September 25, 2006 Park Place Energy Inc. Patch Energy Inc. Vancouver, B.C. V6C 2X8 Vancouver, B.C. V6C 2X8 Attention: David Clark Attention: David Clark Chief Financial Officer Chief Financial Officer Dear Sir: Re: Farmout and Option Agreement N ½...

EX-10.8 10 exhibit10-8.htm FARMOUT AND OPTION AGREEMENT

September 25, 2006
Park Place Energy Inc.	Patch Energy Inc.
1220 – 000 Xxxxxxx Xxxxxx	1220 – 000 Xxxxxxx Xxxxxx
Xxxxxxxxx, X.X. X0X 0X0	Xxxxxxxxx, X.X. X0X 0X0
Attention:                         Xxxxx Xxxxx	Attention:                         Xxxxx Xxxxx
Chief Financial Officer	Chief Financial Officer

Dear Sir:

Re:	Farmout and Option Agreement
	N ½ Sec 22, SW ¼ & Lsds 11 & 12 Sec 26 Xxx 00 Xxx 0 X0X
	Xxxxxxxx Xxx Xxxx, Xxxxxxx

This letter is to evidence the Agreement between Park Place Energy Inc. (“Park Place”), Patch Energy Inc. (“Patch”) and Pine Petroleum Limited (“Pine”) pursuant to which Farmor grants to Farmee the right to earn an interest in the Farmout Lands, the Option Lands and the Area of Mutual Interest on the terms and conditions contained herein (the “Agreement”).

1.	DEFINITIONS
	Each capitalized term used in this Agreement will have the meaning given to it in the Farmout and Royalty Procedure, and, in addition:
	a)	“Area of Mutual Interest” means sections 22, 23, 26 and 27-12-5 W4M;
	b)	"Contract Depth" means the drilling of the Test Well to a depth sufficient to adequately test all Mesozoic formations and to penetrate 15 meters into the Mississippian Section or to a total drill depth of 950 meters below Xxxxx Bushing subsurface or whichever first occurs;
	c)	“Farmee” means Park Place and Patch as to a 50% interest each;
	d)	“Farmor” means Pine;
	e)	“Farmout and Royalty Procedure” means the 1997 CAPL Farmout and Royalty Procedure with insertions as set forth in Schedule “B”;

	f)	“Farmout Lands” means the lands described as such in Schedule “A”;
	g)	“Mutual Interest Lands” means any parcel of land or other interest 50% or more of the surface area of which is located within the Area of Mutual Interest.
	h)	“Option Lands” means the lands described as such in Schedule “A”;
	i)	“Operating Procedure” means the 1990 CAPL Operating Procedure with insertions as set forth in Schedule “C”;
	j)	“Participant” means Pine as to an undivided 10% working interest;

	To the extent necessary to effect the provisions of the Farmout & Royalty Procedure, references to "Farmor", "Farmee" and "Farmout Lands" within the Farmout & Royalty Procedure shall be deemed to be "Farmor", "Farmee" and "Farmout Lands", respectively, as such terms are defined in this Agreement
	Unless otherwise provided herein, all other terms which are defined in the Farmout & Royalty Procedure shall, in this Agreement, have the meaning ascribed to them in the Farmout & Royalty Procedure
2.	SCHEDULES
	The following Schedules are attached hereto and made part of this Agreement:

	a)	Schedules “A” and “A1”, which describe the Farmout Lands, the Option Lands and the Encumbrances;
	b)	Schedule ”B”, which is the Farmout and Royalty Procedure;
	c)	Schedule “C”, which is the Operating Procedure;
	d)	Schedule "D", which specifies the types of drilling information required to be supplied by the Farmee to Farmor pursuant to the Farmout and Royalty Procedure.

3.	TEST WELL
	a)	On or before November 30, 2006 (subject only to surface access, regulatory approval and rig availability – Farmee will use its best efforts to obtain these items in a timely fashion), Farmee (90%), on behalf of itself and the Participant (10%), will commence drilling a well at a location of its choice on the Farmout Lands (“Test Well”). The Test Well will de drilled to Contract Depth and abandoned or completed in accordance with the provisions of Article 3.00 of the Farmout and Royalty Procedure. As between Park Place, Patch and the Participant, the terms and conditions of the Operating Procedure shall apply.
	b)	Farmee shall not assign all, or any portion of, its interest in this Agreement without the Farmor's prior written consent.

