August 19, 2004 Via Courier

1.00 DEFINITIONS AND INTERPRETATION

1.01 Definitions

In those incorporated provisions, "Operating Procedure" will be read as "Farmout & Royalty Procedure", "joint lands" will be read as "Farmout Lands", "joint operations" will be read as "operations", "Joint-Operator" will be read as "Party", "Operator" will be read as "Farmee" or "Farmee Party designated as the representative of the Farmee", as the case may be, "spacing unit" will be read as "Spacing Unit" and "title documents" will be read as "Title Documents", and references to "Authority for Expenditure", "for the joint account" and "production facility" will be deleted. Nothing in any of those incorporated provisions will require the Farmor to assume any cost, risk or expense associated with an operation conducted hereunder unless otherwise provided herein or in the Head Agreement.

1.03 Multiple Farmor Parties

If the Farmor comprises more than one Party: (i) information and notices to be provided to the Farmor will be provided individually to each Farmor Party; (ii) elections provided to the Farmor will be made individually by each Farmor Party; and (iii) subject to any rights of conversion provided for hereunder, the rights and obligations of the Farmor Parties will be several and not joint or collective, and will accrue proportionately to the Farmor Parties in the percentages set forth in the Head Agreement. If the Farmor compromises more that one Party: (i) information and notices to be provided to the Farmor will be provided to the Farmor's designated Representative; (ii) elections provided to the Farmor will be made to the Farmor's designated Representative; and (iii) all payments of the Overriding Royalty shall be solely made to the Farmor's Designated Representative. The Farmor Parties may change the designated Representative at any time, with a minimum 60 days notice to the Farmee, but the Farmee shall only be required to deal with the Farmor's Designated Representative in all affairs concerns this Agreement.

1.04 Multiple Farmee Parties

the Farmee's obligations and liabilities to the Farmor will be joint and several;

the Farmor may deal solely with the Farmee Party designated as the Farmee’s representative in the Head Agreement or, if no designation had been made, the Farmee Party designated as initial Operator therein respecting matters arising under the Head Agreement or this Farmout & Royalty Procedure, provided that: (i) the Farmor will provide each Farmee Party with notices the Farmor serves to the Farmee; (ii) the Farmee is bound by the acts and elections of that representative acting in that capacity; and (iii) the Farmee may designate another representative with the consent of the Farmor, which consent will not be unreasonably delayed or withheld;

the Farmee’s rights and obligations will accrue proportionately to the Farmee Parties in the percentages set forth in the Head Agreement, subject to any rights of conversion provided for in Article 6.00; and

if fewer than all Farmee Parties participate in drilling an Earning Well, references to the Farmee for that Earning Well and any subsequent Earning ▇▇▇▇▇ will be only to those Farmee Parties that participate in the drilling of the well(s). A Farmee Party that does not participate in the drilling of an Earning Well may not participate in subsequent Earning ▇▇▇▇▇ without the consent of the other Farmee Parties.

If the Farmee initially comprises one Party and subsequently disposes of a portion of its interest hereunder, those Farmee Parties will designate one of them as their representative under this Clause.

 

 

1.05 Modifications To CAPL Document Form

This Farmout & Royalty Procedure is the 1997 CAPL Farmout & Royalty Procedure. It has been modified only by the completion of the blanks and elections required herein and by those additional changes specifically identified as such in the body of this document or in the Head Agreement. Insofar as there are differences between this Farmout & Royalty Procedure and the 1997 CAPL Farmout & Royalty Procedure that are not specifically identified, this Farmout & Royalty Procedure will be deemed to be modified to apply the applicable provisions of the 1997 CAPL Farmout & Royalty Procedure as if they had been included herein.

2.00 TITLE AND ENCUMBRANCES

2.01 Farmor Makes No Warranty Of Title

The Farmee will not earn any better interest in the Farmout Lands than the Farmor now has under the Title Documents, and the Farmee will acquire any interest earned by it hereunder subject to the lessor royalty under those Title Documents. The Farmor does not represent or warrant title to the Farmout Lands, but represents that:

except for the Encumbrances or as specifically provided in the Head Agreement, it has not granted any interest (or the right to earn any interest) in the Farmout Lands whereby a third party may acquire any portion of the Farmor’s interest in the Farmout Lands; and

it is not aware of any act or omission whereby the Farmor is (or would be) in default under the terms of the Regulations or the Title Documents and that, prior to the execution of the Agreement, it has not received, or otherwise become aware of, any notice of default for the Farmout Lands that has not been remedied or that has not been addressed specifically in the Head Agreement.

Except as provided in the Head Agreement, the Working Interest earned by the Farmee will be acquired subject to the Encumbrances. The Encumbrances will continue to apply following any application of the surrender, forfeiture or production penalty provisions of the Operating Procedure to that Working Interest.

2.02 Maintaining Title - Earning Phase

A. During the period that the Farmee has the right to earn an interest in the Farmout Lands, the Farmor will not grant any interest in the Farmout Lands and will not do or cause to be done any act or omission whereby the Farmout Lands become encumbered, terminated or forfeited. However, this obligation will not require the Farmor to conduct any operation on or with respect to the Farmout Lands.

B. If, between the Effective Date and the date the Farmee earns its interest in the applicable portion of the Farmout Lands, the payment of a security, penalty or compensatory royalty is required to maintain in good standing any portion of the Farmout Lands in which the Farmee may earn an interest, the Farmor will promptly give notice of that requirement to the Farmee. On or before the 10th day following its receipt of that notice, the Farmee may elect, by notice to the Farmor, to have that payment made for the Farmee's account, provided that any payments for compensatory royalty will be made on a per diem basis. If the Farmee elects not to have that payment made for its account or the Farmee fails to make an election within that period, the applicable lands will be deleted from the Farmout Lands as of that time. If the Farmee elects to have that payment made for its account, the Farmor will make the payment, and the Farmee will reimburse the Farmor for that payment within 30 days of receiving the Farmor's invoice therefor. Insofar as operations conducted hereunder entitle the Farmor to recover all or a portion of the amounts paid by the Farmee, the Farmor will apply for that reimbursement and forward the recovered amount to the Farmee promptly.

