Document:

Exhibit 10.2

GUARANTEE AGREEMENT

by and between

ALLIANCE
FINANCIAL CORPORATION

and

WILMINGTON TRUST COMPANY

Dated as of September 21, 2006

GUARANTEE AGREEMENT

          This
GUARANTEE AGREEMENT (this “Guarantee”), dated as of September 21, 2006, is
executed and delivered by Alliance Financial Corporation, a New York
corporation (the “Guarantor”), and Wilmington Trust Company, a Delaware banking
corporation, as trustee (the “Guarantee Trustee”), for the benefit of the
Holders (as defined herein) from time to time of the Capital Securities (as
defined herein) of Alliance Financial Capital Trust II, a Delaware
statutory trust (the “Issuer”).

          WHEREAS,
pursuant to an Amended and Restated Declaration of Trust (the “Declaration”),
dated as of the date hereof among Wilmington Trust Company, not in its
individual capacity but solely as institutional trustee, the administrators of
the Issuer named therein, the Guarantor, as sponsor, and the holders from time
to time of undivided beneficial interests in the assets of the Issuer, the
Issuer is issuing on the date hereof those undivided beneficial interests,
having an aggregate liquidation amount of $15,000,000.00 (the “Capital
Securities”); and

          WHEREAS,
as incentive for the Holders to purchase the Capital Securities, the Guarantor
desires irrevocably and unconditionally to agree, to the extent set forth in
this Guarantee, to pay to the Holders of Capital Securities the Guarantee
Payments (as defined herein) and to make certain other payments on the terms
and conditions set forth herein; 

          NOW,
THEREFORE, in consideration of the purchase by each Holder of the Capital
Securities, which purchase the Guarantor hereby agrees shall benefit the
Guarantor, the Guarantor executes and delivers this Guarantee for the benefit
of the Holders.

ARTICLE I

DEFINITIONS AND INTERPRETATION

          Section
1.1. Definitions and Interpretation. In this
Guarantee, unless the context otherwise requires:

          (a)          capitalized
terms used in this Guarantee but not defined in the preamble above have the
respective meanings assigned to them in this Section 1.1;

          (b)          a
term defined anywhere in this Guarantee has the same meaning throughout;

          (c)          all
references to “the Guarantee” or “this Guarantee” are to this Guarantee as
modified, supplemented or amended from time to time;

          (d)          all
references in this Guarantee to “Articles” or “Sections” are to Articles or
Sections of this Guarantee, unless otherwise specified;

          (e)          terms
defined in the Declaration as at the date of execution of this Guarantee have
the same meanings when used in this Guarantee, unless otherwise defined in this
Guarantee or unless the context otherwise requires; and

          (f)          a
reference to the singular includes the plural and vice versa.

          “Affiliate”
has the same meaning as given to that term in Rule 405 of the Securities
Act of 1933, as amended, or any successor rule thereunder.

          “Beneficiaries”
means any Person to whom the Issuer is or hereafter becomes indebted or liable.

          “Capital
Securities” has the meaning set forth in the recitals to this Guarantee.

          “Common
Securities” means the common securities issued by the Issuer to the
Guarantor pursuant to the Declaration.

          “Corporate
Trust Office” means the office of the Guarantee Trustee at which the
corporate trust business of the Guarantee Trustee shall, at any particular
time, be principally administered, which office at the date of execution of
this Guarantee is located at Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890-1600, Attention: Corporate Trust Administration.

          “Covered
Person” means any Holder of Capital Securities.

          “Debentures”
means the debt securities of the Guarantor designated the Floating Rate Junior
Subordinated Deferrable Interest Debentures due 2036 held by the Institutional
Trustee (as defined in the Declaration) of the Issuer.

          “Declaration
Event of Default” means an “Event of Default” as defined in the
Declaration.

          “Event
of Default” has the meaning set forth in Section 2.4(a).

          “Guarantee
Payments” means the following payments or distributions, without
duplication, with respect to the Capital Securities, to the extent not paid or
made by the Issuer: (i) any accrued and unpaid Distributions (as defined
in the Declaration) which are required to be paid on such Capital
Securities to the extent the Issuer shall have funds available therefor,
(ii) the Redemption Price to the extent the Issuer has funds available
therefor, with respect to any Capital Securities called for redemption by the
Issuer, (iii) the Special Redemption Price to the extent the Issuer has
funds available therefor, with respect to Capital Securities redeemed upon the
occurrence of a Special Event, and (iv) upon a voluntary or involuntary
liquidation, dissolution, winding-up or termination of the Issuer (other than
in connection with the distribution of Debentures to the Holders of the Capital
Securities in exchange therefor as provided in the Declaration), the lesser of
(a) the aggregate of the liquidation amount and all accrued and unpaid
Distributions on the Capital Securities to the date of payment, to the extent
the Issuer shall have funds available therefor, and (b) the amount of
assets of the Issuer remaining available for distribution to Holders in
liquidation of the Issuer (in either case, the “Liquidation Distribution”).

          “Guarantee
Trustee” means Wilmington Trust Company, until a Successor Guarantee
Trustee has been appointed and has accepted such appointment pursuant to the
terms of this Guarantee and thereafter means each such Successor Guarantee
Trustee.

          “Guarantor”
means Alliance Financial Corporation and each of its successors and assigns.

          “Holder”
means any holder, as registered on the books and records of the Issuer, of any
Capital Securities; provided, however, that, in determining
whether the Holders of the requisite percentage of Capital Securities have
given any request, notice, consent or waiver hereunder, “Holder” shall not
include the Guarantor or any Affiliate of the Guarantor.

          “Indemnified
Person” means the Guarantee Trustee, any Affiliate of the Guarantee
Trustee, or any officers, directors, shareholders, members, partners,
employees, representatives, nominees, custodians or agents of the Guarantee
Trustee.

          “Indenture”
means the Indenture dated as of the date hereof between the Guarantor and Wilmington
Trust Company, not in its individual capacity but solely as trustee, and any
indenture

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supplemental
thereto pursuant to which the Debentures are to be issued to the institutional
trustee of the Issuer.

          “Issuer”
has the meaning set forth in the opening paragraph to this Guarantee.

          “Liquidation
Distribution” has the meaning set forth in the definition of “Guarantee
Payments” herein.

          “Majority
in liquidation amount of the Capital Securities” means Holder(s) of outstanding
Capital Securities, voting together as a class, but separately from the holders
of Common Securities, of more than 50% of the aggregate liquidation amount
(including the stated amount that would be paid on redemption, liquidation or
otherwise, plus accrued and unpaid Distributions to the date upon which the
voting percentages are determined) of all Capital Securities then outstanding.

          “Obligations”
means any costs, expenses or liabilities (but not including liabilities related
to taxes) of the Issuer other than obligations of the Issuer to pay to holders
of any Trust Securities the amounts due such holders pursuant to the terms of
the Trust Securities.

          “Officer’s
Certificate” means, with respect to any Person, a certificate signed by one
Authorized Officer of such Person. Any Officer’s Certificate delivered with
respect to compliance with a condition or covenant provided for in this
Guarantee shall include:

	
 

	
 

	
 

	
          (a)          a
  statement that the officer signing the Officer’s Certificate has read the
  covenant or condition and the definitions relating thereto;

	
 

	
 

	
          (b)          a
  brief statement of the nature and scope of the examination or investigation
  undertaken by the officer in rendering the Officer’s Certificate;

	
 

	
 

	
          (c)          a
  statement that the officer has made such examination or investigation as, in
  such officer’s opinion, is necessary to enable such officer to express an
  informed opinion as to whether or not such covenant or condition has been
  complied with; and

	
 

	
 

	
          (d)          a
  statement as to whether, in the opinion of the officer, such condition or
  covenant has been complied with.

          “Person”
means a legal person, including any individual, corporation, estate,
partnership, joint venture, association, joint stock company, limited liability
company, trust, unincorporated association, or government or any agency or
political subdivision thereof, or any other entity of whatever nature.

          “Redemption
Price” has the meaning set forth in the Indenture.

