PARTICIPATION AND OPERATING AGREEMENT

 

(a)

“Agreement” means this Participation and Operating Agreement, together with the Schedules attached hereto, as amended from time to time;

 

(b)

“AMI Interest” means the following ownership percentages of each of the Parties granted in respect of the AMI Lands pursuant to Article 7 of this Agreement:

 

(i)

with respect to Passport, a 25% interest ;

 

(ii)

with respect to Eternal, 37.5% interest; and

 

(iii)

with respect to American Eagle, 37.5% interest;

 

(c)

“AMI Lands” means the areal, stratigraphic and substance rights located within Township 4, Range 21 W2M;

 

(d)

“Cap” or “Capping” means the installation of such casing, plugs and equipment as are necessary to enable a well prospective of production of Petroleum Substances in Paying Quantities to be completed at a later date;

 

(e)

“Completion Costs” shall have the meaning set forth in the Operating Procedure amended to include Drilling Costs, Equipping Costs (as such terms are defined in the Operating Procedure) and the Farmors’ overhead as permitted under the Operating Procedure, and for greater certainty, specifically includes any such costs incurred by the Farmors in respect of the Test Well prior to the Effective Date;

 

(f)

“Contract Depth” means, for the Test Well, a measured depth of 3,515 meters;

 

(g)

“Effective Date” means the date of this Agreement;

 

(h)

“Encumbrances” has the meaning set forth in Section 2.3;

 

(i)

“Estimated Drilling Costs” means the estimated cost to drill, equip and complete the Test Well as set forth in Schedule “C” attached hereto;

 

(j)

“Farmee” means Passport Energy Inc.;

 

(k)

“Farmors” means Eternal and American Eagle together and each individually, a “Farmor”;

 

(l)

“JOA” has the meaning set forth in the recitals hereto;

 

(m)

“Joint Lands” means the lands set forth as “Joint Lands” in Schedule “A” attached hereto;

 

(n)

“Lands” has the meaning set forth in Section 7.1;

 

(o)

“New Lands” means any interest in Petroleum Substances acquired, or available to be acquired, where the surface area of that interest is contained in the AMI Lands and which becomes available for acquisition either:

 

(i)

under the Regulations, including by presentation of a bid at a Crown sale; or

 

(ii)

by agreement with any third party by purchase and otherwise;

 

(iii)

interests acquired by a Party or an Affiliate pursuant to a corporate reorganization of that Party, the amalgamation with a third party of the acquisition of a third party; and

 

(iv)

legal or beneficial interests acquired by a Party or an Affiliate of that Party prior to the Effective Date, including any documents of title issued in direct substitution for the documents of title under which those interests had been held prior to the Effective Date;

 

(p)

“Operating Procedure” means the 1990 Canadian Association of Petroleum Landmen Operating Procedure, including the 1996 Petroleum Accountants Society of Canada Accounting Procedure, all the elections thereto and attached hereto as Schedule “B”;

 

(q)

“Operator” means Eternal;

 

(r)

“Option Lands” means the lands set forth as “Option Lands” in Schedule “A” attached hereto;

 

(s)

“Option Well” has the meaning set forth in Section 4.1;

 

(t)

“Parties” means Eternal, American Eagle and Passport, each individually, a “Party”;

 

(u)

“Test Well” means the first well drilled for the recovery of Petroleum Substances to be located at 1A4-16-4B4-9-4-21W2M on the Joint Lands; and

 

(v)

“Water Disposal Well” has the meaning set forth in Section 6.1.

 

(a)

Schedule “A”, which sets forth the Joint Lands, the Option Lands, the AMI Lands, the Title Documents, the Working Interests and the Encumbrances;

 

(b)

Schedule “B”, which is the Operating Procedure; and

 

(c)

Schedule “C”, which is the Estimated Drilling Costs.

