tangibles, and the
Miscellaneous Interests;

 
(i)
"Subject Property" means the lands and leasehold interests set out in Schedule
"A", and any lands pooled, unitized or otherwise combined therewith under the
terms of and pursuant to the Unit Agreement and Unit Operating Agreements or
otherwise, together with the Petroleum Substances within, upon or under those
lands;

 
(j)
"Miscellaneous Interests" means, subject to any and all limitations and
exclusions provided for in this definition, all property, assets, interests and
rights pertaining to the Subject Property and the Tangibles, or either of them,
but only to the extent that such property, assets, interests and rights pertain
to the Subject Property and the Tangibles, or either of them, including without
limitation any and all of the following:

 
(i)
contracts and agreements relating to the Subject Property and the Tangibles, or
either of them, including without limitation the Unit Agreement and Unit
Operating Agreements, any communitization agreements still in effect and having
application to the Subject Property, the Title Documents, processing agreements,
transportation agreements and agreements for the construction, ownership and
operation of facilities;

 
(ii)
rights to enter upon, use or occupy, the surface of any lands which are or may
be used to gain access to or otherwise use the Subject Property and the
Tangibles, or either of them;

 
(iii)
all records, books, documents, licences, reports and data which relate to the
Subject Property and the Tangibles, or either of them, including any of the
foregoing that pertain to seismic, geological or geophysical matters not
required to be held confidential and which HSR has the legal right to disclose
to PIN; and

 
(iv)
the Wells (and no other wells), including the wellbores and any and all casing;
 

 
(k)
"Operating Procedure" means the 1982 AAPL Model Form Joint Operating Agreement
attached hereto as Schedule "C 
 

 
(l)
"Party" means a party to this Agreement;

 
(m)(i)
"Payout" means that date when PIN recovers out of the gross proceeds of sale
from it's share of production of Petroleum Substances from the Subject Property
an amount equal to the aggregate costs incurred by or paid by PIN pursuant to
Sections 4.1, 4.2, 4.3 and 5.1.

 
(m)(ii)
"Payout Accounting”" shall mean monthly statements furnished by Buyer to Seller
before the fifth day of each and every calendar month prior to the time. Payout
occurs setting forth the amounts of all expenditures made by Buyer and claimed
by Buyer as costs incurred under Sections 4.1, 4.2, 4.3 and 5.1, together with
supporting invoices together with copies of reports made by or on behalf of
Buyer to the Wyoming Oil and Gas Conservation Commission and/or the Minerals
Management Service, statements from Third Party purchasers, processors and
transporters of production and all other documents evidencing the volumes and
values of Buyer’s share of production, if any, of Petroleum Substances from the
Subject Property for the month prior to the immediately preceding calendar
month. Such monthly statements shall further include the current accumulative
balance of the recoupment of the costs incurred by Buyer under Sections 4.1,
4.2, 4.2, ,4.3 and 5.1.

 

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(n)
"Petroleum Substances" means any of crude oil, crude bitumen and products
derived therefrom, synthetic crude oil, petroleum, natural gas, natural gas
liquids, and any and all other substances related to any of the foregoing,
whether liquid, solid or gaseous, and whether hydrocarbons or not, including
without limitation sulphur;

 

 
(p)
"Studies and Report" has the meaning ascribed to that term in Clause 3.2(a).

 

 
(q)
"Tangibles" means, any and all tangible depreciable property and assets which
are located within, upon or in the vicinity of the Subject Property and which
are used or are intended to be used to produce, process, gather, treat, measure,
make marketable or inject Petroleum Substances or any of them or in connection
with water injection or removal operations that pertain to the Subject Property,
including without limitation any and all gas plants, oil batteries, buildings,
production equipment, pipelines, pipeline connections, meters, generators,
motors, compressors, treaters, dehydrators, scrubbers, separators, pumps, tanks,
boilers and communication equipment;

 
(r)
"Third Party" means any individual or entity other than Parties hereto,
including without limitation any partnership, corporation, trust, unincorporated
organization, union, government and any department and agency thereof and any
heir, executor, administrator or other legal representative of an individual;

 
(s)
"this Agreement", "herein", "hereto", "hereof" and similar expressions mean and
refer to this Agreement;

 

 
(t)
"Title Defect" means a material defect or significant deficiency in the title of
Seller to any portion or part of the Subject Property, which on its own deprives
the Seller of the substantial use, benefit or financial revenue from the Subject
Property, having regard to laws respecting limitations of actions, and is
sufficiently adverse such that it would, on a commercially reasonable assessment
thereof, cause a party experienced in acquisitions of producing oil and gas
properties located in the Rocky Mountain region of the United States to not
purchase the entirety of the Subject Property, having regard to the loss of
value in and thereto;