          “Responsible
Officer” means, with respect to the Guarantee Trustee, any officer within
the Corporate Trust Office of the Guarantee Trustee including any Vice
President, Assistant Vice President, Secretary, Assistant Secretary or any
other officer of the Guarantee Trustee customarily performing functions similar
to those performed by any of the above designated officers and also, with
respect to a particular corporate trust matter, any other officer to whom such
matter is referred because of that officer’s knowledge of and familiarity with
the particular subject.

          “Special
Event” has the meaning set forth in the Indenture.

          “Special
Redemption Price” has the meaning set forth in the Indenture.

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          “Successor
Guarantee Trustee” means a successor Guarantee Trustee possessing the
qualifications to act as Guarantee Trustee under Section 3.1.

          “Trust
Securities” means the Common Securities and the Capital Securities.

ARTICLE II

POWERS, DUTIES AND RIGHTS OF

GUARANTEE TRUSTEE

          Section
2.1. Powers and Duties of the Guarantee Trustee.

          (a)          This
Guarantee shall be held by the Guarantee Trustee for the benefit of the Holders
of the Capital Securities, and the Guarantee Trustee shall not transfer this
Guarantee to any Person except a Holder of Capital Securities exercising his or
her rights pursuant to Section 4.4(b) or to a Successor Guarantee Trustee on
acceptance by such Successor Guarantee Trustee of its appointment to act as
Successor Guarantee Trustee. The right, title and interest of the Guarantee
Trustee shall automatically vest in any Successor Guarantee Trustee, and such
vesting and cessation of title shall be effective whether or not conveyancing
documents have been executed and delivered pursuant to the appointment of such
Successor Guarantee Trustee.

          (b)          If
an Event of Default actually known to a Responsible Officer of the Guarantee
Trustee has occurred and is continuing, the Guarantee Trustee shall enforce
this Guarantee for the benefit of the Holders of the Capital Securities.

          (c)          The
Guarantee Trustee, before the occurrence of any Event of Default and after
curing all Events of Default that may have occurred, shall undertake to perform
only such duties as are specifically set forth in this Guarantee, and no
implied covenants shall be read into this Guarantee against the Guarantee
Trustee. In case an Event of Default has occurred (that has not been waived
pursuant to Section 2.4) and is actually known to a Responsible Officer of
the Guarantee Trustee, the Guarantee Trustee shall exercise such of the rights
and powers vested in it by this Guarantee, and use the same degree of care and
skill in its exercise thereof, as a prudent person would exercise or use under
the circumstances in the conduct of his or her own affairs.

          (d)          No
provision of this Guarantee shall be construed to relieve the Guarantee Trustee
from liability for its own negligent action, its own negligent failure to act,
or its own willful misconduct, except that:

	
 

	
 

	
 

	
 

	
                 (i)          prior
  to the occurrence of any Event of Default and after the curing or waiving of
  all such Events of Default that may have occurred:

	
 

	
 

	
 

	
            (A)          the
  duties and obligations of the Guarantee Trustee shall be determined solely by
  the express provisions of this Guarantee, and the Guarantee Trustee shall not
  be liable except for the performance of such duties and obligations as are
  specifically set forth in this Guarantee, and no implied covenants or
  obligations shall be read into this Guarantee against the Guarantee Trustee;
  and

	
 

	
 

	
 

	
            (B)          in
  the absence of bad faith on the part of the Guarantee Trustee, the Guarantee
  Trustee may conclusively rely, as to the truth of the statements and the
  correctness of the opinions expressed therein, upon any certificates or
  opinions furnished to the Guarantee Trustee and conforming to the
  requirements of this Guarantee; but in the 

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case of any
  such certificates or opinions that by any provision hereof are specifically
  required to be furnished to the Guarantee Trustee, the Guarantee Trustee
  shall be under a duty to examine the same to determine whether or not they
  conform to the requirements of this Guarantee;

	
 

	
 

	
 

	
 

	
                  (ii)          the
  Guarantee Trustee shall not be liable for any error of judgment made in good
  faith by a Responsible Officer of the Guarantee Trustee, unless it shall be
  proved that such Responsible Officer of the Guarantee Trustee or the
  Guarantee Trustee was negligent in ascertaining the pertinent facts upon
  which such judgment was made;

	
 

	
 

	
 

	
                  (iii)          the
  Guarantee Trustee shall not be liable with respect to any action taken or
  omitted to be taken by it in good faith in accordance with the written
  direction of the Holders of not less than a Majority in liquidation amount of
  the Capital Securities relating to the time, method and place of conducting
  any proceeding for any remedy available to the Guarantee Trustee, or relating
  to the exercise of any trust or power conferred upon the Guarantee Trustee
  under this Guarantee; and

	
 

	
 

	
 

	
                  (iv)          no
  provision of this Guarantee shall require the Guarantee Trustee to expend or
  risk its own funds or otherwise incur personal financial liability in the
  performance of any of its duties or in the exercise of any of its rights or
  powers, if the Guarantee Trustee shall have reasonable grounds for believing
  that the repayment of such funds is not reasonably assured to it under the
  terms of this Guarantee or security and indemnity, reasonably satisfactory to
  the Guarantee Trustee, against such risk or liability is not reasonably
  assured to it.

          Section 2.2. Certain Rights of Guarantee
Trustee.

	
 

	
 

	
 

	
 

	
(a)          Subject
  to the provisions of Section 2.1:

	
 

	
 

	
 

	
 

	
               (i)          The
  Guarantee Trustee may conclusively rely, and shall be fully protected in
  acting or refraining from acting upon, any resolution, certificate,
  statement, instrument, opinion, report, notice, request, direction, consent,
  order, bond, debenture, note, other evidence of indebtedness or other paper
  or document believed by it to be genuine and to have been signed, sent or
  presented by the proper party or parties.

	
 

	
 

	
 

	
 

	
               (ii)          Any
  direction or act of the Guarantor contemplated by this Guarantee shall be
  sufficiently evidenced by an Officer’s Certificate.

	
 

	
 

	
 

	
 

	
               (iii)          Whenever,
  in the administration of this Guarantee, the Guarantee Trustee shall deem it
  desirable that a matter be proved or established before taking, suffering or
  omitting any action hereunder, the Guarantee Trustee (unless other evidence
  is herein specifically prescribed) may, in the absence of bad faith on its
  part, request and conclusively rely upon an Officer’s Certificate of the
  Guarantor which, upon receipt of such request, shall be promptly delivered by
  the Guarantor.

	
 

	
 

	
 

	
 

	
               (iv)          The
  Guarantee Trustee shall have no duty to see to any recording, filing or
  registration of any instrument (or any re-recording, refiling or
  re-registration thereof).

	
 

	
 

	
 

	
 

	
               (v)          The
  Guarantee Trustee may consult with counsel of its selection, and the advice
  or opinion of such counsel with respect to legal matters shall be full and
  complete authorization and protection in respect of any action taken,
  suffered or omitted by it hereunder in good faith and in accordance with such
  advice or opinion. Such counsel may be counsel to the Guarantor or any 

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of its
  Affiliates and may include any of its employees. The Guarantee Trustee shall
  have the right at any time to seek instructions concerning the administration
  of this Guarantee from any court of competent jurisdiction.

	
 

	
 

	
 

	
 

	
               (vi)          The
  Guarantee Trustee shall be under no obligation to exercise any of the rights
  or powers vested in it by this Guarantee at the request or direction of any
  Holder, unless such Holder shall have provided to the Guarantee Trustee such
  security and indemnity, reasonably satisfactory to the Guarantee Trustee,
  against the costs, expenses (including attorneys’ fees and expenses and the
  expenses of the Guarantee Trustee’s agents, nominees or custodians) and
  liabilities that might be incurred by it in complying with such request or
  direction, including such reasonable advances as may be requested by the
  Guarantee Trustee; provided, however, that nothing contained in
  this Section 2.2(a)(vi) shall relieve the Guarantee Trustee, upon the
  occurrence of an Event of Default, of its obligation to exercise the rights
  and powers vested in it by this Guarantee.