 

(a)

The Farmors do not warrant title to their Working Interest in the Joint Lands or Option Lands but each Farmor confirms that:

 

(i)

it has complied with the terms of the Title Documents to the extent necessary to keep such Title Documents in full force and effect;

 

(ii)

it has the right, power and authority to enter into this Agreement; and

 

(iii)

as of the Effective Date, it has not received any notice of default related to the Title Documents.

 

(b)

Each Farmor will not do, or cause to be done, any act or make any omission to encumber the Joint Lands or Option Lands which:

 

(i)

adversely and materially affects its Working Interest or the Working Interest of any other Party; or

 

(ii)

results in the Title Documents becoming subject to termination or forfeiture.

 

(c)

The Working Interest earned by the Farmee pursuant to this Agreement shall be subject to the Encumbrances which shall continue to apply to that Working Interest following the application of the surrender, forfeiture or production penalty provisions of the Operating Procedure to that Working Interest, as applicable.

 

(a)

maintain the Joint Lands and the Option Lands, as applicable, in a proper and prudent manner in accordance with good oil and gas industry practices;

 

(b)

pay or cause to be paid all costs and expenses relating to the Joint Lands and the Option Lands, as applicable, which become due;

 

(c)

perform and comply in all material respects with all of its obligations under the Title Documents; and

 

(d)

not dispose of any interest in the Joint Lands or the Option Lands, as applicable, without the prior written consent of Passport.

 

(a)

conduct production tests as soon as practicable if Petroleum Substances other than natural gas in Paying Quantities is indicated; or

 

(b)

if Petroleum Substances composed predominantly of natural gas in Paying Quantities is indicated,

 

(i)

conduct production tests as soon as practicable; or

 

(ii)

Cap the Test Well and conduct production tests on or before the later of the first anniversary date of the Test Well drilling rig release and as soon as practicable after an economic market for those Petroleum Substances becomes available, provided that, if Eternal, as operator for and on behalf of the Farmors, has not fulfilled its obligations within one year of the drilling rig release of the Test Well, Eternal shall, at the end of that year and every 6 months thereafter until Eternal has fulfilled its obligations, give notice to the Parties of its plans to production test and produce the Test Well, if any.

 

(a)

Passport shall promptly pay to Eternal 38.5% of the difference between the Completion Costs and the Estimated Drilling Costs for the Test Well, if the Completion Costs exceed the Estimated Drilling Costs; or

 

(b)

Eternal shall promptly reimburse Passport 38.5% of the difference between the Estimated Drilling Costs and the Completion Costs for the Test Well, if the Completion Costs are less than the Estimated Drilling Costs.

 

(a)

Eternal shall transfer an undivided 12.5% Working Interest in the Joint Lands to Passport; and

 

(b)

American Eagle shall transfer an undivided 12.5% Working Interest in the Joint Lands to Passport.

 

(c)

With respect to Eternal a 37.5% Working Interest;

 

(d)

With respect to American Eagle a 37.5% Working Interest; and

 

(e)

With respect to Passport a 25% Working Interest.

 

(a)

The Farmors, acting together and their sole discretion, may elect to drill the Option Well at a location of the Farmors’ choice on the Option Lands.  Provided that the Farmee fulfils its obligations respecting the Test Well and is not otherwise in default hereunder, upon receipt of notice from the Farmors electing to drill the Option Well, then the Farmee, by written notice to the Farmors on or before the 30th day following the notice from the Farmors of their election to drill the Option Well, may elect to participate in the drilling of the Option Well; or

 

(b)

If the Farmors elect not to drill the Option Well, then the Farmee shall be entitled to elect to drill the Option Well at a location of the Farmee’s choice on the Option Lands at its sole risk, cost and expense by providing written notice to the Farmors on or before the 30th day following the expiration of the Election Period, to earn an undivided 65% Working Interest in the Option Well and the Option Lands.