 

3.00 TEST WELL

3.01 Farmee's Test Well Obligations

A. The Farmee will Spud the Test Well at the time and location set forth in the Head Agreement. The Farmee will diligently and continuously drill the Test Well to Contract Depth, and will Complete, Cap or Abandon that well, all at the Farmee's sole cost, risk and expense. The Farmee will drill the Test Well so that it can be Completed within a Target Area unless the Farmee obtains the prior written consent of the Farmor (which consent will not be unreasonably delayed or withheld). The Farmee must evaluate the Test Well to the reasonable satisfaction of the Farmor and provide the Farmor with well information in accordance with Article 9.00.

B. If the Farmee has drilled the Test Well to Contract Depth and if Petroleum Substances are not reasonably anticipated to be present in Paying Quantities from any zone in the Farmout Lands, the Farmee must promptly comply with the provisions of Article 7.00. If the Farmee has drilled the Test Well to Contract Depth and if Petroleum Substances from any zone in the Farmout Lands are reasonably anticipated to be present in Paying Quantities, the Farmee will set casing for the well and conduct Production Tests as soon as practicable with respect to each such zone. However, if those Petroleum Substances are composed predominantly of natural gas and the Farmee intends to Cap the well and to delay those Production Tests, the Farmee must give notice to the Farmor of that intention and the reasons for that proposed delay. Unless the Farmor reasonably objects to that proposed delay within 5 days of the receipt of that notice, the Farmee may Cap the Test Well, in which case the Farmee will conduct those tests on or before the later of the 2nd anniversary date of the Test Well drilling rig release or as soon as practicable after an economic market for the affected Petroleum Substances becomes available, provided that any dispute respecting the reasonableness of the Farmor’s objection to that proposed delay or the availability of an economic market will be resolved pursuant to Clause 15.01. If the Farmee has not conducted those Production Tests within 2 years of the drilling rig release of the Test Well, the Farmee will, at the end of that year and every 2 years thereafter until the Farmee has conducted those tests, give notice to the Farmor of an intention to delay further the conduct of those Production Tests and the reasons for that proposed delay, in which case the preceding sentence will apply mutatis mutandis to each such notice. When the Farmee has conducted those Production Tests, the Farmee will Complete or Abandon the Test Well as soon as practicable.

3.02 Substitute Well

If the Farmee encounters mechanical difficulties or impenetrable formations that, in the Farmee's reasonable opinion, make further drilling of the Test Well impractical prior to attaining Contract Depth, the Farmee will immediately give notice to the Farmor of those circumstances and the Farmee's intention to Abandon that well. The Farmee will Abandon that well subject to Article 7.00, provided that the first sentence of Clause 7.03 will not apply if the Farmee earns an interest in the Farmout Lands by virtue of a substitute well. The Farmee may Spud a substitute Test Well on the Farmout Lands within 30 days after the rig release date of the rig conducting the Abandonment of that first well. All rights and obligations applicable to the Test Well will apply in the same manner to a substitute well.

3.03 Test Well Earning

If the Farmee has fulfilled its obligations under Subclause 3.01A for the Test Well and the Farmee is not otherwise in default hereunder, the Farmee will, subject to Subclause 3.04A, earn the interests in the Farmout Lands set forth in the Head Agreement, effective as of the drilling rig release date for the Test Well. Subject to Subclause 3.04A, the Farmor will execute and deliver to the Farmee appropriate assignments, subleases, transfers, trust agreements or other documentation to confirm that earning.

3.04 Deferred Test Well Obligations

A. Notwithstanding Clause 3.03, if the Farmee earns an interest in the Farmout Lands by Capping the Test Well or by Abandoning the Test Well wellbore, that earning is subject to a condition subsequent, for the sole benefit of the Farmor, that the Farmee finish Completing or, subject to any required payment by the Farmee pursuant to Subclause 7.02A, finish Abandoning the Test Well, all at the Farmee's sole cost, risk and expense. The Farmee's earning in the affected Farmout Lands will become unconditional when the Farmee discharges (or the Farmor waives) that condition subsequent. Until that time, the Farmor has no obligation to deliver any documents to confirm that the Farmee has unconditionally earned in those Farmout Lands, and the Parties will continue to be bound by this Farmout & Royalty Procedure for all undischarged obligations relating to the condition subsequent.

B. If Article 5.00 applies and the Farmee successfully Completes the Test Well, the Farmee will Equip the Test Well and place that well on production as soon as practicable, having regard to its location, the availability of facilities and, if the well is capable of production of natural gas, the availability of an economic market. If the Farmee shuts-in the Test Well, the Farmee will make reasonable efforts to obtain an economic market for the applicable Petroleum Substances. .

4.00 OPTION ▇▇▇▇▇

4.01 Test Well Provisions Apply To Option ▇▇▇▇▇

A. If the Farmee elects to drill an Option Well pursuant to the Head Agreement, the provisions of this Farmout & Royalty Procedure that apply to the Test Well will apply in the same manner to each Option Well.

5.00 OVERRIDING ROYALTY

5.01 Quantification Of Overriding Royalty

A. Effective as of the date and in the manner provided in the Head Agreement and this Farmout & Royalty Procedure, the Royalty Owner reserves the Overriding Royalty out of the interest earned by the Royalty Payor in the Royalty Lands. Subject to the other provisions of this Article, including the modified calculation under Subclause 5.02C for production of Petroleum Substances allocated to the Royalty Lands, the Overriding Royalty (based on a grant of a 100% Working Interest) will be determined on a well by well basis at the Royalty Determination Point, and will be as follows:

(a) for crude oil, Alternate 1 will apply (Specify 1 or 2).