	
 

	
 

	
 

	
 

	
               (vii)          The
  Guarantee Trustee shall not be bound to make any investigation into the facts
  or matters stated in any resolution, certificate, statement, instrument,
  opinion, report, notice, request, direction, consent, order, bond, debenture,
  note, other evidence of indebtedness or other paper or document, but the
  Guarantee Trustee, in its discretion, may make such further inquiry or
  investigation into such facts or matters as it may see fit.

	
 

	
 

	
 

	
 

	
               (viii)          The
  Guarantee Trustee may execute any of the trusts or powers hereunder or
  perform any duties hereunder either directly or by or through agents,
  nominees, custodians or attorneys, and the Guarantee Trustee shall not be
  responsible for any misconduct or negligence on the part of any agent or
  attorney appointed with due care by it hereunder.

	
 

	
 

	
 

	
 

	
               (ix)          Any
  action taken by the Guarantee Trustee or its agents hereunder shall bind the
  Holders of the Capital Securities, and the signature of the Guarantee Trustee
  or its agents alone shall be sufficient and effective to perform any such
  action. No third party shall be required to inquire as to the authority of
  the Guarantee Trustee to so act or as to its compliance with any of the terms
  and provisions of this Guarantee, both of which shall be conclusively
  evidenced by the Guarantee Trustee’s or its agent’s taking such action.

	
 

	
 

	
 

	
 

	
               (x)          Whenever
  in the administration of this Guarantee the Guarantee Trustee shall deem it
  desirable to receive instructions with respect to enforcing any remedy or
  right or taking any other action hereunder, the Guarantee Trustee
  (i) may request instructions from the Holders of a Majority in
  liquidation amount of the Capital Securities, (ii) may refrain from
  enforcing such remedy or right or taking such other action until such
  instructions are received, and (iii) shall be protected in conclusively
  relying on or acting in accordance with such instructions.

	
 

	
 

	
 

	
 

	
               (xi)          The
  Guarantee Trustee shall not be liable for any action taken, suffered, or
  omitted to be taken by it in good faith, without negligence, and reasonably
  believed by it to be authorized or within the discretion or rights or powers
  conferred upon it by this Guarantee.

	
 

	
 

	
 

	
          (b)          No
  provision of this Guarantee shall be deemed to impose any duty or obligation
  on the Guarantee Trustee to perform any act or acts or exercise any right,
  power, duty or obligation conferred or imposed on it, in any jurisdiction in
  which it shall be illegal or in which the Guarantee Trustee shall be
  unqualified or incompetent in accordance with applicable law to perform any
  such act or acts or to exercise any such right, power, duty or obligation. No
  permissive power or authority available to the Guarantee Trustee shall be
  construed to be a duty.

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          Section
2.3. Not Responsible for Recitals or Issuance of Guarantee. The
recitals contained in this Guarantee shall be taken as the statements of the
Guarantor, and the Guarantee Trustee does not assume any responsibility for
their correctness. The Guarantee Trustee makes no representation as to the
validity or sufficiency of this Guarantee.

          Section
2.4. Events of Default; Waiver.

          (a)          An
Event of Default under this Guarantee will occur upon the failure of the
Guarantor to perform any of its payment or other obligations hereunder.

          (b)          The
Holders of a Majority in liquidation amount of the Capital Securities may,
voting or consenting as a class, on behalf of the Holders of all of the Capital
Securities, waive any past Event of Default and its consequences. Upon such
waiver, any such Event of Default shall cease to exist, and shall be deemed to
have been cured, for every purpose of this Guarantee, but no such waiver shall
extend to any subsequent or other default or Event of Default or impair any
right consequent thereon.

          Section
2.5. Events of Default; Notice.

          (a)          The
Guarantee Trustee shall, within 90 days after the occurrence of an Event of
Default, transmit by mail, first class postage prepaid, to the Holders of the
Capital Securities and the Guarantor, notices of all Events of Default actually
known to a Responsible Officer of the Guarantee Trustee, unless such defaults
have been cured before the giving of such notice, provided, however,
that the Guarantee Trustee shall be protected in withholding such notice if and
so long as a Responsible Officer of the Guarantee Trustee in good faith
determines that the withholding of such notice is in the interests of the
Holders of the Capital Securities.

          (b)          The
Guarantee Trustee shall not be deemed to have knowledge of any Event of Default
unless the Guarantee Trustee shall have received written notice from the
Guarantor or a Holder of the Capital Securities (except in the case of a
payment default), or a Responsible Officer of the Guarantee Trustee charged
with the administration of this Guarantee shall have obtained actual knowledge
thereof.

ARTICLE III

GUARANTEE TRUSTEE

          Section
3.1. Guarantee Trustee; Eligibility.

          (a)          There
shall at all times be a Guarantee Trustee which shall:

	
 

	
 

	
 

	
               (i)          not
  be an Affiliate of the Guarantor, and

	
 

	
 

	
 

	
               (ii)          be
  a corporation organized and doing business under the laws of the United
  States of America or any State or Territory thereof or of the District of
  Columbia, or Person authorized under such laws to exercise corporate trust
  powers, having a combined capital and surplus of at least 50 million
  U.S. dollars ($50,000,000), and subject to supervision or examination by
  Federal, State, Territorial or District of Columbia authority. If such
  corporation publishes reports of condition at least annually, pursuant to law
  or to the requirements of the supervising or examining authority referred to
  above, then, for the purposes of this Section 3.1(a)(ii), the combined
  capital and surplus of such corporation shall be deemed to be its combined
  capital and surplus as set forth in its most recent report of condition so
  published.

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          (b)          If
at any time the Guarantee Trustee shall cease to be eligible to so act under
Section 3.1(a), the Guarantee Trustee shall immediately resign in the
manner and with the effect set out in Section 3.2(c).

          (c)          If
the Guarantee Trustee has or shall acquire any “conflicting interest” within
the meaning of Section 310(b) of the Trust Indenture Act, the Guarantee Trustee
shall either eliminate such interest or resign to the extent and in the manner
provided by, and subject to this Guarantee.

          Section
3.2. Appointment, Removal and Resignation of Guarantee Trustee.

          (a)          Subject
to Section 3.2(b), the Guarantee Trustee may be appointed or removed without
cause at any time by the Guarantor except during an Event of Default.

          (b)          The
Guarantee Trustee shall not be removed in accordance with Section 3.2(a) until
a Successor Guarantee Trustee has been appointed and has accepted such
appointment by written instrument executed by such Successor Guarantee Trustee
and delivered to the Guarantor.

          (c)          The
Guarantee Trustee appointed to office shall hold office until a Successor
Guarantee Trustee shall have been appointed or until its removal or
resignation. The Guarantee Trustee may resign from office (without need for
prior or subsequent accounting) by an instrument in writing executed by the
Guarantee Trustee and delivered to the Guarantor, which resignation shall not
take effect until a Successor Guarantee Trustee has been appointed and has
accepted such appointment by an instrument in writing executed by such
Successor Guarantee Trustee and delivered to the Guarantor and the resigning
Guarantee Trustee.

          (d)          If
no Successor Guarantee Trustee shall have been appointed and accepted
appointment as provided in this Section 3.2 within 60 days after delivery of an
instrument of removal or resignation, the Guarantee Trustee resigning or being
removed may petition any court of competent jurisdiction for appointment of a
Successor Guarantee Trustee. Such court may thereupon, after prescribing such
notice, if any, as it may deem proper, appoint a Successor Guarantee Trustee.

          (e)          No
Guarantee Trustee shall be liable for the acts or omissions to act of any
Successor Guarantee Trustee.

          (f)          Upon
termination of this Guarantee or removal or resignation of the Guarantee
Trustee pursuant to this Section 3.2, the Guarantor shall pay to the Guarantee
Trustee all amounts owing to the Guarantee Trustee under Sections 7.2 and 7.3
accrued to the date of such termination, removal or resignation.

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ARTICLE IV

GUARANTEE

          Section
4.1. Guarantee.