 
 

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(u)
“Term Assignment” shall mean a current assignment of 50% of Seller’s interest in
the Subject Assets, substantially in the form set forth in Schedule "F" hereto  

 
(v)
 

 
(uv)
"Final Assignment”" shall mean an assignment of 50% of Seller's interest in the
Subject Assets, substantially in the form set forth in Schedule "G

 
(vw)
"Title Documents" means, collectively, any and all certificates of title,
leases, reservations, permits, licences, assignments, trust declarations,
operating agreements, royalty agreements, gross overriding royalty agreements,
participation agreements, farm-in agreements, sale and purchase agreements,
pooling agreements and any other documents and agreements granting, reserving or
otherwise conferring rights to (i) explore for, drill for, produce, take, use or
market Petroleum Substances, (ii) share in the production of Petroleum
Substances, (iii) share in the proceeds from, or measured or calculated by
reference to the value or quantity of, Petroleum Substances which are produced,
and (iv) rights to acquire any of the rights described in items (i) to (iii) of
this definition; but only if the foregoing pertain in whole or in part to
Petroleum Substances within, upon or under the Subject Property;

 
(wx)
"Trust Agreement" means an agreement substantially in the form set forth in
Schedule "H";

 
(xy)
"Trustee" means the party acting as trustee under the Trust Agreement;

 
(yz)
"Unit Agreement" means the unit agreement attached hereto as Schedule "E", as
amended and supplemented;

 
(zaa)
"Unit Operating Agreements" means the unit operating agreements attached hereto
as Schedule "D", as amended and supplemented;

 
(aabb)
"Wells" means all wells which are or may be used in connection with the Subject
Property, including without limitation Well 9 and Well 9-17 and all other
producing, shut-in, abandoned, water source, water disposal and water injection
wells.

 
(bbcc)
"Well 9" means the Well located at NW, NW 17, 37 N, 78 W, (API Well No. 49  025
06180)

 
(ccdd)
"Well 9-17" means the Well located at ]NE, SE 17, 37N, 78W (API Well No. 49  025
22264); 

 

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1.2
Headings

 
The expressions "Article", "section", "subsection", "clause", "subclause",
"paragraph" and "Schedule" followed by a number or letter or combination thereof
mean and refer to the specified article, section, subsection, clause, subclause,
paragraph and schedule of or to this Agreement.
 
1.3
Interpretation Not Affected by Headings

The division of this Agreement into Articles, sections, subsections, clauses,
subclauses and paragraphs and the provision of headings for all or any thereof
are for convenience and reference only and shall not affect the construction or
interpretation of this Agreement.
 
1.4
Interpretation Not Affected by Headings

 
When the context reasonably permits, words suggesting the singular shall be
construed as suggesting the plural and vice versa, and words suggesting gender
or gender neutrality shall be construed as suggesting the masculine, feminine
and neutral genders.
 
1.5
Interpretation Not Affected by Headings

 
There are appended to this Agreement the following schedules pertaining to the
following matters:
 
Schedule "A"
Subject Property
Schedule "B"
Area of Mutual Interest
Schedule "C"
Operating Procedure
Schedule “D”
Burke Ranch Unit Operating Agreements
Schedule “E”
Burke Ranch Unit Agreement
Schedule "F"
Term Assignment
Schedule "G”
Final Assignment
Schedule "H"
Trust Agreement
 

Such schedules are incorporated in this Agreement and form a part hereof.
Excepting the agreement described above and appended as Schedule E, and subject
to Article 3.2(d), wherever any term or condition of such schedules conflicts or
is at variance with any term or condition in the body of this Agreement, such
term or condition in the body of this Agreement shall prevail.
 
1.6
Damages

All losses, costs, claims, damages, expenses and liabilities in respect of which
a Party has a claim pursuant to this Agreement include without limitation
reasonable legal fees and disbursements on a attorney and client basis.

