EXHIBIT 10.5


 


FARMOUT
AGREEMENT


 


THIS AGREEMENT dated as of the 25th day of
February 2005.


 


BETWEEN:


 


DEEP WELL OIL & GAS, INC.,
a Nevada corporation extra-provincially registered in Alberta (“Deep Well”) and NORTHERN
ALBERTA OIL LTD., an Alberta
corporation (“Northern”)


 


(collectively,
the “Farmor”)


 


AND:


 


SURGE GLOBAL ENERGY (CANADA),
LTD., an Alberta
corporation  and SURGE GLOBAL ENRGY
INC. a Delaware corporation
(collectively, the “Farmee”)


 


WHEREAS the Farmee
desires the right to acquire an interest in the Title Documents and the Farmout
Lands upon the terms and conditions herein set forth.


 


The Parties agree as
follows:


 


ARTICLE 1

INTERPRETATION


 


1.1          Each
capitalized term used in this Head Agreement will have the meaning given to it
in the Farmout & Royalty Procedure and, in addition:


 


(a)           “6.5 Section Block” means those lands
designated as such in Schedule “A”;


 


(b)           “32 Section Block” means those lands
designated as such in Schedule “A”;


 


(c)           “31 Section Block” means those lands
designated as such in Schedule “A”;


 


(d)           “Assignment Procedure” means the 1993 CAPL
Assignment Procedure which will be deemed to apply as if it had been included
as a separate schedule to this Agreement;


 


(e)           “Assumption of Liabilities and Indemnity Agreement”
means agreement entitled Assumption of Liabilities and Indemnity Agreement
dated as of February 18, 2005 pursuant to which Farmor undertakes to be solely
responsible for the Nearshore ORR as it pertains to the Farmee’s interests in
the Farmout Lands and to indemnify and save Farmee harmless from any and all
claims and demands made by Nearshore Petroleum Corporation (or any person
claiming by, through or under it) in respect of the Nearshore ORR;


 


(f)            “Conditions Satisfaction Date” means the
date on which all conditions in Section 2.1 have been satisfied;


 





















 


(g)           “Contract Depth” means, with respect to each
well drilled by Farmee under this Agreement, a vertical wellbore to a depth
sufficient to penetrate 15 meters into the top of the Wabamun formation or to a
subsurface depth of 800 meters whichever shall first occur, followed by a
minimum 600 meter horizontal wellbore within the Bluesky Formation;


 


(h)           “Earning Period” means a period of 24 months following the
Conditions Satisfaction Date;


 


(i)            “Effective Date” means February 17, 2005;


 


(j)            “Encumbrances” means the royalty interests described under
that heading in Schedule “A”;


 


(k)           “Existing 32 Section Block JOA” means the
Joint Operating Agreement made as of April 26, 2004 originally between Northern
Alberta Oil Ltd. (formerly Mikwec Energy Canada Limited by name change) having
an 80% participating interest and Pan Orient Energy Ltd. (formerly Maxen
Petroleum Inc. by name change) having a 20% participating interest pertaining
to the 32 Section Block;


 


(l)            “Existing 31 Section Block JOA” means the
Joint Operating Agreement made as of December 9th, 2004 among Deep Well having
an 80% participating interest, Pan Orient Energy Ltd. having a 10%
participating interest (Execution Pending) and 1132559 Alberta Ltd. having a
10% participating interest (Executed) pertaining to the 31 Section Block;


 


(m)          “Existing JOAs” means, collectively, the
Existing 32 Section Block JOA and the Existing 31 Section Block JOA;


 


(n)           “Farmor’s Pre-Farmout Working Interests”
means the interests shown under that heading in Schedule “A”;


 


(o)           “Farmout Lands” means the lands shown under the heading
Farmout Lands in Schedule “A”, provided that the “Farmout Lands” shall not
include the 6.5 Section Block lands unless or until the Farmor acquires a legal
or beneficial interest in the Title Documents that comprise the 6.5 Section
Block;


 


(p)           “Farmout & Royalty
Procedure” means the 1997 CAPL Farmout & Royalty Procedure
including the elections and revisions thereof, which are attached to this Head
Agreement as Schedule “B”;


 


(q)           “Head Agreement” means this Agreement other than the
Schedules;


 


(r)            “Mutual Interest Lands” means any interest in any single parcel of
petroleum and natural gas rights, oil sands leases, and oil sands permits where
50% or more of that parcel, by surface area, is within Townships 91 and 92,
Ranges 12 and 13, W5M;


 


(s)           “Nearshore ORR “ means the 6.5% overriding royalty granted
to Nearshore Petroleum Corporation under the Royalty Agreement dated December
12, 2003 originally entered into between Mikwec Energy Canada Ltd. and
Nearshore Petroleum Corporation;


 


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(t)            “Operating Procedure” means
the 1990 CAPL Operating Procedure together with the 1996 PASC Accounting
Procedure including the elections and revisions thereof, which are attached to
this Head Agreement as Schedule “C”;


 


(u)           “Operator” means Farmee;


 


(v)           “Parties” means Farmor and Farmee and “Party” means either of them, as applicable;


 


(w)          “Proved Reserves” means estimated volumes of
crude oil, crude bitumen, oil sands, natural gas and gas condensates, liquids
and associated substances which are expected to be retrieved from deposits and
used commercially, at the economic and technical conditions applicable at the
time and according to current legislation, and includes:


 


(i)            proved
developed reserves, which are amounts of hydrocarbons that are expected to be
retrieved through existing wells, facilities and operating methods; and


 


(ii)           undeveloped
proved reserves, which are amounts of hydrocarbons that are expected to be
retrieved following new drilling, facilities and operating methods; and


 


(x)            “Title Documents” means the documents of title under
the heading Title Documents described in Schedule “A” attached hereto.


