exv10w2



 





Exhibit 10.2



FARMOUT AND ACQUISITION AGREEMENT




BETWEEN




INFINITY OIL AND GAS OF TEXAS, INC.




AND




FOREST OIL CORPORATION




for the




RODEO PROSPECT, BARNETT SHALE




located in




ERATH COUNTY, TEXAS




Dated and made Effective




DECEMBER 1, 2007





 









 








FARMOUT AND ACQUISITION AGREEMENT




Rodeo Prospect, Barnett Shale

Erath County, Texas




December 1, 2007



When executed in the manner hereinafter provided, this Farmout and Acquisition Agreement
(“Agreement”) shall evidence and constitute the complete Agreement made effective on December 1,
2007 (the “Effective Date”) by and between Infinity Oil and Gas of Texas, Inc. “Infinity”) a
Delaware corporation having its principal office at 633 Seventeenth Street, Suite 1800, Denver,
Colorado 80202-2818 and Forest Oil Corporation, (“Forest”) a New York corporation having its
principal office at 707 Seventeenth Street, Denver, Colorado 80202, concerning the Forest
conducting oil and gas operations in the area above described so as to provide Forest the right to
earn an interest in the oil, gas and mineral leases owned by Infinity as hereinafter described and
other matters as set forth herein.




1. DESCRIPTION OF LEASES MADE SUBJECT TO THIS AGREEMENT 





1.1 Farmout Lands




Infinity represents that it is the owner of an undivided One Hundred Percent (100%) interest
in the oil, gas and mineral lease(s) and rights of way which are referred to on Exhibit “A”
of this Agreement (hereinafter the “Leases”) and that the Leases cover approximately 34,000
net mineral acres, subject however to the provisions of the Participation Agreement and
Joint Operating Agreements dated May 18, 2004, among Infinity and Longhorn Properties, LLC.
The lands subject to the Leases on Exhibit “A” are referred to herein as the “Farmout
Lands”, and are further identified as such on the plat attached hereto as Exhibit “A-1”.



2. DRILLING PROGRAM





2.1 Commitment to Drill




Subject to Section 3.1 hereof, Forest commits to drill, at its sole cost and expense, a
ten (10) exploratory well program, or to spend a total of $20 million on exploration
activity, (in either case, the “Drilling Program”) whichever occurs first, at locations of
Forest’s choosing on the Farmout Lands. Upon completion of its earning obligation Forest
will be the operator of the exploratory wells as well as the Bed Rock #1-H Well referenced
in Paragraph 2.3 of this Agreement and will operate the wells under a mutually agreeable
Joint Operating Agreement as further provided in Section 3.4, below. Forest agrees to
consult with Infinity on well locations for wells drilled pursuant to this Agreement. On or
before 60 days prior to the expiration of the primary term of a lease that Forest does not
intend to extend by drilling under the terms of the Drilling Program (“Expiring Lease”),
Forest shall notify Infinity and identify the Expiring Lease. Infinity shall thereafter
have the right to propose the drilling of a well or wells deemed necessary to retain the
Expiring Lease. Infinity’s well proposal and all operations associated with the well will
be governed by the form of Joint Operating Agreement referenced in Section 3.4. of this
Agreement.




2.2 Commencement of Operations




On or before March 15, 2008, Forest agrees to commence, or cause to be commenced, actual
drilling of one or more wells at a location and depth of its choice on the Farmout Lands to
test for oil, gas and associated liquid hydrocarbons.




Forest thereafter agrees to diligently prosecute operations hereunder at Forest’s sole cost,
risk and expense, with due diligence and in a good and workmanlike manner and in compliance
with all applicable provisions of the Lease(s) and with applicable rules and regulations of
any governmental body having jurisdiction there over, until Forest has completed each well
as a producer or has abandoned it as a dry hole in a sand or interval Forest has selected
(the “Objective Depth”). Each well drilled to the Objective Depth and completed as a
producer or abandoned as a dry hole shall hereafter be referred to as a



 









 






“Completed Well” provided that such well is drilled to a depth sufficient to penetrate the
stratigraphic equivalent of the Barnett Shale Formation and the well is tested in such
formation.