ARTICLE 2
TITLE TO SUBJECT PROPERTY
 
2.1 
Title

 
Seller does not represent or warrant title to the Subject Property, but Seller
does represent that:

 

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(a)
except for the royalties payable to the lessors under the oil and gas leases set
forth in Schedule "A" and overriding royalty interests burdening Seller’s
interest in such oil and gas leases that were created by third parties prior to
the acquisition by Seller of its interest in the Subject Property and of which
Seller has no knowledge, it has not granted or otherwise aware of any interest
(or the right to acquire any interest) in the Subject Property whereby a Third
Party may owns or has the right to acquire any royalty interest in the Subject
Property or any portion of Seller’s interest in the Subject Property;

 
(b)
it is not aware of any Title Defects pertaining to the Subject Property, nor is
it aware of any act or omission whereby Seller is or would be in default under
applicable law or the Title Documents and it has not received any notice of
default or otherwise become aware of any notice of default respecting the
Subject Property that has not been remedied; and

 
(c)
Seller is not aware of any environmental defects or deficiencies or
environmental damage affecting or caused by the Subject Assets, nor is Seller
aware of any proceedings which have been commenced or threatened, or which could
reasonably be expected to be commenced, in connection with any such defects,
deficiencies or damages, or any operations relating thereto.

 
2.2 
Maintaining Title

 
While the Term Assignment is effective and provided Seller has not terminated
this Agreement by virtue of a material default by Buyer under this Agreement,
Seller will not grant, assign or convey any interest in the Subject Property
which may be acquired by the Buyer hereunder, nor shall Seller do or cause to be
done any act or omission whereby any interest in the Subject Property becomes
encumbered, terminated or forefeited.

ARTICLE 3
BUYER PAYMENT AND RIGHTS/INTERESTS EARNED
 
3.1 
Buyer Payment

 
Buyer shall upon payment of $150,000 (the "Buyer Payment") to Seller earn the
rights and interests set forth in Section 3.2.  Seller acknowledges prior
receipt of $35,000 from Buyer, such that the balance remaining of the Buyer
Payment is $115,000 (the "Payment Balance"). Buyer shall pay this balance, by
wire transfer or other means satisfactory to Seller in immediately available
funds, to Seller or, if Section 3.3 is applicable, to the Trustee on or before
the third calendar day following the date of this Agreement, failing which this
Agreement and all rights of Buyer hereunder shall terminate.
 
3.2 
 Rights Earned
 

 
(a)
Upon making the Buyer Payment set forth in Section 3.1, the interests in the
Subject Assets shall, subject to the terms of the Term Assignment be:

 

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HSR
49.9%
PIN
49.9%
Others
0.2%

 
In addition, Buyer upon making such payment to Seller or the Trustee shall earn
the right to participate in and pay the costs of the activities described in
Article 4 below. Forthwith after receiving the balance of the Buyer Payment,
Seller shall duly execute and deliver to Buyer the Term Assignment, or if
Section 3.3 is applicable shall cause the Trustee to release the Term Assignment
to Buyer.
 

 
(b)
All of the several obligations set forth in Sections 4.1, 4.2 and 4.3 below and
the time limit prescribed for the performance of each and all such obligations
are and shall be deemed material and shall consititute a single condition
precedent to Seller’s obligation to make the Final Assignment. If the Buyer
Payment described in Section 3.1 above is timely made to Seller or, if Section
3.3 is applicable, to the Trustee and if, thereafter, Buyer thereafter timely
performs in all material respects each and all of its obligations described in
Sections 4.1, 4.2 and 4.3 below, then, prior to Payout, Buyer shall thereupon
have:
 

 
(i)
earned an additional 39.92% beneficial interest in the Subject Assets, such that
the beneficial interests shall be:
 

 
HSR
49.9%
PIN
49.9%
Others
0.2%

 
provided however that HSR shall retain a 49.9% registered legal interest, and
shall hold the additional 39.92% beneficial interest in trust for PIN; and
 

 
(ii)
Buyer shall have the right to receive the Final Assignment and Seller shall
forthwith thereafter duly execute and deliver to Buyer the Final Assignment.

 

 
(c)
In the event the Final Assignment is earned by Buyer and made by Seller and
thereafter Payout occurs, Buyer shall be deemed to have thereupon relinquished
to Seller the additional 39.92% beneficial interest in the Subject Assets
referred to in Section 3.2(b)(i) above, such that the legal and beneficial
interests in the Subject Assets shall thereupon be:

 
HSR
49.9%
PIN
49.9%
Others
0.2%

 

 
(d)
Upon Buyer timely making the Buyer Payment described in Section 3.1 above,
thereby earning the rights described therein, the Operating Procedure shall
govern the Subject  Assets and all operations on or in respect of the Subject
Assets, such that, as between Buyer and Seller, the Operating Procedure shall
supercede the Unit Operating Agreements. Thereafter, each party shall use
commercially reasonable efforts to enter into agreements with, and obtain
approvals from, all relevant third parties (including those "others" owning
working interests in the Subject Property and all applicable governmental and
regulatory authorities) such that the Operating Procedure supercedes the Unit
Operating Agreements for all purposes.