 


1.2          The
following Schedules are attached to, and made part of this Agreement:


 


	
  Schedule “A” -

  	
   

  	
  Description of the
  Farmout Lands, Farmor’s Pre-Farmout Working Interests, the Title Documents
  and Encumbrances;

  
	
   

  	
   

  	
   

  
	
  Schedule “B”

  	
   

  	
  Farmout & Royalty Procedure elections and
  amendments;

  
	
   

  	
   

  	
   

  
	
  Schedule “C”

  	
   

  	
  Operating Procedure elections and amendments;

  
	
   

  	
   

  	
   

  
	
  Schedule 15.1(f)

  	
   

  	
  Outstanding Authorizations for Expenditure

  
	
   

  	
   

  	
   

  
	
  Schedule 15.1(k)

  	
   

  	
  Areas of Mutual Interest

  



 


ARTICLE 2

CONDITIONS PRECEDENT TO FARMEE’S OBLIGATIONS


 


2.1          Farmee’s
obligations under this Agreement shall commence once each of the following
conditions precedent have been satisfied:


 


(a)           Farmor
having conveyed to Farmee a 40% undivided interest in the Title Documents and
Farmee having had transfers accepted for registration evidencing Farmee as a
registered lessee of a 40% undivided interest in each of the Title Documents,
in each case free and clear of all royalties, burdens, claims, encumbrances and
other adverse interests of any nature or kind whatsoever, other than the Encumbrances;


 


(b)           (1)
Farmee shall have received a fully executed copy of the Assumption of
Liabilities and Indemnity Agreement;


 


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(2) Farmor shall dedicate proceeds of this agreement
to retiring mortgage provided by 258662 Alberta Ltd. (Maximum $1,400,000.00
Canadian)


 


(c)           Farmor
shall use best efforts to obtain a fully executed copy of the Existing 31
Section Block JOA and the terms of such agreement and the parties thereto shall
be satisfactory to Farmee, acting reasonably;


 


(d)           Farmee
shall have received a fully executed copy of an agreement between Nearshore
Petroleum Corporation and Northern terminating the Non-Disclosure/Area of
Exclusion Agreement dated November 19, 2003 between those parties.


 


(e)           Execution
of satisfactory Escrow Agreement and satisfactory evidence of completion of
Surge financing or sufficient funds to complete the drilling of the Test Well,
as soon as practical following execution hereof.


 


ARTICLE 3

TEST WELL


 


3.1          Farmee
shall, at its sole cost, risk and expense, and subject to having obtained a
rig, all necessary surface access and Regulatory approvals, Spud the Test Well
at a location of its choice on the Farmout Lands on or before 150 days
following the execution hereof and drill the Test Well to Contract Depth.


 


3.2          Subject
to Article 3.00 of the Farmout & Royalty Procedure and Article 20 of
this Agreement, Farmee will earn 50% of Farmor’s Pre-Farmout Working Interest
in the section of land on which the Test Well is situated together with 50% of
the Farmor’s Pre-Farmout Working Interest in 5 additional sections of the
Farmout Lands which are selected by Farmee not later than 90 days following the
completion or abandonment, as applicable, of the Test Well.


 


ARTICLE 4

OPTION WELL


 


4.1          Within
60 days of rig release of the Test Well, Farmee shall have the right, on notice
to Farmor, to elect to undertake the drilling of an Option Well.  Farmee shall Spud the Option Well at a
location selected by Farmee and Farmor acting reasonably on Farmout Lands not
yet earned by Farmee within 60 days of the date of the Farmee’s election notice
(conditional upon rig availability, Regulatory approvals and surface
access).  Farmee shall continuously drill
the Option Well to Contract Depth.


 


4.2          Subject
to Article 3.00 of the Farmout & Royalty Procedure and Article 20 of
this Agreement, Farmee will earn 50% of Farmor’s Pre-Farmout Working Interest
in the section of land on which the Option Well is situated together with 50%
of the Farmor’s Pre-Farmout Working Interest in 5 additional sections of the
Farmout Lands which are selected by Farmee and Farmor, acting reasonably, not
later than 90 days following the completion or abandonment, as applicable, of
the Option Well.


 


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ARTICLE 5

ROLLING OPTION TO DRILL


 


5.1          Farmee
shall have a continuous rolling option, during the Earning Period, to elect to
drill additional Option Wells on the remaining unearned Farmout Lands in
accordance with Article 4 hereof, until all of the Farmout Lands are
earned or until Farmee’s right to further earning under this Agreement is
terminated.  In respect of each Option
Well which Farmee wishes to drill, Farmee must elect to drill the next Option
Well by giving notice to Farmor within 90 days of rig release of the most
recently drilled Option Well.  All terms
and conditions of this Agreement which apply to the Option Well shall apply, mutatis mutandis, to any additional Option
Wells drilled by Farmee hereunder, provided that if Farmee drills a total of 8
Option Wells, it will have earned (to that point in time) a 40% undivided
interest in 54 sections of the Farmout Lands. 
Notwithstanding Section 4.2, if Farmee drills a 9th Option
Well, it will earn 50% of the Farmor’s Pre-Farmout Working Interest in the 9.0
remaining sections (which were not earned by the drilling of the Test Well and
the prior 8 Option Wells).