          (a)          The
Guarantor irrevocably and unconditionally agrees to pay in full to the Holders
the Guarantee Payments (without duplication of amounts theretofore paid by the
Issuer), as and when due, regardless of any defense (except the defense of
payment by the Issuer), right of set-off or counterclaim that the Issuer may
have or assert. The Guarantor’s obligation to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by the Guarantor to the
Holders or by causing the Issuer to pay such amounts to the Holders.

          (b)          The
Guarantor hereby also agrees to assume any and all Obligations of the Issuer
and in the event any such Obligation is not so assumed, subject to the terms
and conditions hereof, the Guarantor hereby irrevocably and unconditionally
guarantees to each Beneficiary the full payment, when and as due, of any and
all Obligations to such Beneficiaries. This Guarantee is intended to be for the
benefit of, and to be enforceable by, all such Beneficiaries, whether or not
such Beneficiaries have received notice hereof.

          Section 4.2.
Waiver of Notice and Demand.
The Guarantor hereby waives notice of acceptance of this Guarantee and of any
liability to which it applies or may apply, presentment, demand for payment,
any right to require a proceeding first against the Issuer or any other Person
before proceeding against the Guarantor, protest, notice of nonpayment, notice
of dishonor, notice of redemption and all other notices and demands.

          Section
4.3. Obligations Not Affected. The obligations,
covenants, agreements and duties of the Guarantor under this Guarantee shall in
no way be affected or impaired by reason of the happening from time to time of
any of the following:

          (a)          the
release or waiver, by operation of law or otherwise, of the performance or
observance by the Issuer of any express or implied agreement, covenant, term or
condition relating to the Capital Securities to be performed or observed by the
Issuer;

          (b)          the
extension of time for the payment by the Issuer of all or any portion of the
Distributions, Redemption Price, Special Redemption Price, Liquidation
Distribution or any other sums payable under the terms of the Capital
Securities or the extension of time for the performance of any other obligation
under, arising out of or in connection with, the Capital Securities (other than
an extension of time for payment of Distributions, Redemption Price, Special
Redemption Price, Liquidation Distribution or other sum payable that results
from the extension of any interest payment period on the Debentures or any
extension of the maturity date of the Debentures permitted by the Indenture);

          (c)          any
failure, omission, delay or lack of diligence on the part of the Holders to
enforce, assert or exercise any right, privilege, power or remedy conferred on
the Holders pursuant to the terms of the Capital Securities, or any action on
the part of the Issuer granting indulgence or extension of any kind;

          (d)          the
voluntary or involuntary liquidation, dissolution, sale of any collateral,
receivership, insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition or readjustment of debt of, or other
similar proceedings affecting, the Issuer or any of the assets of the Issuer;

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          (e)          any
invalidity of, or defect or deficiency in, the Capital Securities;

          (f)          the
settlement or compromise of any obligation guaranteed hereby or hereby
incurred; or

          (g)          any
other circumstance whatsoever that might otherwise constitute a legal or
equitable discharge or defense of a guarantor, it being the intent of this
Section 4.3 that the obligations of the Guarantor hereunder shall be
absolute and unconditional under any and all circumstances.

          There
shall be no obligation of the Holders to give notice to, or obtain consent of,
the Guarantor with respect to the happening of any of the foregoing.

          Section
4.4. Rights of Holders.

          (a)          The
Holders of a Majority in liquidation amount of the Capital Securities have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Guarantee Trustee in respect of this Guarantee or to
direct the exercise of any trust or power conferred upon the Guarantee Trustee
under this Guarantee; provided, however, that (subject to Section 2.1)
the Guarantee Trustee shall have the right to decline to follow any such
direction if the Guarantee Trustee being advised by counsel determines that the
action or proceeding so directed may not lawfully be taken or if the Guarantee
Trustee in good faith by its board of directors or trustees, executive
committees or a trust committee of directors or trustees and/or Responsible
Officers shall determine that the action or proceedings so directed would
involve the Guarantee Trustee in personal liability.

          (b)          Any
Holder of Capital Securities may institute a legal proceeding directly against
the Guarantor to enforce the Guarantee Trustee’s rights under this Guarantee,
without first instituting a legal proceeding against the Issuer, the Guarantee
Trustee or any other Person. The Guarantor waives any right or remedy to
require that any such action be brought first against the Issuer, the Guarantee
Trustee or any other Person before so proceeding directly against the
Guarantor.

          Section
4.5. Guarantee of Payment. This Guarantee
creates a guarantee of payment and not of collection.

          Section 4.6.
Subrogation. The
Guarantor shall be subrogated to all (if any) rights of the Holders of Capital
Securities against the Issuer in respect of any amounts paid to such Holders by
the Guarantor under this Guarantee; provided, however, that the
Guarantor shall not (except to the extent required by mandatory provisions of
law) be entitled to enforce or exercise any right that it may acquire by way of
subrogation or any indemnity, reimbursement or other agreement, in all cases as
a result of payment under this Guarantee, if, after giving effect to any such
payment, any amounts are due and unpaid under this Guarantee. If any amount
shall be paid to the Guarantor in violation of the preceding sentence, the
Guarantor agrees to hold such amount in trust for the Holders and to pay over
such amount to the Holders.

          Section 4.7.
Independent Obligations.
The Guarantor acknowledges that its obligations hereunder are independent of
the obligations of the Issuer with respect to the Capital Securities and that
the Guarantor shall be liable as principal and as debtor hereunder to make
Guarantee Payments pursuant to the terms of this Guarantee notwithstanding the
occurrence of any event referred to in subsections (a) through (g), inclusive,
of Section 4.3 hereof.

          Section 4.8.
Enforcement by a Beneficiary.
A Beneficiary may enforce the obligations of the Guarantor contained in Section
4.1(b) directly against the Guarantor and the Guarantor waives any right or
remedy to require that any action be brought against the Issuer or any other
person or entity before proceeding against the Guarantor. The Guarantor shall
be subrogated to all rights (if any) of any

10

Beneficiary
against the Issuer in respect of any amounts paid to the Beneficiaries by the
Guarantor under this Guarantee; provided, however, that the
Guarantor shall not (except to the extent required by mandatory provisions of
law) be entitled to enforce or exercise any rights that it may acquire by way
of subrogation or any indemnity, reimbursement or other agreement, in all cases
as a result of payment under this Guarantee, if at the time of any such
payment, and after giving effect to such payment, any amounts are due and
unpaid under this Guarantee.

ARTICLE V

LIMITATION OF TRANSACTIONS; SUBORDINATION

          Section 5.1.
Limitation of Transactions.
So long as any Capital Securities remain outstanding, if (a) there shall
have occurred and be continuing an Event of Default or a Declaration Event of
Default or (b) the Guarantor shall have selected an Extension Period as
provided in the Declaration and such period, or any extension thereof, shall
have commenced and be continuing, then the Guarantor shall not and shall not
permit any Affiliate to (x) declare or pay any dividends or distributions
on, or redeem, purchase, acquire, or make a liquidation payment with respect
to, any of the Guarantor’s or such Affiliate’s capital stock (other than
payments of dividends or distributions to the Guarantor) or make any guarantee
payments with respect to the foregoing or (y) make any payment of
principal of or interest or premium, if any, on or repay, repurchase or redeem
any debt securities of the Guarantor or any Affiliate that rank pari passu in all respects with or junior
in interest to the Debentures (other than, with respect to clauses (x) and (y)
above, (i) repurchases, redemptions or other acquisitions of shares of
capital stock of the Guarantor in connection with any employment contract,
benefit plan or other similar arrangement with or for the benefit of one or
more employees, officers, directors or consultants, in connection with a
dividend reinvestment or stockholder stock purchase plan or in connection with
the issuance of capital stock of the Guarantor (or securities convertible into
or exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the occurrence of the Event of Default,
Declaration Event of Default or Extension Period, as applicable, (ii) as a
result of any exchange or conversion of any class or series of the Guarantor’s
capital stock (or any capital stock of a subsidiary of the Guarantor) for any
class or series of the Guarantor’s capital stock or of any class or series of
the Guarantor’s indebtedness for any class or series of the Guarantor’s capital
stock, (iii) the purchase of fractional interests in shares of the
Guarantor’s capital stock pursuant to the conversion or exchange provisions of
such capital stock or the security being converted or exchanged, (iv) any
declaration of a dividend in connection with any stockholders’ rights plan, or
the issuance of rights, stock or other property under any stockholders’ rights
plan, or the redemption or repurchase of rights pursuant thereto, (v) any
dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior
to such stock and any cash payments in lieu of fractional shares issued in
connection therewith, or (vi) payments under this Guarantee).