Alternate 1: 7.5%. subject to a reduction, as outlined in Clause 6(A)(i) as applicable or 2% as outlined in Clause 6(B)(ii), of the gross monthly production thereof produced from each Royalty Well; and

Alternate 2:

the gross monthly crude oil production from each Royalty Well (expressed in cubic metres, but excluding basic sediment and water) divided by , which amount will be deemed a percentage and will be not less than % and not more than %, provided that if the Royalty Payor Completes a Royalty Well on the Royalty Lands for crude oil in 2 or more zones, the Overriding Royalty will be quantified separately for each such zone, except to the extent that the Crown in right of the Province in which the Royalty Well is located permits the Royalty Payor to commingle production from those zones for the purpose of Crown royalty payments.

(b) for all other Petroleum Substances, Alternate 1 will apply (Specify 1 or 2).

Alternate 1: 7.5%. subject to a reduction, as outlined in Clause 6(A)(i) as applicable or 2% as outlined in Clause 6(B)(ii), % of the gross monthly production thereof produced from each Royalty Well; and

if not taken in kind by the Royalty Owner pursuant to Clause 5.03, the gross proceeds from the Royalty Payor’s sale of % of the gross monthly production thereof produced from each Royalty Well, free and clear, subject to Subclause 5.04C, of all Facility Fees otherwise chargeable pursuant to Clause 5.04; and

if taken in kind by the Royalty Owner, % of the gross monthly production thereof produced from each Royalty Well.

This reservation will be multiplied by the percentage Working Interest held by the Royalty Owner immediately before this Article came into effect.

Notwithstanding the calculation at the Royalty Determination Point under Subclause 5.01A, the reservation of the Overriding Royalty to the Royalty Owner will not include Petroleum Substances that the Royalty Payor reasonably uses or unavoidably loses in the Royalty Payor's drilling and production operations for the Royalty Lands. Those drilling and production operations include the proportionate use of those Petroleum Substances in batteries, treaters, compressors, separators, satellites and similar equipment serving Royalty ▇▇▇▇▇, but do not include the use of Petroleum Substances for any enhanced recovery operations.

5.02 Effect Of Pooling Or Unitization On Calculation

The Royalty Payor may pool the Petroleum Substances in a zone underlying all or a portion of the Royalty Lands to the extent required to form a Spacing Unit in that zone, provided that the pooling allocates production therefrom to the applicable Royalty Lands in the proportion that the surface area of the Royalty Lands placed in the Spacing Unit bears to the total surface area of the Spacing Unit. The Royalty Payor will promptly give notice to the Royalty Owner describing the extent to which the Royalty Lands have been pooled and describing the pooled Spacing Unit.

If the Royalty Payor proposes to pool, unitize or otherwise combine any portion of the Royalty Lands with any other lands, other than as provided in the previous Subclause, the Royalty Payor must promptly send notice of that intention to the Royalty Owner. That notice must include the technical justification for that pooling, unitization or combination and the proposed terms thereof, provided that the Royalty Payor will not be required to provide interpretative data to the Royalty Owner. Unless otherwise required by the Regulations to form a Spacing Unit, the Royalty Payor will not enter into that pooling, unitization or combination without the prior written consent of the Royalty Owner, which consent will not be unreasonably delayed or withheld.

If any portion of the Royalty Lands is pooled, unitized or combined with any other lands pursuant to this Clause, Clause 5.01 will be deemed to be amended to calculate the volume of the Overriding Royalty by applying the percentages or formula set forth in that Clause to the quantity of Petroleum Substances thereby allocated to the affected Royalty Lands. If, however, that pooling, unitization or combination affects crude oil and Alternate 5.01A(a)(2) applies, the gross monthly production to be used in determining the percentage will be:

(a) for poolings using Royalty Lands to form a crude oil Spacing Unit, the total production of crude oil from the Royalty Well subject to that pooling; and

(b) for other forms of poolings, or for any unitization or combination whereby crude oil is allocated to Royalty Lands comprising all or a portion of a crude oil Spacing Unit, the total amount of crude oil production allocated to that Spacing Unit.

5.03 Royalty Owner's Rights To Take Overriding Royalty In Kind

Subject to the provisions of this Clause, the Royalty Payor is appointed as the agent of the Royalty Owner for the handling and disposition of the Overriding Royalty share of Petroleum Substances. All acts of the Royalty Payor under this Clause in the handling and disposition of those Petroleum Substances and the receipt of proceeds of sale therefrom will be as trustee for the Royalty Owner.

The Royalty Owner may, on a minimum of 30 days’ notice to the Royalty Payor, revoke the agency established in Subclause 5.03A and elect to take delivery and separately dispose of the Petroleum Substances comprising the Overriding Royalty at the Royalty Determination Point. This right may be exercised separately for each type of Petroleum Substance, effective at the 1st day of the calendar month next following that minimum 30 day period. The Royalty Owner will supply the Royalty Payor with such information regarding the Royalty Owner's arrangements for disposition of those Petroleum Substances as the Royalty Payor may reasonably require to coordinate custody transfer and shipping arrangements for those Petroleum Substances. Failure to provide the Royalty Payor with that information will be deemed to be a failure by the Royalty Owner to take those Petroleum Substances in kind.

