1048136 ALBERTA LTD.

c/o 1800, 999 West Hastings Street

Vancouver, British Columbia

Canada V6C 2W2

 

June 30, 2005

 

Cascade Energy, Inc.

3405 Folsom Blvd.

Suite 820

Folsom, CA 95630

 

Attention:

Mr. Sam Johal, President

 

Dear Sir:

 

Re:

Farmout Agreement – Acadia Prospect, Province of Alberta

 

_

_________________________________________________

 

Pursuant to an agreement (the “Acadia Farmout and Option Agreement") dated the
21st day of January, 2005, between Hanna Oil & Gas Company-Canada Inc., Firefly
Resources Ltd. and Moraine Resources Ltd. (collectively referred to herein as
the “Original Farmor”) and Vega Resources Ltd. (“Vega”), Vega can earn an
interest in certain title documents and the lands associated therewith (all as
more particularly described in Schedule “A” of the Acadia Farmout and Option
Agreement) by performing the obligations contained in the Acadia Farmout and
Option Agreement.

 

Pursuant to a subsequent agreement (the “Vega Participation Agreement") dated
the 28th day of January, 2005, between Vega and 1048136 Alberta Ltd.
(“1048136”), 1048136 can earn 100% of the interests that Vega can otherwise earn
under the Acadia Farmout and Option Agreement (subject to the royalty reserved
unto Vega by the Vega Participation Agreement) by performing the obligations
contained in the Vega Participation Agreement. A true copy of the Vega
Participation Agreement (which has a true copy of the Acadia Farmout and Option
Agreement attached thereto as a schedule) is attached hereto as Appendix “A”.

 

Pursuant to a certain farmout agreement between 1048136 and Emerson Oil & Gas,
Inc. (“Emerson”) dated May 19, 2005 (the “Emerson Agreement”), Emerson has been
offered the opportunity to earn 49% of 1048136’s interest in one (1) section of
the Farmout Lands by drilling, completing, or capping and abandoning, one (1)
well. Emerson has now drilled a well (the “11-16-24-2W4M well”) on Section 16 of
the Farmout Lands (“Section 16”) and, under the Emerson Agreement, Emerson is
now required to complete the same at its sole cost and expense.

 

Cascade wishes to participate with 1048136 in the further development of Section
16 and 1048136 is willing to grant to Cascade the opportunity to earn a 21%
interest in that section, including the 11-16-24-2W4M well, by agreeing to
paying all additional costs and expenses

 

 

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2

 

whatsoever relating to all development on Section 16 from the date of this
Agreement forward. The interest in Section 16 earned by Cascade hereunder shall
remain subject to royalties reserved by the Acadia Farmout and Option Agreement
and the Vega Participation Agreement.

 

1.

Interpretation

 

 

(a)

The headings of the clauses of this Agreement are inserted for convenience of
reference only and shall not affect the meaning or construction thereof.

 

(b)

The terms and expressions used herein shall have the same meanings as are
ascribed to such terms and expressions in the Vega Participation Agreement and
the Acadia Farmout and Option Agreement, as the case may be.

 

(c)

Wherever the plural or masculine or neuter is used the same shall be construed
as meaning singular or feminine or body politic or corporate, or vice versa as
the context so requires.

 

2.

Appointment of Operator

1048136 is appointed Operator, as between 1048136 and Cascade, with respect to
all operations conducted hereunder and 1048136 shall make all development
decisions., with reasonable consultation with Cascade.

3.

Vega Participation Agreement

Except as modified by the terms of this Agreement, the terms and conditions of
the Vega Participation Agreement shall control the operation of the parties and
shall be deemed to be incorporated herein.

 

4.

Trust Conditions and Term

1048136 agrees that, to the extent that the assignment to Cascade by 1048136 of
certain rights and obligations under the Vega Participation Agreement is not
formally recognized and recorded by Vega or the Original Farmor, as the case may
be, 1048136 shall hold Cascade’s interests in the Vega Participation Agreement,
Acadia Farmout and Option Agreement as the case may be, in trust for Cascade and
shall ensure that all performance by Cascade under the terms of this Agreement,
as assignee of some of the obligations of 1048136 under the Vega Participation
Agreement, is noted, recorded and properly credited. If requested by Cascade,
1048136 agrees to record this trust in writing pursuant to a trust agreement (in
a form similar to the form attached to the Acadia Farmout and Option Agreement
as Schedule “E”, amended as applicable to reflect the interest of Cascade in a
portion of the Farmout Lands) until such time as the interest of Cascade may be
formally recorded.

 

5.

Obligations and Interest Earned

Cascade shall assume all payment obligations of 1048136 or reverting to 1048136
with respect to the ongoing development of 1048136’s interest in Section 16 of
the Farmin Lands and shall be

 

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3

 

entitled to 21% of all benefits thereby accruing from Section 16, subject to
royalties reserved by the Acadia Farmout and Option Agreement and the Vega
Participation Agreement. In the event of a failure by Cascade to fund the
required portion of a given development program, Casacade shall suffer dilution
in proportion to the amount that went unfunded by Cascade. In this regard,
1048136’s determination shall be final and binding on Cascade.

 

6.

Assignment

 

Cascade shall not assign its rights under this Agreement in whole or in part.

 

7.

Other Encumbrances

 

If the interest of either party in the Section 16 shall hereafter become
encumbered by any royalty, production payment or other charge of a similar
nature, other than the royalties as set forth under the Acadia Farmout and
Option Agreement or Vega Participation Agreement, such royalty, production
payment or other charge shall be charged to and paid entirely by the party whose
interest is or becomes thus encumbered.

 

8.

Warranty of Title

 

1048136 makes no representation or warranties as to the status of title to the
Farmout Lands and such title must be independently verified by Cascade.

 

No party shall do or cause to be done any act nor make or cause to be made any
omission whereby Section 16 becomes encumbered in such a way as to adversely
affect the interests of the other parties, or become subject to termination or
forfeiture.

 

9.

No Partnership

 

The rights, duties, obligations and liabilities of the parties shall be several
and not joint or collective, it being the parties' express purpose and intention
that nothing herein shall be construed as creating a partnership of any kind or
imposing upon any party hereto any partnership duty, obligation or liability to
the other party other than as specifically set forth herein.

 

10.

Further Assurance

 

Each of the parties shall at all times do all such further acts and deliver all
such further deeds and documents as shall be reasonably required in order to
fully perform and carry out the terms of this Agreement.

 

11.

Notice

 

Notwithstanding anything to the contrary contained herein, all notices required
or permitted hereunder shall be in writing. Any notice to be given hereunder
shall be deemed to be served properly if served in any of the following modes:

 

 

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4

 

 

a)

personally, by delivering the notice to the party on which it is to be served at
that Party's address for service; or

 

b)

by telecopy or telex (or by any other like method by which a written message may
be sent) directed to the party on which it is to be served at that party's
address for service. A notice so served shall be deemed to be received by the
addressee when actually received by it, if received within normal business hours
on any day other than a Saturday, Sunday or statutory holiday in British
Columbia or at the commencement of the next ensuing business day following
transmission if such notice is not received during such normal business hours;
or

 

c)

by mailing it first class (air mail if to or from a location outside of Canada)
registered post, postage prepaid, directed to the party on which it is to be
served at that party's address for service. Notices so served shall be deemed to
be received by the addressee at noon, local time, on the earlier of the actual
date of receipt or the fourth day (excluding Saturdays, Sundays and statutory
holidays in British Columbia) following the mailing thereof. However, if postal
service is (or is reasonably anticipated to be) interrupted or operating with
unusual delay, notice shall not be served by such means during such interruption
or period of delay.