 


ARTICLE 6

EXISTING JOAs AND OPERATIONS NOTICES


 


6.1          Promptly
following each determination by Farmee that it intends to drill a well under
this Agreement, Farmor shall issue an operation notice (prepared by Farmee)
pursuant to Article X (Independent Operations) of the applicable Existing JOA
and, thereafter, promptly advise Farmee whether either or both of the other
Joint-Operators under the Existing JOA have elected or not elected (or are
deemed to have elected or not elected) to participate or not participate in the
drilling of that well.  If:


 


(a)           either
or both of such Joint-Operators are participating in the operation, Farmor
shall provide all assistance requested by Farmee in respect of such
Joint-Operator(s) including, without limitation, (1) by electing to participate
in the operation (in order that Farmee can share in any participating interest
of a non-participating party), and (2) by issuing and collecting cash calls for
costs of operations (to the extent of Farmor’s rights under the applicable
Existing JOA); and


 


(b)           either
or both of such Joint-Operators are not participating, Farmee will be required
to pay the non-participant’s share of the cost of the operation (to the extent
not assumed by another participating party) and Farmee shall be entitled to all
benefits associated with such non-participation including, without limitation,
the right to receive the full amount of the penalty attributable to such
non-participation in accordance with Clause 1007 and the other provisions of
the applicable Existing JOA.


 


ARTICLE 7

OPERATING PROCEDURE


 


7.1          Upon
each occurrence of earning by Farmee in a 6 section block of Farmout Lands (and
as between Farmor and Farmee), such Farmout Lands and the related Title
Documents (to the extend of such lands) will become subject to the Operating
Procedure with Farmee being the initial Operator thereunder.  Subject to Section 7.2, the Operating
Procedure will govern all future joint operations of the Parties upon or with respect to such earned
Farmout Lands and Title Documents.


 


7.2          Upon
each occurrence of earning by Farmee in Farmout Lands governed by an Existing
JOA, Farmor and Farmee shall take all necessary steps, using the Assignment
Procedure, to have Farmee made a party to the Existing JOA for a 40%
participating interest in respect of the earned Farmout Lands.


 


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ARTICLE 8

NORTHERN AS CONTRACT OPERATOR


 


8.1          Until
such time as Farmee either selects another operator to conduct operations on
Farmee’s behalf under this Agreement or assumes such activities itself, Farmee
and Northern agree that Northern shall conduct such operations on Farmee’s
behalf as an independent contract operator. Northern shall be entitled to be
reimbursed for all costs and expenses incurred by it in connection with acting
as contractor operator, but otherwise, shall not be entitled to be paid a fee
for that service).  Northern represents
and warrants to Farmee that Northern holds all necessary permits and other
authorizations required by Northern to hold well licenses in its name and
conduct such operations on the Farmout Lands (including, without limitation,
those authorizations required from the Alberta Energy and Utilities Board).


 


8.2          At
such time as Farmee elects to replace Northern or use another contract
operator, Northern shall transfer the well licenses in its name to the
successor designated by Farmee


 


ARTICLE 9

AREA OF MUTUAL INTEREST


 


9.1          Article
8.00 of the Farmout & Royalty Procedure will be in effect from Effective
date of this agreement until the end of the Earning Period.  Subject to that Article, the Parties will
have the right to participate in an acquisition of Mutual Interest Lands in the
following percentages:


 


Farmor – 50%


 


Farmee – 50%.


 


9.2          Without
limiting the generality of Section 9.1, this Article 9 shall apply in
respect of any interest acquired by Northern or any of its Affiliates pursuant
to the Non-Disclosure/Area of Exclusion Letter Agreement dated April 27, 2004
between Northern and Pan Orient Energy Ltd. (formerly Maxen Petroleum Inc. by
name change).  Northern shall promptly
advise Farmee of any opportunities available to Northern under that agreement
and Northern shall, if directed by Farmee, exercise its right to acquire the
available interest(s) (on the basis specified in Section 9.1 above).


 


9.3          Notwithstanding
Sections 9.1 and 9.2, and for greater certainty, Article 8.00 of the Farmout
& Royalty Procedure shall not apply to the acquisition by the Farmor of the
lands comprising the 6.5 Section Block. 
Upon the Farmor acquiring legal or beneficial title to the 6.5 Section
Block, such lands such constitute “Farmout Lands” for the purposes of this Agreement.


 


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ARTICLE 10

RECONVEYANCE OF FARMOUT LANDS


 


10.1        Promptly
following the end of the Earning Period, Farmee shall convey to Deep Well or
Northern, as directed by Deep Well, a 40% beneficial interest in those Farmout
Lands (if any) in which Farmee has not earned an interest by the end of the
Earning Period.  In the event Farmee has
not earned a majority interest in any of the lands included within a single
Title Document, then Farmee shall also transfer to Deep Well or Northern in
accordance with their interest as originally held, Farmee’s legal title to a
40% undivided interest in such Title Document. 
However, if Farmee has earned a majority interest in the lands within a
Title Document, Farmee shall be entitled to remain as a registered lessee for
that Title Document (as to a 40% undivided interest) but shall hold in trust
for Farmor a 40% beneficial interest in any Farmout Lands in that Title
Document not earned by Farmee under this Agreement. Farmee shall hold for
Farmor in Trust the entire interest Farmee earns in the farmout lands until
reconveyance or earning is complete.


 


10.2        The
40% interests conveyed by Farmee to Farmor pursuant to this Article shall be
free and clear of any and all royalties, burdens, claims, encumbrances and
other adverse interests created by, through or under Farmee including, without
limitation, any encumbrances registered by Farmee’s lender.  Farmee shall cause any such lender to provide
no interest letters or, if possible, partial discharges and releases, as
necessary in respect of any such 40% interests reconveyed by Farmee to Farmor.


 


ARTICLE 11

ACQUISITION OF SEISMIC DATA


 


11.1        Upon
completion of Farmee’s earning obligations under Article 3 (following the
drilling of the Test Well), or at any time thereafter, and if both Parties
reasonably agree that further seismic data is required prior to the drilling of
any one or more of the Option Wells, then Farmor shall participate with Farmee,
each as to an undivided 50% interest (or 40% interest if each of the other
Joint-Operators participate), in the shooting of additional seismic data on
some or all of the Farmout Lands.