 

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Subject always to Article 4, all rights and obligations in respect of the
Subject Assets shall be borne by the Parties in accordance with their interests
set forth in Sections 3.2(a), (b) and (c) which are prevailing at the applicable
time.
 
Seller shall be the initial operator under the Operating Procedure, provided
that upon the parties agreeing to drill a well pursuant to Section 4.5, or if
Seller does not agree to drill such well and Buyer elects to drill the well by
itself pursuant to the Operating Procedure, Buyer shall in either event
thereupon replace Seller as the operator under the Operating Procedure and the
Unit Operating Agreements, and Seller shall do all things reasonably necessary
to effect such replacement.
 

 
(e)
Provided that Buyer timely makes the Buyer Payment described in Section 3.1 to
Seller or the Trustee, within fifteen (15) days thereafter, Seller shall deliver
copies of the Title Documents and any other agreements and documents to which
the Subject Assets are subject, and copies of contracts, agreements, records,
books, documents, licences, reports and data comprising Miscellaneous Interests.
 

 
(f)
In addition to the Term Assignment and Final Assignment provided for above,
Seller agrees to deliver to Buyer any other conveyances, assignments, transfers,
novations and other instruments reasonably required to to assign to Buyer the
corresponding interest it acquires in the Subject Assets.

 
3.3 
Trust Arrangements
 

 
(a)
If Seller does not deliver to Buyer on the date hereof a title opinion prepared
by Seller's oil and gas legal counsel respecting the Subject Property which
opinion is in form and substance satisfactory to Buyer, acting reasonably, (the
"Title Opinion"), then:
 

 
(i)
Buyer shall be entitled to deliver to the Trustee the Payment Balance, to be
held by the Trustee in accordance with the Trust Agreement. Such payment shall
be deemed to satisfy all of Seller's obligations under this Agreement to make
such payment; and
 

 
 
 
(ii)
Concurrently with Buyer making the payment pursuant to Section 3.3(a)(i), Seller
shall deliver a duly executed copy of the Term Assignment to the Trustee, to be
held by the Trustee in accordance with the Trust Agreement.

 

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If Buyer elects to pay the Payment Balance to the Trustee pursuant to Section
3.3(a)(i) and Seller does not deliver the Title Opinion to Buyer within ninety
(90) days from the date of this Agreement, then Buyer shall be entitled to,
within ten (10) days after the expiry of such period, request a return of the
entire Buyer Payment and all monies expended by Buyer pursuant to Sections 4.1,
4.2 and 4.3. In that event:
 

 
(iii)
the Trustee shall forthwith return the Payment Balance to Buyer and, provided
that Seller has paid all amounts to Buyer as required pursuant to Section
3.3(b)(iv), destroy all copies of the Term Assignment in its possession, with
the result that thereupon Buyer shall have no interest in the Subject Assets;
and
 

 
(iv)
the Seller shall pay to Buyer $35,000, being the prior payment of a portion of
the Buyer Payment, and reimburse Buyer for all amounts expended by Buyer
pursuant to Sections 4.1, 4.2 and 4.3; such payment and reimbursement shall,
during the period of 1 year from the date hereof, be made as soon as reasonably
possible out of the gross proceeds of the sale of production from the Subject
Property. If such amounts are not paid to Buyer within such 1 year period,
Seller shall immediately thereafter pay all such amounts to Buyer.
 

 
(b)
As security for the payment obligations in Section 3.3(b)(iv), Buyer shall have,
and Seller hereby grants, a lien, charge and security interest in the Subject
Assets.
 

 

 
 
In addition, if Seller fails to make the payments to Buyer as required pursuant
to Section 3.3(b)(iv), then notwithstanding any other provision herein, and
without limiting any other rights Buyer may have at aw or otherwise, Buyer
shall:

 

 
(i)
be entitled to request the Trustee to deliver the Term Assignment to Buyer, in
which event Buyer shall be entitled to retain the 49.9% interest governed
thereby for its own account; and
 

 
(iii)
be entitled to the additional 39.92% beneficial interest provided for in Section
3.2(b).
 

 
(c)
If there is any title defect, deficiency or other failure in title which was in
existence at or prior to the date of this Agreement that adversely affects the
Subject Property at any time hereafter, such defects, deficiencies and title
problems shall be deemed to first affect the interests of Seller, such that
Seller's interests shall be reduced first before there is any effect on Buyer's
interests. Conversely, if Seller owned more than a 99.8% working interest in the
Subject Property immediately prior to the date of this Agreement, Seller shall
be entitled to the benefit of any such incremental increased interest.