 

12.

Address for Service

 

The address for service of notices hereunder of each of the parties shall be as
follows:

 

1048136:

c/o Harder & Company

Suite 1800, 999 West Hastings Street

Vancouver, B.C. V6C 2W2

Facsimile: (604) 682-4467

 

Cascade:

Cascade Energy, Inc.

3405 Folsom Blvd.

Suite 820

Folsom, CA 95630

Facsimile: (916) 608-8747

 

A party may change its address for service by notice to the other party, and
such changed address for service thereafter shall be effective for all purposes
of this Agreement.

 

13.

Insurance

 

Cascade shall carry insurance with a reputable insurance company in the manner
and in the amounts set out in the Operating Procedure.

 

14.

Successors and Assigns

 

This Agreement shall enure to the benefit of and be binding upon the parties
hereto and their respective successors and permitted assigns.

 

 

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5

 

 

 

15.

Proper Law

 

This Agreement and the relationship between the parties shall be construed and
determined according to the laws of the Province of British Columbia, and the
courts having original jurisdiction with respect to any matter or thing arising
directly or indirectly relating to this Agreement shall be the courts of the
Province of British Columbia.

 

16.

Supercession

 

This Agreement supercedes and replaces all other agreements, documents, writings
and verbal understandings between the parties with respect to the subject matter
of this Agreement.

 

17.

Counterparts

 

This Agreement may be executed in counterparts and by facsimile.

 

IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed
as of the day and year first written above.

 

 

1048136 ALBERTA LTD.

CASCADE ENERGY, INC.

 

 

per:/s/ Scott Marshall

per: /s/ Chris Foster

 

 

per:__________________________

per:_____________________________

 

 

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6

 

 

APPENDIX A

 

to the Agreement between 1048136 Alberta Ltd. and Cascade Energy, Inc.

(dated June 30, 2005)

 

Copy of Vega Participation Agreement

 

-attached hereto-

 

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7

 

 

 

PARTICIPATION AGREEMENT

 

THIS AGREEMENT made this 28th day of January 2005

 

BETWEEN:

VEGA RESOURCES LTD., a body corporate, having an office in the City of Calgary
in the Province of Alberta

 

(herein called the "Grantor")

 

OF THE FIRST PART

 

AND

 

1048136 ALBERTA LTD., a body corporate, having its registered and records office
in the City of Calgary in the Province of Alberta

 

(hereinafter called the "Participant")

 

OF THE SECOND PART

 

WHEREAS pursuant to an Agreement (hereinafter referred to as "the Farmout
Agreement") dated the 21st day of January, 2005, and made between Hanna Oil and
Gas Company -Canada, Inc, Firefly Resources Ltd. and Moraine Resources Ltd.
(hereinafter collectively referred to as the “Farmor”) and the Grantor
(hereinafter sometimes referred to as the “Farmee”), it is provided that the
Farmee, by performing certain obligations contained in the Farmout Agreement,
will become entitled to earn an interest in certain title documents and the
lands associated therewith, all as more particularly described in the Farmout
Agreement (a true and correct copy of which is attached hereto as Schedule "A");

 

AND WHEREAS the Participant desires to participate with the Grantor as if the
Participant had been the Farmee in the Farmout Agreement, by assuming a share of
the obligations therein contained and an interest in the lands thereunder.

 

NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises
and of the covenants and agreements of the parties hereinafter set forth, the
parties do hereby covenant and agree as follows:

 

1.

INTERPRETATION

 

(a)

The headings of the clauses of this Agreement are inserted for convenience of
reference only and shall not affect the meaning or construction thereof.

 

(b)

The terms and expressions used herein shall have the same meanings as are
ascribed to such terms and expressions under the Farmout Agreement.

 

 

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8

 

 

 

(c)

Wherever the plural or masculine or neuter is used the same shall be construed
as meaning singular or feminine or body politic or corporate, or vice versa as
the context so requires.

 

2.

APPOINTMENT OF OPERATOR

 

The Participant is appointed Operator, as between the Grantor and the
Participant, with respect to all operations conducted hereunder; however, the
Grantor shall have the joint authority with the Participant to deal with the
Farmor on behalf of the parties in respect of matters arising out of the Farmout
Agreement.

 

3.

FARMOUT AGREEMENT

 

Except as modified by the terms of this Agreement, the Terms and conditions of
the Farmout Agreement together with its operating provisions shall control the
operation of the parties and shall be deemed to be incorporated herein.

 

4.

TRUST CONDITIONS AND TERM

 

The Grantor agrees that, to the extent that the present assignment of the
Grantor’s rights and obligations under the Farmout Agreement is not formally
recognized and recorded by the Farmor, the Grantor shall hold the Participant’s
interests in the Farmout Agreement, Farmout Lands and Option Lands, as the case
may be, in trust for the Participant and shall ensure that all performance by
the Participant under the terms of this Agreement and the Farmout Agreement are
noted and recorded as the due performance of the Farmee under the Farmout
Agreement. If requested by the Participant, the Grantor agrees to record this
trust in writing pursuant to a trust agreement (in the form attached to the
Farmout Agreement as Schedule “E”, amended as applicable to reflect the
interests of the Participant in the Farmout Lands and Option Lands, as they
exist from time to time) until such time as the interests of the Participant in
the Farmout Agreement, Farmout Lands and Option Lands, as applicable, may be
formally recorded.

 

5.

PARTICIPATING INTEREST

 

The Participant shall assume all of the obligations of the Grantor under the
Farmout Agreement, including the drilling of the Test Well, and the Participant
shall thereby be entitled to 100% of the benefits and interests earned by the
Farmee under the Farmout Agreement,, subject to the payment to the Grantor of a
$15,000 fee for geological consulting and prospect engineering services (to be
paid upon the execution of this Agreement) and the reservation of a 3% Gross
Over-Riding Royalty by the Grantor, as more particularly set out in Schedule “B”
attached hereto..

 

6.

OPTION WELL(S)

 

(a)

If the Participant, in its absolute discretion, wishes to proceed with the
drilling of the Option Well (s), the provisions of clause 5 hereto will apply to
the Options Well (s) drilled on the Farmout Lands and/or Option Lands, as the
case may be.

 

 

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9

 

 

 

(b)

If the Participant does not wish to proceed with the drilling of certain Option
Well (s), then the Grantor shall be free to do so independently, provided there
is no resulting liability to the Participant. The Grantor shall be solely
responsible for all costs, expenses and liabilities thereby incurred and shall
be entitled to all benefits and interests pursuant to the Farmout Agreement that
are earned as a result.

 

7.

SELETION OF WELL LOCATIONS

 

The parties agree to meet from time to time to discuss ongoing operations under
the Farmout Agreement including selection of well locations. Notwithstanding
such discussions, should the parties fail to agree on the location of an earning
well then the Participant’s choice shall be binding upon the parties.

 

8.

GRANT AND CREDITS

 

Any credits or grants allowable under any acts, rules, regulations or other laws
of the Province of Alberta and/or Canada shall be shared by the parties in
accordance with the manner in which the parties bear the cost of operations
which give rise to the generation of such credits or grants.

 

9.