Actual drilling operations shall be deemed to have “commenced” in accordance with the terms
of this Agreement at such point in time as a rig capable of conducting drilling operations
to the Objective Depth has been rigged up on the well site.




2.3 Bed Rock #1-H Well




Infinity has previously drilled but not completed the Bed Rock #1-H Well described on
Exhibit A-2 attached hereto. Forest shall reimburse Infinity for its costs associated with
drilling the Bed Rock #1-H Well in the amount of One Million Four Hundred Fifty Thousand
Dollars $1,450,000.00 (“Reimbursement Amount”). Upon execution and delivery of this
Agreement, Forest shall wire transfer the Reimbursement Amount to the escrow agent
designated under the Escrow Agreement dated December 27, 2007, among Infinity, Forest and
Amegy Bank and applied by the escrow agent first to unpaid costs incurred in drilling said
well. The Reimbursement Amount shall be included as expenditure for the Drilling Program
and if the Bed Rock #1-H Well is subsequently completed in accordance with the terms of
Section 2.2 then it will qualify as a Completed Well. Infinity shall secure and provide to
Forest a Release of all liens in recordable form filed against the Farmout Lands prior to
disbursement of the Reimbursement Amount.




2.4 Dry Hole




In the event Forest attempts a completion in a well drilled hereunder at the Objective Depth
or at any other depth and such completion attempt(s) is unsuccessful and the well is plugged
and abandoned as a dry hole, the costs incurred in drilling such well shall be included as
expenditures for the Drilling Program as established in Section 2.1 above and such well will
qualify as a Completed Well provided that such well is drilled to a depth sufficient to
penetrate the stratigraphic equivalent of the Barnett Shale Formation and the well is tested
in such formation.




2.5 Program Completion




The Drilling Program will be completed on or before April 1, 2009.



3. RIGHTS EARNED UPON COMPLETION OF PROGRAM





3.1 Earning Prior to Completion of Program




Forest shall be obligated to drill a minimum of three (3) Completed Wells on the Farmout
Lands. If Forest drills a minimum of three Completed Wells on the Farmout Lands as provided
herein then Forest shall earn an undivided seventy-five percent (75%) of Infinity’s interest
in the approximate 350-acre units, associated with and surrounding each Completed Well,
excepting all leasehold and lands retained by Infinity pursuant to Section 3.5. As a
guiding principle in determining the acreage around each well, as to any vertical well the
350 acres surrounding the well shall approximate a square with the well in the center, and
as to any horizontal well the 350 acres surrounding the well shall be a rectangle in which
the lateral leg of the wellbore runs through the center of such rectangle. Within 30 days
after Forest’s completion of three Completed Wells, Forest shall propose to Infinity the
configuration of the 350-acre tract around each Completed Well to be earned by Forest. The
parties shall negotiate in good faith to reach agreement on the configuration of the
350-acre tracts within 90 days after Forest’s completion of three Completed Wells in
accordance with the principles stated herein. Until Forest drills three Completed Wells on
the Farmout Acreage no interest shall be earned hereunder. If Forest has not completed the
Drilling Program on or before April 1, 2009, but Forest has drilled at least three Completed
Wells hereunder, then Infinity shall make an assignment, as provided in Section 3.2, of the
interest earned in each of the Completed Wells.




3.2 Earning at Completion of Program




Upon completion of Ten Completed Wells, or Forest’s total expenditure of $20 million on the
Drilling Program, whichever occurs first (“Completion Date”), Infinity will deliver



 









 






to Forest an assignment and bill of sale for an undivided seventy-five percent (75%) of
Infinity’s leasehold interest in the Farmout Lands in the form attached hereto as
Exhibit “B” within the 350-acre units surrounding each Completed Well and an undivided fifty
percent (50%) of Infinity’s leasehold interest in the remainder of the Farmout Lands,
excepting all leasehold and lands retained by Infinity pursuant to Section 3.5. Within
30 days after Forest’s completion of each Completed Well, Forest shall propose to Infinity
the configuration of the 350 acre tract around such Completed Well to be earned by Forest.
The parties shall negotiate in good faith to reach agreement on the configuration of the
350-acre tract assigned to each Completed Well within 90 days after completion of such well
and based upon the principles outlined in Section 3.1 This assignment to Forest shall be
made by Infinity free and clear of any liens, mortgages or other encumbrances. In no event
shall Infinity’s initial interest in each Lease covering the Farmout Lands be less than a
90% working interest, and any additional interest in the Farmout Lands earned or acquired by
Infinity between the date hereof and the completion of the Drilling Program shall also be
subject to this Section 3.2.