 

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ARTICLE 4
RIGHTS EARNED BY BUYER PAYMENT AND BUYER OPERATIONS
 
4.1 
Seismic

Buyer shall, within one calendar year from the Effective Date, at its sole cost,
risk and expense conduct or cause to be conducted a 3D seismic survey over:
 

 
(a)
the Subject Property ; and
 

 
(b)
any other lands within the AMI which the Parties jointly agree upon, and shall
further conduct (or cause to be conducted) and pay for all processing, analysis,
and interpretation of the 3D seismic data acquired as a result of such seismic
survey which is reasonably necessary to render such data capable of being used
by and useful to the Parties to determine the viability of future drilling
operations on the Subject Property or AMI lands. Buyer shall provide Seller with
access to the results of the seismic program, including all analysis and
interpretation thereof, provided that Seller shall maintain in confidence the
seismic information in accordance with the Operating Procedure, and provide
proof of the same to Seller and share the information as set forth above.
 

 
4.2 
Engineering Study and Development Plans

 

 
(a)
Buyer shall, after consultation with Seller, select an engineering firm (the
"Engineering Firm") to perform certain engineering studies on the Subject
Property and to prepare a development plan (collectively, the "Studies and
Plan") in respect of the Subject Property. The scope and substance of the
Studies and Plan shall be at the direction of Buyer, provided that Buyer will
confer with Seller prior to providing or revising any instructions to the
Engineering Firm. Buyer shall be solely responsible for the costs incurred in
the preparation of the Studies and Plan. Upon mutual agreement, the Parties may
agree to an alternate engineering firm.
 

 
(b)
The Parties shall co-own the Studies and Plan and all related data and
information, and shall share access to all data and information. Each Party
shall maintain in confidence the Studies and Plan and all related data and
information in accordance with the Operating Procedure.
 

 
(c)
Each Party shall appoint a contact person who shall assist in providing
documentation and information to the Engineering Firm.
 

 
4.3
Field Operations

 
Seller shall, within sixty (60) days from the Effective Date (but subject always
to Article 8), cause to be conducted by or under the supervision of Seller (or
its agents, employees or contractors) in accordance with and if required
pursuant to generally accepted industry practices, operations and purchases of
equipment necessary to install a submersible

 

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pump, cable and if needed a motor in Well 9 and, shall within thirty (30) days
from the Effective Date (but subject always to Article 8), complete any tubing
repairs that may be necessary in respect of Well 9-17. Buyer shall be solely
responsible for all costs and expenses relating to such operations, provided
that if the costs and expenses respecting Well 9 or Well 9-17 exceed $50,000,
then Seller shall be solely responsible for all costs and expenses exceeding
$50,000, provided further however, that if, due to wellbore integrity problems,
equipment failures or sticking of equipment or tools in the wellbore or other
problems beyond the anticipation or control of the Parties, the costs of
operations respecting either or both Well 9 and Well 9-17 are anticipated to
exceed $75,000 in the aggregate, then the Parties shall determine whether they
wish to proceed and if so they shall jointly (each as to a 50% share) pay for
any costs in excess of $75,000. If a party determines not to conduct the
operations yielding such costs in excess of $75,000, then the other party shall
be entitled to conduct the operations by itself in accordance with the Operating
Procedure. Seller shall provide Buyer with information on a daily basis in
respect of the foregoing operations and the status thereof, and shall provide
evidence to Buyer of its timely compliance with the obligations set forth in
this Section 4.3 by providing Buyer with invoices from any Third Party
performing such work and/or providing equipment and materials evidencing the
time and dates of the provision of such services and materials/equipment.

Subject to the foregoing, Buyer shall pay any and all such invoices within 30
days of receipt of them, and upon such payment shall be deemed to have satisfied
all of its obligations in this Section 4.3. Buyer shall deliver to Seller signed
acknowledgments by all such Third Parties or other evidence that such invoices
have been paid by Buyer.
 
If Seller fails to complete the operations provided for in this Section 4.3
within 1 year of the Effective Date, Buyer shall be deemed to have no further
obligations under this Section 4.3.
 
4.4
Buyer as Operator

Buyer shall conduct the operations set forth in Sections 4.1 and 4.2 as if and
as though it was the operator of the Subject Property, provided that Buyer will
confer with Seller with regard to those operations described in Sections 4.1 and
4.2 in an effort to keep the associated operational costs as low as reasonably
possible (having regard always to good industry practices and health, safety and
environmental concerns) and make beneficial use of the Seller’s knowledge of the
Subject Property.
 
4.5
Tensleep Test

If, after the acquisition,processing, analysis and interpretation of the seismic
data described in Section 4.1 above, Buyer and Seller mutually agree, in good
faith, based upon such seismic data and analysis thereof, that a well should be
drilled to test the Tensleep Formation (the "Tensleep Well") on the Subject
Property (or the AMI lands), the Buyer shall at its sole cost drill and log (or
cause the drilling and logging of) such a well of such a depth to test the
entire Tensleeep Formation, and, if, after logging, a completion of such a well
for production is justified, as determined mutually by the Parties hereto, then
Seller shall pay 50% of the costs of such

 

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completion. If such well thereafter produces Petroleum Substances, the Parties
shall share in the production from such well on the basis of the fractions
described below, until the costs of such well and its completion have been
recovered out of the production of Petroleum Substances from such well.
 
Prior to Cost Recoupment Fractions:

HSR
Amount of completion costs paid by HSR Total of all drilling, logging and
competion costs paid by HSR and PIN
PIN
Amount of drilling, logging and completion costs paid by PIN Total of all
drilling, logging and completion costs paid by HSR and PIN.

Upon recoupment of such drilling, logging and completion costs, the Parties
shall share in the production from such well on an equal, 50-50 basis.
If a party wishes to drill the Tensleep Well but the other party does not, then
the foregoing provisions of this Article 4.5 shall be of no further effect. In
such event, the party wishing to drill the well shall be entitled to drill such
well by itself without any participation by the other party, all in accordance
with the Operating Procedure. In such event, the penalty applicable to the
non-participating party shall be as set forth in clause Article VI of the
Operating Procedure.
 
Prior to the time the costs of the drilling, logging and completion from such
well have been recovered out of the production of Petroleum Substances from such
well, the Party serving as operator shall before the fifth day of each calendar
month provide the non-operating Party with a monthly accounting of the aggregate
of all costs of drilling, logging and completing of such well and copies of all
reports filed with the Wyoming Oil and Gas Conservation Commission and/or the
Minerals Management Service, statements from Third Party purchasers, processors
and transporters of production and all other documents evidencing the volumes
and values of all production of Petroleum Substances from such well, in each
case as regards those costs and revenues relating to such well that arose in the
month prior to the immediately preceding month, together with the current
accumulative balance of the recoupment of drilling, logging and completion costs
of such well out of the production of Petroleum Substances from such well.
 
ARTICLE 5
PRODUCTION PAYMENT

 
 
 
5.1
Production Payment

 
If Buyer timely makes the Buyer Payment described in Section 3.1 above and
performs the obligations described in Sections 4.1, 4.2 and 4.3 above, and,
thereafter, whether prior to or after Payout, production of Petroleum Substances
from the Subject Property exceeds 20 barrels of oil per day (and for purposes of
this clause 6mcf of natural gas shall equal 1 barrel of oil) for a continuous
period of no less than 30 days, then provided that Buyer has received a Title
Opinion or Buyer is otherwise satisfied with title to the Subject Property,
Buyer shall each month thereafter for a period of 12 months pay to Seller out of
its net share of the proceeds from the sale of Petroleum Substances produced
from the Subject Property a payment of $5,000 (for an aggregate payment
obligation of $60,000). Each such payment shall be made by no later than the
25th day of the following month. The Buyer’s obligation for this production
payment, and

 

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Seller’s reservation thereof, shall be set forth in the Term Assignment and in
the Final Assignment, if made. For greater certainty, if the net revenues from
the Subject Property are not sufficient to permit the $5,000 payment in any one
month, the payment obligation for that month shall be suspended until the next
month in which net revenues are sufficient to permit such $5,000 payment.
 
ARTICLE 6
REPRESENTATIONS AND WARRANTIES
 
6.1
Representations and Warranties

Each Party makes the following representations and warranties to the other:
 

 
(a)
It is a corporation, limited partnership, or limited liability company duly
organized and validly existing under the laws of the jurisdiction of its
incorporation or formation, is authorized to carry on business in the state in
which the Subject Property are located, and now has good right, full power and
absolute authority to perform the obligations provided for in the Agreement
according to the true intent and meaning of this Agreement;
 

 
(b)
the execution, delivery and performance of this Agreement has been duly and
validly authorized by any and all requisite company, member and directors'
actions and will not result in any violation of, be in conflict with or
constitute a default under any articles, charter, operating agreement or other
governing document to which it is bound;
 

 
(c)
the execution, delivery and performance of this Agreement will not result in any
violation of, be in conflict with or constitute a default under any term or
provision of any agreement or document to which it is party or by which it is
bound, nor under any judgment, decree, order, statute, regulation, rule or
license applicable to it;
 

 
(d)
this Agreement and any other agreements delivered in connection herewith
constitute valid and binding obligations of it enforceable against it in
accordance with their terms;
 

 
(e)
it has not incurred any obligation or liability, contingent or otherwise, for
brokers' or finders' fees in respect of this Agreement or the transaction to be
effected by it for which the other Party shall have any obligation or liability;

ARTICLE 7
AREA OF MUTUAL INTEREST
 
7.1
AMI Lands

 
If a Party or any of its Affiliates acquires an interest in any AMI Lands during
the AMI Term, such acquisition shall be subject to the provisions of this
Agreement.
 