ASSIGNMENT BY PARTICIPANT

 

The Participant shall not assign its rights under this Agreement in whole or in
part without first obtaining the written consent of Grantor which consent may
not be unreasonably withheld. Notwithstanding any assignment by the Participant,
the Grantor will always look to the Participant for performance of any duties
and obligations required to be carried out by the Participant under this
Agreement during the Test Well phase of the Farmout Agreement, unless otherwise
agreed to in writing by Grantor.

 

10.

OTHER ENCUMBERANCES

 

If the interest of either party in the Farmout Lands hereafter shall become
encumbered by any royalty, production payment or other charge of a similar
nature, other than the royalties as set forth under the Farmout Agreement, such
royalty, production payment or other charge shall be charged to and paid
entirely by the party whose interest is or becomes thus encumbered.

 

 

11.

WARRANTY OF TITLE

 

The Grantor makes no representation or warranties as to its or Farmor's title to
the Farmout Lands and Option Lands but covenants that they are encumbered only
to the extent noted in the Farmout Agreement.

 

During the term of this Agreement, no party shall do or cause to be done any act
nor make or cause to be made any omission whereby the Farmout Lands or Option
Lands become

 

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10

 

encumbered in such a way as to adversely affect the interests of the other
parties, or become subject to termination or forfeiture.

 

12.

NO PARTNERSHIP

 

The rights, duties, obligations and liabilities of the parties shall be several
and not joint or collective, it being the parties' express purpose and intention
that nothing herein shall be construed as creating a partnership of any kind or
imposing upon any party hereto any partnership duty, obligation or liability to
the other party.

 

13.

NOTICE PERIODS

 

The parties will endeavor on a bonafide basis to meet at least five (5) days
prior to the date when either any election must be made or any notice must be
sent to the Farmor, for the purposes of discussing such election or notice in
order to enable Grantor, on behalf of the parties, to comply with the provisions
of the Farmout Agreement.

 

14.

FURTHER ASSURANCE

 

Each of the parties shall at all times do all such further acts and deliver all
such further deeds and documents as shall be reasonably required in order to
fully perform and carry out the terms of this Agreement.

 

15.

NOTICE

 

Notwithstanding anything to the contrary contained herein, all notices required
or permitted hereunder shall be in writing. Any notice to be given hereunder
shall be deemed to be served properly if served in any of the following modes:

 

a)

personally, by delivering the notice to the Party on which it is to be served at
that Party's address for service; or

 

b)

by telecopy or telex (or by any other like method by which a written message may
be sent) directed to the party on which it is to be served at that Party's
address for service. A notice so served shall be deemed to be received by the
addressee when actually received by it, if received within normal business hours
on any day other than a Saturday, Sunday or statutory holiday in Alberta or at
the commencement of the next ensuing business day following transmission if such
notice is not received during such normal business hours; or

 

c)

by mailing it first class (air mail if to or from a location outside of Canada)
registered post, postage prepaid, directed to the Party on which it is to be
served at that Party's address for service. Notices so served shall be deemed to
be received by the addressee at noon, local time, on the earlier of the actual
date of receipt or the fourth (4th) day (excluding Saturdays, Sundays and
statutory holidays in Alberta) following the mailing thereof. However, if postal
service is (or is

 

 

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11

 

reasonably anticipated to be) interrupted or operating with unusual delay,
notice shall not be served by such means during such interruption or period of
delay.

 

16.

ADDRESS FOR SERVICE

 

The address for service of notices hereunder of each of the Parties shall be as
follows:

 

Grantor:

Vega Resources Ltd.

 

 

5008 Varsity Drive N.W.

 

 

Calgary, Alberta T3A 1A5

Facsimile: (403) 286-2139

 

Participant:

1048136 Alberta Ltd.

c/o 1800, 999 W. Hastings Street

Vancouver, B.C. V6C 2W2

Facsimile: (604) 682-4467

 

A Party may change its address for service by notice to the other Party, and
such changed address for service thereafter shall be effective for all purposes
of this Agreement.

 

17.

INSURANCE

 

The parties shall individually carry insurance with a reputable insurance
company in the manner and in the amounts set out in the Operating Procedure. To
the extent of its cost sharing interest, the Participant agrees to be covered by
Grantor's "Control of Well" insurance and Grantor agrees to make suitable
arrangements in that regard. Participant will bear and pay its proportionate
share of such coverage at cost.

 

18.

SUCCESSORS AND ASSIGNS

 

This Agreement shall enure to the benefit of and be binding upon the parties
hereto and their respective successors and permitted assigns.

 

19.

PROPER LAW

 

This Agreement and the relationship between the parties shall be construed and
determined according to the laws of the Province of Alberta, and the courts
having original jurisdiction with respect to any matter or thing arising
directly or indirectly relating to this Agreement shall be the courts of the
Province of Alberta.

 

20.

SUPERCESSION

 

This Agreement supercedes and replaces all other agreements, documents, writings
and verbal understandings between the parties with respect to the subject matter
of this Agreement.

 

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12

 

 

 

21.

COUNTERPARTS

 

This Agreement may be executed in counterparts and by facsimile.

 

IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed
as of the day and year first written above.

 

 

VEGA RESOURCES LTD.

1048136 ALBERTA LTD.

 

per:__________________________

per:_____________________________

 

 

per:__________________________

per:_____________________________

 

 

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13

 

 

SCHEDULE A

 

to the Participation Agreement between Vega Resources Ltd. and

1048136 Alberta Ltd., dated January 28, 2005

 

Copy of Farmout Agreement

 

•

attached hereto –

 

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14

 

 

FARMOUT and OPTION AGREEMENT

 

Empress Area, Alberta

 

Made as of the 21st day of January, 2005

 

BETWEEN:

 

HANNA OIL AND GAS COMPANY-CANADA, INC., a body corporate with an office in the
City of Calgary, Alberta (“Hanna”)

 

-and-

 

FIREFLY RESOURCES LTD. a body corporate with an office in the City of Calgary,
Alberta (“Firefly”)

 

-and-

 

MORAINE RESOURCES LTD. a body corporate with an office in the City of Calgary,
Alberta (“Moraine”)

 

(Hanna, Firefly and Moraine are hereinafter collectively referred to as
“Farmor”)

 

-and-

 

VEGA RESOURCES LTD., a body corporate with an office in the City of Calgary,
Alberta (“Vega”)

 

WHEREAS Farmor is prepared to grant Vega the right to earn an interest in the
Farmout Lands and the Option Lands in which Farmor holds an undivided one
hundred percent (100%) working interest, on the terms and conditions herein
provided.

In consideration of the mutual covenants contained in this Agreement the Parties
agree as follows:

 

 

1.

DEFINITIONS

 

In this Head Agreement the definitions in the Farmout & Royalty Procedure shall
apply, unless the context otherwise requires, and, the words below shall have
the meanings indicated:

 

“Agreement” means the Head Agreement and the Schedules attached to it.