4.	INTEREST EARNED
	By fulfilling the requirements enumerated in Clause 3 of this Agreement, and subject to the provisions of Clause 3.03 of the Farmout and Royalty Procedure, Farmee will earn an undivided 50% of Farmor’s Interest in the Farmout Lands. Thereafter, the Farmout Lands will be operated in accordance with the Operating Procedure with Patch being named as operator.
	The Farmee shall pay its proportionate share of the Encumbrances on the Farmout Lands.
5.	OPTION WELL
	Within 45 days of release of the rig used to drill the Test Well, Farmee may elect to drill a well (“Option Well”) on the Option Lands to earn an interest in the Option Lands. All of the terms and conditions applicable to the Test Well will apply to the Option Well mutatis mutandis other than the Option Well will be commenced within 45 days of the Farmee’s election.
	In the event that Farmee has acquired 3D Seismic data pursuant to Clause 6 of this Agreement, and notwithstanding the provisions of this Clause 5, Farmor may agree, at its sole discretion, that the Option Well be located in the Farmout Lands rather than the Option Lands.
6.	3D SEISMIC
	After the Farmee has drilled the Test Well, the Farmee may elect within 30 days of release of the rig used to drill the Test Well, to shoot a 3D seismic program over the Farmout Lands and the Option Lands (“3D Seismic”). Field acquisition of the 3D Seismic shall commence within 60 days of Farmee’s election and the 3D Seismic shall be acquired and processed at Farmee’s (90%) and Participant’s (10%) sole cost and in an amount sufficient to provide 100% coverage of an area of at least 1280 acres (the area of coverage shall include the Option Lands) within the Area of Mutual Interest. If the Farmee shoots the 3D Seismic, the time to elect to drill the Option Well will be extended until 45 days after completion of field acquisition of the 3D Seismic.
	Farmor shall be provided with a licenced, processed copy of the 3D Seismic data.
	Farmee may recover its share of the field acquisition and processing cost of the 3D Seismic (“Seismic Cost”) from the sale of petroleum substances from the Option Well (net of the lessor royalty, the Encumbrances and operating costs) as follows:

	Applied to Seismic Cost	40%
	Farmee	25%
	Farmor	25%

After the Farmee has recovered its share of the Seismic Cost from the sale of petroleum substances from the Option Well as above, production from the Option Well shall be shared by Farmee as to 45% and Farmor as to 45%.

7.	AREA OF MUTUAL INTEREST
	Subject to Article 8.00 of the Farmout and Royalty Procedure:
	a)	The Area of Mutual Interest shall be in effect until March 31, 2008.
	b)	The interests of the parties in Mutual Interest Lands will be:                   Farmee – 45%, Farmor – 45% and Participant – 10%

8.	MISCELLANEOUS
	a)	Each of the Parties represents and warrants that it now has, or is entitled to have full right, full power and absolute authority to enter into this Agreement.
	b)	In the event of a conflict between any term or condition of this Agreement and any schedule attached hereto, the term or condition of this Agreement shall prevail.
	c)	Unless, and to the extent only, specifically provided for herein, no party shall be under any obligation to the other parties with respect to such party acquiring an interest in, or conducting operations on, lands other than the Farmout Lands and the Option Lands.
	d)	Any party which develops its own interpretation from information obtained pursuant to the Agreement shall not be required to provide any other party with such interpretation, or any interpretative data, or material, and shall be entitled to use such interpretations for its sole benefit.
	e)	This Agreement and the relationship between the parties shall be construed and enforced in accordance with the laws in effect in the Province of Alberta. Each party attorns to the jurisdiction of the Courts of the Province of Alberta, and all Courts of Appeal therefrom.
	f)	The terms of this Agreement express and constitute the entire agreement between the parties. No amendments shall be binding unless agreed to by all parties in writing. No implied covenant, or liability, is created, or shall arise, by reason of this Agreement, or anything herein contained.
	g)	This Agreement supersedes and replaces all prior agreements, documents, writings and verbal understandings between the parties relating to the Farmout Lands, the Option Lands and the Area of Mutual Interest.
	h)	This Agreement shall be binding upon and enure to the benefit of the parties and their respective successors and assigns.

i)                The two year period for seeking a remedial order under section 3(1)(a) of the Limitations Act, R.S.A. 2000 C.L-12, as amended, for any claim (as defined in the Act) arising in connection with this Agreement, is extended to:

1)      For claims disclosed by audit, two years after the time this Agreement permitted that audit to be performed; and

2)      For all other claims, four years.

j)                This Agreement may be executed in counterpart and together all counterparts shall constitute one agreement.

If this reflects your understanding of the terms and conditions agreed upon respecting this Agreement, please initial each page, sign this letter and return one signed counterpart page to us.

Yours truly, PINE PETROLEUM LIMITED

/s/ Xxxx X. Xxxxxxx Xxxx X. Xxxxxxx Director

Accepted and agreed to this 20 day of October, 2006

/s/ Xxxxx Xxxxxxx ___________________________________________________ Park Place Energy Inc.

Accepted and agreed to this 20 day of October, 2006

/s/ Xxxx Xxxxxxxx ___________________________________________________ Patch Energy Inc.

This is the execution page for a Farmout and Option Agreement dated the 25th day of September, 2006 between Park Place Energy Inc., Patch Energy Inc. and Pine Petroleum Limited.

SCHEDULE “A"

This is Schedule "A" attached to and made part of a Farmout and Option Agreement dated the 25th day of September, 2006 between Park Place Energy Inc., Patch Energy Inc. and Pine Petroleum Limited.