 


ARTICLE 12

DEEP WELL – AGENT FOR THE FARMORS


 


12.1        Deep
Well is the agent for the Farmor for all purposes under this Agreement.  Farmee shall deal solely with Deep Well in
respect of all matters relating to the Farmor or either of them.  Farmee shall be entitled to rely solely on
all communications from Deep Well as having been made by and on behalf of Deep
Well and Northern.  Northern shall be
bound by all decisions, elections and other determinations and communications
made or issued by Deep Well under this Agreement and Northern shall not
communicate with Farmee under any circumstances whatsoever (and Farmee shall be
entitled to disregard any such Northern communications).


 


12.2        Deep
Well and Northern are jointly and severally liable for the performance of all
obligations and liabilities of Farmor under this Agreement regardless of
whether any particular obligation or liability pertains to either or both of
the 32 Section Block or the 31 Section Block.


 


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ARTICLE 13

PROSPECT FEE


 


13.1        In
recognition of the potential play developed by Farmor in respect of the Farmout
Lands, Farmee shall pay to Farmor, at the following times and subject to the
following legal obligations imposed on Farmee (if any), the aggregate amount of
$2,000,000 USD (reduced by the deductions specified herein) as a prospect fee,
payable as 90% to Northern and 10% to Deep Well.


 


(a)           $1,000,000
USD payable 15 business days following the execution and delivery of this
Agreement by the Parties such amount to be reduced by the aggregate of the
following amounts:


 


(i)            $50,000
USD reflecting Farmor’s agreement to pay 50% of the commissions associated with
the payment of the first tranche of the Gemini Investment Strategies LLC
financing (“Gemini Financing”);


 


(ii)           50%
of all legal fees, disbursements and associated taxes incurred (to the date of
this Agreement) by Farmee and Surge Global Energy, Inc. (“SRGG”) in connection with this Agreement
and the Gemini Financing (being the legal costs of Farmee’s Calgary counsel and
SRGG’s corporate, commercial and securities counsel in Denver and the legal
fees of Gemini Investment Strategies LLC); and


 


(b)           $1,000,000
USD payable upon the completion or abandonment of the first Option Well drilled
by Farmee under this Agreement, such amount to be reduced by the following
amount, $50,000 USD reflecting Farmor’s agreement to pay 50% of the commissions
associated with the payment of the second tranche of the Gemini Financing


 


In accordance with the Income Tax Act (Canada), Farmee shall if required by Revenue
Canada withhold 15% of the amount of the payments made under this Section 13.1
and remit the withheld amount to the Receiver General (Canada) by the time
required by the Income Tax Act
(Canada) on account of tax payable by Farmor under the Income Tax Act (Canada).


 


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ARTICLE 14


SURGE
SHARES


 


14.1        Pursuant
to the Escrow Agreement to be completed by March 31st, 2005 among
Farmor, Farmee, and an escrow agent, to be retained by Surge. The appointed
escrow agent will hold one or more certificates representing 33 1/3 % of the fully
diluted common shares of Surge Global Energy, Inc. (“Shares”) outstanding as of February 17th 2005. The
nature of the shares, the conversion mechanism to ear or transfer of these
shares, the anti-dilutive provisions, the representations and warranties of the
parties regarding these shares, the registration rights and obligations of the
parties pertaining to these shares shall all be mutually agreed upon as part of
the Escrow Agreement. The Shares are to be held by the escrow agent thereunder
for delivery to Farmor when Farmor delivers to Farmee a reserves report (“Report”) for the Properties which is in
form and substance satisfactory to Deep Well and Farmee, acting reasonably,
from a mutually acceptable reservoir engineering firm and which confirms that
the Proved Reserves for the Properties exceed $80,000,000 USD.  The Report shall:


 


(a)           use
the forward curve price forecast that is being used by that engineering firm
for the majority of the reserves studies that it is completing at the time the
Report is prepared;


 


(b)           use
a 12.5% discount rate; and


 


(c)           attribute
a value of 100% to the Proved Reserves and no value to probable reserves or
undeveloped lands.


 


The Report shall be
addressed to both Deep Well and Farmee both parties shall be jointly responsible
for obtaining the Report and paying all costs associated with the preparation
and delivery of the Report.  For purposes
of this Section, Ryder Scott and Sproule Associates are deemed to be reservoir
engineering firms that are mutually acceptable to Deep Well and Farmee.


 


ARTICLE 15


REPRESENTATIONS
AND WARRANTIES


 


15.1        Farmor
hereby represents and warrants to Farmee (and acknowledges that Farmee is
relying on such representations and warranties) that:


 


(a)           Deep
Well is a body corporate duly incorporated and validly existing under the laws
of Nevada and is extra-provincially registered in Alberta, and Northern is a
body corporate incorporated and validly existing under the laws of Alberta;


 


(b)           Farmor
has taken all necessary actions and has all requisite power and authority to
enter into this Agreement and to perform its obligations under this Agreement
and any other agreements to be delivered hereunder and this Agreement
constitutes and such other agreements will constitute legal, valid and binding
obligations of Farmor, enforceable against Farmor in accordance with and
subject to the terms set forth herein and therein;


 


(c)           The
consummation by Farmor of the transactions contemplated herein will not violate
or conflict with any of the constating documents, by-laws or governing
documents of Farmor, any judgment, decree, order, statute, rule or Regulation
applicable to Farmor or any material agreement or instrument to which it is a
party or by which it is bound;


 


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(d)           Deep
Well is a non-resident of Canada and Northern is not a non-resident of Canada,
in each case within the meaning of the Income Tax Act
(Canada);


 