Infinity will deliver to Forest its proportionate share of not less than eighty percent
(80%) net revenue interest leasehold and will not burden the Leases with any additional
overriding royalty after the effective date of this Farmout Agreement.




3.3 Additional Assets Earned at Completion of Program




Upon completion of the Drilling Program as described in Section 3.2 above, Forest will also
earn fifty percent (50%) of Infinity’s interest in infrastructure, contracts and data that
currently support Infinity’s production, to include facilities, pipelines, salt water
disposal well(s), surface agreement/contracts, license to 3-D seismic data and reprocessing
within the Farmout Lands. The interest earned shall include the Taylor No. 1 SWD disposal
well. The conveyance of the interest in such well shall be subject to a mutually agreed
operating agreement that includes the following terms:




	 	(a)	 	The parties shall share all cost associated with such well based on their
proportionate monthly use allocated on a per-barrel basis;
	 
	 	(b)	 	The net profit derived from any third-party use of the well shall be divided
equally between the parties.






3.4 Operating Agreement




Upon assignment of the interests as provided in Section 3.2, Infinity and Forest shall enter
into a 1989 AAPL Model Form Operating Agreement as attached hereto as Exhibit “C” which
shall govern all additional operations on the Farmout Lands. All costs and expenses arising
after the Completion Date shall be borne by Forest and Infinity in accordance with their
ownership interests.




3.5 Assets Excluded from Earning




Excluded from the assignment to Forest shall be all leasehold interest and personal
property and other contractual rights to the extent such interests, property and rights are
related to the wellbores described in Exhibit A-2 (except the Bed Rock #1-H Well),
(hereinafter referred to as the “Existing Wells”) together with (a) the leasehold interests
within the one hundred (100) acres surrounding each such Existing Well, as to all depths and
any access rights necessary for the operation of the Existing Well and the marketing of the
proceeds derived therefrom and (b) all proceeds of production attributable to such Existing
Well insofar as the production from the well relates to the producing formation underlying
all lands within the pooled unit for such well. As a guiding principle in determining the
acreage around each Existing Well, as to any vertical well the 100 acres retained shall be
as close to a square as reasonably practicable with the well in the center or such other
shape as may be mutually agreed upon by the parties and as to any horizontal well the
100 acres retained shall be a rectangle in which the lateral leg of the wellbore runs
through the center of such rectangle or such other shape as may be mutually agreed upon by
the parties. Within 30 days after the date of this Agreement, Infinity shall propose to
Forest the configuration of the 100-acre tract around each



 









 






Existing Well retained by Infinity. The parties shall negotiate in good faith to reach
agreement on the configuration of each 100-acre tract retained within 90 days after the date
of this Agreement and in accordance with the principles set forth herein. Notwithstanding
the assignment of any interest earned under this Farmout Agreement in acreage within any
designated units or proration units for Existing Wells, Forest shall not have any interest
in the production from such Existing Wells.



4. REPORTING AND INFORMATION SHARING REQUIREMENTS





4.1 Initial Well.




Forest shall notify Infinity of the date on which operations commence on the wells to be
drilled hereunder.




4.2 Information and Access




During the conduct of operations pursuant to this Agreement and within a reasonable time
after each item is available, Forest shall, upon the request of Infinity, at Forest’s sole
cost and expenses:




	 	(a)	 	Permit Infinity’s authorized representatives to have full and complete access
to the derrick floor at any reasonable time and to observe all operations at Infinity’s
sole risk and expense;
	 
	 	(b)	 	Notify Infinity in sufficient time to have a representative present when Forest
plans to run an electric log, to core or make any drill stem or production test;
	 
	 	(c)	 	Furnish Infinity with copies of all permits relating to the wells drilled
hereunder.
	 