 

(a)

conduct production tests as soon as practicable if Petroleum Substances other than natural gas in Paying Quantities is indicated; or

 

(b)

if Petroleum Substances composed predominantly of natural gas in Paying Quantities is indicated,

 

(i)

conduct production tests as soon as practicable; or

 

(ii)

Cap the Option Well and conduct production tests on or before the later of the first anniversary date of the Option Well drilling rig release and as soon as practicable after an economic market for those Petroleum Substances becomes available, provided that, if either Eternal, as operator for and on behalf of the Farmors, or Passport, as applicable, has not fulfilled its obligations within one year of the drilling rig release of the Option Well, either Eternal or Passport, as applicable, shall, at the end of that year and every 6 months thereafter until such Party has fulfilled its obligations, give notice to the Parties of its plans to production test and produce the Option Well, if any.

 

(a)

In the event that Passport has elected to participate in the Option Well pursuant to Section 4.1(a), Passport shall pay Eternal 38.5% of the Estimated Drilling Costs to be incurred by Eternal with respect to the Option Well no later than 20 days before the anticipated spud date of the Option Well.  Thereafter, on or before that day which is 20 days after the date on which Passport receives from Eternal the summary of the actual Completion Costs incurred by Eternal with respect to the Test Well,

 

(i)

Passport shall promptly pay to Eternal 38.5% of the difference between the Completion Costs and the Estimated Drilling Costs for the Option Well, if the Completion Costs exceed the Estimated Drilling Costs; or

 

(ii)

Eternal shall promptly reimburse Passport 38.5% of the difference between the Estimated Drilling Costs and the Completion Costs for the Option Well, if the Completion Costs are less than the Estimated Drilling Costs.

 

(b)

In the event that Passport has elected to participate in the Option Well pursuant to Section 4.1(b), Passport shall pay 100% of the Completion Costs incurred with respect to the Option Well.

 

(a)

Where the Farmors have elected to drill the Option Well pursuant to Section 4.1(a), upon the drilling of the Option Well to Contract Depth and Completion, Capping or Abandonment of the Test Well, and subject to Eternal receiving payment pursuant to Section 4.4 above:

 

(i)

Eternal shall transfer an undivided 12.5% Working Interest in the Option Lands to Passport; and

 

(ii)

American Eagle shall transfer an undivided 12.5% Working Interest in the Option Lands to Passport.

 

(b)

As a result of the transfers noted in Section 4.5(a) above, the resulting Working Interests of the Parties in and to the Option Lands including the Option Well and all Petroleum Substance received therefrom shall be as follows:

 

(i)

With respect to Eternal a 37.5% Working Interest;

 

(ii)

With respect to American Eagle a 37.5% Working Interest; and

 

(iii)

With respect to Passport a 25% Working Interest.

 

(c)

Where Passport has elected to drill the Option Well at its sole cost, risk and expense pursuant to Section 4.1(b), the resulting Working Interests of the Parties in and to the Option Lands including the Option Well and all Petroleum Substance received therefrom shall be as follows:

 

(i)

With respect to Eternal a 17.5% Working Interest;

 

(ii)

With respect to American Eagle a 17.5% Working Interest; and

 

(iii)

With respect to Passport a 65% Working Interest.

 

(d)

Each of the Farmors shall do all other acts and things necessary to transfer and to evidence the transfer of such Working Interests, including the entering into of an assignment agreement on terms satisfactory to the Parties, acting reasonably.

 

(a)

Passport shall pay to Eternal 38.5% of the difference between the actual conversion completion costs and the estimated conversion costs for the Water Disposal Well, if the actual costs exceed the estimated costs; or

 

(b)

Eternal shall reimburse Passport 38.5% of the difference between the estimated costs and the actual costs for the Water Disposal Well, if the actual costs are less than the estimated costs.

 

(a)

Eternal shall transfer an undivided 12.5% Working Interest in the Water Disposal Well to Passport; and

 

(b)

American Eagle shall transfer an undivided 12.5% Working Interest in the Water Disposal Well to Passport.

 

(c)

With respect to Eternal a 37.5% Working Interest;

 

(d)

With respect to American Eagle a 37.5% Working Interest; and

 

(e)

With respect to Passport a 25% Working Interest.