“Contract Depth” means a depth sufficient to penetrate fifteen metres (15 m)
into the Paleozoic formation or nine hundred and fifty meters (950 m)
subsurface, whichever first occurs;

 

 

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15

 

 

“Earning Well” means the Test Well and the Option Well(s), as the case may be;

“Effective Date” means January 21, 2005;

“Farmee” means Vega;

“Farmor” means Hanna as to a 56% interest, Firefly as to a 24% interest and
Moraine as to 20%;

“Farmout & Royalty Procedure” means the 1997 CAPL Farmout & Royalty Procedure
which is hereby modified by the 1997 CAPL Farmout & Royalty Procedure election
and amendment sheet attached hereto as Schedule “B”

“Farmout Lands” means the areal, stratigraphic and substance rights described as
“Farmout Lands” in Schedule “A” of the Agreement or so much of those rights as
remain subject to the Agreement and the Title Documents, excluding any Reserved
Formations;

“Head Agreement” means the Agreement, other than the Schedules;

 

“Lessor Royalty” means a lessor royalty under a Title Document;

 

“Operating Procedure” means the standard form 1990 CAPL Operating Procedure and
1996 PASC Accounting Procedure with elections attached hereto as Schedule “C”

 

“Option Lands” means the areal, stratigraphic and substance rights described as
“Option Lands” in Schedule “A” of the Agreement or so much of those rights as
remain subject to the Agreement and the Title Documents, excluding any Reserved
Formations;

 

“Option Well” means the well or wells, in addition to the Test Well, that the
Farmee has the option to drill, pursuant to clause 6 entitled ROLLING OPTION
WELL(s) of the Head Agreement, to earn a Working Interest in the Farmout Lands
and/or the Option Lands, as the case may be;

 

“Pre-Farmout Working Interests” means the undivided Working Interests of the
Parties the Farmout Lands and Option Lands, prior to any earning hereunder, as
described in Schedule “A”

 

“Test Well” means the first well drilled under the Head Agreement as provided
for in clause 4 entitled TEST WELL of the Head Agreement;

 

“Title Documents” means the documents of title described as “Title Documents” in
Schedule “A” to the Agreement, insofar as they relate to the Farmout Lands, the
Option Lands and all renewals, extensions, continuations or documents of title
issued in substitution or by selection.

 

“Trust Agreement” means the form of trust agreement attached hereto as Schedule
“E”.

 

 

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16

 

 

“Well Requirement Sheet” means the document specifying the type of information
required to be supplied by the Farmee to the Farmor pursuant to the Farmout &
Royalty Procedure and attached hereto as Schedule “D”.

 

2.

INCORPORATION OF PROVISIONS FROM THE FARMOUT & ROYALTY PROCEDURE

 

Except as otherwise set out herein and unless the context otherwise requires,
clause 1.02 of the Farmout & Royalty Procedure which incorporates certain
provisions of the Operating Procedure is hereby incorporated into the Head
Agreement, except that any reference to “Operating Procedure” or “Farmout &
Royalty Procedure” shall mean the Head Agreement. The following clauses are not
incorporated as a conflicts clause and superseding clause are provided for in
the clauses entitled “Supersedes Previous Agreements” and “Conflicts” of the
Head Agreement”:

 

107 (Conflicts)

2801 (Supersedes Previous Agreements).

 

3.

SCHEDULES

The schedules described below are attached to and form part of this Agreement.

 

Schedule “A”

describes the Farmout Lands, Option Lands, Title Documents, Encumbrances and
Pre-Farmout Working Interests;

 

Schedule “B”

is the 1997 CAPL Farmout & Royalty Procedure and the 1997 CAPL Farmout & Royalty
Procedure election and amendment sheet;

 

Schedule “C”

is the Operating Procedure;

 

Schedule “D”

is the Well Requirement Sheet;

 

Schedule “E”

is the Trust Agreement.

 

4.

TEST WELL

Farmee shall, on or before March 15, 2005, subject to surface access, regulatory
approvals and rig availability, commence drilling a well (hereinafter referred
to as the “Test Well”) at a location of its choice on the Farmout Lands and
shall continuously and diligently drill the Test Well to Contract Depth and
complete, cap or abandon same at its sole cost, risk and expense. Farmee shall
conduct all operations hereunder in accordance with good oilfield practices and
in strict compliance with the terms of the Title Documents, this Agreement and
the Regulations.

5.

INTEREST EARNED

Subject to Article 3.00 of the Farmout & Royalty Procedure and Clause 4 herein
and provided Farmee is not in default under this Agreement, Farmee will earn
100% of the Farmor’s Pre-Farmout Working Interests in four (4) sections of the
Farmout Lands from surface to base of the

 

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17

 

deepest formation fully penetrated and evaluated, subject to the Overriding
Royalty reserved by Farmor under the Farmout & Royalty Procedure. The said four
(4) sections shall be selected with fourteen (14) days of rig release of the
Test Well, which selection must conform to the Department of Energy Regulations
governing lease selection from a PNG License.

6.

ROLLING OPTION WELL(s)

 

If the Farmee has drilled the Test Well, has earned as provided for in clause 5
herein, and is not otherwise in default under this Agreement, the Farmee will
have the right and option, for thirty (30) days from rig release of the last
Earning Well drilled on the Farmout Lands or Option Lands, as the case may be,
in which to elect in writing to Farmor to:

 

(a)

drill a well (hereinafter referred to as the “Option Well”) at a location of its
choice on four pre-selected unearned sections of the Farmout Lands, which Option
Well must be spudded by Farmee no later than forty five (45) days after its
election, subject to surface access, rig availability and regulatory approvals.
Farmee shall continuously and diligently drill the Option Well to Contract Depth
and complete, cap or abandon same at its sole cost, risk and expense. Farmee
shall conduct all operations hereunder in accordance with good oilfield
practices and in strict compliance with the terms of the Title Documents, this
Agreement and the Regulations; or

 

(b)

drill an Option Well at a location of its choice on the Option Lands, which
Option Well must be spudded by Farmee no later than sixty (60) days after its
election, subject to surface access, rig availability and regulatory approvals.
Farmee shall continuously and diligently drill the Option Well to Contract Depth
and complete, cap or abandon same at its sole cost, risk and expense. Farmee
shall conduct all operations hereunder in accordance with good oilfield
practices and in strict compliance with the terms of the Title Documents, this
Agreement and the Regulations.

Failure by Farmee to elect to drill an Option Well in accordance with the
provisions of subclause (a) or (b) above shall be deemed to be an election to
surrender its rights to drill an Option Well and to earn an interest in the
unearned Farmout Lands and Option Lands.

 

7.

OPTION WELL EARNING

 

(a)

In the event Farmee elects to drill an Option Well pursuant to clause 6 (a)
herein, Farmee will, subject to Article 3.00 of the Farmout & Royalty Procedure
and clause 6 (a) herein and provided Farmee is not in default under this
Agreement, will earn 100% of the Farmor’s Pre-Farmout Working Interests in four
(4) sections of the unearned Farmout Lands from surface to base of the deepest
formation fully penetrated and evaluated, subject to the Overriding Royalty
reserved by Farmor under the Farmout & Royalty Procedure. The said four (4)
sections shall be selected with fourteen (14) days of rig release of the Option
Well, which selection must conform to the Department of Energy Regulations
governing lease selection from a PNG License.

(b)

In the event Farmee elects to drill an Option Well pursuant to clause 6 (b)
herein, Farmee will, subject to Article 3.00 of the Farmout & Royalty Procedure
and clause 6 (b) herein

 

 

--------------------------------------------------------------------------------

 

18

 

and provided Farmee is not in default under this Agreement, earn one hundred
(100%) percent of the Farmor’s Pre-Farmout Working Interest from surface to the
base of the deepest formation penetrated and evaluated, in that section of the
Option Lands in which the Option Well was drilled, subject to the Overriding
Royalty and rights of conversion reserved by Farmor as set out in the Farmout &
Royalty Procedure.

