Exhibit 10.2
FARMOUT AGREEMENT
DATED this o day of December, 2002.
BETWEEN:
Grey Wolf Exploration Limited, a body corporate, with an
office in the City of Calgary, in the Province of Alberta
(hereinafter referred to as "Grey Wolf" or "Farmor")
- and -
PrimeWest Energy Inc., a body corporate, with an office in the
City of Calgary, in the Province of Alberta (hereinafter
referred to as "PrimeWest" or "Farmee")
WHEREAS Grey Wolf is or upon closing of the Sale Agreement
will be the holder of the Title Documents and the Farmout Lands as hereinafter
defined; and
WHEREAS Farmee wishes to earn an interest in the Farmout Lands
and Title Documents from Farmor;
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration
of the premises and of the covenants hereof, the parties hereby agree as
follows:
1. Definitions
1.01 In this Agreement, including the recitals, this Clause and the Schedules,
unless otherwise expressly defined herein, the definitions set out in the
Farmout & Royalty Procedure shall have the same meaning when used herein and in
addition:
(a) "Assignment Procedure" means the 1993 CAPL Assignment
Procedure attached hereto as Schedule "E";
(b) "Cardium Contract Depth" means a depth sufficient to
penetrate at least 15 meters below the base of the Cardium
formation or to a total depth of 2450 meters subsurface,
whichever is the lesser;
(c) "Earning Depth" means: (i) for an Earning Well drilled to
Cardium Contract Depth the base of the Cardium formation;
(ii) for an Earning Well drilled to Viking Contract Depth
the base of the Viking formation; and (iii) for an Earning
Well drilled to Mannville Contract Depth the base of the
Mannville formation;
(d) "Expiring Lands" means that portion of the Farmout Lands
which may become defined as Expiring Lands from time to
time pursuant to the provisions of Clause 7.02 hereof;
(e) "Expiry Date" means with respect to any portion of the
Farmout Lands the date the Title Document for that portion
of the Farmout Lands reaches the end of its primary term;
(f) "Farmee" means PrimeWest;
(g) "Farmor" means Grey Wolf;
(h) "Farmout Lands" means the lands and rights described on
Schedule "A" hereto in which Farmee may earn an interest
pursuant to this Agreement;
(i) "Farmout & Royalty Procedure" means the 1997 CAPL Farmout
& Royalty Procedure utilizing the elections set forth on
Schedule "B" attached hereto;
(j) "Mannville Contract Depth" means a depth sufficient to
penetrate at least 15 meters below the base of the deepest
occurrence of the Mannville formation or to a total depth
of 3200 meters subsurface, whichever is the lesser;
(k) "Mutual Interest Lands" means any interest in any single
Title Document of petroleum and natural gas rights where
50% or more of that Title Document, by surface area, is
within the area outlined in red on Schedule "D";
(l) "Operating Procedure" means the 1990 CAPL Operating
Procedure and the 1988 PASC Accounting Procedure (Revised
February, 1991) utilizing the elections set forth on
Schedule "C" attached hereto;
(m) "Sale Agreement" means that certain Purchase and Sale
Agreement dated November 21, 2002 and entered into among
Abraxas Petroleum Corporation, PrimeWest Gas Inc.,
PrimeWest, Canadian Abraxas Petroleum Limited and Grey
Wolf Exploration Inc.; and
(n) "Viking Contract Depth" means a depth sufficient to
penetrate at least 15 meters below the base of the deepest
occurrence of the Viking formation or to a total depth of
2800 meters subsurface, whichever is the lesser.
1.02 Whenever the singular or masculine or neuter is used in this Agreement, the
same shall be construed as meaning the plural or feminine or body politic or
corporate and vice versa as the context or reference to the parties may require.
1.03 The terms of this Agreement express and constitute the entire agreement
among the parties. No implied covenant or liability is created or shall arise by
reason of this Agreement or anything herein contained.
1.04 In the event of any conflict or inconsistency between the provisions of
this Agreement and those of the Schedules attached hereto, the provisions of
this Agreement shall prevail. If any term or condition of this Agreement
conflicts with a term or condition of the Title Documents, then such term or
condition of the Title Documents shall prevail and this Agreement shall be
deemed to be amended accordingly.