 

(a)

For the period commencing on the Effective Date and remaining in effect for three (3) years thereafter (the “AMI Term”), the Parties hereby agree to establish an “Area of Mutual Interest” which consists of the AMI Lands.

 

If any Party wishes to acquire New Lands that the Crown offers for sale during the AMI Term, that Party will first consult with the other Parties at least 48 hours prior to the applicable bid submission deadline, to attempt to establish a joint bid to acquire those New Lands. If unanimous agreement is reached by the Parties for joint acquisition of those New Lands, the Operator (or the agreed upon Party) shall submit that bid on behalf of all Parties. If the Parties do not agree on the terms of a joint bid with respect to the New Lands, any Party may submit an independent bid with respect thereto, subject to Section 6.1(c).  If agreement is reached by 2 or more (but not all) Parties after that consultation, the Parties that were able to agree on the terms of a joint bid will have the right to participate in that bid in the proportions of their applicable Working Interests as stipulated in Sections 3.4(c) to (e) herein (increased by a prorated share of the unassumed Working Interest as stipulated in Sections 3.4(c) to (e) herein of the Party not participating in the bid) or in such other percentages as those Parties may agree.  Each Party participating in a bid under this Section will pay its share of the applicable amount to the Party that submitted the bid within 24 hours of being advised that the bid was successful.

 

(c)

If any Party acquires New Lands or rights thereto:

 

(i)

at a Crown sale without consulting the other Parties or without disclosing to them the price it was prepared to pay for that acquisition;

 

(ii)

at a Crown sale where unanimous agreement was not reached pursuant to Section 6.1(b) and the price paid to acquire those New Lands differs by more than 5% from the last price the acquiring Party disclosed it was prepared to bid for the joint acquisition of those New Lands; or

 

(iii)

other than by bidding at a Crown sale, if that acquisition is included in the definition of New Lands;

 

(a)

Each Party receiving a notice delivered under Section 6.1(b) may elect to participate in the acquisition of the applicable New Lands by written notice to the acquiring Party within 7 days of receipt of the acquiring Party’s notice. A Party may elect to participate in that acquisition to the extent of that Party’s Work Interest percentage as stipulated in Sections 3.4(c) to (e) herein or to the extent that percentage interest is increased by its proportionate share of participation in that acquisition, with a limitation as to a maximum amount of such increased participation which that Party is prepared to accept. Failure by a Party to limit participation in the acquisition of New Lands in its notice to the acquiring Party shall be deemed to be an election to participate to the extent of the percentage interest of that Party’s Working Interest increased by its proportionate share of any unassumed percentage of participation in that acquisition. Any unassumed percentage of participation in that acquisition of those New Lands following these elections shall remain with the acquiring Party. Once the respective interests of the Parties in the New Lands are determined, each Party that elected to acquire an interest in those New Lands will pay the corresponding share of the cash consideration of that acquisition to the acquiring Party within 7 days of receipt of the acquiring Party’s invoice therefor.

 

(b)

Notwithstanding any other provision of this Article 6, if a Party has not received all information to which it is or will be entitled (other than Production Tests delayed with the Farmee’s consent) for the Test Well prior to the acquisition of the New Lands, a Party may, by notice to the other Parties, defer its election to acquire an interest in the New Lands until such time as all of that information is received.  If this condition applies, the applicable Parties may each elect to acquire an interest in the New Lands pursuant to 6.2(a) within 10 days following the receipt of the last of that information.

 

(c)

If the consideration for the acquisition of New Lands is the drilling of a well or the conducting of certain geological or geophysical operations, a Party which elects to acquire a portion of the acquiring Party’s interest or rights in such acquisition shall be required to assume a corresponding share of the cost, risk and expense of those operations which are required to be conducted pursuant to the terms of such acquisition. To the extent that the conduct of those required operations entitles the Parties to earn additional interests in the New Lands by conducting optional operations and fewer than all of the Parties that participated in that acquisition agree to exercise that option, only those Parties participating in that optional operation will be entitled to any portion of the interest so earned and any additional associated rights or options thereunder.