	 	(d)	 	Provide Infinity with copies of the daily drilling reports on any drilling or
completion operations being conducted under the Farmout.
	 
	 	(e)	 	Two (2) copies of a composite electric log survey of the complete interval of
the hole from the bottom of the surface casing to the well’s greatest depth, and
two (2) copies of any and all other logs and surveys which are made;
	 
	 	(f)	 	Two (2) copies of all core records and drill stem or production tests if made;
	 
	 	(g)	 	Evidence of the depth drilled before abandoning or plugging such well;
	 
	 	(h)	 	One (1) copy of all forms filed with any governmental authority or agency,
including, but not limited to, all reports filed with the Texas Railroad Commission;
	 
	 	(i)	 	One (1) copy on tape, disk or CD ROM of all open hole and cased hole wireline
logs; and
	 
	 	(j)	 	Two (2) copies and a digital record of any directional survey made of the hole.




Nothing in this Agreement shall obligate Forest to secure or originate any of the information
identified above. However, to the extent Forest does originate such information then that
information shall be made available to Infinity upon Infinity’s request.




5. INDEMNITY



ALL OPERATIONS IN CONNECTION WITH THE DRILLING OF THE WELLS INCLUDED IN THE DRILLING PROGRAM SHALL
BE PERFORMED AT FOREST’S SOLE RISK, COST AND EXPENSE, AND FOREST SHALL PROTECT, INDEMNIFY AND HOLD
INFINITY HARMLESS FROM ALL LOSSES, COSTS, CLAIMS, EXPENSES, DAMAGES AND LIABILITIES INCLUDING
ATTORNEY’S FEES AND COURT COSTS ARISING OUT OF OR CONNECTED WITH FOREST’S PERFORMANCE, OR FAILURE
TO PERFORM, UNDER THIS AGREEMENT, OR THE ACTS OF OR FAILURE TO ACT BY FOREST’S AGENTS, EMPLOYEES,
CONTRACTORS AND SUBCONTRACTORS.




 









 







The foregoing indemnity shall apply until Forest has earned its interest hereunder, after which
point, it shall be superseded by the provisions of the applicable Joint Operating Agreement,
provided, however, that upon completion of the three (3) Completed Wells, the only remedy for
Forest’s failure to further perform hereunder shall be the loss of its right to earn the interests
provided for in Section 3.2, above.




6. INSURANCE





6.1 Required Insurance Coverage




Throughout the Drilling Program, Forest shall maintain, at its sole cost, the insurance
coverage in the types and amounts set forth below. In addition thereto and without in any
way limiting the foregoing indemnification, Forest agrees that at all times while Forest is
conducting operations pursuant to this Agreement, Forest will procure, carry and maintain in
force policies of insurance, providing as a minimum, the following coverage relative to the
activities hereunder:




	 	(a)	 	Worker’s Compensation Insurance and Employer’s Liability Insurance as may be
required to fully comply with the laws of the State of Texas.
	 
	 	(b)	 	Comprehensive General Liability Insurance with a single combined limit of
$1,000,000.00 each accident for bodily injuries or death and property damage.
	 
	 	(c)	 	Comprehensive Automobile Liability and Property Damage Insurance with a single
combined limit of $1,000,000.00 each accident for bodily injuries or death and property
damage.
	 
	 	(d)	 	An Excess Liability Contract which provides coverage excess of the limits and
inclusive of the scope of insurance provided in (a), (b) and (c) above. Limits of
Liability: $5,000,000.00 combined single limit.
	 
	 	(e)	 	Operator’s Extra Expense Indemnity Insurance including coverage for well
control, underground blowout, re-drilling expenses, removal of wreck or debris, seepage
and pollution and cleanup and containment. The limit of such insurance shall not be
less than $5,000,000 for any one occurrence.






Prior to commencement of operations under this agreement, upon request Forest shall furnish
Infinity with Certificates of Insurance evidencing the above insurance coverage. Forest
shall require its contractors and sub-contractors to comply with the Worker’s Compensation
Laws of the State of Texas and to maintain such insurance, in such amounts as required
hereunder for Forest.