1.05 The parties hereto shall from time to time and at all times do all such
further acts and execute and deliver all such further deeds and documents as
shall be reasonably required in order fully to perform and carry out the terms
of this Agreement.
1.06 This Agreement shall only become effective if closing occurs as
contemplated in the Sale Agreement and the Effective Date of this Agreement
shall be the date of closing of the Sale Agreement.
2
1.07 This Agreement shall be interpreted and construed in accordance with the
laws in force in the Province of Alberta. The Parties agree to submit to he
exclusive jurisdiction of the courts of the Province of Alberta in any actions
related to this Agreement.
1.07 Time is of the essence of this Agreement.
1.08 The following Schedules are attached hereto and incorporated into this
Agreement:
(i) Schedule "A" which sets forth the Farmout Lands and Title
Documents;
(ii) Schedule "B" which is the election sheet for the Farmout &
Royalty Procedure and which includes a Well Information
Requirement Sheet;
(iii) Schedule "C" which is the election sheet for the Operating
Procedure;
(iv) Schedule "D" which outlines the Mutual Interest Lands; and
(v) Schedule "E" which is the Assignment Procedure.
2. Operations
2.01 The Farmout & Royalty Procedure and the Operating Procedure together with
this Agreement shall apply to all operations conducted among the parties.
PrimeWest shall be named the initial Operator and hereby accepts such
appointment.
2.02 Subject to the provisions of this Agreement, the parties hereto shall not
propose independent operations on the Farmout Lands or issue an operations
notice under the Operating Procedure until such time as the Farmee has drilled
the Test Well and has either drilled all of the Option ▇▇▇▇▇ or surrendered its
right to drill further Option ▇▇▇▇▇. Notwithstanding the foregoing, the parties
shall have the right to serve independent operation notices for operations on
any Earning ▇▇▇▇▇ which have been drilled hereunder.
2.03 The parties shall cooperate in issuing independent operations notices to
third parties as may be required to effect the drilling of Earning ▇▇▇▇▇
hereunder.
2.04 Farmor, to the extent it is contractually able to do so, shall provide
Farmee with access to all seismic data in its possession that would aid in
determining the locations of the Test Well and Option ▇▇▇▇▇.
3. ExxonMobil Farmout
3.01 Farmee acknowledges that Grey Wolf Exploration Inc. has entered into a
Farmout and Option Agreement dated September 1, 2002 with ExxonMobil Canada
Energy (herein referred to as the "ExxonMobil Farmout"), which has been or will
be assigned to Farmor. Farmor has commenced to drill, drilled or intends to
drill a test well to Cardium Contract Depth on the ExxonMobil Farmout at a
location in 6-16-33-6W5 (herein referred to as the "ExxonMobil test well"). The
ExxonMobil test well shall be the Test Well pursuant to this Agreement.
3.02 Subject to this Article, on execution of this Agreement, the ExxonMobil
test well shall be deemed to be an Earning Well. Farmee shall be responsible for
and reimburse Farmor for 100% of the costs, to drill the ExxonMobil test well,
whether incurred before or after the date hereof. The Farmee shall be
responsible for and either pay or (at Farmor's election) reimburse Farmor, for
100% of the costs, to complete or abandon the ExxonMobil test well.
3
3.03 Farmor shall continue as operator pursuant to the ExxonMobil Farmout until
closing occurs pursuant to the Sale Agreement. Thereafter, Farmor shall assign
operatorship to Farmee, subject to the terms of the ExxonMobil Farmout. Farmor
will assign the drilling contract, surface rights and other contracts relating
to the ExxonMobil test well and necessary for Farmee's further operations.
Farmor hereby confirms that as of the Effective Date it has not entered into any
arrangements to tie in or produce the ExxonMobil test well to any facilities
other than the Grey ▇▇▇▇ ▇▇▇▇▇▇▇▇ Gas Plant.
3.04 Subject to Article 3.00 of the Farmout & Royalty Procedure and subject to
the terms of the ExxonMobil Farmout, the Farmee will earn an undivided sixty
percent (60%) of Farmor's Working Interest in the farmout lands earned pursuant
to the ExxonMobil Farmout and an undivided sixty percent (60%) of Farmor's
Working Interest in the Farmout Lands insofar as they comprise the balance of
the Test Well Spacing Unit to Earning Depth. For greater certainty, upon
earning, the undivided interests of the parties in the said lands and the Title
Documents shall be as follows:
Grey Wolf 40.00% Working Interest
PrimeWest 60.00% Working Interest
The farmout lands earned pursuant to the ExxonMobil Farmout and the Farmout
Lands insofar as they comprise the balance of the Test Well Spacing Unit to
Earning Depth shall upon earning be operated pursuant to the ExxonMobil Farmout.
Farmor will prepare the necessary documents to assign and novate Farmee into the
ExxonMobil Farmout.
4. Option ▇▇▇▇▇
4.01 If the Farmee has drilled the preceding Earning Well to Cardium Contract
Depth, Viking Contract Depth or Mannville Contract Depth, as it had elected, and
is not otherwise in default, the Farmee shall have the right, for a period of 30
days from the date of rig release of the last Earning Well drilled hereunder, to
elect by notice to Farmor to drill an additional Earning Well (an "Option
Well"), at a location of its choice on the remaining unearned portion of the
Farmout Lands. Farmee's notice shall advise the proposed location of the Option
Well and whether Farmee proposes to drill the Option Well to Cardium Contract
Depth, Viking Contract Depth or Mannville Contract Depth. In the event Farmee so
elects, the Option Well shall be Spud within 30 days of Farmee's election to
drill, subject to surface access and rig availability. Farmee shall at its sole
cost and risk, drill the Option Well continuously to Cardium Contract Depth,
Viking Contract Depth or Mannville Contract Depth, as it had elected, and either
complete or abandon the Option Well.
4.02 Farmee agrees that Farmor may be irreparably injured by a breach by Farmee
of the provisions of Clause 4.01 which may not be adequately compensated for by
damages. Farmor shall be entitled to equitable relief, including injunctive
relief and specific performance, in the event of a breach of Clause 4.01 by
Farmee. Such remedies shall be in addition to any other remedies available to
Farmor at law or in equity.
4.03 Subject to Articles 3.00 and 4.00 of the Farmout & Royalty Procedure, the
Farmee will earn sixty percent (60%) of the Farmor's Working Interest in the
Option Well Spacing Unit to Earning Depth. For greater certainty, upon earning,
the undivided interests of the parties in the Option Well Spacing Unit to
Earning Depth and the Title Documents shall be as follows:
Grey Wolf 40.00% of Farmor's Working Interest
4
PrimeWest 60.00% of Farmor's Working Interest
The Option Well Spacing Unit to Earning Depth shall upon earning be operated
pursuant to the Operating Procedure.
4.04 Provided that Farmee is not in default under this Agreement, Farmee will
have the continuing right to drill Option ▇▇▇▇▇ pursuant to the terms hereof
until it has either earned an interest in all of the Farmout Lands, failed to
elect to drill an additional Option Well, or surrendered its right to drill
further Option ▇▇▇▇▇.
5. Area of Mutual Interest
5.01 Article 8.00 of the Farmout & Royalty Procedure will be in effect from the
Effective Date until the end of 90 days following the later of: (i) the drilling
rig release date of the last Earning Well drilled hereunder; or (ii) the
termination of the Farmee's right to earn any further interest in the Farmout
Lands hereunder. Subject to that Article, the Parties will have the right to
participate in an acquisition of Mutual Interest Lands in the following
percentages: PrimeWest 60%; Grey Wolf 40%.
5.02 On the Effective Date the Farmor will provide Farmee a notice advising all
Crown lands which have been acquired by Farmor within the area outlined in red
on Schedule D at Alberta Crown Land Sales between October 1, 2002 and the
Effective Date. Farmee shall have the right for 7 days from receipt of Farmor's
notice to acquire an undivided 60% interest in such Crown lands by reimbursing
Farmor for 60% of the consideration paid for such Crown lands. Farmee's election
shall include payment for any such Crown lands in which Farmee wishes to acquire
an interest. Thereafter any such lands in which Farmee acquires an interest
shall be joint lands.
6. Reimbursement for Rentals
6.01 Farmee shall forthwith upon being billed therefor, reimburse Farmor for the
amount of 60% of all rentals paid with respect to the Farmout Lands on a per
diem basis from the Effective Date until the drilling rig release date of the
last Earning Well drilled hereunder, or until Farmee's right to earn an interest
is terminated, whichever is the latest occurrence. Thereafter, all rentals
respecting any earned lands shall be shared by the parties in accordance with
their respective Working Interests.
7. Amendment of Farmout Lands
7.01 Effective 6 months prior to the Expiry Date of any of the Title Documents
for any portion of the Farmout Lands, such portion of the Farmout Lands shall
become Expiring Lands.
7.02 Expiring Lands shall cease to be Farmout Lands and shall cease to be
subject to this Agreement effective 6 months prior to the Expiry Date for such
Expiring Lands except for: (i) any portion of the Expiring Lands that forms a
part of a Spacing Unit for an Earning Well which has been drilled hereunder; and
(ii) any portion of the Expiring Lands that forms a part of a Spacing Unit for
an Earning Well which is then committed to be drilled hereunder.
8. Addresses for Notices
8.01 The address for service of notices hereunder for each of the Parties shall
be as follows:
5
PrimeWest Energy Inc. Grey Wolf Exploration Limited
4700, ▇▇▇ - ▇▇▇ ▇▇▇▇▇▇ ▇.▇. 1600, 255 - 5th Avenue S. W.
Calgary, Alberta T2P 3Y7 ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇ ▇▇▇
Attention: Land Manager Attention: Land Manager
9. Buy Back Option
9.01 Farmor hereby grants to Farmee the option, exercisable within 180 days of
rig release of the last Earning Well drilled pursuant to this Agreement, to
purchase, in whole, the entire interest of Farmor in that portion of the Farmout
Lands which have been earned by Farmee pursuant to the terms hereof (the
interest being acquired, the "Purchased Interest") which have, at the time of
exercise, been assigned Proved Reserves or Probable Additional Reserves in the
Engineering Report, by paying to Farmor an amount equal to the fair market value
of the Purchased Interest, less the Special Adjustment described below and
subject to customary adjustments. Fair market value will mean the then present
value of the estimated future net cash flows from the Purchased Interest, before
tax, from Proved Reserves and fifty percent of Probable Additional Reserves, at
a discount rate of 10 percent per annum and employing escalated pricing using
the Price Forecast.
(a) "Engineering Report" means an independent engineering report
prepared by ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇ Associates Limited (hereinafter
referred to as "GLJ") evaluating the Proved and Probable Reserves
as those terms are defined by National Policy 2B of the Canadian
Securities Administrators to be commissioned and paid for by
Farmee. Farmor and Farmee will have the opportunity to work with
each other in the preparation of such report and such report
shall be acceptable in form and substance to both Farmor and
Farmee. The effective date of the report will be the effective
date of the time of exercise of this option to purchase.
(b) For the purposes of this Clause, "Price Forecast" means the
arithmetic average of the most recent price forecasts of GLJ,
▇▇▇▇▇▇▇▇ & Associates Consultants Ltd. and ▇▇▇▇▇▇▇ Associates
Limited available at the time of the report preparation.
(c) For the purposes of this Clause, "Special Adjustment" means the
lesser of (i) the fair market value calculated pursuant to this
Clause (less $1.00); and (ii) $1,000,000.
9.02 The Parties shall enter into a mutually acceptable purchase and sale
agreement substantially in the form of Schedule Q to the Sale Agreement
incorporating the terms of this Article.
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10. Mirant Royalty
10.01 The Farmor or an affiliate intends to purchase from Mirant Canada Energy
Capital, Ltd. the two 2.5% royalties listed in Schedule "A" hereto. If it
acquires such royalties, it shall terminate such royalties as it applies to the
Farmout Lands when earned by the Farmee.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day
and year first above written.
Grey Wolf Exploration Limited
Per:
-------------------------------------------
Per:
-------------------------------------------
PrimeWest Energy Inc.
Per:
-------------------------------------------
Per:
-------------------------------------------
7
This is SCHEDULE "A" attached to and made part of a Farmout Agreement dated the
o day of December, 2002 between Grey Wolf Exploration Limited, as Farmor, and
PrimeWest Energy Inc. as Farmee.
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Farmout Lands
See attached Property Report dated November 13, 2002 comprising pages 1 through
42 inclusive.
This is SCHEDULE "B" attached to and made part of a Farmout Agreement dated the
o day of December, 2002 among Grey Wolf Exploration Limited, as Farmor, and
PrimeWest Energy Inc. as Farmee.
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1997 CAPL Farmout and Royalty Procedure Elections and Amendments
Effective Date: Clause 1.01(f) as detailed in the Head Agreement
-----------------------------------
Payout: Clause 1.01(t) Applicable: No
---------------
Alternate: A_______ or
B_______
Alternate B options: BOE ( m3) and years
Incorporation of Clauses from 1990 CAPL Operating Procedure: Clause 1.02
Clause 311: Alternate: A or
B X
Option ▇▇▇▇▇: Article 4.00 will X / will not apply
Overriding Royalty: Article 5.00 will / will not X apply
Quantification of Overriding Royalty : (Clause 5.01 A, if applicable)
Crude oil (a) Alternate:
If Alternate 1 applies - %
If Alternate 2 applies - , min % , max. %
Other (b) Alternate:
If Alternate 1 applies - %
If Alternate 2 applies - , min. , max.
Permitted Deductions: (Clause 5.04 B, if applicable)
Alternate: using % for Alternate 2
Conversion of Overriding Royalty: (Article 6.00)
will / will not X apply
If applies, conversion to % of Working Interest in
Clause 6.04.
Area of Mutual Interest: (Article 8.00) will X / will not apply
Reimbursement of Land Maintenance Costs (Clause 11.02)
will X / will not apply
If applies, reimbursement of the amounts specified
in the Agreement .
Other Amendments:
none
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GREY WOLF EXPLORATION LIMITED
▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇ III, ▇▇▇ - ▇▇▇ ▇▇▇▇▇▇ ▇▇, ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇ ▇▇▇
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Well Data Requirement Sheet
LOCATION: ___________________________
PRIOR TO DRILLING: COPIES
----------------- ------
Application for Well Licence 1
Well Licence & Amendments 1
Survey Plan 1
Geological Prognosis 1
Drilling Program 1
Logging, Coring, Testing Programs 1
24 HOUR SPUD NOTICE
DURING DRILLING:
---------------
Daily Drilling & Geological Reports 1
Preliminary Core Analysis & DST Charts 1
Transmitted Logs (as required) 1
Mud Gas and Geological Strip Logs 1
AFTER DRILLING:
--------------
Final DST Reports and Fluid Analyses 1
Final Core Analysis Report with LAS Diskette 1
Final Prints of All Logs 1
3.5" LAS Diskette of log data 1
Mud Log Report with 3.5" LAS Diskette 1
Final Geological Report with Strip Log 1
Final Drilling Report 1
COMPLETION & PRODUCTION:
-----------------------
Completion & Testing Program 1
Daily Completion Reports 1
Initial Production Tests 1
AOF Tests, Deliverability Tests, etc. 1
Final prints of all logs 1
Final Completion Report 1
All subsequent workover service information 1
ALL WELL INFORMATION SHOULD BE SENT TO THE ATTENTION OF
▇▇▇▇▇▇ ▇▇▇▇▇
SEND ALL DAILY REPORTS BY E-MAIL: ▇▇▇▇▇▇@▇▇▇▇▇▇▇▇.▇▇
OR BY FAX TO ▇▇▇-▇▇▇▇ Telephone: ▇▇▇-▇▇▇▇
CONTACTS:
Geological: ▇▇▇▇▇▇ ▇▇▇▇ Tel. ▇▇▇-▇▇▇▇ Res. 278-2016
Engineering: ▇▇▇▇ ▇▇▇▇▇ Tel. ▇▇▇-▇▇▇▇ Res. 851-9989
This is SCHEDULE "C" attached to and made part of a Farmout Agreement dated the
o day of December, 2002 among Grey Wolf Exploration Limited, as Farmor, and
PrimeWest Energy Inc. as Farmee.