(e)           There
are no claims, proceedings, actions, lawsuits, administrative proceedings or
governmental investigations in existence, or so far as Farmor is aware,
contemplated or threatened against or with respect to the Farmor (or either of
them) or any of the Farmout Lands or Title Documents and there is no particular
circumstance, matter or thing known to Farmor which could reasonably be
anticipated to give rise to any such claim, proceeding, action, lawsuit,
proceeding or investigation;


 


(f)            There
are no outstanding authorizations for expenditures, mail ballots, cash calls or
other financial commitments with respect to any of the Farmout Lands other than
those as itemized on schedule 15.1(f);


 


(g)           There
are no agreements for the purchase or sale of petroleum substances that may be
deliverable from any of the Farmout Lands;


 


(h)           No
exploration, development or other material activities of any kind have occurred
on any of the Farmout Lands and, as a result, there are no wells, well sites or
tangibles located on the surface of or within any of such lands; excepting the
6.5 Section Block referred to in 1.1(a)


 


(i)            There
are no rights of first refusal or other similar rights applicable to any of the
Farmout Lands;


 


(j)            Farmor
shall not and has not knowingly withheld any records, files or other documents
in its possession relating to the Farmout Lands or Title Documents and which
Farmee has requested from Farmor; and


 


(k)           There
are no areas of mutual interest or similar rights pertaining to any of the
Farmout Lands that remain in effect as of the Effective Date, excepting those
listed on schedule 15.1(k).


 


15.2        Farmee
hereby represents and warrants to Farmor that:


 


(a)           Farmee
is a corporation duly incorporated and validly existing under the laws of
Alberta;


 


(b)           Farmee
has taken all necessary actions and has all requisite power and authority to
enter into this Agreement and to perform its obligations under this Agreement
and any other agreements to be delivered hereunder and this Agreement
constitutes and such other agreements will constitute legal, valid and binding
and obligations of Farmee, enforceable against Farmee in accordance with and
subject to the terms set forth herein and therein;


 


(c)           The
consummation by Farmee of the share transactions contemplated by this Agreement
will not violate or conflict with any of the constating documents, by-laws or
governing documents of Farmee or any provision of any material agreement or
instrument to which Farmee is a party or is bound, or any judgment, decree,
order, statute, rule or regulation applicable to Farmee;


 


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ARTICLE 16


ADDRESS
FOR SERVICE


 


16.1        The
address for service of notice hereunder for each of Farmor and Farmee shall be
as follows:


 


	
  Farmor:

  	
  c/o Deep Well Oil & Gas, Inc

  	
   

  	
  Farmee:

  	
  Surge Global Energy (Canada), Ltd.

  
	
   

  	
  Suite 2600, 144 – 4th
  Avenue SW

  	
   

  	
   

  	
  Suite 2600, 144 – 4th
  Avenue SW

  
	
   

  	
  Calgary, AB T2P 3N4

  	
   

  	
   

  	
  Calgary, AB T2P 3N4

  
	
   

  	
  Attention: Steven Gawne,
  President

  	
   

  	
   

  	
  Attention: Fred Kelly,
  President and CEO

  
	
   

  	
  Facsimile: No. (403)
  232-1464

  	
   

  	
   

  	
  Facsimile No.: (858)
  704-5011 and (403) 355-3371

  



 


Any Party may
change its address for service by written notice to the other Party.  Any
notice faxed to Farmee must be forwarded to both of the above fax numbers to
constitute effective notice hereunder.


 


ARTICLE 17

LIMITATIONS ACT


 


17.1        The
2-year period for seeking a remedial order under Section 3 of the Limitations Act (Alberta), as amended, for
any claim (as defined in that legislation) arising in connection with this
Agreement is extended to:


 


(a)           for
claims disclosed by an audit, 2 years after the time this Agreement permitted
that audit to be performed; or


 


(b)           for
all other claims, 4 years.


 


ARTICLE 18

EARNED INTEREST


 


18.1        It is
the intentions of the Parties that Farmee is incurring significant expenditures
to earn a 40% undivided interest in the Farmout Lands (to the extent of
Farmee’s drilling operations hereunder). 
If, immediately prior to the time Farmor conveyed a 40% undivided
interest in the Farmout Lands and Title Documents to Farmee, the Farmor had
less than a 80% beneficial interest in any of the Farmout Lands or the Title
Documents, the Farmee shall nevertheless earn a 40% undivided beneficial
interest in and to the Farmout Lands earned hereunder even if the effect is
that the Farmor’s residual beneficial interest (after earning by Farmee) is
less than a 40% undivided interest in those Farmout Lands.


 


ARTICLE 19

RIGHT OF FIRST REFUSAL


 


19.1        Notwithstanding
that:


 


(a)           the
Existing JOAs do not provide for a right of first refusal in the event a party
wishes to dispose of an interest in any of the lands governed by such
agreements; and


 


(b)           Farmee
will made a party to the Existing JOAs (as provided for in Article 7
hereof),


 


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as between Farmor and Farmee, it is agreed that
Alternate B of Clause 24.01 of the Operating Procedure will continue to apply, mutatis mutandis, in respect of any
disposition that either Farmor or Farmee may wish to make in respect of any of
the Farmout Lands, whether any such disposition occurs during the Earning
Period or following the termination of the Earning Period.


 


ARTICLE 20


GENERAL


 


20.1        This
Agreement contains the final and entire agreement of the Parties respecting
earning by Farmee of interests in the Farmout Lands from Farmor and, as such
and in respect of that subject matter, supercedes all prior agreements,
memorandums of understanding, letters of intent, verbal understandings and
discussions to the extent specifically relating to such subject matter.


 


20.2        In the
event of any inconsistency or conflict between the provisions of this Head
Agreement and those of any Schedule attached hereto, the provisions of this
Head Agreement shall prevail.