The foregoing insurance requirements shall apply until Forest has earned its interest
hereunder, after which point, it shall be superseded by the provisions of the applicable
Joint Operating Agreement.



7. PAYMENTS BY INFINITY



Infinity shall retain responsibility for administration of the jointly held leases related to the
Farmout Lands including payment of rentals and shut-in royalties. Forest shall reimburse Infinity
for its proportionate share of the costs of rentals or royalties within 60 days after receipt of
billing. The foregoing lease administration requirements shall apply until Forest has earned its
interest hereunder, after which point, it shall be superseded by the provisions of the applicable
Joint Operating Agreement.




8. ACCESS TO LEASE AND RELATED RECORDS OF INFINITY



Infinity agrees to make available to Forest, at reasonable times and intervals and at no additional
cost, the lease files maintained by Infinity or in Infinity’s possession relative to the Farmout
Lands, including any abstracts, title opinions and similar items. Forest may copy same at Forest’s
sole cost and expense. Further, until Forest has earned its interests hereunder, any reliance by
Forest on the information contained in such files shall be at the entire risk of Forest, the
Infinity making no representation as to the accuracy of any such information. After Forest has
earned an interest hereunder, the risk of loss due to reliance upon such information shall be
governed by




 









 







the Joint Operating Agreement. Infinity further agrees to allow Forest to secure and copy the
names and addresses of parties on any pay deck or division of interest with respect to any portion
of the Farmout Lands.




9. RELATIONSHIP OF PARTIES



This Agreement is not intended to create, and nothing herein contained shall be construed as
creating, a partnership, joint venture or other relationship by which one party is liable for the
obligations or acts, either of omission or commission, of the other party. Each of the parties
hereto elects not to be treated as a partnership for any purpose under the Internal Revenue Code of
1986 and, specifically, each of the parties hereto elects, as authorized by Section 761(a) of the
Internal Revenue Code of 1986, that operations covered by this Agreement be excluded from all of
the provisions of Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 as
amended and all applicable regulations thereunder.



In conducting its operations hereunder, Forest shall not be acting as Infinity’s agent, but rather
as an independent contractor, and Infinity shall not be liable in any way for any debts, demands or
claims incurred by or against Forest whether or not in connection with performance of this
Agreement.




10. CONFIDENTIALITY



Without Forest’s prior written consent, Infinity shall not divulge information obtained from
operations hereunder except to the extent required by appropriate governmental authority.




11. ABANDONMENT AND SURFACE RESTORATION





11.1 Obligation of Forest




As to Dry Holes drilled under the Drilling Program, Forest agrees that it shall, at its sole
cost and expense, plug and abandon all wells drilled pursuant to this Agreement in
accordance with all applicable rules and regulations of any governmental body having
jurisdiction thereover. In addition, Forest shall, at its sole expense, restore the Farmout
Lands and settle and dispose of all claims for damages arising from or in connection with
operations conducted pursuant to this Agreement, including, but not limited to, damages to
the land, surrounding waters and wildlife, and for loss of soil. Notwithstanding the
foregoing, if Infinity elects to assume operatorship of any wells drilled hereunder, then
from and after such assumption of operatorship, Infinity shall assume all costs and expenses
of operations, including plugging, abandonment and site restoration with respect to the well
for which Infinity has assumed operatorship.




As to any wells that produce and so become subject to a Joint Operating Agreement, the
plugging and abandonment obligations relating thereto shall be governed by such Joint
Operating Agreement.



12. NOTICE PROVISIONS



All geological reports, information and notices between Forest and Infinity shall be made to:



FOREST OIL CORPORATION

707 Seventeenth Street, Suite 3600

Denver, Colorado 80202

Attention: Land Manager

Business Phone: 303-812-1400

Facsimile: 303-812-1454

Email: vjluszcz@forestoil.com




 









 







INFINITY OIL AND GAS OF TEXAS, INC.

633 Seventeenth Street, Suite 1800

Denver, Colorado 80202

Attention: Renato Bertani

Business: 720-932-7800

Facsimile: 720-932-5409

Email: renato.bertani@tkges.com




13. GOVERNING LAW



This Agreement and all attachments hereto shall be governed by and interpreted in accordance with
the laws of the State of Texas, without regard to the conflict of laws principles thereof.




14. INTERPRETATION IN EVENT OF CONFLICTING PROVISIONS



In the event of a conflict between the terms of this Agreement and the terms of any other
agreement, exhibit or accounting procedure attached hereto, the terms of this Agreement shall
control.




15. MARKETING CONTRACTS



The Leases and Farmout Lands are subject to a Gas Purchase Agreement dated May 15, 2005, between
Infinity Oil and Gas of Texas, Inc. and Louis Dreyfus Gas Development L.P. (“Dreyfus”), as amended
by a First Amendment to Gas Purchase Agreement dated December 16, 2005, and a Second Amendment to
Gas Purchase Agreement, dated May 15, 2006 (“Gas Purchase Agreement”). The oil, gas and associated
hydrocarbons related to the oil and gas leasehold interests earned by Forest under the terms of
this Agreement shall be subject to the Gas Purchase Agreement. Paragraph 6.4 of the Gas Purchase
Agreement provides that Infinity shall compensate Dreyfus on a quarterly basis to the extent the
average daily quantity of gas actually delivered by Infinity is less than the average daily
quantity that Infinity has agreed to deliver. Forest shall have no liability with respect to the
obligations described under Section 6.4 of the Gas Purchase Agreement and Infinity shall indemnify
and hold Forest harmless with respect to any claims made against Forest with respect to such
obligations.



It is understood and agreed between the parties to this Agreement that there are no additional
contractual commitments under any existing production marketing contracts which contain a
contractual term in excess of thirty (30) days that would affect the interest of Infinity in the
Farmout Lands.




16. INVALIDITY



If any provision of this Agreement is held to be invalid, such invalidity shall not, to the extent
practicable, affect the remaining provisions.




17. SUCCESSORS AND ASSIGNS



This Agreement and its terms covenants and conditions hereof shall be covenants running with the
leasehold estate hereinabove referred to and as such shall be binding upon and inure to all heirs,
legal representatives, administrators, successors and assigns of the parties. Either party may
freely assign this agreement to any of its affiliates. Any other proposed assignment may only be
made with the written consent of the non-assigning party, such consent not to be unreasonably
withheld. An affiliate of a party is any person or entity that controls, is controlled by or is
under common control with, such party.




18. COUNTERPARTS



This Agreement may be executed in any number of counterparts, each of which shall be considered an
original for all purposes.




 









 








19. EXHIBITS



The exhibits attached here and made a part of this “Agreement” are as follows:




	 	 	 
	Exhibit “A”:

	 	List of Leases in Farmout Lands.
	 
	 	 
	Exhibit “A-1”:

	 	Map of Farmout Lands.
	 
	 	 
	Exhibit “A-2”:

	 	Excluded Wells.
	 
	 	 
	Exhibit “B”:

	 	Form of Assignment
	 
	 	 
	Exhibit “C”:

	 	Joint Operating Agreement






20. ENTIRE AGREEMENT



The terms of this Agreement constitute the entire contract between the parties and there shall be
no Agreements, undertakings, obligations, promises assurances or conditions, whether precedent or
otherwise, except those specifically set forth in this Agreement.




EXECUTED, ACCEPTED and AGREED on the 27th day of December, 2007 by:




	 	 	 	 	 
	 	 	INFINITY OIL AND GAS OF TEXAS, INC.
	 
	 	 	 	 
	 

	 	By: /s/ Stanton E. Ross
	 
	 	
 

	 

	 	Name:
	 	Stanton E. Ross
	 

	 	Title:
	 	Chief Executive Officer
	 
	 	 	 	 
	 	 	FOREST OIL CORPORATION
	 
	 	 	 	 
	 

	 	By: /s/ Mark E. Bush
	 
	 	
 

	 

	 	Name:
	 	Mark E. Bush
	 

	 	Title:
	 	Vice President, Eastern Business Unit