EX-4.0 3 d50965_ex4-0.txt FARMOUT AGREEMENT Exhibit 4.0 WILLEX ENERGY LTD. December 3, 2001 Watch Resources Ltd. Suite 1320, 925 West Georgia Vancouver, BC V6C 3L2 Attention: Chris Wright Dear Sir: Farmout Agreement Covering Prospects in Greencourt, Vega North, Virginia Hills, and Cecil Whereas, American Leduc Petroleums Limited (American Leduc) purchased PNG Crown Leases at Greencourt, Vega North and Virginia Hills (as more fully described in Clause 3) and; Whereas, American Leduc entered into a Farmin Agreement on November 8, 2001 between American Leduc and Murphy Oil Company for PNG Lease 0597010466 (Cecil Murphy as attached as Exhibit A) and; Whereas, American Leduc entered into a Farmin Agreement on November 13, 2001 between American Leduc and Vintage Petroleum Canada, Inc. for PNG Lease 0597010465 (Cecil Vintage as attached as Exhibit B) and; The following sets out the specific terms and provisions for this Farmout Agreement between Willex Energy Ltd. (Willex) and Watch Resources Ltd. covering all five-prospect areas, controlled by American Leduc, with earning terms and conditions for each prospect area. 1. Farmee: Watch Resources Ltd. 2. Farmor: Willex Energy Ltd. 3. Farmout Lands: The Farmout Lands shall comprise the following lands with the right to explore for, work, win and recover petroleum and natural gas in all P&NG rights which are granted by Alberta Crown Leases as outlined below: Farmout Lands Farmor's Available WI ------------- --------------------- Greencourt PNG Lease # 0501010386 67% Rights: All PNG below base of Viking Formation January 10th,2001 Crown Sale $81,698.08 Seismic Costs: $10,000 T59 R6 W5M Section 7 80 3311 Palliser Drive SW Calgary, Alberta T2V 4W9 Vega North PNG Lease # 0401060174 67% Rights: All PNG Encumbrances: 2% ORR June 13th,2001 Crown Sale $132,918.56 T63 R3 W5M Section 10 PNG Lease # 0401080204 67% Rights: All PNG Encumbrances: 2% ORR August 8th, 2001 Crown Sale $ 61,394.72 Seismic Costs: $50,000 T63 R3 W5M Section 17 Virginia Hills PNG Lease # 0501030812 67% Rights: All PNG Encumbrances: 2% ORR March 21st, 2001 Crown Sale $81,406.00 Seismic Costs: $Nil T64 R14 W5M Section 8 Farmout Lands - Vintage & Murphy Interest to be Earned -------------------------------- --------------------- Cecil Vintage PNG Lease # 0597010465 30% T84 R8 W6M Section 14; S & NW23 Rights: BB CH LK TO BSMT T84 R8 W6M NE23 ALL PNG Encumbrances: 7.5% non-convertible ORR with no deductions Cecil Murphy PNG Lease # 0597010466 67% Rights: BB CH LK TO BSMT Encumbrances: 7.5% non-convertible ORR With deductions T84 R8 W6M Sections 15 and 22 Farmor does not warrant title to the Farmout Lands. These lands are encumbered by the Alberta Government Crown royalty and a Gross overriding royalty as described above. 4. Greencourt This earning well will be drilled in the first quarter of 2002 subject to surface access, rig availability and government approval. The Farmor will choose the location for this well. Farmee agrees to pay 50% of Farmor's 67% in drilling, completing, equipping and tie-in costs. Until payout is reached in this well, the Farmee will have a 33.33% working interest in the drilling spacing unit subject to the overriding and crown royalties. The payout account will be reduced by 33.33% of the land costs and 25% of the seismic costs as described in the Greencourt reference of clause 3. At the time of payout in this Greencourt well, Farmee will convert to a 16.67% working interest in the drilling spacing unit subject to the overriding and crown royalties. 81 5. Vega North This earning well will be drilled in the first quarter of 2002 subject to surface access, rig availability and government approval. The Farmor will choose the location for this well. Farmee agrees to pay 50% of Farmor's 67% in drilling, completing, equipping and tie-in costs. Until payout is reached in this well, the Farmee will have a 33.33% working interest in the drilling spacing unit subject to the overriding and crown royalties. The payout account will be reduced by 33.33% of the land costs and 25% of the seismic costs as described in the Vega North reference of clause 3. At the time of payout in this Vega North well, Farmee will convert to a 16.67% working interest in the drilling spacing unit subject to the overriding and crown royalties. In addition, this land is encumbered by a 2% Gross Overriding Royalty on 100% of production, payable to Rolling Thunder Resources Inc. (attached as Exhibit C). 6. Virginia Hills This earning well will be drilled in the first quarter of 2002 subject to surface access, rig availability and government approval. The Farmor will choose the location for this well. Farmee agrees to pay 50% of Farmor's 67% in drilling, completing, equipping and tie-in costs. Until payout is reached in this well, the Farmee will have a 33.33% working interest in the drilling spacing unit subject to the overriding and crown royalties. The payout account will be reduced by 33.33% of the land costs and 25% of the seismic costs as described in the Virginia Hills reference of clause 3. At the time of payout in this Virginia Hills well, Farmee will convert to a 16.67% working interest in the drilling spacing unit subject to the overriding and crown royalties. 