 


20.3        The
terms, covenants and conditions in this Agreement shall run with, attach to, be
binding upon, and form part of the Farmout Lands and the Title Documents, and
the estates affected thereby for the duration of this Agreement.


 


20.4        If any
term of this Agreement is or becomes invalid, illegal or unenforceable in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other term of this Agreement
and such invalid, illegal or unenforceable term shall be, as to such
jurisdiction, severable from this Agreement.


 


20.5        This
Agreement shall be conclusively deemed for all purposes to be made under, and
for all purposes to be governed by and construed in accordance with the laws of
the Province of Alberta and of Canada applicable therein and shall be treated
in all respects as an Alberta contract. 
Each of the Parties hereby attorns to the Courts of Alberta at Calgary
in respect of any suit, action or proceeding connected with this Agreement.


 


20.6        Each
Party shall from time to time and at all times do all such further acts and
execute and deliver all such further documents as may be reasonably required in
order to perform and carry out the terms and the intent of this Agreement.


 


20.7        This
Agreement may be executed in any number of separate counterparts with the same
effect as if all Parties had signed the same copy of this Agreement.  All counterparts shall be construed together
and constitute one agreement.  Each Party
shall be entitled to rely on the delivery of executed facsimile copies of
counterpart execution pages of this Agreement and such facsimile copies shall
be legally effective to create a valid and binding agreement between the
Parties.


 


20.8        This
Agreement shall inure to the benefit of and be binding upon the Parties and
their respective successors and permitted assigns.


 


IN WITNESS WHEREOF the Parties hereto have executed this Agreement
effective as of the date first written above.


 


12





















 




	
  NORTHERN
  ALBERTA OIL LTD.

  	
   

  	
  DEEP
  WELL OIL & GAS, INC.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Per:

  	
    /s/ Curtis J. Sparrow

  	
   

  	
  Per:

  	
    /s/ Steven Gawne

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Per:

  	
    President

  	
   

  	
  Per:

  	
    President and Chief Executive
  Officer

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  SURGE
  GLOBAL ENERGY Inc..

  	
   

  	
  SURGE GLOBAL ENERGY (CANADA),

  LTD.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Per:

  	
    /s/ Fred W. Kelly

  	
   

  	
  Per:

  	
    /s/ Fred W. Kelly

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Per:

  	
    Chief Executive Officer

  	
   

  	
  Per:

  	
    Chief Executive Officer

  	
   

  






 


13





















 


SCHEDULE
“A” attached to and
forming part of a Farmout Agreement dated as of the 25th day of
February 2005 between Deep Well Oil & Gas, Inc. and Northern Alberta Oil
Ltd., as Farmor and Surge Global Energy (Canada), Ltd., as Farmee


 


	
  FARMOUT
  LANDS

  	
   

  	
  TITLE DOCUMENTS

  	
   

  	
  FARMOR’S 

  PRE-

  FARMOUT

  WORKING

  INTERESTS

  	
   

  	
  ENCUMBRANCES

  
	
  32 Section
  Block *

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Township 91, Range 12:

  Sections 27, 28, 29, 30, 31,

  32;Township 91, Range 13: Sections 25, 26, 27, 35, 36
Oil Sands (Top of the Peace

  River to Base of the

  Pekisko)
Covering 2816 hectares

  	
   

  	
  Alberta Crown Oil Sands Development Lease 7403070365 dated July 10th
  2003 and currently standing in the name of Northern Alberta Oil, Ltd. – 80%,
  Pan Orient Energy Ltd. – 10%, 1132559 Alberta Ltd. 10%

  	
   

  	
  80%

  	
   

  	
  Crown Royalty
Nearshore ORR **

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Township 92, Range 13:

  Sections 1, 2, 10, 11, 12, 13,

  14, 15, 22, 23, 24
Oil Sands (Top of the Peace

  River to Base of the

  Pekisko)
Covering 2816 hectares

  	
   

  	
  Alberta Crown Oil Sands Development Lease 7403070367 dated July 10th
  2003 and currently standing in the name of Northern Alberta Oil, Ltd. – 80%,
  Pan Orient Energy Ltd. – 10%, 1132559 Alberta Ltd. - 10%

  	
   

  	
  80%

  	
   

  	
  Crown Royalty
Nearshore ORR **

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Township 92, Range 13:

  Sections 6, 7, 8, 9, 16, 17,

  18, 19, 20, 21
Oil Sands (Top of the Peace

  River to Base of the

  Pekisko)
Covering 2560 hectares

  	
   

  	
  Alberta Crown Oil Sands Development Lease 7403070368 dated July10th
  2003 and currently standing in the name of Northern Alberta Oil, Ltd. – 80%,
  Pan Orient Energy Ltd. – 10%, 1132559 Alberta Ltd. - 10%

  	
   

  	
  80%

  	
   

  	
  Crown Royalty
Nearshore ORR **

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  31 Section
  Block *

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Township 92, Range 12:

  Sections 15, 16, 17, 18, 19,

  20, 21, 28, 29, 30, 31, 32, 33
Oil Sands (Top of the Peace

  River to Base of the

  Pekisko)
Covering 3328 hectares

  	
   

  	
  Alberta Crown Oil Sands Development Lease 7404080870 dated August 19th
  2004 and currently standing in the name of Deep Well Oil & Gas, Inc. –
  80%, Pan Orient Energy Ltd. – 10%, 1132559 Alberta Ltd. - 10%

  	
   

  	
  80%

  	
   

  	
  Crown Royalty
Nearshore ORR **

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Township 92, Range 12:

  Sections 22, 26, 27, 34, 35,

  36

  	
   

  	
  Alberta Crown Oil Sands Development Lease 7404080871 dated August 19th
  2004 and currently standing in the

  	
   

  	
  80%

  	
   

  	
  Crown Royalty
Nearshore ORR **

  



 


14





















 


	
  FARMOUT
  LANDS

  	
   

  	
  TITLE DOCUMENTS

  	
   

  	
  FARMOR’S 

  PRE-

  FARMOUT

  WORKING

  INTERESTS

  	
   

  	
  ENCUMBRANCES

  
	
  Oil Sands (Top of the Peace River to Base of the Pekisko)
Covering 1536 hectares

  	
   

  	
  name of Deep Well Oil & Gas, Inc. – 80%, Pan Orient Energy Ltd. –
  10%, 1132559 Alberta Ltd. - 10%

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Township 92, Range 13:

  Sections 25, 26, 27, 28, 29,

  30, 31, 32, 33, 34, 35, 36
Oil Sands (Top of the Peace

  River to Base of the

  Pekisko)
Covering 3072 hectares

  	
   

  	
  Alberta Crown Oil Sands Development Lease 7404080872 dated August 19th
  2004 and currently standing in the name of Deep Well Oil & Gas, Inc. –
  80%, Pan Orient Energy Ltd. – 10%, 1132559 Alberta Ltd. - 10%

  	
   

  	
  80%

  	
   

  	
  Crown Royalty
Nearshore ORR **

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.5 Section
  Block

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Township 91, Range 13:
  N

  1⁄2 Section 28, Sections 32,

  33, 34; Township 92, Range

  13: Sections 3, 4, 5

  	
   

  	
  Alberta Crown Oil Sands
  Permit 7003040812 dated ·.

  	
   

  	
  TBD

  	
   

  	
  TBD

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Oil Sands (Top of the
  Peace River to Base of the Pekisko)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Covering 1664 hectares

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Township 91, Range 13: N

  1⁄2 Section 28, Sections 32,

  33, 34; Township 92, Range

  13: Sections 3, 4,5
Petroleum & Natural Gas

  (from Surface to Basement)
Covering 1664 hectares

  	
   

  	
  Alberta Crown Petroleum and Natural Gas Lease 5495030101 dated ·.

  	
   

  	
  TBD

  	
   

  	
  TBD

  



 










*              The
use of the headings “32 Section Block”
and “31 Section Block” are intended for convenience of
reference only and are not, under any circumstances whatsoever, to be taken
into consideration when interpreting this Agreement or when determining a
Party’s rights or obligations under this Agreement.  Without limiting the generality of the
foregoing, Farmee may (but is not required), when selecting any 6
section block of lands in which Farmee earns a 40% undivided interest by
the drilling of the Test Well or any Option Well, include lands from each of
the 38.5 Section Block and the 31 Section Block in any such 6
section block.


 


**           Pursuant
to the Assumption of Liabilities and Indemnity Agreement, Farmor shall be
solely responsible for the payment of the Nearshore ORR as it would otherwise
pertain to the interests earned by Farmee in the Farmout Lands.


 


***         The
6.5 Section Block shall not constitute “Farmout Lands” for the purposes
hereof unless or until the Farmor acquires a legal or beneficial interest in
the Title Documents that comprise the 6.5 Section Block.


 


15





















 


SCHEDULE “B”
attached to and forming part of a Farmout Agreement dated as of the 25th day of
February 2005 between Deep Well Oil & Gas, Inc. and Northern
Alberta Oil Ltd., as Farmor and Surge Global Energy (Canada), Ltd., as Farmee


 


Farmout &
Royalty Procedure Elections and Amendments


 


1.             Effective Date
(Subclause 1.01(f) – February 17, 2005)


 


2.             Payout (Subclause
1.01(t), if Article 6.00 applies) – Alternate
       - N/A


 


3.             Incorporation
of Clauses from 1990 CAPL Operating Procedure (Clause 1.02)

(l) Insurance (311)        Alternate A - o       Alternate
B -  ý


 


4.             Article 4.00
(Option Wells) will ý/will not o apply.


 


5.             Article 5.00 (Overriding
Royalty) will o/will not ý
apply.


 


6.             Quantification of
Overriding Royalty (Subclause 5.01A, if applicable)


 


	
  (i)

  	
   

  	
  Crude Oil (a)

  	
  -

  	
  Alternate –N/A

  
	
   

  	
   

  	
   

  	
  -

  	
  If Alternate 1 applies      %

  
	
   

  	
   

  	
   

  	
  -

  	
  If Alternate 2 applies      min      %   max      %

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Other (b)

  	
  -

  	
  Alternate - N/A

  
	
   

  	
   

  	
   

  	
  -

  	
  If Alternate 1 applies       %

  
	
   

  	
   

  	
   

  	
  -

  	
  If Alternate 2 applies      min      %   max      %

  



 


7.             Permitted Deductions
(Subclause 5.04B, if applicable) – Alternate -  N/A


 


8.             Article 6.00
(Conversion of Overriding Royalty)  will o/will
not  ý apply.


 


•              If
Article 6.00 applies, conversion to N/A OF Working interest in
Subclause 6.04 A.


 


9.             Article 8.00
(area of Mutual Interest) will ý/will not o apply.


 


10.           Reimbursement
of Land Maintenance Costs (Clause 11.02) will o/will
not ý apply. 
If applies, reimbursement of $            .


 





















 


SCHEDULE “C” attached to and
forming part of a Farmout Agreement dated as of the 25th day of
February 2005 between Deep Well Oil & Gas, Inc. and Northern
Alberta Oil Ltd., as Farmor and Surge Global Energy (Canada), Ltd., as Farmee


 


1990 CAPL OPERATING PROCEDURE


 


	
  I.

  	
   

  	
  Clause 311

  	
   

  	
  Insurance Election:

  	
   

  	
  A.