          Section 5.2.
Ranking. This Guarantee
will constitute an unsecured obligation of the Guarantor and will rank
subordinate and junior in right of payment to all present and future Senior
Indebtedness (as defined in the Indenture) of the Guarantor. By their
acceptance thereof, each Holder of Capital Securities agrees to the foregoing
provisions of this Guarantee and the other terms set forth herein.

          The
right of the Guarantor to participate in any distribution of assets of any of
its subsidiaries upon any such subsidiary’s liquidation or reorganization or
otherwise is subject to the prior claims of creditors of that subsidiary,
except to the extent the Guarantor may itself be recognized as a creditor of
that subsidiary. Accordingly, the Guarantor’s obligations under this Guarantee
will be effectively subordinated to all existing and future liabilities of the
Guarantor’s subsidiaries, and claimants should look only to the assets of the
Guarantor for payments hereunder. This Guarantee does not limit the

11

incurrence or
issuance of other secured or unsecured debt of the Guarantor, including Senior
Indebtedness of the Guarantor, under any indenture that the Guarantor may enter
into in the future or otherwise.

ARTICLE VI

TERMINATION

          Section
6.1. Termination. This Guarantee shall terminate
as to the Capital Securities (i) upon full payment of the Redemption Price
or Special Redemption Price of all Capital Securities then outstanding,
(ii) upon the distribution of all of the Debentures to the Holders of all
of the Capital Securities or (iii) upon full payment of the amounts
payable in accordance with the Declaration upon dissolution of the Issuer. This
Guarantee will continue to be effective or will be reinstated, as the case may
be, if at any time any Holder of Capital Securities must restore payment of any
sums paid under the Capital Securities or under this Guarantee.

ARTICLE VII

INDEMNIFICATION

          Section 7.1.
Exculpation.

          (a)          No
Indemnified Person shall be liable, responsible or accountable in damages or
otherwise to the Guarantor or any Covered Person for any loss, damage or claim
incurred by reason of any act or omission performed or omitted by such
Indemnified Person in good faith in accordance with this Guarantee and in a
manner that such Indemnified Person reasonably believed to be within the scope
of the authority conferred on such Indemnified Person by this Guarantee or by
law, except that an Indemnified Person shall be liable for any such loss,
damage or claim incurred by reason of such Indemnified Person’s negligence or
willful misconduct with respect to such acts or omissions.

          (b)          An
Indemnified Person shall be fully protected in relying in good faith upon the
records of the Issuer or the Guarantor and upon such information, opinions,
reports or statements presented to the Issuer or the Guarantor by any Person as
to matters the Indemnified Person reasonably believes are within such other
Person’s professional or expert competence and who, if selected by such
Indemnified Person, has been selected with reasonable care by such Indemnified
Person, including information, opinions, reports or statements as to the value
and amount of the assets, liabilities, profits, losses, or any other facts
pertinent to the existence and amount of assets from which Distributions to
Holders of Capital Securities might properly be paid.

          Section 7.2.
Indemnification.

          (a)          The
Guarantor agrees to indemnify each Indemnified Person for, and to hold each
Indemnified Person harmless against, any and all loss, liability, damage, claim
or expense incurred without negligence or willful misconduct on the part of the
Indemnified Person, arising out of or in connection with the acceptance or
administration of the trust or trusts hereunder, including, but not limited to,
the costs and expenses (including reasonable legal fees and expenses) of the
Indemnified Person defending itself against, or investigating, any claim or
liability in connection with the exercise or performance of any of the Indemnified
Person’s powers or duties hereunder. The obligation to indemnify as set forth
in this Section 7.2 shall survive the resignation or removal of the
Guarantee Trustee and the termination of this Guarantee.

12

          (b)          Promptly
after receipt by an Indemnified Person under this Section 7.2 of notice of
the commencement of any action, such Indemnified Person will, if a claim in
respect thereof is to be made against the Guarantor under this
Section 7.2, notify the Guarantor in writing of the commencement thereof;
but the failure so to notify the Guarantor (i) will not relieve the
Guarantor from liability under paragraph (a) above unless and to the
extent that the Guarantor did not otherwise learn of such action and such
failure results in the forfeiture by the Guarantor of substantial rights and
defenses and (ii) will not, in any event, relieve the Guarantor from any
obligations to any Indemnified Person other than the indemnification obligation
provided in paragraph (a) above. The Guarantor shall be entitled to
appoint counsel of the Guarantor’s choice at the Guarantor’s expense to
represent the Indemnified Person in any action for which indemnification is
sought (in which case the Guarantor shall not thereafter be responsible for the
fees and expenses of any separate counsel retained by the Indemnified Person or
Persons except as set forth below); provided, however, that such
counsel shall be reasonably satisfactory to the Indemnified Person.
Notwithstanding the Guarantor’s election to appoint counsel to represent the
Guarantor in an action, the Indemnified Person shall have the right to employ
separate counsel (including local counsel), and the Guarantor shall bear the
reasonable fees, costs and expenses of such separate counsel if (i) the
use of counsel chosen by the Guarantor to represent the Indemnified Person
would present such counsel with a conflict of interest, (ii) the actual or
potential defendants in, or targets of, any such action include both the
Indemnified Person and the Guarantor and the Indemnified Person shall have
reasonably concluded that there may be legal defenses available to it and/or
other Indemnified Person(s) which are different from or additional to those
available to the Guarantor, (iii) the Guarantor shall not have employed
counsel satisfactory to the Indemnified Person to represent the Indemnified
Person within a reasonable time after notice of the institution of such action
or (iv) the Guarantor shall authorize the Indemnified Person to employ
separate counsel at the expense of the Guarantor. The Guarantor will not,
without the prior written consent of the Indemnified Persons, settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
Indemnified Persons are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each Indemnified Person from all liability arising out of such claim,
action, suit or proceeding.

          Section
7.3. Compensation; Reimbursement of Expenses.
The Guarantor agrees:

          (a)          to
pay to the Guarantee Trustee from time to time such compensation for all
services rendered by it hereunder as the parties shall agree to from time to
time (which compensation shall not be limited by any provision of law in regard
to the compensation of a trustee of an express trust); and

          (b)          except
as otherwise expressly provided herein, to reimburse the Guarantee Trustee upon
request for all reasonable expenses, disbursements and advances incurred or
made by it in accordance with any provision of this Guarantee (including the
reasonable compensation and the expenses and disbursements of its agents and
counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or willful misconduct.

          For
purposes of clarification, this Section 7.3 does not contemplate the
payment by the Guarantor of acceptance or annual administration fees owing to
the Guarantee Trustee for services to be provided by the Guarantee Trustee
under this Guarantee or the fees and expenses of the Guarantee Trustee’s
counsel in connection with the closing of the transactions contemplated by this
Guarantee. The provisions of this Section 7.3 shall survive the
resignation or removal of the Guarantee Trustee and the termination of this
Guarantee.

13

ARTICLE VIII

MISCELLANEOUS

          Section 8.1.
Successors and Assigns.
All guarantees and agreements contained in this Guarantee shall bind the
successors, assigns, receivers, trustees and representatives of the Guarantor
and shall inure to the benefit of the Holders of the Capital Securities then
outstanding. Except in connection with any merger or consolidation of the
Guarantor with or into another entity or any sale, transfer or lease of the
Guarantor’s assets to another entity, in each case, to the extent permitted
under the Indenture, the Guarantor may not assign its rights or delegate its
obligations under this Guarantee without the prior approval of the Holders of
at least a Majority in liquidation amount of the Capital Securities.

          Section 8.2.
Amendments. Except with
respect to any changes that do not adversely affect the rights of Holders of
the Capital Securities in any material respect (in which case no consent of
Holders will be required), this Guarantee may be amended only with the prior
approval of the Holders of not less than a Majority in liquidation amount of
the Capital Securities. The provisions of the Declaration with respect to
amendments thereof apply to the giving of such approval.

          Section
8.3. Notices. All notices provided for in this
Guarantee shall be in writing, duly signed by the party giving such notice, and
shall be delivered, telecopied or mailed by first class mail, as follows:

          (a)          If
given to the Guarantee Trustee, at the Guarantee Trustee’s mailing address set
forth below (or such other address as the Guarantee Trustee may give notice of
to the Holders of the Capital Securities and the Guarantor):

	
 

	
 

	
 

	
Wilmington
  Trust Company

	
 

	
Rodney
  Square North

	
 

	
1100 North
  Market Street

	
 

	
Wilmington,
  Delaware 19890-1600

	
 

	
Attention: Corporate
  Trust Administration

	
 

	
Telecopy:
  302-636-4140

          (b)          If
given to the Guarantor, at the Guarantor’s mailing address set forth below (or
such other address as the Guarantor may give notice of to the Holders of the
Capital Securities and to the Guarantee Trustee):

	
 

	
 

	
 

	
Alliance
  Financial Corporation

	
 

	
120 Madison
  Street

	
 

	
MONY Tower
  II, 18th Floor

	
 

	
 

	
 

	
Syracuse,
  New York 13202

	
 

	
Attention:
  J. Daniel Mohr

	
 

	
Telecopy:
  315-475-3558

          (c)          If
given to any Holder of the Capital Securities, at the address set forth on the
books and records of the Issuer.

          All
such notices shall be deemed to have been given when received in person,
telecopied with receipt confirmed, or mailed by first class mail, postage
prepaid, except that if a notice or other document is refused delivery or
cannot be delivered because of a changed address of which no notice was given,

14

such notice or
other document shall be deemed to have been delivered on the date of such
refusal or inability to deliver.

          Section 8.4.
Benefit. This Guarantee
is solely for the benefit of the Beneficiaries and, subject to Section 2.1(a),
is not separately transferable from the Capital Securities.

          Section 8.5.
Governing Law. THIS
GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH, THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAWS
PRINCIPLES THEREOF (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL
OBLIGATIONS LAW).

          Section
8.6. Counterparts. This Guarantee may be
executed in one or more counterparts, each of which shall be an original, but
all of which taken together shall constitute one and the same instrument.

          Section
8.7 Separability. In case one or more of the
provisions contained in this Guarantee shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality
or unenforceability shall not affect any other provisions of this Guarantee,
but this Guarantee shall be construed as if such invalid or illegal or
unenforceable provision had never been contained herein. 

Signatures appear on the following page

15

          THIS GUARANTEE is executed as of the day and
year first above written.

	
 

	
 

	
 

	
 

	
 

	
ALLIANCE
  FINANCIAL CORPORATION, as Guarantor

	
 

	
 

	
 

	
 

	
 

	
By:

	
/s/ J.
  Daniel Mohr

	
 

	
 

	

	
 

	
 

	
 

	
Name: J.
  Daniel Mohr

	
 

	
 

	
 

	
Title:
  Treasurer & CFO

	
 

	
 

	
 

	
 

	
 

	
WILMINGTON
  TRUST COMPANY, as Guarantee Trustee

	
 

	
 

	
 

	
 

	
 

	
By:

	
/s/ Michele
  C. Harra

	
 

	
 

	

	
 

	
 

	
 

	
Name:
  Michele C. Harra

	
 

	
 

	
 

	
Title:
  Financial Services Officer

16August 29, 2001

SEISMIC OPTION, FARMOUT AND NET CARRIED INTEREST AGREEMENT

This Agreement dated the 22nd day of September, 2006.

BETWEEN:

UNIVERSAL ENERGY CORP., a Delaware Corporation, having offices in Altamonte Springs, Florida, in the United States of America (hereinafter referred to as "Universal")

OF THE FIRST PART

- AND -

1097885 ALBERTA LTD., a body corporate registered to carry on business and having offices in the City of Calgary, in the Province of Alberta (hereinafter referred to as "1097885")

OF THE SECOND PART

- AND -

0700667 BC LTD., a body corporate registered to carry on business and having offices in the Community of 150 Mile House, in the Province of British Columbia (hereinafter referred to as "0700667")

OF THE THIRD PART

(1097885 and 0700667 hereinafter collectively referred to as the "Company")

 

WHEREAS 1097885 Alberta Ltd. is the registered lessee, owner and entitled to an undivided One Hundred (100%) Percent interest owner in and to Farmout Lands and Net Carried Interest Lands known as the Nisku Reef Project (hereinafter "Nisku Reef"), located in North Central Alberta as more particularly defined and outlined in Schedule "A" attached to and forming part of this Agreement;

WHEREAS 0700667 has provided technical services and knowledge in and to the Farmout Lands and Net Carried Interest Lands for and on behalf of 1097885;

WHEREAS 1097885 for services rendered by 0700667 hereby wish to provide for the granting and reserving for the sole benefit of 0700667 a Five Percent (5%) Net Carried Interest to 0700667 in and to the Farmout Lands and Net Carried Interest as outlined in Schedule "A" to this Agreement; 

WHEREAS 0700667 and 1097885 acknowledges and confirms that the Five Percent (5%) Net Carried Interest granted to 0700667 shall be a royalty encumbrances running with and upon the Farmout Lands and Net Carrried Interest Lands as described in Schedule "A" herein;  

WHERAS Universal wishes to conduct further seismic review in and to the Farmout Lands and Net Carried Interest Lands and based on favourable results as determined by Universal shall elect to proceed to farmin to the lands and the Company agrees to farmout its entire interest in the Farmout Lands and Net Carried Interest Lands, subject to the terms and conditions set forth herein;

  

WHEREAS Universal and the Company wish to enter into a formal Seismic Option, Farmout and Net Carried Interest Agreement (hereinafter referred to as the "Agreement") outlining the mutual understanding of the parties hereto;

NOW THEREFORE in consideration of the premises and the mutual covenants and warranties herein contained the Parties agree as follows:

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

	"Contract Depth" means a depth sufficient to penetrate at least 20 meters below the base of the Nisku Formation, or 3300 meters subsurface, whichever first occurs;

	"Effective Date" means the 18th day of September, 2006;

	"Farmee" means Universal Energy Corp.;

	"Farmor" means 1097885 Alberta Ltd.;

	"Farmout Lands" and "Net Carried Interest Lands" means the Petroleum and Natural Gas Rights underlying lands described as Farmout and Net Carried Interest Lands in Schedule "A";

	"Net Carried Interest" shall have the mean 0700667's Five Percent (5%) share of Petroleum Substances which are within, upon, under or attributed to the Farmout and Net Carried Interest Lands or Confidentiality Agreement Lands, or are deemed to be produced from or allocated to the Farmout and Net Carried Interest Lands or Confidentiality Agreement Lands as defined in Schedule "D" attached to and forming part of this Agreement; 

	"Net Carried Interest Recipient" or "NCIR" means 0700667 BC Ltd.;

	"Operating Procedure" means the standard form 1997 CAPL Farmout and Royalty Procedure, 1990 CAPL Operating Procedure and the 1988 PASC Accounting Procedure including the elections and revisions thereof attached hereto as Schedule "B";

2.Schedules:
The following schedules are attached to and incorporated in this Agreement:

	Schedule "A" which sets forth the Farmout Lands and Net Carried Interest Lands, the Title Documents and Encumbrances and the Pre-Farmout Working Interests;

	Schedule "B" are the elections for the 1997 CAPL Farmout and Royalty Procedure, 1990 CAPL Operating Procedure and 1988 PASC Accounting Procedure and including the 1993 CAPL Assignment Procedure;

	Schedule "C" sets forth Farmor's Well Requirement Sheet;

	Schedule "D" sets forth the "CONFIDENTIALITY AGREEMENT" and "AREA of MUTUAL INTEREST".