For clarification, the Option Lands earned pursuant to sub-clauses 7(b) above
shall be held as follows:

 

Before Payout

After Payout

Farmee

100%

60.0%

Hanna

GOR

22.4%

Firefly

GOR

9.6%

Moraine

GOR

8.0%

 

8.

AREA OF MUTUAL INTERST

 

The Parties hereto agree that Section 8-24-2W4 shall be an Area of Mutual
Interest (“AMI”). The AMI shall have a term of the later of one (1) year from
rig release of the last Earning Well drilled hereunder or the termination of
earning by Farmee as provided for in this agreement. The Parties interest in the
AMI shall be Farmee 60%, Hanna 22.4%, Firefly 9.6% and Moraine 8.0%.

 

9.

TRUST AGREEMENT

 

Farmor shall assign to Farmee the entire interest earned in the Farmout Lands,
but if such assignment is not possible or practical, it shall hold such
interests in trust for Farmee in accordance with the Trust Agreement.

 

8.

ASSIGNMENT

 

(a)

Until Farmee has earned the entire interest it is entitled to earn hereunder or
its right to earn any further interest hereunder has terminated or expired,
Farmee may not assign this Agreement, either in whole or in part.

 

(b)

Once Farmee has earned the entire interest it is entitled to earn hereunder or
its right to earn any further interest hereunder has terminated or expired,
2401(A) of the standard form 1990 CAPL Operating Procedure shall apply to all
dispositions of Working Interests hereunder and any reference to “party” therein
shall mean “Party”.

 

9.

LIMITATIONS

 

The two (2) year period for seeking a remedial order under section 3(1)(a) of
the Limitations Act, S.A. 2000 c. L-12, as amended, for any claim (as defined in
that Act) arising in connection with this agreement is extended to: (a) for
claims disclosed by an audit, two (2) years after the time this agreement
permitted that audit to be performed, and (b) for all other claims, four (4)
years.

 

 

--------------------------------------------------------------------------------

 

19

 

 

 

10.

ADDRESS FOR NOTICE

 

The address for service of notices hereunder for each Party is:

 

Hanna Oil and Gas Company-

 

Canada, Inc.
1400, 715 – 5th Avenue SW
Calgary, AB T2P 2X6
Attn: Land Department
Fax: (403) 265-1870

Firefly Resources Ltd.
1400, 715 – 5th Avenue SW
Calgary, AB T2P 2X6
Attn: Ken Havard, President
Fax: (403) 269-2557

 

 

Moraine Resources Ltd.
1411, 715 – 5th Avenue SW
Calgary, AB T2P 2X6
Attn: William Turnbull, President
Fax: (403) 265-1870

Vega Resources Ltd.
5008 Varsity Drive NW
Calgary, AB T3A 1A5
Attn: Richard Johnson
Fax: (403) 286-2139

 

 

11.

SUPERSEDES PREVIOUS AGREEMENTS

 

This Agreement supersedes all other agreements, documents, writings and verbal
understandings between the Parties with respect to the Farmout Lands and the
Option Lands and contains the entire agreement between the Parties with respect
thereto.

 

 

12.

CONFLICTS

 

(a)

If any provision in the Head Agreement conflicts with any provision in an
exhibit or schedule attached hereto (other than any Title Document), the
provision of the Head Agreement shall prevail.

 

(b)

If there is a conflict between any provision of the Agreement and the
Regulations or Title Documents, the Regulations or Title Documents, as the case
may be, shall govern, except that: (i) as between the Parties in their
capacities or as Working Interest owners, the Working Interests shall prevail if
there is a difference between the Working Interests and the registered interests
in the Title Documents; and (ii) the allocation of responsibility for losses as
provided herein shall govern the relationship of the Parties.

(c)

If there is a conflict as provided in any subclause above, the Agreement
(excluding Title Documents) shall be modified accordingly to the extent
necessary to resolve such conflict, and, as so modified, shall continue in full
force and effect.

 

 

 

--------------------------------------------------------------------------------

 

20

 

 

13.

JURISDICTION

This Agreement shall be subject to and interpreted, construed and enforced in
accordance with the laws in effect in the Province of Alberta. Each Party
accepts the jurisdiction of the courts of the Province of Alberta and all courts
of appeal therefrom.

 

 

IN WITNESS WHEREOF the parties have executed this Agreement on the date first
set out above.

 

 

HANNA OIL AND GAS COMPANY-CANADA, INC.

Per: ______________________________
     Chuck Gusa, Manager

FIREFLY RESOURCES LTD.

Per: _______________________________
       Kenneth Havard, President

 

 

 

MORAINE RESOURCES LTD.

Per: ______________________________
      William (Bill) Turnbull, President

VEGA RESOURCES LTD.

Per: _______________________________
       Name & Title

 

 

 

This is the execution page of a Farmout and Option Agreement dated January 21,
2005 between Hanna Oil and Gas Company-Canada, Inc., Firefly Resources Ltd.,
Moraine Resources Ltd and Vega Resources Ltd.

 

 

--------------------------------------------------------------------------------

 

21

 

 

 

SCHEDULE “A”

Attached to and made a part of a Farmout and Option Agreement dated January 21,
2005 between Hanna Oil and Gas Company-Canada, Inc., Firefly Resources Ltd.,
Moraine Resources Ltd and Vega Resources Ltd.

 

 

Farmout Lands

 

Title Documents

 

Encumbrances

Pre-Farmout Working Interests

 

 

 

 

 

 

Twp 24 Rge 2W4M:
Section’s 9, 10, 11, 12, 13, 14, 15, 16, 22 & 23
All PNG Rights

 

Alberta Crown
PNG License
#5303080787

 

Alberta Crown Royalty

Hanna          56%
Firefly          24%
Moraine        20%

 

 

 

 

 

 

Twp 24 Rge 2W4M:
Section 17
All PNG Rights below base Viking formation

Twp 24 Rge 2W4M: Section 21
All PNG Rights to base Viking formation

 

 

 

 

 

Twp 24 Rge 2W4M:
Section 21
All PNG Rights below base Viking formation to basement

 

Alberta Crown
PNG Lease
#0400080023

 

Alberta Crown Royalty

Hanna          56%
Firefly          24%
Moraine        20%

 

 

 

 

 

 

Option Lands

 

Title Documents

 

Encumbrances

Pre-Farmout Working Interests

Twp 24 Rge 2W4M:
Section 5
All PNG rights below base Medicine Hat formation to basement

 

Alberta Crown
PNG Lease
#0403010070

 

Alberta Crown Royalty

Hanna          56%
Firefly          24%
Moraine        20%

 

 

 

 

 

 

 

 

 

 

 

 

Twp 24 Rge 2W4M:
Section 6
All PNG rights below base Medicine Hat formation to basement

 

Alberta Crown
PNG Lease
#0401110453

 

Alberta Crown Royalty

Hanna          56%
Firefly          24%
Moraine        20%

 

 

 

 

 

 

Twp 24 Rge 2W4M:
Section 7
All PNG rights

 

Alberta Crown
PNG Lease
#0402010037

 

Alberta Crown Royalty

Hanna          56%
Firefly          24%
Moraine        20%

 

 

 

--------------------------------------------------------------------------------

 

22

 

 

SCHEDULE “B”

Attached to and made a part of a Farmout and Option Agreement dated January 21,
2005 between Hanna Oil and Gas Company-Canada, Inc., Firefly Resources Ltd.,
Moraine Resources Ltd and Vega Resources Ltd.

1997 CAPL FARMOUT AND ROYALTY PROCEDURE

ELECTIONS AND AMENDMENTS

______________________________________________________________________

 

1.

EFFECTIVE DATE [Subclause 1.01(f)]: January 21, 2005

 

2.

PAYOUT [Subclause 1.01(t)] Alternate A – With respect to the Option Lands only

 

3.

INCORPORATION OF CLAUSES FROM 1990 CAPL OPERATING PROCEDURE [Clause 1.02]

 

Clause 311 (Insurance) – Alternate A.

 

Add Subclause 311h

 

“In addition to the policies of insurance required under Clause 311A of the
Operating Procedure, Farmee shall obtain and maintain control of well insurance
to the extent of a minimum of three million dollars ($3,000,000) with respect to
each well drilled hereunder and each such policy shall also include the waivers
of subrogation required by Clause 311A of the Operating Procedure. All costs of
insurance maintained by Farmee pursuant to this Clause shall be borne solely by
Farmee and, upon request of Farmor, Farmee shall promptly provide Farmor with
evidence that such insurance is maintained by Farmee, including a copy of any
particular policy of insurance if so requested by Farmor.”

 

4.

OPTION WELLS [Article 4.00]

 

This optional Article 4.00 will X / will not __ apply herein.

 

5.

OVERRIDING ROYALTY [Article 5.00]

 

This optional Article 5.00 will X / will not __ apply herein.

 

6.

QUANTIFICATION OF OVERRIDING ROYALTY [Clause 5.01]

 

for crude oil, Alternate 1 will apply

 

Alternate 1: 15% of gross monthly production; or

 

Alternate 2: ___ (divisor); not less than __% and not more than __%

 

for all other Petroleum Substances, Alternate 1 will apply

 

 

--------------------------------------------------------------------------------

 

23

 

 

Alternate 1: 15% of gross monthly production; or

 

Alternate 2: if not taken in kind: ____% of gross monthly production; or

if taken in kind ____% of gross monthly production

 

 

7.

ROYALTY PAYOR’S ALLOWED DEDUCTIONS OF OVERRIDING ROYALTY NOT TAKEN IN KIND
[Subclause 5.04B]

 

DEDUCTIONS (5.04 B) Alternates:

1 only

__

2 only

__

1 and 2

X

 

neither 1 nor 2

__

 

Alternate 2 - 20%

Marketing Fees are not an allowed deduction.

 

8.

ROYALTY OWNER’S RIGHTS UPON SURRENDER [Subclause 5.08]

 

Add new paragraph:

“Surrender in this Clause shall include the Royalty Payor’s intention not to
make application to continue a Title Document beyond its primary term. The
Royalty Owner shall have the right for fifteen (15) days from the date of such
surrender notice to request an assignment from the Royalty Payor of the interest
that it desires to surrender. From and after the date of such surrender or
assignment the Royalty Payor shall be discharged of, from and against any and
all obligations with respect to the interests so surrendered or assigned to the
extent that such obligations are attributable to the period commencing with the
date of the surrender or assignment, and the lands and the leases as
hereinbefore defined, shall thereafter be deemed to exclude the interests so
surrendered or assigned. The provisions of this Clause shall be subject to the
Title Documents covering the lands and in the event of conflict, the provisions
of the Title Documents shall prevail.”

9.

CONVERSION OF OVERRIDING ROYALTY [Article 6.00]

 

This optional Article 6.00 will X / will not __ apply herein with respect to the
Option Lands only.

 

 

10.

OPERATIONS AT CONVERSION [Clause 6.04]

 

If Article 6.00 applies, conversion will be to 40% of the Working Interest by
Farmor. This Article applies only to the Option Lands.

 

11.

AREA OF MUTUAL INTEREST [Article 8.00]

 

This optional Article 8.00 will X/ will not ___ apply herein.

 

12.

LIABILITY AND INDEMNITY [Article 10.00]

 

 

 

--------------------------------------------------------------------------------

 

24

 

 

Add:

“10.03 Survives Termination

This Article shall survive the termination of the Agreement until Farmee has
fully and properly abandoned all well sites, surface and subsurface facilities
on the Farmout Lands or used in connection with production from the Farmout
Lands in accordance with the regulations and has fully restored the surface for
such well sites, surface and subsurface facilities in accordance with the
regulations.”

 

 

13.

LAND MAINTENANCE COSTS [Clause 11.02]

 

This optional Clause 11.02 will X / will not __ apply herein.

The Farmee will pay the Farmor $__________ with 30 days of Effective Date.

Add:

“Farmee shall be responsible for all rentals on a per diem basis payable on the
Title Documents from the Effective Date until Farmee has earned an interest in
the Farmout Lands and or the Option Lands or until Farmee’s right to earn any
further interest is terminated or surrendered. Thereafter Farmee and Farmor
shall pay all rentals and taxes on those Farmout Lands and Option Lands that
Farmee has earned an interest in proportionate to the working interests they
hold in such Farmout Lands and Option Lands.”

 

 

--------------------------------------------------------------------------------

 

25

 

 

SCHEDULE “C”

Attached to and made a part of a Farmout and Option Agreement dated January 21,
2005 between Hanna Oil and Gas Company-Canada, Inc., Firefly Resources Ltd.,
Moraine Resources Ltd and Vega Resources Ltd.

 

OPERATING PROCEDURE ELECTIONS

 

1990 CAPL OPERATING PROCEDURE

 

Clause 311 - Insurance:

Alternate A __

B X  

 

Clause 604 - Marketing Fee:

Alternate A X_ B ___  

(if 'B' is selected add specific options for petroleum, NG, NGL & sulphur)

 

Clause 903 - Less than All Parties Participate: Alternate A _ X_ B ___

 

Clause 1007 - Penalty Where Independent Well Results in Production:

1007 (a) (iv) - Development Wells 300%  

 

1007 (a) (iv) - Exploratory Wells

500%  

 

Clause 1010 (a) iv - exception:

180 days

 

Clause 2202 - Addresses for Notices:

 

 

Hanna Oil and Gas Company-Canada, Inc.
1400, 715 –5th Avenue SW
Calgary AB
T2P 2X6
Attn: Land Dept.

Firefly Resources Ltd.
1400, 715 –5th Avenue SW
Calgary AB
T2P 2X6
Attn: President

 

Moraine Resources Ltd.
1411, 715 – 5th Avenue SW
Calgary, AB
T2P 2X6
Attn: President

Vega Resources Ltd.
5008 Varsity Drive NW
Calgary AB
T3A 1A5
Attn: Land Dept.

 

 

 

Clause 2401 - Right to Assign/Sell/Dispose:

Alternate A _ X_

B ___

 

 

Clause 2404 - Recognition upon Assignment: deleted in its entirety and replaced
with 1993 CAPL Assignment Procedure

 

1996 PASC ACCOUNTING PROCEDURE

 

Clause 105 - Operating Fund:

10%  

 

Clause 110 - Approvals:

2 or more parties totalling 75%  

 

 

 

--------------------------------------------------------------------------------

 

26

 

 

Clause 112 - Expenditure Limitations:

(a) excess of $25,000 (c) excess of $25,000

 

Clause 202(b) Employee Benefits: (b) exceed 22%

 

Clause 213 - Camp & Housing: shall not

 

Clause 216 - Warehouse Handling: 5%

 

Clause 302 - Overhead Rates:

 

(a)

For each Exploration Project:

 

 

(1)

5 % of the first $ 50,000; plus

 

 

(2)

3 % of the next $100,000; plus

 

 

(3)

1 % of cost exceeding the sum of (1) and (2)

 

(b)

For each Drilling Well:

 

 

(1)

3 % of the first $ 50,000; plus

 

 

(2)

2 % of the next $100,000; plus

 

 

(3)

1 % of cost exceeding the sum of (1) and (2)

 

(c)

For each Initial Construction Project:

 

 

(1)

5 % of the first $ 50,000; plus

 

 

(2)

3 % of the next $100,000; plus

 

 

(3)

1 % of cost exceeding the sum of (1) and (2)

 

 

(d)

For each Subsequent Construction Project:

 

 

(1)

5% of the first $50,000; plus

 

 

(2)

3% of the next $100,000; plus

 

 

(3)

1% of the cost exceeding the sum of (1) and (2)

 

(e)

For Operation and Maintenance:

 

 

(1)

- _% of the cost; and

 

 

(2)

$250.00/producing well/month;

 

 

(3)

$____Flat rate per month.

 

 

Rates for e(2) and e(3) will not be adjusted each July

 

Clause 406 - Dispositions: $25,000

 

 

--------------------------------------------------------------------------------

 

27

 

 

SCHEDULE “D”

Attached to and made a part of a Farmout and Option Agreement dated January 21,
2005 between Hanna Oil and Gas Company-Canada, Inc., Firefly Resources Ltd.,
Moraine Resources Ltd and Vega Resources Ltd.

 

WELL DATA REQUIREMENT SHEET

 

WELL NAME: __________________

LOCATION ________________________

 

1.

INFORMATION REQUIRED PRIOR TO DRILLING: PLEASE MAIL THE NOTICES TO:

 

 

Hanna Oil and Gas Company-Canada, Inc.
1400, 715 – 5th Avenue SW
Calgary, AB T2P 2X6
Attention: Chuck Gusa, Manager

Moraine Resources Ltd.
1411, 715 – 5th Avenue S.W.
Calgary, AB T2P 2X6
Attention: William (Bill) Turnbull, President

Firefly Resources Ltd.
1400, 715 – 5th Avenue SW
Calgary, AB T2P 2X6
Attention: Kenneth Havard, President

 

 

 

# of Copies to each company

Required

 

Survey Plan

1

Application for Well Licence

1

Well Licence

1

Drilling Program and Geological Prognosis

1

 

2. DAILY E-MAIL DAILY REPORTS TO:

 

Hanna - Chuck Gusa
hanna@pngland.com

Moraine - William (Bill) Turnbull
williamturnbull@yahoo.com

Firefly - Kenneth Havard
firefly@pngland.com

 

 

 

3. INFORMATION REQUIRED DURING & AFTER DRILLING: PLEASE MAIL TO THE ABOVE
ADDRESSES

 

# of Copies to each Company

 

Required

Daily Written Reports

1

 

Logs: Field Prints

1

 

 

Final Digits

1

 

Core and Sample Descriptions

1

 

Drill Stem Test Reports

1

 

Core Analyses: Preliminary

1  

 

 

 

--------------------------------------------------------------------------------

 

28

 

 

 

Final

1

Oil, Water and Gas Analyses

1

Abandonment Report (AEUB Forms)

1

Well Status Reports(AEUB Forms)

1

Pressure Surveys, Completion Reports

1

Production Reports

1

 

Access to Well Site Operations

Yes

X No

 

 

4. FORMATION SAMPLES: ACCESS TO OPERATOR'S CUTTINGS

 

5. NOTICES REQUIRED:

 

24

hours notice of intention to spud

 

Immediate notice of oil or gas shows

X Yes

No

 

24

hours notice of intention to log, core or test

 

 

24

hours notice of completion or abandonment

 

 

Please direct all notices to the attention of:

Chuck Gusa, Manager - Hanna Oil and Gas Company-Canada, Inc.

Kenneth Havard, President - Firefly Resources Ltd.

William (Bill) Turnbull, President – Moraine Resources Ltd.

 

6.

ADDITIONAL REQUIREMENTS AND REMARKS

 

Chuck Gusa

Home Phone # (403) 288-9652

 

Cell # (403) 660-9029

 

 

Office # (403) 269-4182

 

 

E-Mail: hanna@pngland.com

 

 

Kenneth Havard

Office # 237-8778

 

E-Mail: >firefly@pngland.com

 

 

William (Bill) Turnbull

Office # (403) 263-1933

 

 

E-Mail: williamturnbull@yahoo.com

 

--------------------------------------------------------------------------------

 

29

 

 

SCHEDULE “E”

Attached to and made a part of a Farmout and Option Agreement dated January 21,
2005 between Hanna Oil and Gas Company-Canada, Inc., Firefly Resources Ltd.,
Moraine Resources Ltd and Vega Resources Ltd.

 

 

TRUST AGREEMENT

 

THIS AGREEMENT made the

day of

, 19

 

BETWEEN:

 

, a body corporate,

having an office at the City of Calgary, in the Province of Alberta

(“Trustee”)

 

-and-

 

, a body corporate,

having an office at the City of Calgary, in the Province of Alberta

(“Beneficiary”)

 

Trustee is the lessee under a lease (the “Lease”) granting to lessee certain
petroleum or natural gas rights or both which may be found within, upon or under
certain lands (the” Lands”). The Lease and Lands are described in Schedule “A”
hereto.

 

Trustee and Beneficiary are parties to an agreement (the “Agreement") described
in Schedule “A” hereto whereby Beneficiary is entitled to certain interests in
the Lease and Trustee agrees to hold the interest (the “Trust Interest”) of the
Beneficiary in the Lease in trust on the terms and conditions set out below.

 

In consideration of the mutual promises, covenants and conditions and in
consideration of the sum of $10.00, receipt of which is hereby acknowledged, the
parties agree as follows:

 

1.

The effective date of this Declaration is the date first written above.

 

2.

Trustee hereby acknowledges and agrees that from the date of this agreement and
for the balance of the unexpired term of the Lease and subject to the Agreement
and this agreement;

 

(a)

it holds the Trust Interest in trust for Beneficiary;

 

(b)

all benefit accruing to the Trust Interest, if and when received by Trustee,
shall be held by Trustee, its successors and assigns, for the benefit of
Beneficiary; and

 

 

 

--------------------------------------------------------------------------------

 

30

 

 

(c)

it will not transfer, encumber, or in any other way dispose of the Trust
Interest except with the written consent of Beneficiary or with the prior
written consent of Beneficiary, which consent shall not be unreasonably
withheld, PROVIDED HOWEVER, Trustee may dispose of the Trust Interest without
Beneficiary’s consent if Trustee disposes of all its beneficial interest in the
Lease and the party acquiring such interest agrees, in writing, to hold the
Trust Interest in trust for Beneficiary and be bound by the terms of this
Agreement in respect thereto.

 

3.

Trustee does not purport to hold in trust and does not warrant to Beneficiary
any better title to the Trust Interest than it has now or is entitled to
receive.

 

4.

Where applicable, Trustee shall use its reasonable efforts, notwithstanding any
restrictions on assignment contained in the Lease, to have the operator under
the applicable operating agreement recognize and deal directly with Beneficiary.

 

 

5.

(a)        Beneficiary shall forthwith upon being invoiced by Trustee reimburse
Trustee for the annual rental payments under the Lease, provided that all
invoices delivered by Trustee to Beneficiary are in respect of annual rental
payments that are payable or have been paid by Trustee.

 

(b)

Trustee shall use its reasonable efforts to keep Beneficiary apprised of all
notices, operations and other matters insofar as they relate to the Trust
Interest.

 

6.

When requested to do so by Beneficiary Trustee shall, subject to all applicable
laws and all applicable agreements, assign the Trust Interest to an assignee
specified by Beneficiary or execute a further trust agreement(s) in favor of
such assignee as Beneficiary may designate in writing.

 

7.

 

 

(a)

Trustee shall not be liable to Beneficiary for any loss or damage arising from
any act or omission of Trustee so long as Trustee acts in good faith and
performs its obligations diligently and in a timely manner in maintaining the
Trust Interest, including, but not limited to, making all payments required to
maintain the Lease in good standing and registering or transferring caveats
necessary to protect Trustee’s and Beneficiary’s interest in the Lease.

 

(b)

Beneficiary hereby agrees to indemnify Trustee against all actions, claims,
suits, costs, demands, losses, damages and expenses of any nature that may be
brought against or suffered by Trustee or which Trustee may sustain, pay or
incur by reason of any matter or thing whether directly or indirectly arising
out of or in any way attributable to Trustee holding the Trust Interest in trust
pursuant to this agreement except where caused by Trustee’s gross negligence or
wilful misconduct.

 

8.

Each party shall without further consideration do all such further acts and
execute and deliver all such further documents reasonably required to fully
perform the terms of this agreement.

 

9.

This agreement shall enure to the benefit of and is binding upon the parties
hereto and their respective successors and assigns.

 

10.

If a term of this agreement conflicts with a term of the Agreement the term of
the Agreement shall prevail and this agreement shall be deemed to be amended
accordingly.

 

 

 

--------------------------------------------------------------------------------

 

31

 

 

IN WITNESS of the foregoing the parties have executed and delivered this
agreement as of the date first written above.

 

TRUSTEE:

 

_______________________________________

 

Per:____________________________________

 

_______________________________________

Print Name/Title:

 

BENEFICIARY:

 

________________________________________

 

Per:_____________________________________

 

________________________________________

Print Name/Title:

 

EXECUTION PAGE TO TRUST AGREEMENT DATED THE ___ DAY OF ______ 19__ , BETWEEN

 

_______________________________________ AND ___________________________________.

 

--------------------------------------------------------------------------------

 

 

 

This is Schedule “A” attached to and forming part of the Trust Agreement
between____________________ and                                           
       dated                            , 19      .

 

the Lease:

 

 

 

the “Agreement”

 

 

 

the Lands:

 

 

 

 

 

 

the Trust Interest:

 

 

 

 

 

--------------------------------------------------------------------------------

33

 

 

 

SCHEDULE B

 

to the Participation Agreement between Vega Resources Ltd. and

1048136 Alberta Ltd., dated January 28, 2005

 

Gross Over-Riding Royalty

1997 CAPL FARMOUT AND ROYALTY PROCEDURE

ELECTIONS AND AMENDMENTS

______________________________________________________________________

 

1.

EFFECTIVE DATE [Subclause 1.01(f)]: January 21, 2005

 

3.

PAYOUT [Subclause

] Alternate

– Will not apply

 

3.

INCORPORATION OF CLAUSES FROM 1990 CAPL OPERATING PROCEDURE [Clause 1.02]

 

Clause 311 (Insurance) – Alternate A.

 

Add Subclause 311h:

 

“In addition to the policies of insurance required under Clause 311A of the
Operating Procedure, Farmee shall obtain and maintain control of well insurance
to the extent of a minimum of three million dollars ($3,000,000) with respect to
each well drilled hereunder and each such policy shall also include the waivers
of subrogation required by Clause 311A of the Operating Procedure. All costs of
insurance maintained by Farmee pursuant to this Clause shall be borne solely by
Farmee and, upon request of Farmor, Farmee shall promptly provide Farmor with
evidence that such insurance is maintained by Farmee, including a copy of any
particular policy of insurance if so requested by Farmor.”

 

4.

OPTION WELLS [Article 4.00]

 

This optional Article 4.00 will X / will not __ apply herein.

 

5.

OVERRIDING ROYALTY [Article 5.00]

 

This optional Article 5.00 will X / will not __ apply herein.

 

6.

QUANTIFICATION OF OVERRIDING ROYALTY [Clause 5.01]

 

for crude oil, Alternate 1 will apply

 

Alternate 1: 3% of gross monthly production; or

 

Alternate 2: ___ (divisor); not less than __% and not more than __%

 

for all other Petroleum Substances, Alternate 1 will apply

 

 

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Alternate 1: 3% of gross monthly production; or

 

Alternate 2: if not taken in kind: ____% of gross monthly production; or

if taken in kind ____% of gross monthly production

 

 

7.          ROYALTY PAYOR’S ALLOWED DEDUCTIONS OF OVERRIDING ROYALTY NOT TAKEN
IN KIND [Subclause 5.04B]

 

DEDUCTIONS (5.04 B) Alternates:

1 only

__

 

2 only

__

 

1 and 2

X

neither 1 nor 2

__

 

 

Alternate 2 - 20%

Marketing Fees are not an allowed deduction.

 

 

8.

ROYALTY OWNER’S RIGHTS UPON SURRENDER [Subclause 5.08]

 

Add new paragraph:

 

“Surrender in this Clause shall include the Royalty Payor’s intention not to
make application to continue a Title Document beyond its primary term. The
Royalty Owner shall have the right for fifteen (15) days from the date of such
surrender notice to request an assignment from the Royalty Payor of the interest
that it desires to surrender. From and after the date of such surrender or
assignment the Royalty Payor shall be discharged of, from and against any and
all obligations with respect to the interests so surrendered or assigned to the
extent that such obligations are attributable to the period commencing with the
date of the surrender or assignment, and the lands and the leases as
hereinbefore defined, shall thereafter be deemed to exclude the interests so
surrendered or assigned. The provisions of this Clause shall be subject to the
Title Documents covering the lands and in the event of conflict, the provisions
of the Title Documents shall prevail.”

 

9.

CONVERSION OF OVERRIDING ROYALTY [Article 6.00]

 

This optional Article 6.00 will

/ will not X apply herein

 

 

10.

OPERATIONS AT CONVERSION

 

N/A

 

 

11.

AREA OF MUTUAL INTEREST [Article 8.00]

 

This optional Article 8.00 will X/ will not ___ apply herein.

 

 

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12.

LIABILITY AND INDEMNITY [Article 10.00]

 

Add:

 

“10.03 Survives Termination

This Article shall survive the termination of the Agreement until Farmee has
fully and properly abandoned all well sites, surface and subsurface facilities
on the Farmout Lands or used in connection with production from the Farmout
Lands in accordance with the regulations and has fully restored the surface for
such well sites, surface and subsurface facilities in accordance with the
regulations.”

 

13.

LAND MAINTENANCE COSTS [Clause 11.02]

 

This optional Clause 11.02 will X / will not __ apply herein.

 

The Farmee will pay the Farmor $__________ with 30 days of Effective Date.

Add:

“Farmee shall be responsible for all rentals on a per diem basis payable on the
Title Documents from the Effective Date until Farmee has earned an interest in
the Farmout Lands and or the Option Lands or until Farmee’s right to earn any
further interest is terminated or surrendered. Thereafter Farmee and Farmor
shall pay all rentals and taxes on those Farmout Lands and Option Lands that
Farmee has earned an interest in proportionate to the working interests they
hold in such Farmout Lands and Option Lands.”