FARMOUT LANDS	XXXXX XXXXXXXXX
Xxx 00, Xxx 0 X0X: N ½ Xxxxxxx 00	Xxxxx X&XX Lease # 0403050008
all P&NG below base Medicine Hat	Lessor Royalty:             Crown
to base Mannville
Farmor’s Interest – an undivided 90% working interest
OPTION LANDS	XXXXX XXXXXXXXX
Xxx 00, Xxx 0 X0X: SW ¼ & Lsds 11 & 12 Xxxxxxx 00	Xxxxx X&XX Lease # 0403030044
all Petroleum to base Mannville	Lessor Royalty:              Crown
Farmor’s Interest – an undivided 90% working interest

ENCUMBRANCES on the FARMOUT LANDS and the OPTION LANDS

0.5% non-convertible gross overriding royalty payable to Covenant Resources Ltd. as described in Schedule “A1”.

SCHEDULE “A1"

This is Schedule "A1" attached to and made part of a Farmout and Option Agreement dated the 25th day of September, 2006 between Park Place Energy Inc., Patch Energy Inc. and Pine Petroleum Limited.

SCHEDULE “B"

This is Schedule "B" attached to and made part of a Farmout and Option Agreement dated the 25th day of September, 2006 between Park Place Energy Inc., Patch Energy Inc. and Pine Petroleum Limited

INSERTIONS FOR THE 1997 CAPL FARMOUT & ROYALTY PROCEDURE:

	Clause 1.01 (f)	"Effective Date"	September 25, 2006
	Clause 1.01 (t)	"Payout"	Will not apply
	Clause 1.02	"Clause 311 - Insurance"	Alternate A
	Article 4.00	"Option Well"	Will apply
	Article 5.00	"Overriding Royalty"	Will not apply
	Article 5.01 A (a)	“Quantification of … Royalty”	will not apply
	Article 5.01 A (b)	“Quantification of … Royalty”	will not apply
	Article 5.04 B	“Allowed Deductions”	will not apply
	Article 6.00	"Conversion of Overriding Royalty"	Will not apply
	Article 6.04	“Operations at Conversion”	not applicable
	Article 8.00	"Area of Mutual Interest"	Will apply
	Clause 11.02	"Farmee to Reimburse Farmor"	Will not apply

SCHEDULE “C"

This is Schedule "C" attached to and made part of a Farmout and Option Agreement dated the 25th day of September, 2006 between Park Place Energy Inc., Patch Energy Inc. and Pine Petroleum Limited

INSERTIONS FOR THE 1990 CAPL OPERATING PROCEDURE:

Clause 311	“Insurance”	Alternate “A”
		Farmee shall carry a minimum of $3,000,000.00 of insurance pursuant to Clause 311 (e) and shall include Farmor and Participant as a named insureds as to their respective interests in this Agreement
Clause 604	“Marketing Fee”	Alternate “A”
Clause 903	“Less … Parties Participate”	Alternate “A”
Clause 1007 (a)(iv)	“Penalty … Production”	Development Xxxxx - 300%
		Exploratory Xxxxx - 500%
Clause 1010 (a)(iv)	“Exception to Clause 1007”	365 days
Clause 2202	“Addresses For Notices”	As per page one of the Agreement
Clause 2401	“Right to Assign … Dispose”	Alternate “A”
Clause 2404	“Recognition on Assignment”	deleted and replaced
		with the 1993 CAPL Assignment Procedure

INSERTIONS FOR THE 1996 PASC ACCOUNTING PROCEDURE:

Clause 105	(a)	“Operating Fund”	10% of approved forecast
Clause 110		“Approvals”	2 or more owners, 70% or more
Clause 112	(a)	“Expenditure Limitations”	not in excess of $25,000.00
Clause 112	(c)	“Expenditure Limitations”	not in excess of $25,000.00
Clause 202	(b)	“Employee Benefits”	22% of cost
Clause 213	(b)	“Camp and Housing”	shall be chargeable
Clause 216		“Warehouse Handling”	5% of cost
Clause 221		“Allocation Options”	not applicable
Clause 302	(a)	“Exploration Project”	(1)	5%, $50,000.00
			(2)	3%, $100,000.00
			(3)	1%
	(b)	“Drilling”	(1)	3%, $50,000.00
			(2)	2%, $100,000.00
			(3)	1%
	(c)	“Initial Construction”	(1)	5%, $50,000.00
			(2)	3%, $100,000.00
			(3)	1%
	(d)	“Subsequent Construction”	(1)	5%, $50,000.00
			(2)	3%, $100,000.00
			(3)	1%
	(e)	“Operations and Maintenance”	(1)	0% and
			(2)	$250.00/producing well/month
				Subclause 302(e)(2) shall not be
				adjusted
Clause 406		“Dispositions”	$25,000.00

SCHEDULE “D"

This is Schedule "D" attached to and made part of a Farmout and Option Agreement dated the 25th day of September, 2006 between Park Place Energy Inc., Patch Energy Inc. and Pine Petroleum Limited