7.2
AMI Procedure for Acquisition

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If AMI Lands are acquired at any time during the AMI Term by a Party or any of
its Affiliates, that Party (the "Acquiring Party") shall forward a notice to the
other Party (the "Receiving Party") within seven (7) days of the acquisition of
such AMI Lands. The notice (the "Acquisition Notice") shall set forth the
particulars of the acquisition, including but not limited to:
 

 
(a)
the date that the interest was acquired,

 
(b)
the interest which was acquired,

 
(c)
from whom the interest was acquired,

 
(d)
the amount of out of pocket costs incurred by the Acquiring Party and/or its
Affiliates in acquiring the AMI Lands, and

 
(e)
the amount of maintenance costs, if any, incurred by the Acquiring Party and/or
its Affiliates with respect to the AMI Lands.

 
The Receiving Party shall have twenty (20) days from the date of receipt of an
Acquisition Notice (the "Acceptance Period") to elect to acquire 50% of the
interest acquired by the Acquiring Party and any of its Affiliates in the AMI
Lands set out in such Acquisition Notice by paying 50% of the amounts set forth
in the Acquisition Notice. If the Receiving Party fails to pay such amount
within thirty (30) days of its election, it shall be deemed to have elected not
to acquire such interest, and it shall have no further rights to such interest.

If the consideration paid by the Acquiring Party or any of its Affiliates to
acquire the AMI Lands was other than cash or work commitment, the Acquisition
Notice shall specify the cash equivalent of such consideration. The Receiving
Party may, within five (5) days of its receipt of the Acquisition Notice,
require the determination of the cash equivalent of the consideration to be
submitted to arbitration, in which event the twenty (20) day period specified
in this section shall commence to run on the date the arbitrator's decision is
communicated in writing to the Parties. The cash value so determined by the
arbitrator and communicated in writing to the Parties shall be deemed to be the
cash equivalent of the consideration.
 
ARTICLE 8
FORCE MAJEURE
 
8.1
Meaning of Force Majeure

For the purposes of this Article, "force majeure" means an occurrence beyond the
reasonable control of the Party claiming suspension of an obligation hereunder,
which has not been caused by such Party's negligence and which such Party was
unable to prevent or provide against by the exercise of reasonable diligence at
a reasonable cost and includes, without limiting the generality of the
foregoing, an act of God, war, revolution, insurrection, blockage, riot, strike,
a lockout or other industrial disturbance, fire, lightning, unusually severe
weather, storms, floods, explosion, accident, shortage of labour or materials
(including rig availability), or government restraint, action, delay or
inaction.

 

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8.2
Suspension of Obligations Due to Force Majeure

 
If any Party is prevented by force majeure from fulfilling any obligation
hereunder, the obligations of the Party, insofar only as its obligations are
affected by the force majeure, shall be suspended while the force majeure
continues to prevent the performance of such obligation and for that time
thereafter as that Party may reasonably require to commence to fulfill such
obligation, and during the entirety of such period shall not in any event be
considered to be in default as regards the affected obligations. A Party
prevented from fulfilling any obligation by force majeure shall promptly give
each other Party notice of the force majeure and the affected obligations,
including reasonably full particulars in respect thereof.
 
8.3
Obligation to Remedy

 
The Party claiming suspension of an obligation as aforesaid shall promptly use
commercially reasonable efforts to remedy the cause and effect of the applicable
force majeure, insofar as it is reasonably able so to do, and such Party shall
promptly give each other Party notice when the force majeure ceases to prevent
the performance of the applicable obligation. However, the terms of settlement
of any strike, lockout or other industrial disturbance shall be wholly in the
discretion of such Party, notwithstanding Section 8.1, and that Party shall not
be required to accede to the demands of its opponents in any strike, lockout or
industrial disturbance solely to remedy promptly the force majeure thereby
constituted.
 
8.4
Exception for Lack of Finances

 
Notwithstanding anything contained in this Article, lack of finances shall not
be considered a force majeure, nor shall any force majeure suspend any
obligation for the payment of money due hereunder.