If the Royalty Owner takes in kind its Overriding Royalty share of crude oil or liquid products extracted from natural gas at the wellhead, the Royalty Payor will, at the Royalty Payor’s cost, remove basic sediment and water from those Petroleum Substances in accordance with good oilfield practice, so that relevant pipeline specifications can be met. The Royalty Payor will provide the Royalty Owner, at the Royalty Payor's cost, production tankage capacity for an accumulation of the Overriding Royalty share of those Petroleum Substances consistent with the Royalty Payor’s shipping schedule for its own share of those Petroleum Substances. Subject to Subclause 5.04C, the Royalty Payor will deliver the Overriding Royalty share of those Petroleum Substances to the Royalty Owner, or the Royalty Owner’s nominee, at the Royalty Determination Point, in accordance with usual and customary pipeline and shipping practice, free and clear of all charges. If the Royalty Owner takes its Overriding Royalty share of natural gas in kind, the Royalty Payor will deliver that gas to the Royalty Owner, or the Royalty Owner’s nominee, at the Royalty Determination Point for the relevant well at the Royalty Payor’s cost.

Except to the extent otherwise agreed by the Royalty Payor and the Royalty Owner, insofar as the Royalty Payor takes possession of Petroleum Substances comprising the Overriding Royalty as agent of the Royalty Owner, the Royalty Payor will dispose of those Petroleum Substances by:

(a) selling those Petroleum Substances at a Market Price and accounting to the Royalty Owner for the proceeds of the sale; or

(b) purchasing those Petroleum Substances for the Royalty Payor's own account (or the account of an Affiliate) at a Market Price and accounting to the Royalty Owner therefor.

Insofar as the Royalty Owner has elected to revoke the agency established by Subclause 5.03A, the Royalty Owner may re-establish that agency on a minimum of 30 days’ notice to the Royalty Payor, effective as of the 1st day of the calendar month next following that minimum 30 day period. This right may be exercised separately for each type of Petroleum Substance.

5.04 Royalty Payor's Allowed Deductions If Overriding Royalty Not Taken In Kind

To the extent that the Royalty Payor disposes of Petroleum Substances comprising the Overriding Royalty on behalf of the Royalty Owner, the Royalty Owner's share of those Petroleum Substances will be free of any deductions for costs and expenses incurred by the Royalty Payor to and including the Royalty Determination Point. Subject to Subclause 5.04C, the Royalty Owner will be responsible, on a well by well basis, for the following costs and expenses incurred after the Royalty Determination Point with respect to the Royalty Owner’s share of those Petroleum Substances:

(a) for crude oil and liquid products extracted from natural gas at the wellhead, any associated Facility Fees and any transportation costs to transport those Petroleum Substances from the Royalty Determination Point to the point of sale; and

(b) for Petroleum Substances other than those described in the preceding Paragraph, the associated Facility Fees if Alternate 5.01A(b)(1) applies.

A cost or expense attributable to more than one Petroleum Substance being sold by the Royalty Payor may only be deducted once.

The deductions applicable pursuant to the preceding Subclause will be subject to Alternate(s) 1 only below (Specify Alternate):

The deductions must exceed those permitted by the Regulations for the calculation of royalties if the Lessor under the relevant Title Documents were the State Government of the applicable State in which the Royalty Lands are located

The deductions must not exceed those permitted by the Regulations for the calculation of royalties if the lessor under the relevant Title Documents were the Crown in right of the Province in which the Royalty Lands are located.

Alternate 2:

The deductions must not be greater than % of the Market Price received by the Royalty Payor from the sale of the Royalty Owner’s Overriding Royalty share of those Petroleum Substances, provided that the Market Price will first be adjusted for any deductions under Subclause 5.04C.

Notwithstanding any other provision of this Article, if the Royalty Payor is required to incur costs to enrich the Overriding Royalty share of Petroleum Substances to increase the heating value or to facilitate transportation or marketing of those Petroleum Substances, those costs will be deductible by the Royalty Payor against the gross proceeds of sale applicable to those enriched Petroleum Substances, with the intention that neither the Royalty Payor nor the Royalty Owner suffer a loss as a result of that enrichment. Enrichment operations, include, without limitation, condensate blending in the case of heavy oil and enrichment by propane or butane in the case of gas with a low heating value.

The Royalty Payor's right to make the deductions set forth in this Clause pertains to the costs and expenses that would otherwise be incurred by the Royalty Owner to bring those Petroleum Substances to the point of sale if the Royalty Owner were taking those Petroleum Substances in kind. The allowable deductions from the proceeds of sale of the Royalty Owner’s Overriding Royalty share of Petroleum Substances are expressed as cash obligations for convenience of record keeping and audit, and are not to be construed as altering the nature of the Overriding Royalty as an interest in land.

5.05 Royalty Payor To Account To Royalty Owner Monthly

If the Royalty Payor receives funds on account of or as the proceeds of sale of the production of Petroleum Substances comprising the Overriding Royalty, the Royalty Payor will receive the Royalty Owner’s share of those funds as trustee for the Royalty Owner. The Royalty Payor must remit to the Royalty Owner all funds accruing to the Royalty Owner on account of the Overriding Royalty on or before the 25th day of the calendar month next following the calendar month in which those funds were received by the Royalty Payor, provided that for the purpose of the timing of receipt of proceeds in this Clause "received" will be read as "normally received" if the purchaser of those Petroleum Substances fails to pay the Royalty Payor for that production. The Royalty Payor must provide the Royalty Owner with a statement in written or electronic format showing in reasonable detail the manner in which the Royalty Payor calculated that payment, including the unit sale price for those Petroleum Substances, and, if requested by the Royalty Owner, a copy of all reports the Royalty Payor is required to submit under the Regulations for the production of those Petroleum Substances.

5.06 Royalty Owner's Lien

As of the effective date that the Overriding Royalty is reserved by the Royalty Owner, the Royalty Owner will have a first and prior lien on the Royalty Payor’s Working Interest in the Royalty Lands, the Petroleum Substances within, upon or under the Royalty Lands, or produced therefrom, and the ▇▇▇▇▇ and other equipment thereon to secure the Overriding Royalty. The Overriding Royalty and that lien are interests in land that attach to the Title Documents.

5.07 Royalty ▇▇▇▇▇ To Be Produced Equitably

The Royalty Payor will not discriminate against the Petroleum Substances produced or producible from the Royalty Lands in the production and marketing of those Petroleum Substances because those Petroleum Substances are subject to the Overriding Royalty. The Royalty Payor will use reasonable efforts to produce Petroleum Substances from a Royalty Well equitably with production from any diagonally or laterally offsetting well producing from the same pool as a Royalty Well, insofar as the Royalty Payor, or its Affiliate, has an interest in that offsetting well.

5.08 Royalty Owner's Rights Upon Surrender

If there are multiple Royalty Payor Parties and a Royalty Payor Party proposes to surrender all or a portion of the Royalty Lands to the grantor of the Title Documents, that Royalty Payor Party will comply with the applicable provisions of the Operating Procedure, if any, or any other agreement otherwise governing the Royalty Payors. To the extent those Royalty Lands are thereafter proposed for surrender or there is only one Royalty Payor, Article XI of the standard form 1990 CAPL Operating Procedure will apply mutatis mutandis between the Royalty Payor and the Royalty Owner, except that the notice and reply periods in Clause 1101 therein are reduced from 60 and 30 days to 20 and 10 days respectively.

5.09 Audits Of Overriding Royalty And Payout Account

A. The Royalty Owner may, upon reasonable notice to the Royalty Payor and at the Royalty Owner’s own expense, audit the books, records and accounts of the Royalty Payor with respect to the production, disposition or sale of the Overriding Royalty and, if Alternate A of the definition of Payout applies, the Payout status of an Earning Well. The Royalty Owner may conduct that audit within 24 months next following the end of the applicable calendar year with respect to the Overriding Royalty and within 24 months following the receipt of a Payout statement for an Earning Well if the Royalty Payor is required to issue a Payout statement pursuant to Clause 6.01. The Royalty Owner will conduct any such audit in accordance with PASC Joint Venture Audit Protocol Bulletin No. 6 (or any replacement therefor).

B. Any statement issued by the Royalty Payor to the Royalty Owner respecting the calculation of the Overriding Royalty will be presumed to be true and correct 26 months following the end of the calendar year in which that statement was issued, unless the Royalty Owner takes written exception thereto and requests an adjustment pursuant to this Clause within that 26 month period. If a Party discovers during that period that there was an error in the calculation of the Overriding Royalty and can demonstrate that the error applied both to that period and a prior period, the Royalty Payor will make the required adjustment retroactively to either the inception of that error or such other time as the Parties may agree, provided that any dispute respecting the proposed retroactive adjustment will be resolved pursuant to Clause 15.01. Except to the extent required to confirm the adjustment proposed by the Royalty Payor, the retroactive adjustment contemplated by the previous sentence will not extend the Royalty Owner’s audit rights beyond the 24 month limitation provided for in Subclause 5.09A.

6.00 CONVERSION OF OVERRIDING ROYALTY

However: (i) failure to make that election within the prescribed period will be deemed to be an election to retain the Overriding Royalty pursuant to Paragraph (b); (ii) that election will not apply to any formation in which that Earning Well has been Capped or Completed and any formation of the Farmout Lands deeper than the deepest formation to be penetrated by that additional well; (iii) the Farmor’s election for the Spacing Unit for that additional well will not otherwise affect the Farmor’s right to convert to a Working Interest in the Spacing Unit for that Earning Well pursuant to Clause 6.02 or 6.03; and (iv) the conversion to a Working Interest for the Spacing Unit for the additional well pursuant to this Clause will not require the Farmor to elect to participate in the additional well to which the Farmee’s operation notice pertains.

The Farmor’s election under this Clause will be effective as of the date of the Farmor’s receipt of the Farmee’s operation notice. If the Farmee fails to Spud the additional well on or before the 90th day after the date the Farmee issued that operation notice, the Farmee will be deemed not to have issued that operation notice, and the Farmor’s election hereunder will be void.

7.00 ABANDONMENT OF ▇▇▇▇▇

7.01 Farmor's Right To Take Over Earning Well

If the Farmee has drilled an Earning Well to Contract Depth, the Farmee has performed all related obligations hereunder to the Farmor's reasonable satisfaction, the Farmee has not Completed that Earning Well and the Operating Procedure does not then apply between the Farmor and the Farmee with respect to that Earning Well, the Farmee must give notice to the Farmor if the Farmee intends to Abandon that Earning Well. The Farmee must supply the Farmor with all information the Farmee is obligated to provide the Farmor for that well and such other data for that well as the Farmor may reasonably require for the exercise of its rights pursuant to this Article. If, within 24 hours following the Farmor's receipt of that notice and information from the Farmee when a rig is located on the wellsite, or within 15 days of the Farmor's receipt of that notice and information in any other case:

the Farmor fails to reply to the Farmee or gives notice to the Farmee that it consents to the Abandonment of that well, the Farmee will promptly Abandon the wellbore of that well and will conduct its reclamation work in a timely manner;

the Farmor gives notice to the Farmee of those additional tests it wishes to have conducted on that well, the Farmee will conduct those tests in a timely manner on behalf of the Farmor at the Farmor's sole cost, risk and expense if, in the Farmee’s reasonable opinion, the condition of the wellbore so permits, and will promptly provide the data therefrom to the Farmor, in which case the election period described above will apply from the Farmor's receipt of that additional testing information; or

the Farmor gives notice to the Farmee that it wishes to take over that well, the Farmee will, effective as of the date of the Farmor's election to take over that well, assign that well (including the material, equipment and surface access rights relating solely thereto that the Farmor wishes to use) to the Farmor, without warranty. The Farmee will be released from all obligations and liabilities accruing for the property assigned to the Farmor pursuant to this Paragraph following that assignment. However, that assignment will not release the Farmee from any obligation that should have been performed by it or any liability that may have accrued to it prior to that assignment.

Compliance by the Farmee with the provisions of this Article will constitute the Farmee’s satisfaction of its obligation to Abandon the wellbore of the applicable Earning Well for the purpose of earning hereunder, subject to a condition subsequent that the Farmee fulfils its remaining obligations associated with the Abandonment of that well pursuant to Subclause 3.04A, including, if applicable, the payment of any amount required pursuant to Subclause 7.02A.

7.02 Well May Be Abandoned For Account Of Farmee

A. If the Farmor takes over a well pursuant to this Article, the Farmor will Complete or commence to Abandon the well within 6 months of the Farmor's election to take over that well, provided that this period will be extended to 12 months if the Farmout Lands are in a winter access only area. If the Farmor commences to Abandon the well within the applicable period, the Farmor will Abandon that well for the account of the Farmee, provided that the Farmee will not be responsible for any extra costs of Abandonment resulting from the Farmor's takeover of that well. The Farmor will calculate the Abandonment costs for which the Farmee is responsible under this Clause and the net salvage value of the material and equipment the Farmee had installed respecting that well. The Farmor will provide the Farmee with a statement showing the calculation of the proposed adjustment of accounts in reasonable detail. The Party owing an amount will pay that amount to the other Party within 30 days of the receipt of that statement. However, the amount of the adjustment will be determined pursuant to Clause 15.01 if the Parties are unable to agree on the amount of the adjustment, and the resultant payor will pay the payee the amount so determined within 30 days of that determination.

B. If the Farmor does not Complete or commence to Abandon the well within the period in Subclause A of this Clause, the Farmee will calculate the amount of the estimated net salvage value of the material and equipment assigned to the Farmor. The Farmor will pay that amount within 30 days of receiving an invoice for same. If the Parties are unable to agree on that value estimate, the applicable value will be determined under Clause 15.01, and the resultant payor will pay the payee the amount so determined within 30 days of that determination. The Farmee will cease to be responsible for Abandonment costs if the Farmor so retains the well.

7.03 Effect On Farmee's Interest

If, within the applicable 6 or 12 month period prescribed by the preceding Clause, the Farmor successfully Completes the well in a zone originally contained in the Farmout Lands, the Farmee will assign to the Farmor, without warranty, the Farmee's Working Interest in the Spacing Unit for that well in only the zone(s) Completed by the Farmor and the Petroleum Substances therein, effective as of the date of the Farmor's election to take over that well. That assignment will not release the Farmee from any obligation that should have been performed by it or any liability that may have accrued to it prior to that assignment. If the Farmor does not Complete the well in a zone originally contained in the Farmout Lands within that applicable period, or if the Farmor Completes the well in only a Reserved Formation within that period, the Farmee will not be required to make an assignment to the Farmor pursuant to this Clause.

7.04 Operating Procedure Applies Among Farmor Parties

A. If the Farmor is comprised of more than one Party and one or more (but fewer than all) of the Farmor Parties elect to conduct additional tests for a well proposed to be Abandoned pursuant to this Article, those Farmor Parties that do not elect to participate in those tests will not be entitled to participate in the takeover and Completion of the well in the tested zone. If one or more (but fewer than all) of the Farmor Parties elect to take over a well proposed to be Abandoned pursuant to this Article, that takeover will be: (i) at the sole cost, risk and expense of those Parties taking over the well; (ii) deemed to be an independent operation under Articles IX and X of the Operating Procedure, if any; and (iii) subject to Article 10.00 mutatis mutandis, as between those Farmor Parties that take over the well and those Farmor Parties that do not elect to take over that well. In such event, the amount (if any) paid to the Farmee pursuant to Clause 7.02 will be deemed to be an Operating Cost for the purpose of determining the amount of any penalty applicable to the takeover and Completion.

B. From and after the effective date referred to in Clause 7.03, the Operating Procedure will apply mutatis mutandis to the Farmor Parties respecting a well taken over pursuant to Subclause 7.04A and the applicable zone(s) of the Spacing Unit, provided that, if Article 6.00 has been selected to apply, the Overriding Royalty will not be payable for that well until such time as the production penalty prescribed by the Operating Procedure for that operation is recovered or ceases to apply. At that time, each Farmor Party that elected not to participate in the takeover of that well may elect to convert to a Working Interest in that well on the same basis as is provided in Article 6.00. The Farmor Parties will appoint one of them to be the initial Operator under the Operating Procedure. If no Operating Procedure is included in the Agreement, the term "Operating Procedure" in this Clause means the standard form 1990 CAPL Operating Procedure and as an attachment thereto the standard form 1996 PASC Accounting Procedure, with those rates and elections as the Farmor Parties taking over that well may negotiate at the required time.

7.05 Abandonment Obligation For Other Royalty ▇▇▇▇▇

The provisions of this Article will apply in the same manner to any Royalty Well on the Royalty Lands that is not an Earning Well, subject to the following conditions:

the Royalty Owner only has the right to take over that Royalty Well if it then retains a right to convert its Overriding Royalty to a Working Interest in an Earning Well under Article 6.00; and

the Royalty Owner does not have the right to elect to take over that Royalty Well until the Parties holding Working Interests in that well have all elected to Abandon that well.

8.00 AREA OF MUTUAL INTEREST

any information beyond that information which the Party is required to provide to that other Party pursuant to this Agreement at that time; or

any interpretation developed by that Party at its own expense from geological, geophysical or other data acquired by that Party under this Agreement.

9.00 WELL INFORMATION TO FARMOR

9.01 Farmor's Well Information Requirements - Earning ▇▇▇▇▇

For each Earning Well, the Farmee will supply the Farmor with the information prescribed in the well information requirement Schedule attached to this Agreement.

9.02 General Conditions Applicable To Earning Well Information

A. The Farmee will conduct its drilling and Completion operations for an Earning Well in material compliance with the drilling and Completion programs supplied to the Farmor for that well. The Farmee will supply all data to be provided to the Farmor under this Article at the Farmee’s sole cost and expense. The Farmor will advise the Farmee, by notice, of:

(a) the Farmor's representative(s) to whom the Farmee is to provide the information described in this Article; and

(b) the reasonable number of additional copies or samples of any of that information required by the Farmor if the Farmor requires more than 1 copy or sample.

Upon reasonable notice by the Farmor, the Farmee will allow authorized representatives of the Farmor access to the wellsite of an Earning Well, including ▇▇▇▇▇▇▇ floor privileges, at the Farmor's sole cost, risk and expense. The Farmee will also advise the Farmor of its intention to conduct a logging or testing program with respect to an Earning Well a sufficient time prior to the conduct of those logs or tests to provide the Farmor with a reasonable opportunity to have its representatives present at the wellsite to observe those logs or tests.

9.03 Well Information To Royalty Owners

If the Royalty Payor drills a Royalty Well on the Royalty Lands that is not an Earning Well, the Royalty Payor will supply the following information to the Royalty Owner:

notice of intention to drill that Royalty Well prior to the Spudding of that well; and

the additional information described in the well information requirement Schedule and this Article only if the Royalty Owner retains the right to convert its share of the Overriding Royalty to a Working Interest pursuant to Article 6.00 for the Earning Well for which the Farmee earned the Royalty Lands on which that Royalty Well is located. However, if that Royalty Well is being drilled to obtain information to evaluate any petroleum and natural gas rights within 3.2 kilometers of that well that have been offered for sale at a Crown land sale and the provisions of Article 8.00 are not then in effect, the obligation to deliver that additional information will be suspended until 7 days following the applicable Crown land sale.

10.00 LIABILITY AND INDEMNITY

10.01 Farmee's Responsibility

Except to the extent that the Operating Procedure becomes effective between the Farmor and the Farmee hereunder, the Farmee will:

be liable to the Farmor for all losses, costs, damages and expenses whatsoever (whether contractual or otherwise) that the Farmor may suffer, sustain, pay or incur; and, in addition

indemnify and hold harmless the Farmor and its directors, officers, agents and employees against all actions, causes of action, proceedings, claims, demands, losses, costs, damages and expenses whatsoever that may be brought against or suffered by the Farmor, its directors, officers, agents and employees or that they may sustain, pay or incur;

insofar as they are a direct result of: (i) any act or omission (whether negligent or otherwise) of the Farmee with respect to operations or activities conducted by it or on behalf of it hereunder; (ii) a breach of a provision herein by the Farmee; or (iii) the wilful or wanton misconduct of the Farmee, its employees, agents or contractors. However, this obligation will not apply to the extent that the particular act or omission was done or omitted to be done in accordance with the Farmor’s written instructions or written concurrence. Costs described in this Clause will include reasonable legal costs on a solicitor-client basis.

10.02 Farmor's Responsibility

The provisions of the preceding Clause will apply mutatis mutandis to the Farmor’s operations, activities and obligations with respect to the Farmout Lands or the Reserved Formations.

11.00 LAND MAINTENANCE COSTS

11.01 Farmor To Pay Rentals During Earning Phase

Subject to Subclause 2.02B, the Farmor will initially pay all rentals, shut-in or suspended well payments and any other payments required to maintain the Farmout Lands in good standing during the period in which the Farmee retains the right to earn an interest in the Farmout Lands.

11.02 Farmee To Reimburse Farmor

The Farmee will pay the Farmor $100,000.00 (U.S. Dollars) within 30 days of the Effective Date as full reimbursement of amounts paid pursuant to the preceding Clause to maintain the Farmout Lands in good standing.

 

 

 

 

 

12.00 ASSIGNMENT

12.01 Incorporation Of Assignment Procedure

The 1993 CAPL Assignment Procedure is incorporated by reference into the Agreement, and will be deemed to apply as if it had been included as a Schedule to the Agreement.

12.02 Dispositions Of Royalty Lands

Except as provided in the next sentence, Article XXIV (election 2401A) of the standard form 1990 CAPL Operating Procedure will apply mutatis mutandis to any disposition of Royalty Lands by either the Royalty Owner or the Royalty Payor. If: (i) the Agreement includes an Operating Procedure under which election 2401B has been made; (ii) Article 6.00 has been elected to apply hereunder; and (iii) the Royalty Owner then retains the right to convert the Overriding Royalty to a Working Interest under that Article for any portion of the Royalty Lands, Article XXIV of the Operating Procedure will apply mutatis mutandis to any disposition of that portion of the Royalty Lands by either the Royalty Owner or the Royalty Payor, as if the Royalty Owner had elected to convert its Overriding Royalty to a Working Interest in that portion of the Royalty Lands immediately prior to the issuance of any required disposition notice.

13.00 DEFAULT

13.01 Farmor's Default Remedies

A. If the Farmee fails to Spud an Earning Well or commence any other operation by the date required in the Head Agreement (or any mutually agreed extension) and force majeure does not prevent the performance of that obligation, the Farmee’s right to conduct operations hereunder terminates, subject to Subclause 13.01D. If force majeure applies to the Farmee's failure to Spud an Earning Well or commence any other operation, either the Farmor or the Farmee may give notice to the other terminating the Farmee’s right to drill that well or commence that operation if that force majeure has continued for more than 6 months, provided that this period will be extended to 12 months if the Farmout Lands are located in a winter access only area. If the Farmee had conducted operations respecting that well prior to that force majeure, the Farmee will Abandon any associated well site and access roads at its sole cost, risk and expense, unless the Farmor has agreed to accept an assignment of those surface rights.

B. If the Farmee fails to pay the Overriding Royalty or any other amount required to be paid to the Farmor by the Farmee hereunder, Subclauses 505(b), (c) and (d) of the standard form 1990 CAPL Operating Procedure will apply mutatis mutandis to that default as if the Farmor is the Operator and the Farmee the defaulting Party thereunder, except that the reference in Paragraph 505(b)(vi) of that document to "Subclause (a) of this Clause" will be amended to read "Clause 5.06".

C. If the Farmee is in default of any of its obligations hereunder or under the Head Agreement, other than as provided in the preceding Subclauses of this Clause, the Farmor may give the Farmee notice stating the nature of that default. If the Farmee fails to commence to remedy that default within 30 days after receipt of that notice or fails to continue to remedy that default with due diligence thereafter, the Farmor may, by notice to the Farmee, terminate all or any portion of the interest of the Farmee acquired in the Farmout Lands hereunder, subject to Subclause D of this Clause.

▇. ▇▇ termination of the Farmee’s interests or rights under this Clause will apply to any portion of the Farmout Lands in which the Farmee had earned a Working Interest hereunder, unless that default is with respect to any condition subsequent applicable to those lands pursuant to Subclause 3.04A.

E. Nothing in this Article will release the Farmee from any obligation: (i) to indemnify or be liable to the Farmor pursuant to Clause 10.01; (ii) to pay any amount owing hereunder by the Farmee; (iii) to keep information confidential; or (iv) if applicable, to finish Abandoning an Earning Well.

F. The rights granted to the Farmor in this Article will be in addition to and not in substitution for any other right or remedy that the Farmor may have under this Agreement. The existence or the exercise of those rights or the termination of the Farmee’s interests or rights under this Clause will not deprive the Farmor of any other right or remedy at law or in equity, including damages and indemnity.

13.02 Application Of Article To Other Financial Defaults

The provisions of Subclause 13.01B will apply mutatis mutandis between the Party owed an amount and the Party owing that amount with respect to: (i) the Farmor’s failure to pay any required amount to the Farmee hereunder; (ii) any failure of a Party to indemnify the other Parties with respect to the operation of Clause 801 of the standard form 1990 CAPL Operating Procedure; and (iii) any failure of a Party to pay any amount applicable to its acquisition of Mutual Interest Lands pursuant to Article 8.00. However, if the default pertains to item (iii) of this Clause, the acquiring Party will have the option, in lieu of those rights, to terminate the defaulting Party’s right to participate in that acquisition of Mutual Interest Lands by notice to that Party.

14.00 RESERVED FORMATIONS

14.01 Farmor's Access To Reserved Formations

The Farmor may enter upon the Farmout Lands at any time to drill a well to penetrate any Reserved Formations and to produce Petroleum Substances therefrom. The Farmor will conduct its drilling and any resultant producing operations with respect to the Reserved Formations in a manner that will interfere as little as is reasonably possible with drilling or production operations conducted on the Farmout Lands pursuant to this Agreement. Nothing in this Clause, however, permits the Farmor to use a well drilled to the Reserved Formations for the production or testing of Petroleum Substances from any zone contained in the Farmout Lands, unless otherwise agreed by the Parties or permitted under the Agreement.

15.00 DISPUTE RESOLUTION

15.01 Disputes Initially Referred To Mediation

The Parties will attempt to resolve any dispute arising under this Agreement through consultation and negotiation in good faith. If those attempts fail, the applicable Parties will then attempt to resolve that dispute through mediation, with costs of the mediation being shared equally by those Parties. However, any Party to that dispute may terminate the mediation at any time upon reasonable notice to the other Parties. If a dispute arises under a provision of this Farmout & Royalty Procedure that makes specific reference to this Clause, a Party must refer that dispute to arbitration for resolution pursuant to the provisions of the Arbitration Act of the Province of Alberta, as amended, after the terminated mediation. Otherwise, a Party may, if it so chooses, resort to judicial proceedings to resolve the dispute after the terminated mediation.

16.00 GOODS AND SERVICES TAXES

16.01 Joint Election For Goods And Services Tax

If the Agreement includes an Operating Procedure, the Parties jointly elect, effective as of the Effective Date, to have the Farmee account for goods and services tax in respect of all properties and services that are supplied, acquired or imported by the Farmee on behalf of the Parties, including, without limitation, any interest in properties that may be acquired by the Farmor pursuant to Article 6.00, while the election is in effect pursuant to paragraph 273(1)(a) of the Excise Tax Act (Canada). If there is more than one Farmee Party or a Party other than the Farmee is conducting operations on behalf of the Parties hereunder, the obligations of the Farmee in this Clause will be assumed by the Farmee Party designated as the representative of the Farmee or that other Party, as the case may be.

17.00 APPLICATION OF PROCEDURES TO FURTHER OPERATIONS

17.01 Application Of Farmout & Royalty Procedure

This Farmout & Royalty Procedure will apply as of the Effective Date. It will apply to all matters or operations pertaining to the Farmout Lands until such time as the Farmee fully performs its obligations for those portions of the Farmout Lands to be earned by it hereunder. Notwithstanding any application of the Operating Procedure pursuant to Clause 17.02, this Farmout & Royalty Procedure will continue to apply following that earning with respect to:

all provisions pertaining to the Overriding Royalty, including, without limitation, Articles 5.00, 6.00, 9.00 and 13.00, insofar as the Overriding Royalty exists hereunder; and

Articles 7.00, 8.00, 10.00, 12.00, 14.00, 15.00 and 16.00, insofar as they do not cease to apply by their own terms.

Nothing in this Clause, however, will relieve the Farmor or the Farmee from any obligation or liability that accrued under the Head Agreement or this Farmout & Royalty Procedure prior to the date the Operating Procedure becomes effective.

17.02 Application Of Operating Procedure

Subject to Clause 17.01 and any restrictions imposed in the Head Agreement, each operation conducted upon any portion of the Farmout Lands in which the Farmee has earned a Working Interest hereunder will be conducted pursuant to the provisions of the Operating Procedure, if any. The initial Operator and the initial Working Interests of the Parties thereunder will be as set forth in the Head Agreement.