3.Seismic Option Election

Concurrently with the execution of this Agreement hereof, Universal shall have paid and deposited in an accepted administered escrow account an amount equal to One Hundred and Fifty Thousand ($150,000.00) Dollars Canadian Funds (referred to herein as "Seismic Escrow Funds").  Upon Farmor acknowledging that the Seismic Escrow Funds have been deposited and received in the escrow account Universal shall execute the seismic program on behalf of the Farmor. Upon completion of the program study (s), a seismic review of the Pembina Nisku Reef project in the Farmout Lands and Net Carried Interest Lands will be held.  A seismic review consists of a presentation of the data, interpretation and report (s) obtained/developed/interpreted/prepared by the consulting geophysicist and magnetic telluric specialist in the Farmor's office. Subsequent presentations requested by the Farmee and not identified in the program AFE, will be at the Farmee's cost. All program data and associated information will reside in the Farmor's office and presentations will be available on reasonable notice for all  parties.

The Seismic Escrow Funds shall be apportioned and utilized as follows:

	Universal will purchase the rights to existing 3-D seismic covering the prospect lands or if necessary shoot new lines of 3-D seismic at its sole cost to further enhance and define the prospect for optimal drilling locations. Universal shall at its sole cost have all new or existing 3-D seismic data on the lands interpreted and or reprocessed by a qualified geophysicist to determine if any seismic anomalies exist at depth on the prospect.

 

	Universal shall perform a second stage unconventional Magnetic Telluric geophysical survey on the prospect lands to further enhance and augment the 3-D seismic data at its sole cost.

All information related to the seismic program shall be the property of the Farmor and be maintained in the Farmor's office. All other data, interpretations, information purchased or obtained relating to this Agreement shall be provided to the Farmor for its files and future use absolute.  

Within 60 days after Universal has reviewed the Nisku Reef seismic data, Universal shall have the first right to make an election to drill a well(s) at a location(s) of its choice.   Such election to drill the Test Well shall be deemed an acceptance by Universal to proceed with the terms and conditions of this Agreement.  

The Farmee hereby agrees and shall pay to the Farmor a non refundable One Hundred Thousand ($100,000.00) Dollars in Canadian Funds hereinafter defined as the "Non-drill Penalty Funds" if the Farmee does not meet its commitment to spud and begin to drill a Test Well by July 15, 2007 based upon its election to do so after a favourable seismic review.  Farmee shall remit the non-refundable Non-drill Escrow Funds to Farmor within five (5) business days after July 15, 2007.  The Farmee upon paying the Farmor the Non-drill Escrow Funds shall be granted a further three (3) month extension to drill a Test Well on the Farmout Lands, Farmee shall notify Farmor of its request for extension by providing Farmor written notice to do so.  

4.Test Well
On or before July 15, 2007 subject to surface access and all regulatory approvals, Farmee shall commence the drilling of a test well (the "Test Well") at a location of Farmee's choice in the Farmout and Net Carried Interest Lands and thereafter diligently and continuously drill such well to Contract Depth.  Upon reaching Contract Depth, Farmee shall log, test and either complete and equip the Test Well for the taking of production or abandon the Test Well.   All capital costs associated with such Test Well shall be borne entirely by Universal as to Farmor's pre-farmout working interest. 

In the event that Farmee does not spud the Test Well on or before July 15, 2007 then Farmee agrees and accepts that the Non-drill Escrow Funds as defined in Clause 3 of this Agreement, will not be refunded to Farmee and Farmor shall retain such Non-drill Escrow Funds for its own use and benefit.  

Notwithstanding paragraph 2 to this Clause 4 herein, should Farmee require an extension to drill the said Test Well Farmee shall promptly provide written notice to Farmor requesting an extension, with terms, for the drilling of the Test Well.

5.Earning
Upon Farmee having fulfilled its obligations to drill, complete and equip, or        abandon the Test Well, as provided for in this Agreement and provided Farmee has not defaulted on the terms of the Agreement, then Farmee shall;  

	have earned Farmor's undivided Ninety-Five Percent (95%) working interest in the Test Well spacing unit in and to the Farmout Lands and Net Carried Interest Lands, identified in Schedule "A" herein and 0700667 BC Ltd. shall have earned its 5% net carried interest for services rendered to the parties of this Agreement, but not limited to, the Nisku formation approximately 3300 meters subsurface.  Reserving unto Farmor a 15% Gross Overriding Royalty (GORR) with a right to convert its overriding royalty in part or in whole at a rate of 1% GORR to 3% Working Interest after payout.

	 	

Earned Interests

	 	

Before Payout
	

After Payout

	

Universal (Farmee)
	

100%
	

95%

	

0700667 (NCIR)
	

5% Net Carried
	

5%

	

10097885 (Farmor)
	

15% Conv. GORR
	

Conv. Rate**

**"Conversion Rate" shall mean a rate of 1% GORR to a 3% After Payout Working Interest

(Example: 15% GORR x 3 would be converted to a 45% After Payout Interest)

 6.Option Well

	Upon Farmee fulfilling its obligations to drill, complete, equip or abandon the Test Well and provided Farmee has not defaulted herein, Farmee shall have the right to a 90 day rolling option after the rig release of the first Test Well and/or Option Well to elect to drill another well on a location of its choice on the remainder of the undrilled Farmout Lands and Net Carried Interest Lands.

	In the event Farmee notifies Farmor that it intends to drill an Option Well prior to the expiry of the 90 day rolling option provided in subclause a) hereof, upon the expiry of the 90 day option, Farmee shall have a further 45 day period to commence spudding the Option Well at a location of its choice on the remaining undrilled Farmout Lands and Net Carried Interest Lands as defined in Schedule "A".      

	Upon Farmee fulfilling all its obligations to drill, complete, equip or abandon the Option Well, Farmee shall have a further right to another 90 day rolling option as defined in subclauses a) and b), to drill a 2nd Option Well on the Farmout Lands and Net Carried Interest Lands .  

	The parties agree that any Option Well(s) drilled during the term of this Agreement shall have the same earning provisions as stipulated and defined under Clause 5 of this Agreement.

7.Drilling of Substitute Well

If in the drilling or completing of the Test Well, Farmee encounters operating difficulties (which shall not include lack of finances) or impenetrable formations that in Farmee's reasonable opinion make such drilling or completion of the Test Well inadvisable, Farmee shall promptly notify Farmor of the problems so encountered.  Farmee may terminate such drilling or completion of the Test Well after first obtaining the written consent of Farmor, which consent shall not be unreasonably withheld.  Within thirty (30) days of receipt by Farmor of notification that the Test Well has been abandoned, Farmee shall commence drilling a substitute well at a location of its choice on the Farmout Lands and Net Carried Interest Lands.  The substitute well shall be deemed to be the Test Well and all provisions of this Agreement which apply to the Test Well shall apply, mutatis mutandis, with the same force and effect to the substitute well.

8.Net Carried Interests
Effective as of the date of this Agreement Farmor hereby covenants, reserves and grants unto Net Carried Interest Recipient a Five Percent (5%) Net Carried Interest from Farmor's entire working interest in and to the Farmout Lands and Net Carried Interest Lands.

The Net Carried Interest granted herein to Net Carried Interest Recipient under this Clause 6 shall be an interest in land, shall run with and attach to the Farmout Land or Net Carried Interest Lands and form part of the Title Documents and the estates affected thereby until the termination of this Agreement or the Title Documents.

Notwithstanding the foregoing the parties agree and acknowledge that the Net Carried Interest shall also apply to any and all lands to be included into this Agreement inclusive of those terms and conditions identified in Article 9 of this Agreement. 

In the event any well or well(s) is producing in two or more zones and the production therefrom is segregated and accounted for separately in accordance with the Regulations, the Net Carried Interest shall be quantified separately for each zone producing Petroleum Substances rather than upon the total production from such well or well(s) in the Farmout Lands or Net Carried Interest Lands.  

 

 

9.Confidential Agreement Lands 
The parties agree that the Farmor's "Confidentiality Agreement" and Area of Mutual Interest" Lands signed by Universal on September 22, 2006 shall and will form part of this Agreement in effect, unless this Agreement is terminated.  All Confidentiality of data pertaining to the drilling and completion of the Test Well shall expire for all parties upon payout of such Test Well or Option Well.

In the event Farmee farms-in on Petroleum and Natural Gas Rights under lease but not leased to Farmor within the "Area of Mutual Interest" lands as more particularly outlined and identified in Schedule "D", Farmee will and shall assign a convertible gross overriding royalty to its working interest in and to the leases or earned farmin interests in such leased lands and the Net Carried Interest granted to 0700667 shall apply mutatis mutandis to Article 9 herein.   Farmor shall make an election upon 60 days written notice from Farmee, after payout, as described in Article 6.00 of the Farmout and Royalty Procedure shown in Schedule "B, Part 2.  The gross overriding royalty or working interest shall be determined as follows:

	for the Nisku formation: a 15% GORR times the working interest percent negotiated for the said lands and be convertible to a working interest on a 1 GORR to 3 WI basis, if so elected by 1097885 Alberta Ltd. (example: say Universal negotiates a 50% WI then the GORR assigned to 1097885 Alberta Ltd. would be 15% * 50% = 7.50% GORR convertible to a working interest of 3%*7.50% = 22.50%WI), and

	for any formation up-hole to the Nisku: 50% of the GORR/WI calculated in subclause 1 above (example: say Universal negotiates a 50% WI then the GORR assigned to 1097885 Alberta Ltd would be 50% of 15% * .50% = 3.25% GORR convertible to a working interest of 3%*3.25% = 9.75%).

10.Operator
Universal shall have the absolute discretion in appointing the operator (the "Operator") of all drilling programs conducted pursuant to this Agreement, and Well operations will be performed in accordance with the CAPL Operating Procedures.  

11.Operating Procedure

Schedule "B" shall come into effect as to the date of this Agreement and shall apply to all operations under this Agreement, and to the rights and obligations of the Company and Farmee, except where such provisions conflicts with the express terms and provisions of this Agreement.

 

12.Title

1097885 Alberta Ltd. represents and warrants and Universal has verified to its satisfaction and agrees that:

i)1097885 Alberta Ltd. has acquired the petroleum and natural gas rights that include the Nisku Formation in Alberta Crown Leases 050409826, 0505060813, 0505020195 via crown sale of P&NG rights in the Province of Alberta Canada; 

ii)1097885 Alberta Ltd. has complied with all the terms of Alberta Energy leasing regulations to the extent necessary to maintain the Farmout Lands and Net Carried Interest Lands in force and effect as of the date hereof; and

iii)the Farmout Lands and Net Carried Interest Lands are not currently subject to any contracts for the sale of petroleum substances.

13.Abandonment and Reclamation Costs
1097885 Alberta Ltd. will have the right for a 24 hour period following written notice from Universal to 1097885 Alberta Ltd. of its intention to abandon the Test Well or Option Wells, to take over such Test Well at their sole cost and expense and conduct such further tests or other operations that they may wish to do.  Failure to respond to such notice will be deemed an election not to take over such Test Well or Option Well as the case maybe.  In the event 1097885 Alberta Ltd. elects not to take over the Test Well or Option Well, Universal agrees that it will pay all reclamation costs associated with all operations to the satisfaction of the provincial regulations.  This obligation will survive the termination of this Agreement.  

14.Termination of Agreement
In the event Farmee does not fulfil its obligations under this Agreement, then this Agreement will terminate and the interest in the Farmout Lands and Net Carried Interest Lands will revert to the interests prior to this Agreement;

If the Exchange has not approved this Agreement in whole within 4 months of the signing date, this Agreement may be terminated on written notice by 1097885 Alberta Ltd.; 

The drilling obligations described in Clauses 4, 6 and 7 respectively will be at the sole discretion of Farmee.  In the event Farmee does not fulfil its drilling obligations under Clause 4 of this Agreement, then this Agreement shall terminate and the interest in the Farmout Lands and Net Carried Interest Lands will revert to the interests prior to this Agreement'

Not withstanding the preceding, after termination neither party will be indebted to the other. 

15.Regulatory Approval
This Agreement is not subject to any regulatory and Exchange approvals.

16.Lease Rentals

Lease Rentals owed in all Title Documents shall be shared in accordance with the working interests in the Farmout Lands and will be transacted by 1097885 Alberta Ltd. until Farmee has earned the said Title Documents. Farmee will be responsible for lease rental payments on behalf of 1097885 Alberta Ltd. on any leases not owned by 1097885 Alberta Ltd. but obtained by Universal within the Confidential Agreement Lands.

17.No Assignment Until Earning:
Farmee shall not assign all or any portion of its interest prior to earning pursuant to this Agreement without Company's written consent, which consent shall not be unreasonably withheld. 

18.Shared Information
The parties agree that all information shared between them concerning the Farmout Lands and Net Carried Interest Lands and the development thereof will be held in confidence and will not be used for any purposes other than completing this transaction and matters directly related thereto during the life of this Agreement.  Copies of all information acquired by the Farmee shall be provided to the Farmor as identified on Schedule "C".

19.Encumbrances
The parties hereto agree that the Farmout Lands and Net Carried Interest Lands outlined in Schedule "A" attached to and forming part of this Agreement are unencumbered except for the applicable Crown and 5% Net Carried Interest only. 

20.Parties to do All Further Acts

The parties hereto shall from time to time and at all times without additional cost or charge to any other party hereto do all such further acts and execute 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.

21.Post-Expenses
Prior to the generation of the initial Authorization For Expenditure ("A.F.E.") on the Test Well, each of the parties will bear its own out-of-pocket costs, including legal, accounting, engineering and consulting expenses, incurred in connection with the subject matter hereof.

22.Conflicts

Wherever any term or condition of any Schedule conflicts or is at variance with any term or condition in the body hereof, the latter shall prevail.  In the event of any conflict or inconsistency between the provisions of this Agreement and the Title Documents, the provisions of the Title Documents shall prevail.

23.Headings

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

24.Jurisdiction

This Agreement shall be subject to and will be 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.

25.Limitations Act
The two year period for seeking a remedial order under section 3(1)(a) of the Limitations Act, S.A. 1996 c. L-15.1, 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 years after the time this Agreement permitted that audit to be performed; or 

b) for all other claims, four years.

26Counter Part Execution 
This Agreement may be executed in counterpart and when each party has executed and delivered a counterpart, all counterparts taken together shall constitute one agreement.

27.Supersedes
This Agreement supersedes and replaces all previous agreements, whether written or oral, memorandum or correspondence among the Parties with respect to the subject matter of this Agreement.

28.Miscellaneous
The rights and obligations of the parties hereunder will be binding on and endure to the benefit of and be enforceable by each of the parties hereto, and their respective successors and permitted assigns.  Except as provided herein, the rights or obligations of the parties may not be assigned by any party hereto without the consent of the other parties.

29.Time of Essence

Time is of the essence in this Agreement.

30.Enurement

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

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

	

1097885 ALBERTA LTD.,
	 	

UNIVERSAL ENERGY CORP.

	 	 	 
	 	 	 
	

/s/ Peter Forrest
	 	

/s/ Billy Raley

	Peter Forrest

	 	

Billy Raley, CEO

	 	 	 
	0700667 BC LTD.

	 	 
	 	 	 
	

/s/ Willow Raven Sage
	 	 
	Willow Raven Sage

	 	 
	 	 	 

 

This is an execution page to that certain Seismic Option, Farmout and Net Carried Interest Agreement dated the 22nd day of September, 2006 among 1097885 Alberta Ltd., as Farmor, and 0700667 BC Ltd., as Net Carried Interest Recipient and Universal Energy Corp., as Farmee.

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