ARTICLE 9
GENERAL
 
9.1
Confidentiality

 
The Parties covenant that agree to continue to keep all information and
documentation directly or indirectly related to the Subject Property
confidential in accordance with Clause [·]Article XV of the Operating Procedure.
Nothing contained herein or in the Operating Procedure or the Unit Operating
Agreements shall prevent a Party at any time from furnishing information to any
governmental agency or regulatory authority or to the public if required by
applicable law, provided that the Parties shall advise each other in advance of
any public statement which they are required to make.

 

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9.2
Further Assurances

 
Each Party will, from time to time and at all times, without further
consideration, do such further acts and deliver all such further assurances,
deeds and documents as shall be reasonably required in order to fully perform
and carry out the terms of this Agreement.
 
9.3
Further Assurances

 
All payments to be made pursuant to Clauses 3.1 and 5.1 shall be made by
certified cheque, bank draft or wire transfer.
 
9.4
Entire Agreement

 
The provisions contained in any and all documents and agreements collateral
hereto shall at all times be read subject to the provisions of this Agreement
and, in the event of conflict, the provisions of this Agreement shall prevail.
No amendments shall be made to this Agreement unless in writing, executed by the
Parties. This Agreement supersedes all other agreements, documents, writings and
verbal understandings among the Parties relating to the subject matter hereof
and expresses the entire agreement of the Parties with respect to the subject
matter hereof.
 
9.5
Governing Law

 
This Agreement shall, in all respects, be subject to, interpreted, construed and
enforced in accordance with and under the laws of the State of Wyoming. The
Parties irrevocably submit to the exclusive jurisdiction of the courts of the
State of Wyoming in respect of all matters arising out of or in connection with
this Agreement.
 
9.6
Enurement

 
This Agreement may not be assigned by a Party without the prior written consent
of the other Party, which consent may be unreasonably and arbitrarily withheld.
This Agreement shall be binding upon and shall enure to the benefit of the
Parties and their respective administrators, trustees, receivers, successors and
permitted assigns.
 
9.7
Time of Essence

Time shall be of the essence in this Agreement.
 
9.8
Notices

 
The addresses for service and the fax numbers of the Parties shall be as
follows: 

HSR
With a copy to:
 
Hot Springs Resources Ltd.
142 N. Lincoln
Casper, WY
82601
Facsimile (307) 234-2245
Attention: President
PIN
   
PIN Partners Petroleum Ltd.
Suite 2410, P.O. Box 11524
650 West Georgia Street
Vancouver, B.C.
V6B 4N7
Facsimile (604)·682-5564
 
Attention: President

 
All notices, communications and statements required, permitted or contemplated
hereunder shall be in writing, and shall be delivered as follows:
 

 
(a)
by personal service on a Party at the address of such Party set out above, in
which case the item so served shall be deemed to have been received by that
Party when personally served;

 
(b)
by facsimile transmission to a Party to the fax number of such Party set out
above, in which case the item so transmitted shall be deemed to have been
received by that Party when transmitted; or

 
(c)
except in the event of an actual or threatened postal strike or other labour
disruption that may affect mail service, by mailing first class registered post,
postage prepaid, to a Party at the address of such Party set out above, in which
case the item so mailed shall be deemed to have been received by that Party on
the third Business Day following the date of mailing.

A Party may from time to time change its address for service or its fax number
or both by giving written notice of such change to the other Party.
 
9.9
Invalidity of Provisions

In case any of the provisions of this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality or enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
 
9.10
Waiver

 
No failure on the part of any Party in exercising any right or remedy hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right or remedy preclude any other or further exercise thereof or the
exercise of any right or remedy in law or in equity or by statute or otherwise
conferred. No waiver of any provision of this Agreement, including without
limitation, this section, shall be effective otherwise than by an instrument in
writing dated

 

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subsequent to the date hereof, executed by a duly authorized representative of
the Party making such waiver.
 
9.11
Amendment

 
This Agreement shall not be varied in its terms or amended by oral agreement or
by representations or otherwise other than by an instrument in writing dated
subsequent to the date hereof, executed by a duly authorized representative of
each Party.
 
9.12
Counterpart Execution

 
This Agreement may be executed in counterpart, no one copy of which need be
executed by Seller and Buyer. A valid and binding contract shall arise if and
when counterpart execution pages are executed and delivered by Seller and Buyer.

IN WITNESS WHEREOF the Parties have executed this Agreement as of the day and
year first above written.
 
 
 
HOT SPRINGS RESOURCES LTD.
 
 
Per: _________________________________
 
 
 
PIN PARTNERS PETROLEUM LTD.
 
 
Per: _________________________________
 

 

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