7. Cecil Murphy This earning well will be drilled in the 4th quarter of 2001.The location is 02/8-15-84-8 W6M. This well carries an encumbrance of a 7.5% non-convertible overriding royalty payable to Murphy Oil Company on 100% of the production. Farmee agrees to pay 50% of Farmor's 67% in drilling and casing costs. There is no payout in this well. Farmee will earn 16.67% in the drilling spacing unit subject to the overriding and crown royalties. Farmee will pay 16.67% of the completing, equipping and tie-in costs of this well. 8. Cecil Vintage This earning well will be drilled in the 4th quarter of 2001.The location is 02/14-84-8 W6M. This well carries an encumbrance of a 7.5% non-convertible overriding royalty payable to Vintage Petroleum Canada, Inc. on 45% of the production, net 3.375% without deductions. Farmee agrees to pay 50% of the Farmor's 30% in drilling and casing costs. There is no payout in this well. Farmee will earn 7.5% in the drilling spacing unit subject to the overriding and crown royalties. Farmee will pay 7.5% of the completing, equipping and tie-in costs of this well. 9. Insurance 82 Unless notified by Farmee, Farmee will be covered under Farmor's Well Control and Blow Out Insurance. 10. Appointment of Operator Willex, or its assigns, is hereby appointed the initial Operator and agrees to act as Operator to conduct operations on the Farmout Lands for the Parties in accordance with their working interests. 11. Limitations Act Extension The two year period for seeking a remedial order under section 3(1)(a) of the Limitations Act, S.A. 1996 c. L 15.1, as amended, for any claim (as defined in that Act) arising in connection with this Agreement is extended to: (a) for claims disclosed by an audit, two years after the time this agreement permitted that audit to be performed; or, (b) for all other claims, four years. 12. Formal Agreement This letter sets out the basic terms and conditions of our proposal. If you are in agreement with the foregoing, kindly indicate your acceptance by signing in the space provided below and return one copy of this letter to the attention of the undersigned. Upon agreement of this letter both parties will agree to comply with the 1997 CAPL Farmout and Royalty Procedure, 1990 CAPL Operating Procedure and the 1996 PASC Accounting Procedure (both completed using the electives as set forth in Exhibit D attached to this letter) and the 1993 CAPL Assignment Procedure. Sincerely, Willex Energy Ltd. /s/ Ken Woolner ----------------------------------------- Ken Woolner President ACCEPTED AND AGREED TO THIS 3rd DAY OF DECEMBER 2001. Watch Resources Ltd. /s/ Chris Wright ---------------------------------------- Chris Wright Chairman 83 Exhibit "D" Attached to and forming part of a Farmin Agreement dated the 3rd day of December, 2001 between Willex Energy Ltd. and Watch Resources Ltd. 1997 CAPL FARMOUT & ROYALTY PROCEDURE ELECTIONS AND AMENDMENTS I. Effective Date (Subclause 1.01(f) - December 3, 2001 II. Farmout Lands (Subclause 1.01(n): described as "Farmout Lands" in the Agreement III. Incorporation of Clauses from 1990 CAPL Operating Procedure (Clause 1.02) A. Insurance (311) - Alternate A: |X| Alternate B:_______ V. Article 4.00 (Option Wells) will______/will not |X| apply. VI. Article 5.00 (Overriding Royalty) will_______ /will |X| not apply. VII. Article 6.00 (Conversion of Overriding Royalty) - will_____ /will not |X| VIII. Article 8.00 (Area of Mutual Interest) - will |X| /will not______ IX. Reimbursement of Land Maintenance Costs (Clause 11.02) - will_____ /will not|X| CAPL OPERATING PROCEDURE - 1990 Clause 311 - Insurance: Alternate A |X| B ____ Clause 604 - Marketing Fee: Alternate A |X| B ____ Clause 903 - Less than All Parties Participate: Alternate A |X| B ____ Clause 1007 - Penalty Where Independent Well Results in Production: 1007 (a) (iv) - Development Wells 300% 1007 (b) (iv) - Exploratory Wells 500% Clause 1010(a)(iv) - Exception to Clause 1007 Where Well Preserves Title: 180 days Clause 2202 - Address for Service: Willex Energy Ltd. Watch Resources Ltd. 3311 Palliser Drive SE Suite 1320, 925 West Georgia Calgary, Alberta Vancouver, BC T2V 4W9 V6C 3L2 Attention: Ken Woolner Attention: Chris Wright Clause 2401 - Right to Assign, Sell or Dispose: Alternate A |X| B ____ Clause 2404 - Recognition Upon Assignment: Replaced by Assignment Procedure 84 EXHIBIT "D" Continued Attached to and forming part of a Farmin Agreement dated the 3rd day of December, 2001 Willex Energy Ltd. and Watch Resources Ltd. RATES, ELECTIONS AND MODIFICATIONS TO THE 1996 PETROLEUM ACCOUNTANTS SOCIETY OF CANADA (PASC) ACCOUNTING PROCEDURE 101. Rates and Elections 105. Operating Fund: 10% 110. Approvals n/a, from 2; Seventy -five percent (75%) 112. Expenditure Limitations: (a) excess of twenty five thousand dollars ($25,000) (c) excess of twenty five thousand dollars ($25,000) 202. Employee Benefits: (d) exceed twenty -two percent (22%) 213. Camp and Housing: (b) shall____ /shall not|X| 216. Warehouse Handling: 2.5%, $5000.00; five percent (5%) 302. Overhead Rates: A) Exploration (1) five percent (5%); fifty thousand dollars ($50,000) (2) three percent (3%); one hundred thousand dollars ($100,000) (3) one percent (1%) B) Drilling (1) three percent (3%); fifty thousand dollars ($50,000) (2) two percent (2%); one hundred thousand dollars ($100,000) (3) one percent (1%) C) Construction (1) five percent (5%); fifty thousand dollars ($50,000) (2) three percent (3%); one hundred thousand dollars ($100,000) (3) one percent (1%) D) Operation and Maintenance 2) $250.00 per producing well per month Rates for D (2) and D (3) will not be adjusted 406. Dispositions: twenty five thousand dollars ($25,000) 85