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1990 CAPL Operating Procedure
Clause 311 - Insurance: A or B X ;
----- -------
Clause 604 - Marketing Fee: A X or B (a) % or $ /m3
----- ---- --
(b) % or /103m3
---- -------------
(c) % or /m3
---- -------------
(d) % or /t
---- -------------
Clause 903 - Casing Point Election: A X or B
----- ----
Clause 1004 - Operator for Independent Operations as per attached Exhibit 1
Clause 1007(a) - Penalty for Independent Operations: 1. Development ▇▇▇▇▇: 300 %
-----
2. Exploratory ▇▇▇▇▇: 500 %
-----
Clause 1010(a)(iv): Title Preserving Well 180 days
Clause 2401: Disposition of Interests: A X or B
------ -----
Clause 2404: Recognition upon Assignment: Deleted (replaced by
Assignment Procedure)
1988 PASC Accounting Procedure (Revised February, 1991)
-------------------------------
Clause 105 - Operating Advances: (a) 10 %
------
Clause 110 - Approvals: 2 or more Parties totaling 65 %
Clause 202 - Labour: (b) (1)Second Level Supervisors: shall , shall not X
-- ---
(2)Technical Employees: shall , shall not X
-- ---
Clause 203 - Employee Benefits: (b) Non-Compulsory 23 %
----
Clause 217 - Warehouse Handling: (a)(1) 2.5 % of the cost of tubular goods in
excess of $5,000 and 5 % of the cost of all other Material
Clause 302 - Overhead Rates:
(a) For each Exploration Project: (1) 5 % of the first $50,000
(2) 3 % of the next $100,000
(3) 1 % of cost exceeding the
sum of (1) and (2)
(b) For each Drilling Well: (1) 3 % of the first $50,000
(2) 2 % of the next $100,000
(3) 1 % of cost exceeding the
sum of (1) and (2)
(c) For each Construction Project: (1) 5 % of the first $50,000
(2) 3 % of the next $100,000
(3) 1 % of cost exceeding the
sum of (1) and (2)
----
(d) For Operation and Maintenance: (1) %; or
(2) $250 per producing well per
month; or
(3) $ flat rate per month for
producing, injection and
water source operations:
rates in (d) (2) and (d)
(3) will , will not X
Article IV - Pricing of Joint Material Purchases,
Transfers and Dispositions: $25,000
Clause 501 - Periodic Inventory: 5 year intervals
This is Exhibit 1 to SCHEDULE "C" attached to and made part of a Farmout
Agreement dated the o day of December, 2002 among Grey Wolf Exploration Limited,
as Farmor, and PrimeWest Energy Inc. as Farmee.
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1004 OPERATOR FOR INDEPENDENT OPERATIONS - Notwithstanding anything to the
contrary contained in this Operating Procedure, if the Operator is a
participating party, it shall carry out the operation for the account of the
participating parties; provided, if the Operator is not a participating party,
the participating parties shall, as and among themselves and in accordance with
the provisions of Clause 206, mutatis mutandis, appoint an Operator for the
operation. If the operation is commenced prior to the time the Operator becomes
a participating party (and it is specifically understood that nothing in this
Clause shall restrict or prohibit the proposing party from actually commencing
operations as provided in clause 1003), the Operator, upon becoming a
participating party, shall have the right to take over and carry out the
operation for the participating parties.
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This is SCHEDULE "D" attached to and made part of a Farmout Agreement dated the
o day of December, 2002 among Grey Wolf Exploration Limited, as Farmor, and
PrimeWest Energy Inc. as Farmee.
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Mutual Interest Lands
[GRAPHIC OMITTED]