  	
   

  	
   

  	
   

  	
  B.

  	
   

  	
  X

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  II.

  	
   

  	
  Clause 604

  	
   

  	
  Marketing Fee:

  	
   

  	
  A.

  	
   

  	
  X

  	
   

  	
  B.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  III.

  	
   

  	
  Clause 903

  	
   

  	
  Casing Point Election:

  	
   

  	
  A.

  	
   

  	
  X

  	
   

  	
  B.

  	
   

  	
   

  



 


 


IV.           Clause 1004           Replace
with the following:


 


“Notwithstanding anything to the contrary contained in
this Operating Procedure, if the Operator is a participating party, it shall
carry out the operation for the account of the participating parties; provided
that, if the Operator is not a participating party, the participating parties
shall, as and among themselves and in accordance with the provisions of Clause
206, mutatis mutandis, appoint an
Operator for the operation.  If the
operation is commenced prior to the time the Operator becomes a participating
party, it is specifically understood that nothing in this Clause shall restrict
or prohibit the proposing party from actually commencing operations as provided
in Clause 1003.  The Operator, upon
becoming a participating party, shall have the right to take over and carry out
the operation for the participating parties.”


 


V.            Clause
1007           Penalty
for Independent Operations:


 


1.             Development
Wells:                            400%


 


2.             Exploratory
Wells:                               500%


 


VI.           Clause
1010           Title
Preserving Well:                                          180
days


 


VII.          Clause
2202           Address
for Notices:


 


	
  Farmor:

  	
  c/o Deep Well Oil & Gas, Inc

  	
   

  	
  Farmee:

  	
  Surge Global Energy
  (Canada), Ltd.

  
	
   

  	
  •Suite 2600, 144-4th Avenue
  SW

  	
   

  	
   

  	
  Suite 2600, 144 – 4th Avenue SW

  
	
   

  	
  •Calgary, AB T2p 3N4

  	
   

  	
   

  	
  Calgary, AB T2P 3N4

  
	
   

  	
  •Attention Steve Gawne, CEO

  	
   

  	
   

  	
  Attention: Fred Kelly, CEO

  



 


VIII.        Clause
2401           Disposition
of Interests:                     A.                            B.            X


 


IX.           Clause
2404           Deleted
and replaced with the Assignment Procedure


 





















 


1996 PASC ACCOUNTING PROCEDURE


 


I.              Clause
105             Operating
Fund:                   10%


 


Clause
110             Approvals:  2 or more Owners totaling 65%


 


Clause
112             Expenditure
Limitations:


 


(a)           excess
of                                $  25,000.00


 


(c)           excess of                                $  25,000.00


 


II.            Clause
201(a) 6     Labour: 
Delete and replace as follows:


 


“Salaries
and wages of the Operator’s employees engaged in production Engineering who are
either temporarily or permanently assigned to and directly employed off-site in
direct support of Joint Operations.”


 


Clause
202(b)        Employee Benefits – not
to exceed:  25%


 


Clause
207             Services:  replace “warehouse” with “Warehouse”
throughout


 


Clause
213(b)        Camp and Housing:  shall o/shall not  ý apply.


 


Clause 216             Warehouse
handling:          5%


 


Clause 221             Allocation
Options:             n/a


 


III.           Clause
301(a)        Cost:       Delete
and replace as follows:


 


“Cost” means total expenditures described in Article II,
excluding those expenditures pursuant to Subclause 209(b) and Clause 218
of this Accounting Procedure, and salvage credits for Material retired, the
value of injected substances purchased for enhanced recovery and any additional
exclusions as approved by the Owners.


 


IV.           Clause
302             Overhead
Rates:


 


(a)           For
each Exploration Project:


 


(i)               5%   of first                                          $    50,000


(ii)              3%   of first                                          $  100,000


(iii)             1%   of costs in excess of sum of (i) and
(ii)


 


(b)           For
each Drilling Well:


 


(i)               5%   of first                                          $    50,000


(ii)              3%   of first                                          $  100,000


(iii)             1%   of costs in excess of sum of (i) and
(ii)


 





















 


(c)           For
each Initial Construction Project:


 


(i)               5%   of first                                          $    50,000


(ii)              3%   of first                                          $  100,000


(iii)             1%   of costs in excess of sum of (i) and
(ii)


 


(d)           For
each Subsequent Construction Project:


 


(i)               5%   of first                                          $    50,000


(ii)              3%   of first                                          $  100,000


(iii)             1%   of costs in excess of sum of (i) and
(ii)


 


(e)           For
Operation and Maintenance:


 


(i)               10%    of the cost of the Joint Property; and


(ii)             $350    per Producing Well per month; or


(iii)                       Flat
rate per month


 


Subclause
302(3)(ii) and 302 (e)(iii) shall o/shall not ýapply.


 


V.            Clause
406             Dispositions:  $25,000


 


Clause
406             Dispositions:  replace “affiliates” with “Affiliates”


 


VI.           Clause
501(b)        Dispositions:  replace “warehouse” with “Warehouse”


 





















 


SCHEDULE 15.1(f) attached
to and forming part of a Farmout Agreement dated as of the 25th day of
February 2005 between Deep Well Oil & Gas, Inc. and Northern
Alberta Oil Ltd., as Farmor and Surge Global Energy (Canada), Ltd., as Farmee


 


Outstanding Authorizations for
Expenditures, Etc.


 





















 


SCHEDULE 15.1(k)
attached to and forming part of a Farmout Agreement dated as of the 25th day of
February 2005 between Deep Well Oil & Gas, Inc. and Northern
Alberta Oil Ltd., as Farmor and Surge Global Energy (Canada), Ltd., as Farmee


 


Areas of Mutual Interest