 

(d)

If the New Lands acquired by the acquiring Party are not acquired at a Crown sale and are acquired subject to an overriding royalty, production payment or other charge of a similar nature, the acquiring Party must disclose that encumbrance in the notice of acquisition that it gives to the other Parties under this Article.  Those Parties that elect to acquire an interest in those New Lands will assume a corresponding share of that disclosed encumbrance.  However, the obligation to assume an encumbrance under this Section 6.2(d) will not apply to any encumbrance created directly or indirectly by or through an acquiring Party with an Affiliate, director, officer, agent, employee, independent contractor or consultant of that acquiring Party in conjunction with that acquisition.

 

(a)

any information beyond that information which that Party is required to provide to that other Party pursuant to this Agreement;

 

(b)

where that other Party’s right to information has been delayed pursuant to any provision of this Agreement, any such information prior to the time specified for that other Party’s entitlement to same; or

 

(c)

any geological, geophysical or other interpretation of data developed by that Party wholly or partially from information acquired by that Party under this Agreement.

 

(a)

govern the relationship of the Parties as to their respective Working Interest in the Joint Lands, the Option Lands and any New Lands acquired in accordance with Article VII (collectively, the “Lands”); and

 

(b)

apply to all Operations conducted on the applicable Lands.

7.2

 

(a)

In the event any Party (the “Defaulting Party”) has breached its obligations under this Agreement or has committed an act of bankruptcy, is insolvent, has proposed a compromising arrangement to its creditors generally, has had a petition for a receiving order in bankruptcy filed against it, has made a voluntary assignment in bankruptcy, has taken any proceeding to have itself declared bankrupt or wound-up or has taken or been subject to any similar action shall be in default under this Agreement, a non-defaulting Party shall have the right, on 10 Business Days written notice (“Default Notice”) to the Defaulting Party, to the acceleration of any payments due and owing under this Agreement and to charge interest on any late payments due and owing hereunder at a rate of 10%, compounded monthly.

 

(b)

The Defaulting Party shall have 20 Business Days from receipt of the Default Notice to cure the default in question.  If the Defaulting Party fails to cure the default within the prescribed time period for doing so, the non-defaulting Party shall have the right to purchase the Defaulting Party’s respective Working Interest in any applicable Title Document and the corresponding Lands for fair market value, as determined by the non-defaulting Party, acting reasonably, less 20%.  If there is more than 1 non-defaulting Party, the non-defaulting Parties shall be deemed to have acquired the Defaulting Party’s Working Interest on a pro rata basis in proportion to their respective Working Interests.

By:

  

By:

  

By:

  

By:

  

By:

  

By:

  

E½ and SW¼ of Section 4, W½ of Section 9, W½ of Section 16 and W½ of Section 21 in Township 4, Range 21 W2M

  

  

- AEE Canada Inc. – 50%

- EERG Energy ULC. – 50%

  

- 9% GORR to Crescent Point Energy

- 1.75% GORR to Fairway Resources LLP

- .25% GORR to Tom Lantz

- 1% GORR to Richard Findley

- Saskatchewan Crown Royalties and Mineral Taxes

W½ of Sections 5, 6, 17 and 18 in Township 4, Range 21 W2M

  

  

- AEE Canada Inc. – 50%

- EERG Energy ULC. – 50%

  

- 9% GORR to Crescent Point Energy

- 1.75% GORR to Fairway Resources LLP

- .25% GORR to Tom Lantz

- 1% GORR to Richard Findley

- Saskatchewan Crown Royalties and Mineral Taxes

 

a)

For each Exploration Project:

 

b)

For each Drilling of a Well:

 

c)

For each Initial Construction Project (Alternative B):

 

d)

For each Initial Construction Project (Alternative B):

 

e)

For Operations and Maintenance: