SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to __________________
Commission file number 1-3793
CANADA SOUTHERN PETROLEUM LTD.
(Exact name of registrant as specified in its charter)
NOVA SCOTIA, CANADA 98-0085412
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Suite 1410, One Palliser Square
125 Ninth Avenue, S.E.
Calgary, Alberta CANADA T2G OP6
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (403) 269-7741
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Limited Voting Shares, Pacific Exchange, Inc.
$1 (Canadian) per share Boston Stock Exchange
Toronto Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Limited Voting Shares, NASDAQ SmallCap Market
$1 (Canadian) per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately U.S. 67,501,000 at March 15, 1999.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Limited Voting Shares, par value $1.00 (Canadian) per share, 14,234,740
shares outstanding as of March 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement of Canada Southern Petroleum Ltd. related to
the Annual Meeting of Shareholders for the year ended December 31, 1998, which
is incorporated into Part III of this Form 10-K.
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. Business 4
Item 2. Properties 14
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for the Company's Limited Voting Shares and Related
Stockholder Matters 25
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 56
PART III
Item 10. Directors and Executive Officers of the Company 56
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain Beneficial Owners and Management 56
Item 13. Certain Relationships and Related Transactions 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 57
- ---------------------------
Unless otherwise indicated, all dollar figures set forth are expressed in
Canadian currency. The exchange rate at March 15, 1999 was $1.00 Canadian = U.S.
$.6552.
<PAGE>
PART I
Item 1. Business
The nature of Canada Southern Petroleum Ltd.'s (the "Company" or
"Canada Southern") business is described at Item 1(c) herein, and a description
of its principal oil and gas properties in Canada appears in Item 2 herein. For
additional information regarding the development of the Company's business, see
"Properties" and "Supplemental Information on Oil and Gas Activities".
(a) General Development of Business
Yukon Territory - The Kotaneelee Field
The Company's principal asset is a 30% carried interest in the
Kotaneelee gas field located on Ex-Permit 1007 (31,888 gross acres or 9,566 net
acres) in the extreme southeastern corner of the Yukon Territory. This partially
developed field is connected to a major pipeline system. Two wells have been
completed to date that are capable of an estimated output of in excess of 60
million cubic feet per day, the capacity of the field dehydration plant. At
December 31, 1998, field production was approximately 60-65 million cubic feet
("mmcf") per day. The operator is Anderson Exploration Ltd., which acquired all
of Columbia Gas Development of Canada Ltd.'s interests. See Item 3 - "Legal
Proceedings" for a discussion of the Kotaneelee Litigation concerning this
asset.
Production at Kotaneelee commenced in February 1991. According to
government reports, total production in billion cubic feet ("bcf") from the
Kotaneelee gas field since 1991 has been as follows:
Calendar Year Production (bcf)
------------- ----------------
1991 8.1
1992 18.0
1993 17.5
1994 16.7
1995 15.7
1996 15.2
1997 14.4
1998 16.0
-----
Total 121.6
=====
<PAGE>
At present, the Company does not receive any cash payments from
production but is credited with 30% of the gross revenues until a like percent
of the working interest costs, exclusive of any interest expense, are recovered
by the operator. The Company will not receive any payment from production
revenues until its share of the working interest costs are recovered. When the
deferred costs are recovered, 30% of gross revenues (net of gross overriding
royalties) less 30% of current working interest costs will be paid to the
Company. Gross overriding royalties amount to 10% to the Canadian Federal
government and 4.06% to certain individuals. The operator has reported to the
Company development costs totaling approximately $95,849,000 and, of that
amount, approximately $19,039,000 (Company share = $5,712,000) remained to be
recovered at December 31, 1998. The Company has contested the amount of costs
that have been charged to the carried interest account. It is estimated that the
Company will not begin to receive proceeds from the Kotaneelee gas field before
the year 2000, based upon a price of $1.28 per mcf (average 1998 price) and
current production rates. The period before payment to the Company begins may be
shorter or longer, depending on prevailing market conditions and the results of
the Kotaneelee Litigation.
British Columbia Properties
The Company's major source of income has been from oil and gas fields
in northeast British Columbia. These fields, developed in the 1950's and 1960's,
produce revenue through both working and carried interest agreements. During
November 1998, the major working interests in these fields were sold to Canadian
Natural Resources Ltd. ("CNRL") for approximately $3.5 million.
In addition to the producing properties, since 1988 the Company has
acquired a number of leases in northeast British Columbia by participating in
British Columbia land sales. To date five wells have been drilled on the lands
resulting in three oil discoveries and two dry holes. Currently, the Company is
defining the prospects by geophysics. Work completed to date indicates that six
of the prospects justify drilling. The Company estimates that the drilling costs
(excluding completion costs) of the six prospects would be $1,625,000. However,
as most of these wells would be wildcat wells (exploratory wells), the Company
plans to reduce its risk by selling or farming out part of its interest. The
timing of the drilling is dependent on the availability of funds. The Company
anticipates that its average net cost per well (assuming a farmout or sale)
would be approximately $75,000, or a total of $525,000, for drilling and
completion costs.
One prospect has been farmed out on a seismic option basis. If the
farmee elects to drill a well, the Company will not be required to pay any of
the drilling costs. In 1998, the Company acquired leases on two additional
prospects.
In the Paradise area, one well that was drilled and completed as an oil
well in 1997 proved to be non-commercial. Another oil well, which was drilled
under a farmout arrangement, is currently suspended. An additional farmout well
which was drilled in late 1997 has been plugged and abandoned.
<PAGE>
The Company also has interests at Buick Creek, Wargen and Siphon. The
Siphon and Wargen fields have new operators. As these properties are held under
the carried interest agreements, the Company is not aware of any proposed
exploration and development plans for these properties, but anticipates the
change of operator will cause new work to be done.
Arctic Islands
As of December 31, 1998, the Company held working interests in 45,100
gross acres (1,817 net acres) and carried interests in 131,730 gross acres
(37,180 net acres) in the Sverdrup Basin, located in the Arctic Islands. The
Hecla, Whitefish, Drake Point, Roche Point, Kristoffer, Romulus and Bent Horn
fields have been designated significant discovery lands ("SDL" ) by the Federal
Government. The Company's interests in the SDL's have been retained pending
development.
Panarctic Oils Ltd. ("Panarctic"), the operator, received Federal
government regulatory approvals for a pilot project to move shipments of crude
oil from the Bent Horn field by tanker through the Northwest Passage to southern
Canada in 1985. Through December 31, 1996, approximately 2.7 million barrels of
Bent Horn crude had been sold with deliveries being made at northern Canadian
and European markets as well as the eastern seaboard market. In 1996, the
operator decided to shut down production from the field and dismantle the
production facilities because of economic uncertainties. The Company has a 5%
carried interest in the area which has not yet reached payout status. The timing
of any payout is uncertain.
Northwest Territories Properties
The Company has a 45% carried interest in the Northwest Territories in
the Celibeta field designated as Significant Discovery Lands ("SDL") by the
Federal Government (1,594 gross acres and 717 net acres). The gas field is
presently shut-in.
Alberta
In 1994, the Company purchased a 5% working interest in the Kitscoty
heavy oil field and the related facilities. Oil recovery from this field is
being enhanced by steam injection.
In 1996, the Company purchased an additional 5% working interest in the
Kitscoty field. Three more wells were drilled in 1996; two horizontal wells and
one vertical well. All the wells encountered oil and were completed as oil
wells. One well also discovered three potential gas zones which will be
evaluated for future use as fuel for the steam generation needed to enhance the
oil production. Scheduled remedial work programs have been postponed pending an
increase in the current low netbacks on heavy oil. Additional work at the new
Lloydminister heavy oil discovery at 16-2-51-2 W4M has also been postponed for
this reason.
<PAGE>
During 1997 and 1998, the Company participated in the exploration and
development of a glauconite heavy oil project in the Atlee/Majestic area. A
multitude of production problems occurred which caused numerous delays. Although
the project was successful in developing substantial reserves, the prevailing
low heavy oil prices made the economic return on this project less favorable
than other Company projects. For this reason, the Company's interest was sold in
November 1998 for $2.2 million.
The Company also acquired a 10-20% working interest in over 12,000
acres in four other areas of Alberta. These lands were purchased on the basis of
seismic work which showed a number of promising prospects. Subsequently,
additional seismic work has confirmed the potential of those prospects. One was
drilled in 1997 and completed as a potential gas well. A second well was drilled
in early 1998 and completed as an oil well.
In 1998, the Company purchased leases (100% interest) in an area
prospective for both oil and gas. The leases are currently being evaluated with
the intent of drilling in late 1999 or early 2000.
In Alberta, the Company currently has working interests ranging from
10% to 100% in a total of 1,920 gross (326 net) developed acres and 26,869 gross
(8,448 net) undeveloped acres.
Saskatchewan
The Company has a 3.75% working interest in five sections in
Saskatchewan. During 1997, three wells were drilled on the lands resulting in 2
dry holes and 1 shut-in gas well.
United States
Texas
In 1996 and 1997, the Company participated in the drilling of four
wells in Texas which resulted in four potential oil wells. Because of low
production rates and low oil prices, three of the wells have since been
abandoned, leaving one producing oil well. During 1998, the costs of these wells
totaling $489,000 were written off. Based on the technical results of these
wells in which it has a relatively small interest, the Company commenced a new
leasing program and acquired four leases (100% interest) on which it conducted a
seismic program in 1998. Currently, plans are being made to test the first of
several Chappel reef prospects on these leases in the second quarter of 1999.
<PAGE>
California
During March 1998, the Company agreed to participate with two other
companies in a heavy oil recovery project in California. The field is estimated
to have approximately 12 million barrels of oil in place with only 13% of the
oil recovered to date. The initial purchase price for a 90% (75% after payout)
interest in the project is U.S. $200,000 (Company share 30% - U.S. $60,000).
Capital expenditures were expected to be U.S. $600,000 to perform remedial work
on the field and to complete a pilot stream flood program during the first year
of the project (Company share U.S. $180,000). If the total amount of
expenditures is less than U.S. $600,000, the participants' interests will be
reduced proportionately to an amount which is not less than 10% (Company share -
3%). Because of the current low price of heavy oil, major development work on
the project has been suspended pending an increase in oil prices. In addition,
the Company also wrote off the carrying costs of the property in the amount of
$196,000 during 1998.
(b) Financial Information about Industry Segments
Since the Company is primarily engaged in only one industry, oil and
gas exploration and development, this item is not applicable to the Company. See
Item 8 - "Financial Statements and Supplemental Data" for general financial
information concerning the Company.
(c) (1) Narrative Description of the Business
The Company was incorporated in 1954 under the Canada
Corporations Act. In 1979, it became subject to the Canadian Business
Corporations Act and in 1980, was continued under the Nova Scotia Companies Act.
The Company is, either in its own right, or through other entities,
engaged in the exploration for and development of properties containing or
believed to contain recoverable oil and gas reserves and the sale of oil and gas
from these properties. Although many of the properties in which the Company has
interests are undeveloped, all properties with proved reserves are partially or
fully developed. The Company's interests in exploratory ventures are on
properties located in Alberta, British Columbia, Saskatchewan, the Northwest and
Yukon Territories and the Arctic Islands in Canada and in the United States. The
Company's principal asset is its 30% carried interest in the Kotaneelee field, a
partially developed gas field (See Item 3 - "Legal Proceedings".) The Company
also has interests in producing properties in British Columbia and Alberta.
<PAGE>
Most of this acreage is covered by carried interest agreements, which provide
that revenues are not payable to the Company until expenditures by the carrying
partners have been recouped from production, and that operating decisions are
made by the carrying partners. Generally, the Company may, at any time, as to
each block or economic unit, elect to convert from a carried interest position
to a working interest position by paying its share of the unrecouped
expenditures for the unit (i.e., expenditures not recouped from production
revenues). At December 31, 1998, the Company's share of unrecouped expenditures
were as follows:
British Columbia:
Ex-permit 149 $ 4,013,000
Yukon and Northwest Territories:
Ex-permit 1007 (Kotaneelee)* $19,039,000
Ex-permit 2713 (Celibeta) $ 321,000
*See Item 3 - Legal Proceedings
(i) Principal Products
The majority of the Company's interests are
carried interests. The Company also participates in the production and sale of
crude oil and natural gas derived from its working interests.
(ii) Status of Product or Segment
At present, some of the properties in which
the Company has interests are undeveloped and/or nonproducing.
(iii) Raw Materials
Not applicable.
(iv) Patents, Licenses, Franchises and
Concessions Held
Permits and concessions are important to the
Company's operations, since they allow the search for and extraction of any
crude oil and natural gas discovered on the areas covered. See the detailed
schedule of properties under Item 2 - "Properties."
(v) Seasonality of Business
The Company's business is not seasonal,
except that sales of natural gas peak during the winter heating season.
Exploration and development activities are restricted in certain areas on a
seasonal basis because extreme weather conditions affect transportation and the
ability to pursue these activities.
<PAGE>
(vi) Working Capital Items
Not applicable.
(vii) Customers
Substantially all oil production from the
Company's properties for the current year was purchased by CNRL, the operator of
the majority of the producing properties. Most of the natural gas produced from
Company properties was sold by the operator, Petro Canada, to various gas
marketers. The production from the Kotaneelee gas field is also being sold by
the working interest partners who have not disclosed the purchasers.
(viii) Backlog
Not applicable.
(ix) Renegotiation of Profits or Termination of
Contracts or Subcontracts at the Election of
the Government
Not applicable.
(x) Competitive Conditions in the Business
The exploration for and production of oil
and gas are highly competitive operations, both internally within the oil and
gas industry and externally with producers of other types of energy. The ability
to exploit a discovery of oil or gas is dependent upon considerations such as
the ability to finance development costs, the availability of equipment, and
the ability to overcome engineering and construction delays and difficulties.
The Company must compete with companies which have substantially greater
resources available to them. Because the majority of Company interests are in
remote areas, operation of its properties is more difficult and costly than in
more accessible areas.
Furthermore, competitive conditions may be
substantially affected by various forms of energy legislation which may have
been or may be proposed in the United States and Canada; however, it is not
possible to predict the nature of any such legislation which may ultimately be
adopted or its effects upon the future operations of the Company. For a further
discussion of Canadian governmental regulation of the petroleum industry, see
Item 1(d)(2) - "Risks Attendant to Foreign Operations".
(xi) Research and Development
Not applicable.
<PAGE>
(xii) Environmental Regulation
In the exploration for and development of
natural resources, the Company is required to comply with significant
environmental laws and regulations which add to the expense of those activities.
The Company has not been required to spend significant sums to comply with clean
up laws and regulations. Compliance by the Company with governmental provisions
regulating the discharge of materials to the environment or otherwise relating
to the protection of the environment are not expected to have a material effect
on the capital expenditures, earnings or competitive position of the Company.
(xiii) Number of Persons Employed by Company
The Company currently has three full time
employees, all of whom are located in Canada. The Company also relies to a great
extent on consultants (approximately 10) for technical, legal, accounting and
administrative services. The Company uses consultants because it is more cost
effective than employing a larger full time staff.
(d) Financial Information about Foreign and Domestic Operations
and Export Sales
(1) Revenues, Operating Losses and Identifiable Assets
Substantially all of the Company's operating assets
and revenues are attributable to its operations in Canada. Operating losses are
substantially attributable to the ongoing Kotaneelee litigation.
(2) Risks Attendant to Foreign Operations
The properties in which the Company has interests are
located primarily in Canada and are subject to certain risks involved in the
ownership and development of such foreign property interests. These risks
include but are not limited to those of: nationalization; expropriation;
confiscatory taxation; native rights; changes in foreign exchange controls;
currency revaluation; burdensome royalty terms; export sales restrictions;
limitations on the transfer of interests in exploration licenses; and other laws
and regulations which may adversely affect the Company's properties, such as
those providing for conversion, proration, curtailment, cessation or other forms
of limiting or controlling production of, or exploration for, hydrocarbons.
Thus, an investment in the Company represents an exposure to risks in addition
to those inherent in petroleum exploratory ventures.
<PAGE>
Governmental Regulation of the Canadian Oil and Natural Gas Industry
The oil and natural gas industry in Canada is subject to extensive
controls and regulations imposed by various levels of government relating to
land tenure, production, production facilities, pricing and marketing,
royalties, environmental protection and other matters. Outlined below are some
of the more significant aspects of the legislation, regulations and agreements
governing the oil and natural gas industry in Canada. All current legislation is
a matter of public record and the Company is unable to predict whether any
additional legislation or amendments may be enacted.
Land Tenure
Crude oil and natural gas located in the western provinces is owned
predominantly by the respective provincial governments. Provincial governments
grant rights to explore for and produce oil and natural gas pursuant to leases,
licenses and permits for varying terms from two years and on terms and
conditions set forth in provincial legislation including requirements to perform
specific work or make payments. Oil and natural gas located in such provinces
can also be privately owned and rights to explore for and produce such oil and
natural gas are granted by lease on such terms and conditions as may be
negotiated. The term of both Crown and freehold leases will generally continue
as long as oil or natural gas is produced from the property.
Oil and natural gas rights on federal lands outside of the provinces is
generally regulated by the Government of Canada unless authority has been
delegated by agreement to the territorial government or the government of the
province adjacent to the federal offshore area. In May 1993, the Canada Yukon
Oil and Gas Accord was signed which allowed for the transfer to the Yukon of
authority to administer and control oil and natural gas resources within that
territory and for the establishment of an Oil and Gas Management Regime. The
transfer has been completed and the lands are now administered by the Yukon
Government.
Production and Production Facilities
The Governments of Canada, Alberta, British Columbia and Saskatchewan
have enacted statutory provisions regulating the production of oil and natural
gas. These regulations may restrict the maximum allowable production from a well
based on reservoir engineering and/or conservation practices. The construction
and operation of facilities to recover and process oil and natural gas are also
subject to regulation.
Pricing and Marketing - Oil
In Canada, producers of oil negotiate sales contracts directly with oil
purchasers, with the result that the market determines the price of oil. Certain
purchasers periodically advertise for volumes of oil they are prepared to
purchase and the price being offered for such volumes. The price depends in part
on oil quality, prices of competing fuels, distance to market and the value of
refined products.
<PAGE>
Pricing and Marketing - Natural Gas
In Canada, the price of natural gas is determined by negotiation
between buyers and sellers, with the result that the market determines the price
of natural gas. Natural gas exported from Canada is subject to regulation by the
National Energy Board ("NEB") and the Government of Canada. Exporters are free
to negotiate prices and other terms with purchasers, provided that the export
contracts must continue to meet certain criteria prescribed by the NEB and the
Government of Canada. As is the case with oil, natural gas exports for a term of
less than two years must be made pursuant to an NEB order, or, in the case of
exports for a longer duration, pursuant to an NEB license and Governor in
Council approval.
The Governments of Alberta, British Columbia and Saskatchewan also
regulate the volume of natural gas which may be removed from those provinces for
consumption elsewhere based on such factors as reserve availability,
transportation arrangements and market considerations.
Royalties and Incentives
The royalty regime is a significant factor in the profitability of oil
and natural gas production. Royalties payable on production from lands other
than Crown lands are determined by negotiations between the mineral owner and
the lessee, although production from such lands may also be subject to
provincial taxes and regulations. Crown royalties are determined by government
regulation and are generally calculated as a percentage of the value of the
gross production, and the rate of royalties payable generally depends in part on
prescribed reference prices, well productivity, geographical location, field
discovery date and the type or quality of the product produced. The value of the
gross production for royalty purposes may be based on a deemed value for the
product rather than the actual value received by the interest holder.
From time to time the Governments of Canada, Alberta, British Columbia
and Saskatchewan have established incentive programs which have included royalty
rate reductions, royalty holidays and tax credits for the purpose of encouraging
natural gas and oil exploration or enhanced recovery projects. Incentives are
intended to enhance the existing cash flow of the oil and natural gas industry
and to improve the economics of finding and developing new and more costly oil
and natural gas reserves. Oil royalty holidays for specific wells and royalty
reductions reduce the amount of Crown royalties paid by the interest holder to
the respective government. Tax credit programs provide a rebate on Crown
royalties paid.
<PAGE>
Environmental Regulation
The oil and natural gas industry is subject to environmental regulation
pursuant to local, provincial and federal legislation. Environmental legislation
provides for restrictions and prohibitions on spills, releases or emissions of
various substances produced in association with certain oil and natural gas
industry operations. An environmental assessment and review may be required
prior to initiating exploration or development projects or undertaking
significant changes to existing projects. In addition, legislation requires that
well and facility sites be abandoned and reclaimed to the satisfaction of the
appropriate authorities. A breach of such legislation may result in the
imposition of fines or penalties. Federal environmental regulations also apply
to the use and transport of certain restricted and prohibited substances. The
Company is committed to meeting its responsibilities to protect the environment
wherever it operates and believes that it is in material compliance with
applicable environmental laws and regulations. The Company has not been required
to spend significant sums to comply with clean up laws and regulations.
Compliance by the Company with governmental provisions regulating the discharge
of materials to the environment or otherwise relating to the protection of the
environment are not expected to have a material effect on the capital
expenditures, earnings or competitive position of the Company.
(3) Data which Are Not Indicative of Current or Future Operations
Not applicable.
Item 2. Properties
(a) The principal asset of the Company is its 30% carried interest in
the Kotaneelee field, a partially developed gas field in the Yukon Territory.
See Item 3 - "Legal Proceedings." The Company also has interests in producing
properties in British Columbia and Alberta and in several exploration prospects.
The exploratory ventures are properties located in British Columbia, Alberta,
Saskatchewan, the Yukon and Northwest Territories and the Arctic Islands in
Canada and in the United States. Geophysical, geological and drilling work on
the Company's properties is conducted by the operators under various agreements
with the Company. The results of this work are reviewed by Company personnel and
consultants retained by the Company.
(b) (1) The information regarding reserves, costs of oil and gas
activities, capitalized costs, discounted future net cash flows and results of
operations is contained in Item 8 - "Financial Statements and Supplementary
Data."
<PAGE>
The following graphic presentation has been omitted, but the following is a
description of the omitted material:
Map of Canada showing key Company properties
<PAGE>
The following graphic presentation has been omitted, but the following is a
description of the omitted material:
Map of N.E. British Columbia and Yukon, Northwest Territories
showing Company interest lands
<PAGE>
The following graphic presentation has been omitted, but the following is a
description of the omitted material:
Map showing the Kotaneelee Field
<PAGE>
The following graphic presentation has been omitted, but the following is a
description of the omitted material:
Map of the Arctic Island Fields
showing the Company interest lands
<PAGE>
(2) Reserves Reported to Other Agencies
Not applicable.
(3) Production
Average sales price per unit and average production cost for oil and
gas produced during the periods shown below are as follows:
Average Sales Price Average Production Costs
Year Oil (per bbl) Gas (per mcf) Oil (per bbl) Gas (per mcf)
($) ($) ($) ($)
1998 14.84 2.17 8.41 1.41
1997 22.50 2.31 8.70 1.30
1996 25.47 1.64 8.67 .79
(4) Productive Wells and Acreage
Productive wells and acreage on working and carried interest properties
as of December 31, 1998 are as follows:
Gross Wells Net Wells
Oil Gas Oil Gas
46.0 69.0 6.72 11.49
Gross and Net Developed Acres
Gross Acres Net Acres
Alberta 3,840 349
British Columbia 46,638 7,681
Yukon Territory 3,350 1,005
Arctic Islands 3,060 153
Texas, USA 160 33
California, USA 262 79
------ -----
57,310 9,300
====== =====
<PAGE>
(5) Undeveloped Acreage
Total developed and undeveloped acreage in which the Company has
interests is summarized by geographic area in the table below:
Gross and Net Petroleum Acreage as of December 31, 1998
Developed Acres Undeveloped Acres
Gross Net Gross Net
Acres Acres % Acres Acres %
Canada:
British Columbia:
Carried Interests 28,592 6,039 21.1 6,415 1,363 21.2
Working Interests 6,269 1,005 16.0 11,913 7,797 65.5
Overriding royalty interest 11,777 637 5.4 6,123 95 1.6
------ ----- ------- ------
Total British Columbia 46,638 7,681 24,451 9,255
------ ----- ------- ------
Saskatchewan:
Working Interests 3,200 120 3.8
------- -------
Alberta:
Working Interests 1,920 326 17.0 26,869 8,448 31.4
Overriding Royalty Interest 1,920 23 1.2 640 21 3.3
------ ----- ------- ------
Total Alberta 3,840 349 27,509 8,469
------ ----- ------- ------
Yukon & Northwest Territories:
Carried Interests 3,350 1,005 30.0 31,726 9,757 30.8
Arctic Islands:
Carried Interests 3,060 153 5.0 128,670 37,027 28.8
Working Interests - - 45,100 1,817 4.0
------ ----- ------- ------
Total Arctic Islands 3,060 153 173,770 38,844
------ ----- ------- ------
Total Canada 56,888 9,188 260,656 66,445
California, USA 262 79 30.2 - -
Texas, USA 160 33 20.6 889 889 100
------ ----- ------- ------
Total United States 422 112 889 889
TOTAL 57,310 9,300 261,545 67,334
====== ===== ======= ======
(6) Drilling activity
Productive and dry net wells drilled during the following periods:
Gross Net
Year Productive Dry Productive Dry
1998 9 2 1.440 .200
1997 25 2 3.606 .250
1996 10 2 1.044 .150
<PAGE>
(7) Present Activities
There were no wells drilling at December 31, 1998.
(8) Delivery Commitments
None.
Item 3. Legal Proceedings
The Company, which has a 30% interest in the Kotaneelee gas field,
believes that the working interest owners in the field have not adequately
pursued the attainment of contracts for the sale of Kotaneelee gas. In October
1989 and in March 1990, the Company filed statements of claim in the Court of
Queens Bench of Alberta, Judicial District of Calgary, Canada, against the
working interest partners in the Kotaneelee gas field. The named defendants were
Amoco Canada Petroleum Corporation, Ltd., Dome Petroleum Limited (now Amoco
Canada Resources Ltd.), and Amoco Production Company (collectively the "Amoco
Dome Group"), Columbia Gas Development of Canada Ltd. ("Columbia"), Mobil Oil
Canada Ltd. ("Mobil") and Esso Resource of Canada Ltd. ("Esso") (collectively
the "Defendants").
The Company claims that the Defendants breached either a contract
obligation and/or a fiduciary duty owed to the Company to market gas from the
Kotaneelee gas field when it was possible to so do. The Company asserts that
marketing the Kotaneelee gas was possible in 1984 and that the Defendants
deliberately failed to do so. The Company seeks money damages and the forfeiture
of the Kotaneelee gas field. The Company presented evidence at trial that the
money damages sustained by the Company were approximately $100 million.
In addition, the Company has claimed that the Company's carried
interest account should be reduced because of improper charges to the carried
interest account by the Defendants. The Company claims that when the Defendants
in 1980 suspended production from the field's gas wells, they failed to take
precautionary measures necessary to protect and maintain the wells in good
operating condition. The wells thereafter deteriorated, which caused unnecessary
expenditures to be incurred, including expenditures to redrill one well. In
addition, the Company claims that expenditures made to repair and rebuild the
field's dehydration plant should not have been necessary had the facilities been
properly constructed and maintained by the Defendants. The expenditures, the
Company claims, were inappropriately charged to the field's carried interest
account. The effect of an increased carried interest account is to extend the
period before payout begins to the carried interest account owners.
<PAGE>
The Company claims that production from the field should have commenced
in 1984. At that time the field's carried interest account was approximately $63
million. The Company claims that by 1993 at least $34 million of unnecessary
expenses had been wrongfully charged to the carried interest account. The
Company's 30% share of these expenses would be approximately $10.2 million. The
Company further claims that if production had commenced in 1984, the carried
interest account would have been paid off in approximately two years and the
Company would have begun to receive revenues from the field in 1986. At present,
the Company does not expect to receive revenues before the year 2000, based on a
price of Cdn. $1.28 per mcf and current production rates.
Columbia has filed a counterclaim against the Company seeking, if the
Company is successful in its claim for the forfeiture of the field, repayment
from the Company of all sums Columbia has expended on the Kotaneelee lands
before the Company is entitled to its interest.
The parties to the litigation have conducted extensive discovery since
the filing of the claims. The trial began on September 3, 1996 and the Company
completed the presentation of its case against the Defendants on September 16,
1998. Based upon newly discovered evidence, the Company filed a new claim during
May 1998 that the Defendants failed to develop the field in a timely manner. The
Company is unable to estimate the time necessary to conclude the litigation.
Matters Ancillary to Kotaneelee Litigation
In its 1989 statement of claim, the Company sought a declaratory
judgment regarding two issues:
(1) whether interest accrued on the carried interest account; and
(2) whether expenditures for gathering lines and dehydration
equipment are expenditures chargeable to the carried interest
account or whether the Company will be assessed a processing
fee on gas throughput.
With respect to the first issue, the Company maintains that no interest
should accrue on the account and the Defendants have not contested this
position. With regard to the second issue, the Company maintains that the
expenditures are chargeable to the carried interest account. Mobil, Esso and
Columbia have essentially agreed to the Company's position while the Amoco Dome
Group continues to contest this issue.
<PAGE>
On January 22, 1996, the Company settled two claims outstanding against
the Company in the Court of Queens Bench, Calgary, Alberta, which related to a
suit brought against AlliedSignal Inc. ("AlliedSignal") in Florida which was
dismissed on the basis that Canada was the appropriate forum for the litigation.
AlliedSignal had sought additional relief against the Company in Canada to
preclude other types of suits by the Company and to recover the costs of the
defense of the initial action. The settlement bars AlliedSignal from making a
claim against the Company for any costs in connection with the Kotaneelee
Litigation. The Company agreed not to bring any action against AlliedSignal in
connection with the Kotaneelee gas field. Neither party made any monetary
payment to the other party.
In 1991, Anderson Exploration Ltd. acquired all of the shares in
Columbia and changed its name to Anderson Oil & Gas Inc. ("Anderson"). Anderson
is now the sole operator of the field and is a direct defendant in the Canadian
lawsuit. Columbia's previous parent, The Columbia Gas System, Inc., which was
reorganized in a bankruptcy proceeding in the United States, is contractually
liable to Anderson in the legal proceeding described above.
The working interest owners have reported that they have been selling
Kotaneelee gas since February 1991.
Under Canadian law, certain costs (known as "taxable costs") of the
litigation may be assessed against the non-prevailing party. Previously, the
Company had reported that while such costs were not determinable, the Company
estimated that taxable costs, assuming a twelve month trial, could be
approximately $1.5 million and noted that the judge in complex and lengthy
trials has the discretion to increase an award.
Effective September 1, 1998, the Alberta Rules of Court were amended to
provide for a material increase in the costs which may be awarded to the
prevailing party in matters before the Court. In addition, the Company believes
that the trial will extend well beyond its original time estimates and,
therefore, potentially assessable costs would increase accordingly.
The trial has been lengthy, complicated and costly to all parties and
the Company believes that the prevailing party or parties in the litigation will
argue for a substantial assessment of costs against the non-prevailing party or
parties. The Court has very broad discretion as to whether to award costs and
disbursements and as to the calculation of the amount to be awarded.
Accordingly, the Company is unable to determine whether, in the event that it
does not prevail on its claims in the litigation, costs will be assessed against
it or in what amount. However, since the costs incurred by the Defendants have
been substantial, and since the Court has broad discretion in the awarding of
costs, an award to the Defendants potentially could be material. A cost award
against the Company could be of sufficient magnitude to necessitate a sale of
Company assets or a debt or equity financing to fund such an award. There are no
assurances that any such sale or financing would be consummated.
<PAGE>
There is no assurance whatever that the Company will be successful on
the merits of its claims, which have been vigorously defended by the Defendants.
There is also no assurance that the Company will be awarded any damages, or
that, if damages are awarded, the Court will apply the measure of damages the
Company claims should be applied.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Company
The following information with respect to the executive officers of the
Company is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Length of Other Positions
Service Held with
Name Age Office in this Office Company
M. A. Ashton 63 President Since June 4, 1997 Director
All officers of the Company are elected annually by the Board of
Directors and serve at the pleasure of the Board of Directors.
The Company is aware of no arrangement or understanding between the
individual named above and any other person pursuant to which any individual was
selected as an officer.
<PAGE>
PART II
Item 5. Market for the Company's Limited Voting Shares and Related
Stockholder Matters
(a) Principal Markets
The Company's Limited Voting Shares, par value $1.00 per share, are
traded on The Toronto, Pacific and Boston Stock Exchanges, and in the NASDAQ
SmallCap Market.
The quarterly high and low closing prices (in Canadian dollars) on The
Toronto Stock Exchange during the calendar periods indicated were as follows:
1997 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---- ----------- ----------- ----------- -----------
High 11.00 12.50 16.60 15.00
Low 8.50 7.50 12.25 10.75
1998 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---- ----------- ----------- ----------- -----------
High 11.75 10.50 9.00 10.00
Low 9.00 8.00 5.50 6.25
The quarterly high and low closing prices (in United States dollars) on
the Pacific Exchange, Inc. during the calendar periods indicated were as
follows:
1997 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---- ----------- ----------- ----------- -----------
High 8 9 11 15/16 11
Low 6 1/2 5 3/4 8 13/16 7 1/4
1998 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---- ----------- ----------- ----------- -----------
High 8 5/16 7 5/8 6 3/16 6 1/2
Low 6 3/8 5 3/4 3 1/2 4 3/16
<PAGE>
(b) Approximate Number of Holders of Limited Voting
Shares at March 15, 1999
Approximate
Title of Class Number of Record Holders
Limited Voting Shares, par value
$1.00 per share. 4,600
(c) Dividends
The Company has never paid a dividend on its Limited Voting Shares. Any
future dividends will be dependent on the Company's earnings, financial
condition, and business prospects. The Company is legally restricted from paying
any dividend or making any other payment to shareholders (except by way of
return of capital) on the Limited Voting Shares until its accumulated deficit
($23,849,000 at December 31, 1998) is eliminated.
Current Canadian law does not restrict the remittance of dividends to
persons not resident of Canada. Under current Canadian tax law and the United
States-Canada tax treaty, any dividends paid to U.S. shareholders are currently
subject to a 15% Canadian withholding tax.
<PAGE>
Item 6. Selected Financial Data
The following selected consolidated financial information (in thousands
except per share and exchange rate data) of the Company insofar as it relates to
each of the fiscal periods shown has been extracted from the Company's
consolidated financial statements.
Year ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
($) ($) ($) ($) ($)
Operating revenues 1,810 2,120 1,755 1,657 1,691
======= ======= ======= ======= =======
Total revenues 3,409 2,515 2,228 1,793 1,942
======= ======= ======= ======= =======
Net loss (2,707) (1,758) (1,461) (1,162) (1,210)
======= ======= ======= ======= =======
Net loss per share (.19) (.12) (.11) (.09) (.10)
======= ======= ======= ======= =======
Working capital 6,876 5,573 8,403 1,510 2,417
======= ======= ======= ======= =======
Total assets 17,546 20,956 20,375 12,380 13,390
======= ======= ======= ======= =======
Shareholders' Equity:
Capital stock 40,489 40,489 38,888 29,635 29,513
Deficit (23,849) (21,143) (19,385) (17,923) (16,762)
-------- -------- -------- -------- --------
16,640 19,346 19,503 11,712 12,751
======= ======= ======= ======= =======
Average number of
shares outstanding 14,235 14,084 13,362 12,622 12,613
======= ======= ======= ======= =======
Exchange rates:
Year-end .6535 .6992 .7297 .7329 .7129
===== ===== ===== ===== =====
Average for the period .6749 .7224 .7335 .7289 .7324
===== ===== ===== ===== =====
Range .63-.67 .69-.75 .72-.75 .70-.75 .71-.76
======= ======= ======= ======= =======
U.S. GAAP Information
Under U.S. generally accepted accounting principles ("GAAP"), the above selected
information would be as follows (See Note 6 in Notes to Consolidated Financial
Statements):
Net loss (2,328) (1,588) (1,236) (1,001) (1,140)
======= ======= ======= ======= =======
Net loss per share (.16) (.11) (.09) (.08) (.09)
======= ======= ======= ======= =======
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in nature
are intended to be, and are hereby identified as, "forward looking statements"
for purposes of the "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that forward looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward looking
statements.
(1) Liquidity and Capital Resources
At December 31, 1998, the Company had approximately $7 million of cash
and securities available which amount includes the $5.7 million proceeds from
the sale of certain properties that was completed in November 1998. These funds
are expected to be used for general corporate purposes, including exploration
and development and to continue the Kotaneelee field litigation. The Company
estimates that it currently has adequate working capital for 1999 and 2000.
However, it might be required to raise additional funds through the sale of
properties or other means in order to complete the Kotaneelee Litigation.
Cash flow used in operations during 1998 increased to $2,351,000
compared to $1,003,000 during the 1997 period. The $1,348,000 difference between
the periods was caused primarily by the following:
Increase in loss from operations $(1,332,000)
Increase in accounts receivable and other 1,488,000
Net change in current liabilities (1,504,000)
------------
Increase in net cash used in operations $(1,348,000)
============
A significant proportion of the Company's property interests are
covered by carried interest agreements, which provide that expenditures made by
the operator are recouped solely out of revenues from production. Major capital
expenditures made by the operators have an impact on the Company's cash flow
from operations as no revenues are reported or received until the capital costs
have been recovered by the operator. Certain properties in the Fort Nelson,
British Columbia area in which the Company has carried interests have reached
payout status. Proceeds from these carried interests plus oil and gas sales from
working interest properties are the Company's major sources of working capital.
During 1998, the Company sold the majority of its Canadian working interest oil
and gas properties, therefore, the Company expects a significant decrease in its
1999 revenues, royalties and lease operating expenses.
<PAGE>
The Company is currently evaluating and expects to continue to evaluate
oil and gas properties and may make investments in such properties utilizing
cash on hand. The Company anticipates that its capital expenditures for land
acquisitions and drilling for the year 1999 will be approximately $1,200,000. In
addition, substantial continuing expenses are expected to be incurred in
connection with the Kotaneelee Litigation. During 1998, the Company expended
approximately $2.4 million in connection with the Kotaneelee Litigation which
has been the principal cause of the Company's losses since 1991.
The Company has established a reserve for its potential share of future
site restoration costs. The estimated amount of these costs, which total
$271,000, is being provided on a unit of production basis in accordance with
existing legislation and industry practice.
At December 31, 1998, the Company believes that it is year 2000
compliant. In addition, the year 2000 change will have no material impact on the
Company's internal operations or financial results. However, the Company will be
dependent on its suppliers, partners and customers to make their systems year
2000 compliant.
(2) Results of Operations
1998 vs. 1997
The net loss for the year 1998 was $2,706,537, ($.19 per share)
compared to a net loss of $1,757,664 ($.12 per share) for the 1997 period. A
summary of revenue and expenses during the periods is as follows:
1998 1997 Net Change
---- ---- ----------
Revenues $ 3,409,361 $ 2,514,978 $ 894,383
Costs and expenses (6,115,898) (4,272,642) (1,843,256)
------------ ------------ ------------
Net loss $(2,706,537) $(1,757,664) $ (948,873)
============ ============ ============
Oil sales decreased by 20% due primarily to a 34% decrease in the
average prices of oil sold which was partially offset by a 2% increase in
production. There was also a decrease in royalties paid by the Company. The
Company sold the majority of its oil producing properties in two separate
transactions effective July 1, 1998 and September 1, 1998. The 1998 royalties
paid amount includes a provincial royalty tax credit in the amount of $117,000.
Oil unit sales in barrels ("bbls") (before deducting royalties) and the average
price per barrel sold during the periods indicated were as follows:
1998 1997
---------------------------- -----------------------------
Average price Average price
bbls per bbl Total bbls per bbl Total
Oil sales 64,954 $14.84 $964,000 63,783 $22.50 $1,436,000
Royalties paid (66,000) (315,000)
--------- -----------
Total $898,000 $1,121,000
======== ==========
<PAGE>
Gas sales increased 35% because of a 52% increase in number of units
sold which was partially offset by a 6% decrease in the average price for gas.
In addition, gas sales include royalty income which decreased 13% in 1998. The
Company sold the majority of its working interest gas properties effective July
1, 1998. The primary increase in gas production was the payout of two wells that
had been in a penalty position. These wells were included in the properties
sold. The volumes in million cubic feet ("mmcf") and the average price of gas
per thousand cubic feet ("mcf") sold during the periods indicated were as
follows:
1998 1997
---------------------------- -----------------------------
Average price Average price
mmcf per mcf Total mmcf per mcf Total
Gas sales 304 2.17 $660,000 200 2.31 $462,000
Royalty income 127,000 146,000
Royalties paid (82,000) (85,000)
--------- ---------
Total $705,000 $523,000
======== ========
Proceeds under carried interest agreements decreased 57% to $207,000
during 1998 compared to $476,000 in 1997. During 1998, there were significant
expenditures made by the operators of the carried interest properties,
therefore, revenues from these properties will be substantially lower in 1999.
Interest and other income decreased 44% in 1998. Interest income
decreased from $336,000 to $194,000 in 1998 due to the decrease in funds
available for investment and lower interest rates. In addition, the 1998 period
includes proceeds from the sale of seismic data in the amount of $27,000
compared to $59,000 from such sales in 1997. Interest income should increase in
1999 with the increased funds available from the 1998 sale of properties. It is
not possible for the Company to estimate the amount of future seismic data sales
which are dependent on a purchaser's evaluation of a prospective oil and gas
prospect for the related seismic data that the Company owns.
Gain on the sale of properties in 1998 amounted to $1,378,000 primarily
represents the sale of the Company's heavy oil properties in Alberta and the
sale of certain working interest properties in British Columbia.
General and administrative costs increased 18% in 1998 to $1,301,000
from $1,105,000 in 1997 primarily as a result of increased Company activity in
connection with the Kotaneelee litigation and the Company's exploration program.
In addition, the expenses increased in the United States because of the 7%
increase in the value of the U.S. dollar compared to the Canadian dollar during
1998.
<PAGE>
Legal expenses increased 24% during 1998 to $2,358,000 compared to
$1,898,000 during 1997. These expenses are related primarily to the cost of the
Kotaneelee litigation. During 1998, the Company continued the presentation of a
major part of its case against the working interest partners. The Company's case
was completed on September 16, 1998 and Defendants' case is now proceeding. The
1998 costs represent both legal fees and the cost of various Company experts who
testified, were being prepared for testimony, or assisted in the
cross-examination of defense witnesses.
Lease operating costs increased 22% from $799,000 in 1997 to $976,000
in the 1998 period. The increase represents the charges by the operators of the
Company's properties which is related to the increased production. In addition,
the Company's share of production costs in producing Alberta heavy oil
increased. Lease operating costs should decrease in 1999 because of the 1998
sale of properties.
Depletion, depreciation and amortization expense increased 39% in 1998
to $870,000 from $624,000 in 1997. The increase in depletion in 1998 is the
result of increased production and the amount of additional costs being
depleted.
A foreign exchange gain of $179,000 was recorded in 1998, contrasted
with a gain of $231,000 on the Company's U.S. investments in 1997. In 1998, the
gain was attributable to the continuing strengthening of the U.S. dollar as
compared to the Canadian dollar on the Company's U.S. investments.
Abandonments and write downs were $685,000 which resulted from a write
down of certain of the Company's properties in California and Texas. There were
no abandonments and write downs in 1997.
Income taxes. No provision for income taxes was required in 1998. There
has been no income tax recovery recorded in the accounts for the Company's
losses because there is a lack of virtual certainty that the recovery will be
realized. If at such time as the Company begins to receive revenues from the
Kotaneelee gas field, it is expected that the tax recovery benefit of these
losses will be recognized.
1997 vs. 1996
The net loss for the year 1997 was $1,757,664, ($.12 per share)
compared to a net loss of $1,461,283 ($.11 per share) for the 1996 period. A
summary of revenue and expenses during the periods is as follows:
1997 1996 Net Change
---- ---- ----------
Revenues $2,514,978 $2,228,393 $ 286,585
Costs and expenses (4,272,642) (3,689,676) (582,966)
----------- ----------- ----------
Net loss $(1,757,664) $(1,461,283) $(296,381)
============ ============ ==========
<PAGE>
Oil sales increased by 46% due primarily to an 85% increase in
production which was partially offset by a 12% decrease in the average prices of
oil sold. There was also a 184% increase in royalties paid by the Company. Oil
unit sales in barrels ("bbls") (before deducting royalties) and the average
price per barrel sold during the periods indicated were as follows:
1997 1996
------------------------------ ----------------------------
Average price Average price
bbls per bbl Total bbls per bbl Total
Oil sales 63,783 $22.50 $1,436,000 34,565 $25.47 $880,000
Royalties paid (315,000) (111,000)
----------- ---------
Total $1,121,000 $769,000
========== ========
Gas sales increased 33%. There was a 41% increase in the average price
for gas and a 2% increase in number of units sold. In addition, gas sales
include royalty income which increased 35% in 1997. The volumes in million cubic
feet ("mmcf") and the average price of gas per thousand cubic feet ("mcf") sold
during the periods indicated were as follows:
1997 1996
----------------------------- -----------------------------
Average price Average price
mmcf per mcf Total mmcf per mcf Total
Gas sales 200 $2.31 $462,000 197 $1.64 $323,000
Royalty income 146,000 108,000
Royalties paid (85,000) (36,000)
--------- ---------
Total $523,000 $395,000
======== ========
Proceeds under carried interest agreements decreased 20% to $476,000
during 1997 compared to $591,000 in 1996. The operator of the Company's carried
interest properties increased its development activities during late 1996,
thereby incurring additional capital costs which were deducted in 1997. Proceeds
under carried interest agreements are derived from net production revenues after
payout of capital costs.
Interest and other income decreased 17% in 1997. Interest income
increased from $259,000 to $336,000 in 1997 due to the increase in funds
available for investment from the June 1996 rights offering to shareholders. In
addition, the 1997 period includes proceeds from the sale of seismic data in the
amount of $59,000 compared to $215,000 from such sales in 1996.
<PAGE>
General and administrative costs increased 23% in 1997 to $1,105,000
from $895,000 in 1996. Capital taxes, which are based on the Company's net
worth, increased $48,000 in 1997. Directors' fees increased $44,000 in 1997
because four nonemployee directors are being paid fees in 1997 compared to 1996
when only two directors were paid fees. Geological and engineering expenses
increased $23,000 in 1997 because of the Company's active exploration program.
Shareholders' expenses increased $32,000 in 1997 compared to 1996 because of
increased printing and mailing costs. Salaries increased $39,000 in 1997 with
the addition of a new employee.
Legal expenses increased 18% during 1997 to $1,898,000 compared to
$1,610,000 during 1996. These expenses are related primarily to the cost of the
Kotaneelee litigation. During 1997, the Company presented a major part of its
case against the working interest partners. The 1997 costs represent both legal
fees and the cost of various Company experts who testified or were being
prepared for testimony.
Lease operating costs increased 68% from $477,000 in 1996 to $799,000
in the 1997 period. The increased costs are relative to the 85% increase in oil
production. Although the revenue on these properties also increased during the
period, the costs are not yet proportional to revenue because some of the new
wells are awaiting installation of production facilities.
A foreign exchange gain of $231,000 was recorded in 1997, contrasted
with a gain of $25,000 on the Company's U.S. investments in 1996. In 1997, the
gain was attributable to a strengthening of the U.S. dollar as compared to the
Canadian dollar on the Company's U.S. investments.
Income taxes. No provision for income taxes is required for the current
period.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company does not have any significant exposure to market risk as
the only market risk sensitive instruments are its investments in marketable
securities. At December 31, 1998, the carrying value of such investments was
approximately $6,703,000 which was approximately equal to fair value and face
value of the investments. Since the Company expects to hold the investments to
maturity, the maturity value should be realized. In addition, the Company's
investments in marketable securities included investments held in the United
States which are subject to foreign exchange fluctuations. At December 31, 1998,
the investments in the United States totaled $1,823,000.
<PAGE>
Item 8. Financial Statements and Supplementary Data
AUDITORS' REPORT
To the Shareholders of
Canada Southern Petroleum Ltd.
We have audited the consolidated balance sheets of Canada Southern Petroleum
Ltd. as at December 31, 1998 and 1997, and the consolidated statements of
operations and deficit, cash flows and limited voting shares and contributed
surplus for each of the years in the three year period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Canada Southern Petroleum Ltd. as
at December 31, 1998 and 1997 and the results of its operations and the changes
in its financial position for each of the years in the three year period ended
December 31, 1998, in accordance with accounting principles generally accepted
in Canada.
Calgary, Canada /s/ ERNST & YOUNG LLP
March 18, 1999 Chartered Accountants
<PAGE>
CANADA SOUTHERN PETROLEUM LTD.
(Incorporated under the laws of Nova Scotia)
CONSOLIDATED BALANCE SHEETS
(Expressed in Canadian dollars)
As at December 31,
1998 1997
----------- -----------
Assets
Current assets
Cash and cash equivalents (Note 2) $ 6,208,634 $ 2,129,156
Marketable securities (Note 3) 751,511 3,373,334
Accounts receivable (Notes 4 and 7) 266,116 1,226,086
Other assets 319,697 242,278
----------- -----------
Total current assets 7,545,958 6,970,854
----------- -----------
Oil and gas properties and equipment
(full cost method) (Note 4) 10,000,010 13,984,771
----------- -----------
Total assets $17,545,968 $20,955,625
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 375,554 $ 1,120,521
Accrued liabilities (Note 10) 294,491 277,715
----------- -----------
Total current liabilities 670,045 1,398,236
----------- -----------
Future site restoration costs 236,045 210,974
----------- -----------
Contingencies (Note 8) - -
Shareholders' Equity
Limited Voting Shares, par value
$1 per share (Note 5)
Authorized - 100,000,000 shares
Outstanding -14,234,740 shares 14,234,740 14,234,740
Contributed surplus 26,254,139 26,254,139
----------- -----------
Total capital 40,488,879 40,488,879
Deficit (23,849,001) (21,142,464)
----------- -----------
Total shareholders' equity 16,639,878 19,346,415
----------- -----------
Total liabilities and shareholders' equity $17,545,968 $20,955,625
=========== ===========
See accompanying notes.
Approved on behalf of the Board
/s/ M. A. Ashton /s/ Arthur B. O'Donnell
Director Director
<PAGE>
CANADA SOUTHERN PETROLEUM LTD.
Consolidated Statements of Operations and Deficit
(Expressed in Canadian dollars)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
------------ ------------ ------------
Revenues:
<S> <C> <C> <C>
Oil sales (Notes 9 and 10) $ 897,878 $ 1,120,789 $ 768,576
Gas sales (Notes 9 and 10) 705,277 523,433 395,068
Proceeds under carried interest agreements 206,503 475,697 590,935
Interest and other income 221,523 395,059 473,814
Gain on sale of assets 1,378,180 - -
------------ ------------ ------------
-
Total revenues 3,409,361 2,514,978 2,228,393
------------ ------------ ------------
Costs and expenses:
General and administrative 1,300,595 1,104,535 894,766
Legal (Note 8) 2,357,707 1,897,506 1,610,477
Lease operating costs 975,899 799,372 476,562
Depletion, depreciation and amortization 869,600 623,600 654,982
Foreign exchange gains (178,850) (231,457) (24,693)
Provision for future site restoration costs 29,500 21,500 24,600
Rent 76,812 57,586 52,982
Abandonments and write downs 684,635 - -
------------ ------------ ------------
-
Total costs and expenses 6,115,898 4,272,642 3,689,676
------------ ------------ ------------
Loss before income taxes (2,706,537) (1,757,664) (1,461,283)
Income taxes (Note 6) - - -
------------ ------------ ------------
-
Net loss (2,706,537) (1,757,664) (1,461,283)
Deficit - beginning of period (21,142,464) (19,384,800) (17,923,517)
------------ ------------ ------------
Deficit - end of period $(23,849,001) $(21,142,464) $(19,384,800)
============= ============= =============
Net loss per share (Basic & Fully Diluted) $(.19) $(.12) $(.11)
====== ====== ======
Average number of shares
Outstanding (Basic & Fully Diluted) 14,234,740 14,084,294 13,362,410
========== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
CANADA SOUTHERN PETROLEUM LTD.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
<TABLE>
<CAPTION>
Year ended
December 31,
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(2,706,537) $(1,757,664) $(1,461,283)
Adjustments to reconcile net loss
to net cash provided by
(used in) operating activity:
Depreciation, depletion and amortization 869,600 623,600 654,982
Future site restoration costs (net) 25,071 (39,300) (56,454)
Gain on sale of assets (1,378,180) - -
Abandonments and write downs 684,635 - -
Change in assets and liabilities:
Accounts and interest receivable 959,970 (590,863) (284,625)
Other assets (77,419) (14,910) 112,074
Accounts payable (744,967) 680,684 314,328
Accrued liabilities 16,776 95,611 (54,228)
----------- ----------- -----------
Net cash used in operations (2,351,051) (1,002,842) (775,206)
----------- ----------- -----------
Cash flows from investing activities:
Additions to oil and gas properties (net) (1,942,474) (3,258,426) (1,496,308)
Sale (purchase) of marketable securities 2,621,823 2,079,452 (5,452,786)
Proceeds from the sale of properties 5,751,180 - -
----------- ----------- -----------
et cash used in investing activities 6,430,529 (1,178,974) (6,949,094
----------- ----------- -----------
Cash flows from Financing Activities:
Sale of common stock less expenses - - 9,019,609
Exercise of stock options - 1,601,375 232,707
----------- ----------- -----------
Net cash from financing activities - 1,601,375 9,252,316
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents 4,079,478 (580,441) 1,528,016
Cash and cash equivalents at the
beginning of period 2,129,156 2,709,597 1,181,581
----------- ----------- -----------
Cash and cash equivalents at the
end of period (Note 2) $ 6,208,634 $ 2,129,156 $ 2,709,597
=========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
CANADA SOUTHERN PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF LIMITED VOTING SHARES
AND CONTRIBUTED SURPLUS
(Expressed in Canadian dollars)
<TABLE>
<CAPTION>
Limited
Number Voting Shares Contributed
of shares $1 par value surplus Total
---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance as at December 31, 1995 12,645,791 12,645,791 16,989,397 29,635,188
Sale of common stock 1,268,549 1,268,549 7,751,060 9,019,609
Exercise of stock options 42,200 42,200 190,507 232,707
---------- ----------- ----------- -----------
Balance as at December 31, 1996 13,956,540 13,956,540 24,930,964 38,887,504
Exercise of stock options 278,200 278,200 1,323,175 1,601,375
---------- ----------- ----------- -----------
Balance as at December 31, 1997 14,234,740 $14,234,740 $26,254,139 $40,488,879
and 1998 ========== =========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
CANADA SOUTHERN PETROLEUM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
December 31, 1998, 1997 and 1996
1. Summary of significant accounting policies
Accounting principles
The Company prepares its accounts in accordance with accounting
principles generally accepted in Canada which, except as described in Note 6,
conform in all material respects with United States generally accepted
accounting principles ("U.S. GAAP").
Consolidation
The consolidated financial statements include the accounts of Canada
Southern Petroleum Ltd. and its wholly-owned subsidiaries, Canpet Inc. and C.S.
Petroleum Limited.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Specifically estimates were utilized in calculating
depletion, depreciation and amortization, site restoration costs, and
abandonments and write downs. Actual results could differ from those estimates.
Cash and cash equivalents
For the purposes of the statement of cash flows, the Company considers
all highly liquid investments with a maturity of three months or less to be cash
equivalents.
Oil and gas properties and equipment
The Company, which is engaged primarily in one industry, the
exploration for and the development of oil and gas properties, principally in
Canada, follows the full cost method of accounting for oil and gas properties,
whereby all costs associated with the exploration for and the development of oil
and gas reserves are capitalized. Such costs include land acquisition, drilling,
geological, geophysical and overhead expenses.
The Company periodically reviews the costs associated with undeveloped
properties and mineral rights to determine whether they are likely to be
recovered. When such costs are not likely to be recovered, such costs are
transferred to the depletable pool of oil and gas costs.
<PAGE>
CANADA SOUTHERN PETROLEUM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
December 31, 1998, 1997 and 1996
1. Summary of significant accounting policies (Cont'd)
The net carrying cost of the Company's oil and gas properties in
producing cost centers is limited to an estimated recoverable amount. This
amount is the aggregate of future net revenues from proved reserves and the
costs of undeveloped properties, net of impairment allowances, less future
general and administrative costs, financing costs and income taxes. Future net
revenues are calculated using year end prices that are not escalated or
discounted. For Canadian GAAP future net revenues are undiscounted, whereas, for
U.S. GAAP future net revenues are discounted at 10%.
The costs of the Company's 30% carried interest in the Kotaneelee gas
field are included in oil and gas properties and in the cost center for the
purpose of computing depletion. In addition, the Company's share of estimated
net reserves after payout are also included in the proved oil and gas reserves
base for the purpose of computing depletion. However, no revenue production data
will be reported for financial statement purposes until the Company is entitled
to participate in the field's revenue after payout status is achieved.
Gains or losses are not recognized upon disposition of oil and gas
properties unless crediting the proceeds against accumulated costs would result
in a change in the rate of depletion of 20% or more.
Depletion is provided on costs accumulated in producing cost centers
including production equipment using the unit of production method. For purposes
of the depletion calculation, gross proved oil and gas reserves as determined by
outside consultants are converted to a common unit of measure on the basis of
their approximate relative energy content.
Depreciation has been computed for equipment, other than production
equipment, on the straight-line method based on estimated useful lives of four
to ten years.
Substantially all of the Company's exploration and development
activities related to oil and gas are conducted jointly with others and
accordingly the consolidated financial statements reflect only the Company's
proportionate interest in such activities.
Revenue recognition
The Company recognizes revenue on its working interest properties from
the production of oil and gas in the period the oil and gas are sold.
<PAGE>
1. Summary of significant accounting policies (Cont'd)
Revenue under carried interest agreements is recorded in the period
when the proceeds become receivable. The Company is entitled to participate in
oil and gas net revenues after the repayment of exploration, drilling and
completion expenses to the party or parties bearing these costs. The carried
interest accounts are subject to independent audits which are performed in
subsequent years. In the past, these audits have resulted in both positive and
negative adjustments. For these reasons, the proceeds under carried interest
agreements may fluctuate each year depending on both capital expenditures and
any audit adjustments.
Earnings per share
Earnings per common share is based upon the weighted average number of
common and common equivalent shares outstanding during the period. In February
1997, the FASB issued Statement No. 128, Earnings per Share ("EPS"), which the
Company adopted retroactively in 1997 for purposes of U.S. GAAP reporting. The
Company's basic and diluted calculations of EPS are the same for both U.S. and
Canadian GAAP.
Future site restoration costs
Total future site restoration costs are estimated to be $271,000 and
are being provided on a unit of production basis. The provision is based on
current costs of complying with existing legislation and industry practice for
site restoration and abandonment. At December 31, 1998, approximately $36,000 in
such costs have yet to be accrued. The sale of the Company's Alberta and British
Columbia properties during 1998 relieved the Company of $533,000 of potential
future restoration costs.
Income taxes
The Company follows the deferral method of tax allocation accounting
whereby the income tax provision is based on pre-tax income reported in the
accounts. Under this method, full provision is made for deferred income taxes
resulting from claiming deductions at the rates permitted by income tax
legislation, which may differ from those used in the accounts.
Foreign currency translation
Transactions for settlement in U.S. dollars have been translated at
average monthly exchange rates. Assets and liabilities in U.S. dollars have been
translated at the year end exchange rates. Exchange gains or losses resulting
from these adjustments are included in costs and expenses.
<PAGE>
1. Summary of significant accounting policies (Cont'd)
Financial instruments
The carrying value for cash and cash equivalents, accounts receivable
and accounts payable approximates fair value based on anticipated cash flows and
current market conditions.
Comprehensive income
In 1997, the Financial Accounting Standards Board issued FASB Statement
No. 130, Reporting Comprehensive Income. As the Company has no items of other
comprehensive income, the net loss under U.S. GAAP for all periods presented is
equal to the comprehensive loss.
2. Cash and cash equivalents
The Company considers all highly liquid short term investments with
maturities of three months or less at date of acquisition to be cash
equivalents. Cash equivalents are carried at cost which approximates market
value.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash $ 269,918 $ 436,030
Canadian and U.S. bankers acceptances (1998-4.9%, 1997-2.9%) 4,880,833 988,437
U.S. Government securities (1998-4.8%, 1997-5.6%) 1,057,883 704,689
---------- ----------
$6,208,634 $2,129,156
========== ==========
</TABLE>
3. Marketable Securities
At December 31, 1998 and 1997, the Company held the following
marketable securities which were expected to be held until maturity:
<TABLE>
<CAPTION>
1998
Security Par value Maturity Date Amortized Cost Fair value
U.S. Federal National
<S> <C> <C> <C> <C>
Mortgage Assoc. $ 765,111 Apr. 7, 1999 $ 751,511 $ 751,711
========== ========== ==========
1997
U.S. Federal Home Bank Note $ 143,021 Mar. 6, 1998 $ 140,418 $ 141,247
U.S. Federal Home Bank Note 286,041 Apr. 6, 1998 278,324 280,925
U.S. Federal Farm Credit Bank Note 143,021 May 4, 1998 139,600 139,469
U.S. Treasury Note 2,145,309 May 31, 1998 2,137,934 2,149,321
U.S. Federal Home Loan Bank Note 715,103 Jun. 19, 1998 677,058 683,411
---------- ---------- ----------
Total $3,432,495 $3,373,334 $3,394,373
========== ========== ==========
</TABLE>
<PAGE>
4. Oil and gas properties and equipment
<TABLE>
<CAPTION>
Less
Accumulated
Provisions and Net Book
Cost Writedowns Value
----------- -------------- -----------
Balance December 31, 1998
<S> <C> <C> <C>
Oil and gas properties-developed $18,524,670 $8,720,066 $ 9,804,605
Oil and gas properties-(U.S.) undeveloped 851,651 684,635 167,016
Seismic data 112,000 112,000
----------- ---------- -----------
-
19,488,321 9,516,701 9,971,621
Equipment 75,073 46,684 28,389
----------- ---------- -----------
$19,563,394 $9,563,385 $10,000,010
=========== ========== ===========
Balance December 31, 1997
Oil and gas properties - developed $21,192,037 $7,854,066 $13,337,971
Oil and gas properties (U.S.) - undeveloped 616,980 - 616,980
Seismic data 112,000 112,000
----------- ---------- -----------
-
21,921,017 7,966,066 13,954,951
Equipment 67,769 37,949 29,820
----------- ---------- -----------
$21,988,786 $8,004,015 $13,984,771
=========== ========== ===========
</TABLE>
Substantially all gas sales were made to CanWest Gas Supply Inc.
and oil sales were made to Probe Exploration, Inc. ("Probe"). The gain on sale
of assets and the amount of abandonments and write downs are same under both
Canadian and U.S. GAAP. During 1998, a total of $95,000 of general and
administrative expenses were capitalized.
The $266,000 amount of accounts receivable is due from various industry
partners which include Probe, Berkley Petroleum Ltd., PetroCanada and Alberta
Treasury.
5. Limited Voting Shares and stock options
The Memorandum of Association (Articles of Continuance) of the Company
provides that no person (as defined) shall vote more than 1,000 shares.
Under the terms of the Company's 1985, 1992 and 1998 stock option
plans, the Company is authorized to grant certain employees, directors and
consultants options to purchase Limited Voting Shares at prices based on the
market price of the shares as determined on the date of the grant. The options
are normally exercisable immediately and issued for a period of five years from
the date of grant.
On January 27, 1998, the Company's Board of Directors approved a stock
option plan that permits the granting of both stock options and stock
appreciation rights. The plan for 700,000 shares was approved by the Company's
shareholders at the June 1998 Annual Meeting. A total of 700,000 Limited Voting
Shares were reserved for the plan.
<PAGE>
5. Limited Voting Shares and stock options (Cont'd)
In 1996, the Company sold 1.3 million shares to its shareholders at
$7.50 per share. The proceeds to the Company from the rights offering were
$9,019,609 after deducting the $494,509 cost of the offering.
Following is a summary of option transactions which reflects
adjustments of the stock option prices and the number of shares subject to stock
options as discussed above:
Options Outstanding Expiration Dates Number of Shares Option Prices
- ------------------- ---------------- ---------------- -------------
December 31, 1995 Oct. 1997 - Aug. 1999 461,700
Canceled (137,000) 3.45 - 7.00
Exercised (42,200) 3.45 - 8.75
Granted 150,700 3.15 - 6.37
Granted 12,500 8.75
-------
December 31, 1996 Oct. 1999 - Jun. 2001 445,700
-------
Exercised (278,200) 3.70 - 8.75
Granted 35,000 13.50
December 31, 1997 Aug. 1999 - Oct. 2002 202,500 6.37 - 13.50
Granted 7,500 10.25
--------
December 31, 1998 Aug. 1999 - Apr. 2003 210,000 ($7.94 weighted average)
=======
Options reserved for future grants 869,634
On July 8, 1996, 137,000 options to purchase limited voting shares of
the Company which were previously granted were canceled and reissued to reflect
the June 1996 rights offering.
For U.S. GAAP, the Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25)
and related interpretations in accounting for its stock options because the
alternative fair value accounting provided under FASB Statement No. 123,
"Accounting for Stock Based Compensation," requires use of option valuation
models that were not developed for use in valuing stock options. Under APB No.
25, because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model.
<PAGE>
5. Limited Voting Shares and stock options (Cont'd)
Option valuation models require that input of highly subjective
assumptions including the expected stock price volatility. All of the valuations
assumed no expected dividend. The assumptions used in the 1996 valuation model
were: risk free interest rate - 6.7%, expected life - 5 years and expected
volatility - .396. The assumptions used in the 1997 valuation model were: risk
free interest rate - 5.7%, expected life - 5 years and expected volatility -
.459. The assumptions used in the 1998 valuation model were: risk free interest
rate - 4.45%, expected life - 5 years and expected volatility - .328.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
For the purpose of pro forma disclosures, the estimated fair value of
the stock options is expensed in the year of grant since the options are
immediately exercisable. The Company's pro forma information is as follows:
Amount Per Share
Net loss as reported Canadian GAAP - December 31, 1996 $(1,461,283) $(.11)
Stock option expense 49,373 -
----------- ------
Pro forma net loss U.S. GAAP - December 31, 1996 $(1,510,656) $(.11)
============ ======
Net loss as reported Canadian GAAP - December 31, 1997 $(1,757,664) $(.12)
Stock option expense 225,400 (.02)
----------- ------
Pro forma net loss U.S. GAAP - December 31, 1997 $(1,983,064) $(.14)
============ ======
Net loss as reported Canadian GAAP - December 31, 1998 $(2,706,537) $(.19)
Stock option expense 29,600 -
----------- ------
Pro forma net loss U.S. GAAP - December 31, 1998 $(2,736,137) $(.19)
============ ======
6. Income taxes
Income taxes vary from the amounts that would be computed by applying
the Canadian federal and provincial income tax rates as follows:
1998 1997 1996
------------ ---------- ----------
44.84% 44.84% 44.84%
====== ====== ======
Provision (recovery) for income taxes
based on combined basic Canadian federal
and provincial income tax $(1,213,611) $(788,137) $(655,239)
Nondeductible crown charges 104,663 154,463 61,599
Resource allowance 403,270 232,922 -
Other 24,919 21,106 478
Nontaxable portion of capital gain (20,049) (20,743) -
Unrealized tax loss 700,808 400,389 593,162
----------- --------- ---------
Actual provision for income taxes $ - $ - $ -
=========== ========= =========
<PAGE>
6. Income taxes (Cont'd)
At December 31, 1998, the Company had net operating losses for income
tax purposes of approximately $3,821,000 which are available to be carried
forward to future periods. These losses expire in the following years: 1999 -
$194,000, 2000 - $294,000, 2001 - $545,000, 2002 - $569,000, 2003 - $1,077,000,
2004 - $544,000 and 2005 - $1,711,000.
At December 31, 1998, the following oil and gas tax deductions are
available to reduce future taxable income, subject to a final determination by
taxation authorities.
Canada
Drilling, exploration and lease acquisition costs $9,965,000
Earned depletion 1,975,000
Undepreciated capital costs 2,322,000
Cumulative eligible capital losses 407,000
Share issue costs 175,000
United States
Exploration and lease acquisition costs $819,000
The tax benefits attributable to the above accumulated expenditures
will not be reflected in the consolidated financial statements until such
benefits are realized.
Under U.S. GAAP, the provisions for income taxes would have differed
for the reasons set out below:
In February 1992, the United States Financial Accounting Standards
Board issued Statement No. 109, "Accounting for Income Taxes", effective for
fiscal years beginning after December 15, 1993. Under U.S. GAAP, the Company
would have been required to adopt Statement No. 109 commencing July 1, 1993.
Under Statement No. 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Under
Canadian GAAP and previously under U.S. GAAP, income tax expense is determined
using the deferral method. Deferred tax expense is based on items of income and
expense that are reported in different years in the financial statements and tax
returns and are measured at the tax rate in effect in the year the differences
originated.
<PAGE>
6. Income taxes (Cont'd)
The following schedule summarized the Company's income tax recovery and
deferred tax asset under U.S. GAAP. If Statement No. 109 was adopted, the
Company would have had a deferred tax asset which primarily represents the
excess of available resource deductions for income tax purposes over the
recorded value of oil and gas properties together with operating and capital
income tax loss carryforwards. These amounts are expected to be recovered from
the production of current oil and gas reserves when the Kotaneelee litigation
expenditures have ended. As certain of the resource deductions are restricted
and the operating loss carryforwards are subject to expiration, there is
considerable risk that certain of these deductions will not be utilized.
Accordingly, the Company would have established a valuation allowance to
recognize this uncertainty. Income taxes computed in accordance with U.S. GAAP,
would have resulted in a credit to the provision of taxes.
1998 1997 1996
----------- ----------- -----------
Deferred tax asset $4,749,727 $3,663,793 $3,233,506
Valuation reserve (3,441,222) (2,733,655) (2,473,526)
----------- ----------- -----------
Net deferred tax asset $1,308,505 $ 930,138 $ 759,980
========== ========== ==========
Deferred tax recovery $ 378,367 $ 170,158 $ 225,222
========== ========== ==========
Net loss under U.S. GAAP, in total, and per share based on average
number of shares outstanding during the periods shown is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net loss under Canadian GAAP before income taxes $(2,706,537) $(1,757,664) $(1,461,283)
Income tax adjustment 378,367 170,158 225,222
------------ ------------ ------------
Net loss under U.S. GAAP $(2,328,170) $(1,587,506) $(1,236,061)
============ ============ ============
Per Share Basis:
Net loss under Canadian GAAP before income taxes $(.19) $(.12) $(.11)
Income tax adjustment .03 .01 .02
------ ------ ------
Net loss under U.S. GAAP $(.16) $(.11) $(.09)
====== ====== ======
</TABLE>
The deficit under U.S. GAAP would have been $22,540,496 and
$20,212,326 at December 31, 1998 and 1997, respectively.
7. Line of credit
The Company has a line of credit with a Canadian chartered bank which
provides for a loan of $500,000. The line of credit provides for a $125,000
operating loan and $375,000 for letters of credit as part of the directors'
indemnification agreements. The interest rate on borrowing is at 3/4% above the
bank's prime lending rate. The line of credit is subject to annual review and is
secured by a general assignment of accounts receivable and an undertaking to
provide security in the form of assignment of future working interest proceeds.
No drawings were made under this line during 1998 or 1997.
<PAGE>
8. Litigation
The Company, which has a 30% interest in the Kotaneelee gas field,
believes that the working interest owners in the field have not adequately
pursued the attainment of contracts for the sale of Kotaneelee gas. In October
1989 and in March 1990, the Company filed statements of claim in the Court of
Queens Bench of Alberta, Judicial District of Calgary, Canada, against the
working interest partners in the Kotaneelee gas field. The named defendants were
Amoco Canada Petroleum Corporation, Ltd., Dome Petroleum Limited (now Amoco
Canada Resources Ltd.), and Amoco Production Company (collectively the "Amoco
Dome Group"), Columbia Gas Development of Canada Ltd. ("Columbia"), Mobil Oil
Canada Ltd. ("Mobil") and Esso Resource of Canada Ltd. ("Esso") (collectively
the "Defendants").
The Company claims that the Defendants breached either a contract
obligation and/or a fiduciary duty owed to the Company to market gas from the
Kotaneelee gas field when it was possible to so do. The Company asserts that
marketing the Kotaneelee gas was possible in 1984 and that the Defendants
deliberately failed to do so. The Company seeks money damages and the forfeiture
of the Kotaneelee gas field. The Company presented evidence at trial that the
money damages sustained by the Company were approximately $100 million.
In addition, the Company has claimed that the Company's carried
interest account should be reduced because of improper charges to the carried
interest account by the Defendants. The Company claims that when the Defendants
in 1980 suspended production from the field's gas wells, they failed to take
precautionary measures necessary to protect and maintain the wells in good
operating condition. The wells thereafter deteriorated, which caused unnecessary
expenditures to be incurred, including expenditures to redrill one well. In
addition, the Company claims that expenditures made to repair and rebuild the
field's dehydration plant should not have been necessary had the facilities been
properly constructed and maintained by the Defendants. The expenditures, the
Company claims, were inappropriately charged to the field's carried interest
account. The effect of an increased carried interest account is to extend the
period before payout begins to the carried interest account owners.
<PAGE>
8. Litigation (Cont'd)
The Company claims that production from the field should have commenced
in 1984. At that time the field's carried interest account was approximately $63
million. The Company claims that by 1993 at least $34 million of unnecessary
expenses had been wrongfully charged to the carried interest account. The
Company's 30% share of these expenses would be approximately $10.2 million. The
Company further claims that if production had commenced in 1984, the carried
interest account would have been paid off in approximately two years and the
Company would have begun to receive revenues from the field in 1986. At present,
the Company does not expect to receive revenues before the year 2000, based on a
price of Cdn. $1.28 per mcf and current production rates.
Columbia has filed a counterclaim against the Company seeking, if the
Company is successful in its claim for the forfeiture of the field, repayment
from the Company of all sums Columbia has expended on the Kotaneelee lands
before the Company is entitled to its interest.
The parties to the litigation have conducted extensive discovery since
the filing of the claims. The trial began on September 3, 1996 and the Company
completed the presentation of its case against the Defendants on September 16,
1998. Based upon newly discovered evidence, the Company filed a new claim during
May 1998 that the Defendants failed to develop the field in a timely manner. The
Company is unable to estimate the time necessary to conclude the litigation.
Matters Ancillary to Kotaneelee Litigation
In its 1989 statement of claim, the Company sought a declaratory
judgment regarding two issues:
(1) whether interest accrued on the carried interest account; and
(2) whether expenditures for gathering lines and dehydration equipment
are expenditures chargeable to the carried interest account or whether the
Company will be assessed a processing fee on gas throughput.
With respect to the first issue, the Company maintains that no interest
should accrue on the account and the Defendants have not contested this
position. With regard to the second issue, the Company maintains that the
expenditures are chargeable to the carried interest account. Mobil, Esso and
Columbia have essentially agreed to the Company's position while the Amoco Dome
Group continues to contest this issue.
<PAGE>
8. Litigation (Cont'd)
On January 22, 1996, the Company settled two claims outstanding against
the Company in the Court of Queens Bench, Calgary, Alberta, which related to a
suit brought against AlliedSignal Inc. ("AlliedSignal") in Florida which was
dismissed on the basis that Canada was the appropriate forum for the litigation.
AlliedSignal had sought additional relief against the Company in Canada to
preclude other types of suits by the Company and to recover the costs of the
defense of the initial action. The settlement bars AlliedSignal from making a
claim against the Company for any costs in connection with the Kotaneelee
Litigation. The Company agreed not to bring any action against AlliedSignal in
connection with the Kotaneelee gas field. Neither party made any monetary
payment to the other party.
In 1991, Anderson Exploration Ltd. acquired all of the shares in
Columbia and changed its name to Anderson Oil & Gas Inc. ("Anderson"). Anderson
is now the sole operator of the field and is a direct defendant in the Canadian
lawsuit. Columbia's previous parent, The Columbia Gas System, Inc., which was
reorganized in a bankruptcy proceeding in the United States, is contractually
liable to Anderson in the legal proceeding described above.
The working interest owners have reported that they have been selling
Kotaneelee gas since February 1991.
Under Canadian law, certain costs (known as "taxable costs") of the
litigation may be assessed against the non-prevailing party. Previously, the
Company had reported that while such costs were not determinable, the Company
estimated that taxable costs, assuming a twelve month trial, could be
approximately $1.5 million and noted that the judge in complex and lengthy
trials has the discretion to increase an award.
Effective September 1, 1998, the Alberta Rules of Court were amended to
provide for a material increase in the costs which may be awarded to the
prevailing party in matters before the Court. In addition, the Company believes
that the trial will extend well beyond its original time estimates and,
therefore, potentially assessable costs would increase accordingly.
<PAGE>
8. Litigation (Cont'd)
The trial has been lengthy, complicated and costly to all parties and
the Company believes that the prevailing party or parties in the litigation will
argue for a substantial assessment of costs against the non-prevailing party or
parties. The Court has very broad discretion as to whether to award costs and
disbursements and as to the calculation of the amount to be awarded.
Accordingly, the Company is unable to determine whether, in the event that it
does not prevail on its claims in the litigation, costs will be assessed against
it or in what amount. However, since the costs incurred by the Defendants have
been substantial, and since the Court has broad discretion in the awarding of
costs, an award to the Defendants potentially could be material. A cost award
against the Company could be of sufficient magnitude to necessitate a sale of
Company assets or a debt or equity financing to fund such an award. There are no
assurances that any such sale or financing would be consummated.
There is no assurance whatever that the Company will be successful on
the merits of its claims, which have been vigorously defended by the Defendants.
There is also no assurance that the Company will be awarded any damages, or
that, if damages are awarded, the Court will apply the measure of damages the
Company claims should be applied.
9. Related party transactions
In 1991, the Company granted interests to certain of its officers,
employees, directors, counsel and consultants amounting to an aggregate of 7.8%
of any and all benefits to the Company after expenses from the litigation in
Canada relating to the Kotaneelee gas field. The Company has reserved a 2.2%
interest in such net benefits for possible future grants to persons who may
include officers and directors of the Company.
Mr. Heath, a director of the Company, has royalty interests in certain
of the Company's oil and gas properties, (present and past) which were received
directly or indirectly through the Company. The Company and third-party
operators and/or owners of properties made payments pursuant to these royalties
for the benefit of Mr. Heath totaling U.S. $8,324, $11,158 and $10,844 in 1998,
1997 and 1996, respectively.
<PAGE>
10. Other financial information
Accrued liabilities
1998 1997
---- ----
Accrued accounting and legal expenses $ 69,890 $137,650
Accrued royalties 141,575 139,645
Other 83,026 420
-------- --------
$294,491 $277,715
======== ========
Year ended December 31,
1998 1997 1996
-------- -------- --------
Royalty payments (1) $146,161 $366,661 $147,572
======== ======== ========
Interest payments (2) $ 1,625 $ 1,775 $ 2,224
======== ======== ========
Large corporation tax payments $ 22,837 $ 27,388 $ 2,741
======== ======== ========
- --------------------
(1) Oil and gas sales are reported net of royalties paid.
(2) Bank line of credit charges.
11. Year 2000 date issue
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
Company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
<PAGE>
CANADA SOUTHERN PETROLEUM LTD.
SUPPLEMENTARY INFORMATION ON OIL AND
GAS PRODUCING ACTIVITIES
(unaudited)
The following information includes estimates which are subject to
rapid and unanticipated change. Therefore, these estimates may not accurately
reflect future net income to the Company.
All amounts below except for costs, acreage, wells drilled and present
activities relate to Canada. Oil and gas reserve data and the information
relating to cash flows were provided by Paddock Lindstrom & Associates Ltd.,
independent consultants.
Estimated net quantities of proved oil and gas reserves:
Oil Gas
(bbls) (bcf)
-------- -------
Proved reserves:
December 31,1995 284,800 33.205
Revisions of previous estimates 178,448 (2.655)
Production* (37,448) (1.519)
-------- -------
December 31, 1996 425,800 29.031
Revisions of previous estimates 179,333 (3.802)
Production* (71,333) (.838)
-------- -------
December 31, 1997 533,800 24.391
Sale of properties 350,800) (2.632)
Revisions of previous estimates 145,819) (2.088)
Production* (73,381) (1.263)
-------- -------
December 31, 1998 36,200 18.408
======= ======
Proved developed reserves:
December 31, 1994 473,600 32.957
======= ======
December 31, 1995 284,800 33.205
======= ======
December 31, 1996 358,400 28.265
======= ======
December 31, 1997 508,200 24.391
======= ======
December 31, 1998 36,200 18.408
======= ======
- -----------------
* Production data includes oil and gas sales and the proceeds from the
carried interest properties.
<PAGE>
Results of oil and gas operations:
1998 1997 1996
---------- ---------- ----------
Income:
Oil and gas sales $1,603,155 $1,644,222 $1,163,644
Proceeds under carried
interest agreements 206,503 475,697 590,935
Gain on sale of assets 1,378,180 - -
---------- ---------- ----------
3,187,838 2,119,919 1,754,579
---------- ---------- ----------
Costs and expenses:
Production costs 975,899 799,372 476,562
Depletion depreciation, and
amortization 869,600 623,600 654,982
Provision for future site
restoration costs 29,500 21,500 24,600
Abandonments and write downs 684,635 - -
Income tax expense - - -
---------- ---------- ----------
2,559,634 1,444,472 1,156,144
---------- ---------- ----------
Net income from operations $ 628,204 $ 675,447 $ 598,453
========== ========== ==========
Capitalized costs of oil and gas activities:
1998 1997 1996
---------- ---------- ----------
Acquisition costs $ 11,000 $ 399,000 $ 484,000
Exploration 174,000 546,000 146,000
Development 1,758,000 2,313,000 866,000
Standardized measure of discounted future net cash flows relating to proved oil
and gas reserve quantities during the following period (in thousands of
dollars):
1998 1997 1996
---------- ---------- ----------
Future cash inflows $ 28,052 $ 46,435 $ 49,410
Future development and production costs (14,030) (22,517) (20,813)
-------- -------- --------
14,022 23,918 28,597
Future income tax expense* - (1,573) (2,931)
-------- -------- --------
Future net cash flows 14,022 22,345 25,666
10% annual discount (4,781) (7,836) (9,691)
-------- -------- --------
Standardized measure of discounted
future net cash flows $ 9,241 $ 14,509 $ 15,975
======== ======== ========
* Reflects tax benefit for the years 1998, 1997 and 1996, from carryforward of
exploration, development and lease acquisition costs, undepreciated capital
costs and book earned depletion of $16,381,000, $18,065,000, and $17,032,000.
Current prices used in the foregoing estimates were based upon selling
prices at the wellhead in the last month of each fiscal period. Current costs
were based upon estimates made by consulting engineers at the end of each year.
<PAGE>
Changes in the standardized measure during the following periods (in thousands
of dollars):
Year ended December 31,
1998 1997 1996
------- ------- -------
Changes due to:
Sale of properties $(4,374) $ - $ -
Prices and production costs (402) (579) 3,248
Future development costs (1,204) (2,350) (1,049)
Sales net of production costs (906) (1,562) (1,330)
Development costs incurred
during the year 1,758 2,313 866
Net change due to extensions,
discoveries and improved recovery - 1,692 1,458
Revisions of quantity estimates (872) (3,642) (4,229)
Accretion of discount 1,045 1,723 1,660
Net change in income taxes (313) 939 423
------- ------- -------
Net change $(5,268) $(1,466) $ 1,047
======== ======== =======
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
For information concerning Item 10 - "Directors and Executive Officers
of the Company," Item 11 "Executive Compensation," Item 12 - "Security Ownership
of Certain Beneficial Owners and Management" and Item 13 "Certain Relationships
and Related Transactions," see the Proxy Statement of Canada Southern Petroleum
Ltd. relative to the Annual Meeting of Shareholders for the fiscal year ended
December 31, 1998, which will be filed with the Securities and Exchange
Commission, which information is incorporated herein by reference. For
information concerning Item 10 - "Executive Officers of the Company," see Part
I.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The financial statements and schedules listed below and
included under Item 8, above are filed as part of this report.
Page
Reference
Auditors' Report 34
Consolidated Balance Sheets as at December 31, 1998 and 1997 35
For the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Operations and Deficit 36
Consolidated Statements of Cash Flows 37
Consolidated Statements of Limited Voting Shares and Contributed
Surplus for the three years ended December 31, 1998 38
Notes to Consolidated Financial Statements 39-52
Supplementary Information On Oil and Gas Producing Activities (unaudited) 53
(2) Consolidated Financial Statement Schedules
All schedules have been omitted since the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
(3) Exhibits
List of each management contract or compensatory or
arrangement required to be filed as an exhibit pursuant to Item 14(c).
None.
(b) Reports on Form 8-K
On November 25, 1998, the Company filed a Current Report on
Form 8-K to report that it had sold its heavy oil properties in Alberta for $2.2
million. In addition, the Company also reported that it completed the sale of
its British Columbia properties for $3.6 million. The Company reported that it
would record an estimated total gain of $1.3 million on the transactions.
<PAGE>
(c) Exhibits
The following exhibits are filed as part of this report:
Item Number
2. Plan of acquisition, reorganization, arrangement,
liquidation or succession
Not applicable.
3. Articles of Incorporation and By-Laws
(a) Memorandum of Association as amended on June 30,
1982, May 14, 1985 and April 7, 1988 filed as Exhibit
4B to Form S-8 as filed on November 25, 1998 is
incorporated by reference.
(b) By-laws, as amended, filed as Exhibit 4C to Form
S-8 as filed on November 25, 1998 are incorporated by
reference.
4. Instruments defining the rights of security holders,
including indentures
None.
9. Voting trust agreement
None.
10. Material contracts
(a) Agreements relating to Kotaneelee.
(1.) Copy of Agreement dated May 28, 1959 between
the Company et al. and Home Oil Company Limited et
al. and Signal Oil and Gas Company is filed herein.
(2.) Copies of Supplementary Documents to May 28,
1959 Agreement (see (1) above), dated June 24, 1959,
consisting of Guarantee by Home Oil Company Limited
and Pipeline Promotion Agreement, is filed herein.
(3.) Copy of Modification to Agreement dated May
28, 1959 (see (1) above), made as of January 31,
1961, is filed herein.
(4.) Copy of Agreement dated April 1, 1966 among
the Company et al. and Dome Petroleum Limited et al.
is filed herein.
<PAGE>
(5.) Copy of Letter Agreement dated February 1,
1977 between the Company and Columbia Gas Development
of Canada, Ltd. for operation of the Kotaneelee gas
field is filed herein.
(b) Copy of Agreement dated January 28, 1972 between
the Company and Panarctic Oils Ltd. for development
of the offshore Arctic Islands gas fields is filed
herein.
(c) Stock Option Plan adopted December 9, 1992 is
filed herein.
(d) Stock Option Plan effective July 1, 1998 filed as
Exhibit A to Schedule 14A Information (Proxy
Statement) as filed on May 1, 1998 is incorporated by
reference.
11. Statement re computation of per share earnings
None.
12. Statement re computation of ratios
None.
13. Annual report to security holders, Form 10-Q or
quarterly report to security holders
Not applicable.
16. Letter re change in certifying accountant
Not applicable.
18. Letter re change in accounting principles
None.
21. Subsidiaries of the Company
Canpet Inc. incorporated in Delaware on August 3,
1973. C. S. Petroleum Limited incorporated in Nova
Scotia on December 15, 1981.
22. Published report regarding matters submitted to vote
of security holders
None.
<PAGE>
23. Consents of experts and counsel
(a) Paddock Lindstrom & Associates, Ltd. filed
herein.
(b) Ernst & Young LLP filed herein.
24. Power of attorney
Not applicable.
27. Financial Data Schedule
Filed herein (EDGAR filing only).
99. Additional exhibits
(a) Statement of Claim filed on October 27, 1989 against
Columbia Gas Development of Canada Ltd., Amoco
Production Company, Dome Petroleum Limited, Amoco
Canada Petroleum Company Ltd., Mobil Oil Canada Ltd.
and Esso Resources of Canada Ltd. in the Court of
Queen's Bench of Alberta Judicial District of
Calgary, Alberta, Canada is filed herein.
(b) Amended Statement of Claim, amending the October 27,
1989 Statement of Claim, filed on March 12, 1990, is
filed herein.
(c) Amended Statement of Claim in the same action, filed
on November 17, 1993, is filed herein.
(d) Amended Statement of Third Party Notice by Amoco
Canada Production Company Ltd. and Amoco Production
Company, filed November 17, 1993 in the same action,
is filed herein.
(e) Amended Statement of Defense to Third Party Notice by
Anderson Oil & Gas Inc. (formerly Columbia Gas
Development of Canada Ltd.) filed January 27, 1994 in
the same action is filed herein.
(d) Financial Statement Schedules
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CANADA SOUTHERN PETROLEUM LTD.
(Registrant)
Dated: March 30, 1999 By /s/ M. Anthony Ashton
M. Anthony Ashton
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By /s/ M. Anthony Ashton By /s/ Kelly B. Johnson
M. Anthony Ashton Kelly B. Johnson
President and Director Treasurer and Chief Financial and
Accounting Officer
Dated: March 30, 1999 Dated: March 30, 1999
---------------------------- ----------------------------
By /s/ Benjamin W. Heath By /s/ Timothy L. Largay
Benjamin W. Heath Timothy L. Largay
Director Director
Dated: March 30, 1999 Dated: March 30, 1999
---------------------------- ----------------------------
By /s/ Arthur B. O'Donnell By /s/ Eugene C. Pendery
Arthur B. O'Donnell Eugene C. Pendery
Director Director
Dated: March 30, 1999 Dated: March 30, 1999
---------------------------- ----------------------------
<PAGE>
INDEX TO EXHIBITS
Exhibit No.
10. (a) Agreements relating to Kotaneelee
(1.) Copy of Agreement dated May 28, 1959 between the
Company et al. and Home Oil Company Limited et
al. and Signal Oil and Gas Company
(2.) Copies of Supplementary Documents to May 28, 1959
Agreement (see (1) above), dated June 24, 1959,
consisting of Guarantee by Home Oil Company
Limited and Pipeline Promotion Agreement
(3.) Copy of Modification to Agreement dated May 28,
1959 (see (1) above), made as of January 31, 1961
(4.) Copy of Agreement dated April 1, 1966 among the
Company et al. and Dome Petroleum Limited et al
(5.) Copy of Letter Agreement dated February 1, 1977
between the Company and Columbia Gas Development
of Canada, Ltd. for operation of the Kotaneelee
gas field
(b) Copy of Agreement dated January 28, 1972 between the
Company and Panarctic Oils Ltd. for development of the
offshore Arctic Islands gas fields
(c) Stock Option Plan adopted December 9, 1992
23. (a) Consent of Independent Petroleum Engineers
(b) Consent of Independent Auditors
27. Financial Data Schedule (EDGAR filing only)
<PAGE>
INDEX TO EXHIBITS (Cont'd)
Exhibit No.
99. (a) Statement of Claim filed on October 27, 1989 against
Columbia Gas Development of Canada Ltd., Amoco Production
Company, Dome Petroleum Limited, Amoco Canada Petroleum
Company Ltd., Mobil Oil Canada Ltd. and Esso Resources of
Canada Ltd. in the Court of Queen's Bench of Alberta
Judicial District of Calgary, Alberta, Canada
(b) Amended Statement of Claim, amending the October 27, 1989
Statement of Claim, filed on March 12, 1990
(c) Amended Statement of Claim in the same action, filed on
November 17, 1993
(d) Amended Statement of Third Party Notice by Amoco Canada
Production Company Ltd. and Amoco Production Company,
filed November 17, 1993 in the same action
(e) Amended Statement of Defense to Third Party Notice by
Anderson Oil & Gas Inc. (formerly Columbia Gas Development
of Canada Ltd.) filed January 27, 1994 in the same action
Agreement
Between
CANADA SOUTHERN PETROLEUM LTD.
and
MAGELLAN PETROLEUM CORPORATION
and
OIL INVESTMENTS, INC.
and
HOME OIL COMPANY LIMITED
and
KERN COUNTY LAND COMPANY
and
ALMINEX LIMITED
and
UNITED OILS, LIMITED
and
SIGNAL OIL AND GAS COMPANY
Dated as of May 28, 1959
<PAGE>
TABLE OF CONTENTS
Agreement dated as of May 28, 1959.
Article Page
Definitions............................................. I 2
Assignment.............................................. II 2
Payment and Exploratory Program......................... III 3
Option.................................................. IV 5
Division of Lands....................................... V 6
Information to be Delivered to Home..................... VI 7
Incorporation of Operating Procedure.................... VII 7
SCHEDULE "A"-Description of Lands....................... 9
Clause Page
SCHEDULE "B"-Operating Procedure:
Definitions.................................... A 21
Status of Manager Operator..................... B 23
Change of Manager Operator..................... C 23
Meetings....................................... D 24
Budget......................................... E 24
Duties of the Manager Operator................. F 25
Rights of Joint Operators...................... G 26
Competitive Operating Basis.................... H 27
Insurance...................................... I 27
Advances....................................... J 28
Lien........................................... K 28
Division of Production......................... L 29
Obligatory Operations.......................... M 30
Independent Operations......................... N 30
Selection of Leases............................ O 32
Surrender...................................... P 32
<PAGE>
Clause Page
Assignment..................................... Q 33
Assignments Among Parties...................... R 33
Relationship of Parties........................ S 33
Liability of Manager Operator.................. T 34
Force Majeure.................................. U 34
Waiver......................................... V 35
Conflict with Laws............................. W 35
Notices........................................ X 35
Further Assurances............................. Y 36
Entire Agreement............................... Z 36
Division of Expenses........................... AA 36
Term........................................... BB 37
Interpretation................................. CC 37
SCHEDULE "C"-Accounting Procedure....................... 38
<PAGE>
THIS AGREEMENT made as of this Twenty-eighth day of May, A. D. 1959.
Between:
CANADA SOUTHERN PETROLEUM LTD., a corporation incorporated under the laws
of Canada (hereinafter referred to as "Canada Southern")
and
MAGELLAN PETROLEUM CORPORATION, a Panama Corporation (hereinafter referred
to as "Magellan")
and
OIL INVESTMENTS, INC., a Panama corporation (hereinafter referred to as
"Oil Investments")
(which aforesaid three corporations are hereinafter collectively
referred to as "C-M-O" and individually as a member of the C-M-O group)
and
HOME OIL COMPANY LIMITED, a corporation incorporated under the laws of
Canada, (hereinafter referred to as "Home")
and
KERN COUNTY LAND COMPANY, a company incorporated under the laws of
California (hereinafter referred to as "Kern")
and
ALMINEX LIMITED, a company incorporated under the laws of Canada
(hereinafter referred to as "Alminex")
and
UNITED OILS, LIMITED, a corporation incorporated under the laws of Canada
(hereinafter referred to as "United")
and
SIGNAL OIL AND GAS COMPANY, a company incorporated under the laws of
Delaware (hereinafter referred to as "Signal")
(the said Home, Kern County, Alminex, United and Signal being
hereinafter collectively referred to as "H-S" and individually as a
member of the H-S group)
WHEREAS C-M-O own jointly certain oil and gas permits in the Northwest
Territories and the Yukon Territory, Canada, described in Schedule "A" hereto;
and
WHEREAS H-S and C-M-O are desirous that H-S acquire one-half of C-M-O`s
ownership in certain areas covered by those permits.
Now THEREFORE IN CONSIDERATION of the mutual covenants and agreements
hereinafter set forth, the parties agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings, unless the context otherwise requires:
1.1 "Properties" shall mean the lands described in Schedule "A" hereto
other than the optioned lands.
1.2 "Execution of this Agreement" shall mean the date when it has been
signed by all the parties thereto.
1.3 "First Drilling Season" shall mean the winter season of 1959-1960.
1.4 "Known producing horizons" shall mean all known producing horizons
down to and including the Devonian.
1.5 "North Petitot" shall mean the known seismic structure which has
been heretofore mapped by Canada Southern and submitted to H-S under
all or portions of Permits Numbers 1136, 1137, 2301, 2713, 2302,
1134, 1154, 1153 and 1152.
1.6 "Discovery well" shall mean a well which establishes production in a
new reservoir.
1.7 "Exploratory well" shall mean an exploratory well as defined in the
Operating Procedure.
1.8 "Delineation or development wells" shall mean any and all wells
(whether dry or not) which are not discovery wells.
1.9 "Net acre acquirable" shall mean one-half the amount of acreage
which may be securable in gas license or oil and/or gas lease form
from the Dominion Government, recognizing that the Owners of the
North halves of Permits Numbers 1137 and 2301 are entitled to
one-half of the total acreage acquirable under the said Permits in
the absence of agreement to the contrary.
1.10 "Dollars" shall mean Canadian Dollars.
ARTICLE II
2.1 C-M-O hereby transfers, assigns and vests in the members of the H-S
group the undivided interests set out hereunder in and to the oil and gas
permits described in Schedule "A" except for the South one-half of Permits
Numbers 1137 and 2301 comprising 31,966 acres, and subject to the payment of
Fifty (50%) percent of the royalties described in Schedule "A".
To Home........................................ 12 1/2%
To Kern........................................ 5%
To Alminex..................................... 5%
To United...................................... 2 1/2%
To Signal...................................... 25%
<PAGE>
2.2 Home shall thereafter become the Manager Operator of the properties in
accordance with the terms of the Operating Procedure hereto attached and marked
as Schedule "B" except as hereinafter otherwise provided.
2.3 C-M-O agree they will deliver to Messrs. Gowling, MacTavish, Osborne &
Henderson registrable transfers of the said Permits in form sufficient to enable
Messrs. Gowling, MacTavish, Osborne & Henderson to have such Permits registered
with the Chief of the Mining and Lands Division of the Northern Administration
and Lands Branch of the Department of Northern Affairs and Natural Resources,
Ottawa, Canada, in the following undivided interests:
Canada Southern................................. 50%
Signal.......................................... 25%
Home............................................ 20%
Kern County..................................... 5%
it being understood that Canada Southern shall hold the interests of Magellan
and Oil Investments in trust and that Home shall hold the interests of Alminex
and United in trust.
2.4 The parties hereto agree that the monies to be paid pursuant to
Article 3.1(A) (a) shall be paid by certified cheques delivered to Messrs.
Gowling, MacTavish, Osborne & Henderson, 88 Metcalfe Street, Ottawa, Canada, to
be held by Messrs. Gowling, MacTavish, Osborne & Henderson until such time as
the said Permits with the assignments thereof had been delivered to the said
Chief and registered in the said Department and thereupon the said cheques shall
be delivered to C-M-O.
2.5 C-M-O hereby agree that the said Permits are in good standing, that
they have good title to the said Permits and good right, full power and absolute
authority (except for the consent of the said Chief) to transfer the said
Permits as herein provided, and that the properties are free and clear of any
claims, liens or encumbrances except the royalties described in Schedule "A".
ARTICLE III
3.1 H-S shall pay C-M-O for the interests acquired hereunder the following
considerations:
(A) In cash not chargeable to or recoupable from C-M-O:
(a) Upon the execution of this Agreement, $1,500,000, in
accordance with the provisions of Article 2.4 above.
(b) One year after the execution of this Agreement $666,666.
(c) Two years after the execution of this Agreement $666,667.
(d) Three years after the execution of this Agreement $666,667.
<PAGE>
(B) In work not chargeable or recoupable from C-M-O:
(a) H-S shall commence in 1959 a program of exploration on the
properties or on the optioned acreage which shall include the
drilling of a minimum of five exploratory wells, irrespective of
cost, to at least a depth to test the known producing horizons, or
igneous or other impenetrable formations, or a depth of 12,000 feet,
whichever is the least, of which at least one such well shall be
drilled into the Pre Cambrian and one such well shall be located on
the Western block of the properties, consisting of Permits Nos.
1006, 1007, 1132, 1133 and 1135. The first such exploratory well
shall be located on the North Petitot structure and shall be drilled
during the first drilling season and one well may be on the optioned
acreage but such well shall not be in lieu of the well required to
be drilled on the North Petitot structure.
(b) In the event the total cost of the exploratory program
described in (a) above should be less than $3,000,000, then H-S are
obligated to spend the difference between such total cost and
$3,000,000, in exploration and development work on the properties
and costs incidental or ancillary thereto.
(c) The work and expenditures described in (a) and (b) above
shall be completed within five years from the date of the execution
of this Agreement.
(d) H-S will be obligated to reconvey the properties to C-M-O in
the event they should fail to meet the obligations described in this
paragraph (B). Such reconveyance shall not serve in any way to
constitute partial or liquidated damages or to cancel any obligation
undertaken by H-S under the terms of this Agreement.
(C) Subsequent to the completion of both (A) and (B) above, H-S
shall permit C-M-O to enjoy the following preferential position with
respect to further work done on the properties so long as the work is
performed prior to the time when any particular or potential oil or gas
field is producing into a trunk pipe line, or, in the case of oil, prior
to the time oil moves to market in quantities that permit C-M-O to
finance its share of further reasonable development pursuant to normal
commercial banking arrangements.
(1) Should H-S drill, deepen or complete a discovery well in
accordance with the provisions of Clause N of the Operating
Procedure, in the cost of which C-M-O does not participate, the
rights of H-S to recoup therefrom under the terms of Clause N of the
Operating Procedure shall be limited to 300%; that is, H-S may
recoup from C-M-O's interest in such discovery well three times what
would have been C-M-O's cost of participating in the said well.
(2) Should H-S drill, deepen or complete a delineation or
development well in accordance with the provisions of Clause N of
the Operating Procedure, in the cost of which C-M-O does not
participate, the rights of H-S to recoup therefrom under the terms
of Clause N of the Operating Procedure shall be limited to 105%;
that is, H-S may recoup from C-M-O's interest in such delineation or
development well 100% of what would have been C-M-O's cost of
participating in the said well plus 5%.
<PAGE>
(D) H-S will assure the earliest feasible development and marketing
of oil and/or gas found on the properties.
ARTICLE IV
4.1 H-S shall have an exclusive option to buy from C-M-O, for the price
and during the period hereinafter stated, an undivided one-half interest in and
to the South one-half of Permits Numbers 1137 and 2301 comprising approximately
31,966 acres, subject to the payment of 50% of the royalty described in Schedule
"A". If, as and when the option is exercised, the optioned acreage will
thereafter become subject to this Agreement as a part of the properties as
defined. No amounts paid, in connection with the option as hereinafter provided,
shall be chargeable to or recoupable from C-M-O.
4.2 The prices at which and periods within which the option may be
exercised are as follows:
Before August 1, 1960, $400. per net acre acquirable;
Before August 1, 1961, $600. per net acre acquirable;
Before August 1, 1962, $800. per net acre acquirable;
Before August 1, 1963, $1,000. per net acre acquirable.
4.3 Payment shall be made upon exercise of the option in accordance with
the then existing law or regulations governing oil and gas permits in the
Northwest Territories. In the event that modification of the law or regulations
subsequent to the exercise of the option permits greater acreage acquirement by
the permittees within the boundary of the optioned acreage then H-S may elect to
purchase a 50% interest in such additional acquirable acreage and additional
payment shall promptly be made accordingly determined by the price pertaining
when the original option was exercised.
4.4 Once payment has been made for acquirable oil and/or gas rights under
any surface acre and if other oil or gas rights are acquirable under the same
surface acre, no additional payment shall be required to be made to C-M-O for
such other rights under such surface acre.
4.5 Prior to the exercise of the option or its expiration C-M-O will give
H-S thirty (30) days' prior written notice of any well to be drilled on the
optioned acreage. H-S may participate 50% with C-M-O in the cost of drilling any
such well or wells on the optioned acreage. Failure to participate, however,
will serve to terminate the option unless within thirty (30) days H-S agrees to
drill and does thereafter diligently commence and drill a well thereon to the
known producing horizons or to igneous or other impenetrable formations or to a
depth of 12,000 feet, whichever is the least.
4.6 Prior to the exercise of the option or its expiration, H-S may have
access to the area under option and any information in C-M-O's possession
pertaining thereto. H-S may, upon prior written notice, commence and drill an
exploratory test well on the option area at the sole cost and expense of H-S,
none of which shall be chargeable to or recoupable from C-M-O.
<PAGE>
4.7 Any well drilled under the provisions of Clauses 4.5 or 4.6 above
shall, after its completion, be operated by the then operator of the optioned
acreage.
4.8 Prior to the expiration of the option described in Article IV, neither
C-M-O nor H-S shall make application for oil and/or gas leases and/or licenses
under any permit which includes any part of the optioned acreage except by
mutual agreement, provided that, if during this period, any rules or regulations
governing oil and gas in the Northwest Territories shall require or render it
advantageous to apply for oil and/or gas leases and/or licenses on any of the
optioned acreage, then C-M-O and H-S shall meet promptly for the purpose of
agreeing upon such application. Consent by H-S to the areas to be covered by
such application with respect to any permit which includes any part of the
optioned acreage shall not be unreasonably withheld.
4.9 Any exploratory well drilled by H-S under this Article IV shall be
considered one of the wells required to be drilled under Article III and the
cost of any well drilled by H-S whether exploratory or not, and the cost of any
well in which H-S participates on the optioned lands shall be considered part of
the expenditures required to be made under Article 3.1(B) (b).
4.10 Participation in a well or any work done on the optioned lands shall
not be deemed an exercise of the option by H-S.
ARTICLE V
5.1 At any time after a period of five (5) years following the execution
of this Agreement, C-M-O shall have the right to call for a division of all or
any of the areas which have gone to lease or license and which are jointly owned
by H-S and C-M-O and the termination of this Agreement to the extent that it
affects the areas to be subdivided. The subdivision shall in no case affect the
obligation of H-S to assure the earliest feasible marketing of oil or gas found
on the areas jointly owned by H-S and C-M-O, including those which may become
subdivided. The procedure for such division of said area or areas and the
termination of such agreement shall be as follows:
C-M-O shall advise H-S in writing of its desire.
Upon receipt of this notice there shall ensue a period of thirty
(30) days within which the parties shall endeavour by agreement to work
out a division of the area or areas.
If by the expiration of the said thirty (30) days no agreement has
been reached, C-M-O may within fifteen (15) days thereafter prepare and
present to H-S a division into two parts of all areas to be divided and
other assets jointly owned in connection therewith under this Agreement.
Such plan of division shall be in a checkerboard pattern in which the
units shall be a maximum size calculated to avoid forcible unitization if
possible and a minimum of one section except in the case of lands
producing oil the maximum shall be a maximum size calculated to avoid
forcible unitization if possible and a minimum of one-quarter section. H-S
shall have a period of thirty (30) days from receipt of the proposed
division to elect which of the two parts it desires to receive. If H-S
does not make its election within the said thirty (30) days by notice in
writing to C-M-O, the latter shall, within ten (10) days thereafter, elect
which of the two parts it desires and so notify H-S.
<PAGE>
5.2 At all times mentioned in this Article existing contracts between the
parties shall remain in full force and effect and normal operations thereunder
shall continue. Thirty (30) days after the final election is made by either
party in accordance with the above established procedure, all existing contracts
shall terminate with respect to the divided properties except as provided in
this Article. All joint operations in respect of the divided properties shall
then cease and all obligations except the liquidation of current accounts of
either party to the other and obligations to third parties shall be at an end
except as provided in this Article but during such final thirty (80) days and
thereafter the parties will individually and together take whatever action is
necessary to conserve the area or areas and assets jointly owned by H-S and
C-M-O and to expedite final transfer of titles and liquidation of any accounts
and other matters pending as of the date of the termination.
ARTICLE VI
6.1 C-M-O shall promptly deliver to Home, C-M-O's files or copies thereof
relating to the areas covered by this Agreement, retaining copies thereof for
C-M-O's own use. C-M-O shall give to Home original or duplicate copies of all
data obtained by C-M-O or available to C-M-O with respect to the geology of the
areas covered by this Agreement and all other information which C-M-O may have
on hand or is presently entitled to acquire with respect to exploration and
development of the areas covered by this Agreement.
ARTICLE VII
INCORPORATION OF OPERATING PROCEDURE
7.1 The parties agree that the provisions contained in the Operating
Procedure attached hereto as Schedule "B" shall apply to the same extent and in
the same manner as though such provisions were contained in this Agreement.
Where there is any conflict between the provisions of this Agreement and the
Operating Procedure or the Accounting Procedure the provisions of this Agreement
shall prevail and in the case of any conflict between the Operating Procedure
and the Accounting Procedure the provisions of the Operating Procedure shall
prevail.
IN WITNESS WHEREOF the parties hereto have executed this Agreement this
Twenty-fourth day of June, 1959.
(SEAL) CANADA SOUTHERN PETROLEUM LTD.
per: JOHN W. BUCKLEY
President
per: M. A. REASONER
Vice-President
<PAGE>
(SEAL) MAGELLAN PETROLEUM CORPORATION
per: JOHN W. BUCKLEY
Vice-President
per: C. DEAN REASONER
Assistant Secretary
(SEAL) OIL INVESTMENTS, INC.
per: JOHN W. BUCKLEY
Vice-President
per: C. DEAN REASONER
Assistant Secretary
(SEAL) HOME OIL COMPANY LTD.
per: ALEX CLARK
Vice-President
per: J. W. HAMILTON
Assistant Secretary
(SEAL) KERN COUNTY LAND COMPANY
per: JOHN H. MATKIN
Vice-President
per: JAMES A. WALKER
Assistant Secretary
(SEAL) ALMINEX LIMITED
per: J. B. WEBB
Vice-President
per: P. H. POWERS
A./Sec. Treas.
(SEAL) UNITED OILS, LIMITED
per: ROBERT CAMPBELL
Director
per: J. W. HAMILTON
Assistant Secretary
(SEAL) SIGNAL OIL AND GAS COMPANY
per: J. HOWARD MARSHALL
Vice-President
per: JAMES K. WOOTAN
Director
<PAGE>
SCHEDULE "A"
To an Agreement made as of May 28, 1959, between Canada Southern Petroleum
Ltd., Magellan Petroleum Corporation, Oil Investments, Inc., Home Oil
Company Limited, Kern County Land Company, Alminex Limited,
United Oils Limited, Signal Oil and Gas Company.
Permit No. Areas Described in Permit Date of Permit
1132 All that certain tract of land in the April 29th, 1957
Mackenzie Mining District, in the Northwest
Territories, containing sixty-three thousand
two hundred and twelve acres, more or less,
said tract being more particularly described
as follows:
Commencing at a point at latitude sixty
degrees thirty minutes no seconds and
longitude one hundred and twenty-three
degrees fifteen minutes no seconds; thence
westerly on a right line to a point at
latitude sixty degrees thirty minutes no
seconds and longitude one hundred and
twenty-three degrees thirty minutes no
seconds; thence southerly on a right line to
a point at latitude sixty degrees twenty
minutes no seconds and longitude one hundred
and twenty-three degrees thirty minutes no
seconds; thence easterly on a right line to
a point at latitude sixty degrees twenty
minutes no seconds and longitude one hundred
and twenty-three degrees fifteen minutes no
seconds; thence northerly on a right line to
the point of commencement; said latitudes
and longitudes being as determined by
astronomic means, in situ.
1133 The whole of that parcel in the Mackenzie April 29th, 1957
Mining District, in the Northwest
Territories, said parcel being more
particularly described as follows:
Commencing at a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-three
degrees thirty minutes no seconds; thence
westerly on a right line to a point at
latitude sixty degrees twenty minutes no
seconds and longitude one hundred and
twenty- three degrees forty-five minutes no
seconds; thence southerly on a right line to
a point at latitude sixty degrees ten
minutes no seconds and longitude one hundred
and twenty-three degrees forty-five minutes
no seconds; thence easterly on a right line
to a point at latitude sixty degrees ten
minutes no seconds and longitude one hundred
and twenty-three degrees thirty minutes no
seconds; thence northerly on a right line to
the point of commencement; said latitudes
and longitudes being as determined by
astronomic means, in situ.
Saving and excepting thereout and therefrom
said parcel all that part lying within the
limits of Petroleum and Natural Gas Permit
numbered four hundred and seventy-nine, the
remainder containing fifty-eight thousand
and sixty-eight acres, more or less; also
excepting any part thereof which may be
affected by the rights of other persons
acquired through prior staking.
<PAGE>
1134 The south half of that parcel in the Mackenzie April 29th, 1957
Mining District, in the Northwest
Territories, said parcel being more
particularly described as follows:
Commencing at a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-two degrees
fifteen minutes no seconds; thence westerly
on a right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-two degrees
thirty minutes no seconds; thence southerly
on a right line to a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-two degrees thirty
minutes no seconds; thence easterly on a
right line to a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-two degrees fifteen
minutes no seconds; thence northerly on a
right line to the point of commencement;
said latitudes and longitudes being as
determined by astronomic means, in situ.
Saving and excepting thereout and therefrom
said parcel all that part lying within the
limits of Petroleum and Natural Gas Permit
numbered two hundred and ninety-nine, the
remainder containing twenty-five thousand
two hundred and seventy-nine acres, more or
less; also excepting any part thereof which
may be affected by the rights of other
persons acquired through prior staking.
1135 The whole of that parcel in the Mackenzie April 29th, 1957
Mining District, in the Northwest
Territories said parcel being more
particularly described as follows:
Commencing at a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-three degrees thirty
minutes no seconds; thence westerly on a
right line to a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-three degrees forty-
five minutes no seconds; thence southerly on
a right line to a point at latitude sixty
degrees no minutes no seconds and longitude
one hundred and twenty-three degrees forty-
five minutes no seconds; thence easterly on
a right line to a point at latitude sixty
degrees no minutes no seconds and longitude
one hundred and twenty-three degrees thirty
minutes no seconds; thence northerly on a
right line to the point of commencement;
said latitudes and longitudes being as
determined by astronomic means, in situ.
Saving and excepting thereout and therefrom
said parcel all that part lying within the
limits of Petroleum and Natural Gas Permit
numbered four hundred and seventy-nine, the
remainder containing thirty thousand six
hundred and seventy acres, more or less,
also excepting any part thereof which may be
affected by the rights of other persons
acquired through prior staking.
1136 All that certain tract of land in the April 29th, 1957
Mackenzie Mining District, in the Northwest
Territories containing sixty-three thousand
eight hundred and fifty-four acres, more or
less, said tract being more particularly
described as follows:
<PAGE>
Commencing at a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-two degrees thirty
minutes no seconds; thence westerly on a
right line to a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-two degrees forty-
five minutes no seconds; then southerly on a
right line to a point at latitude sixty
degrees no minutes no seconds and longitude
one hundred and twenty-two degrees forty-
five minutes no seconds; thence easterly on
a right line to a point at latitude sixty
degrees no minutes no seconds and longitude
one hundred and twenty-two degrees thirty
minutes no seconds; thence northerly on a
right line to the point of commencement;
said latitudes and longitudes being as
determined by astronomic means, in situ.
1137 The whole of that parcel in the Mackenzie April 29th, 1957
Mining District, in the Northwest
Territories, said parcel being more
particularly described as follows:
Commencing at a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-two degrees fifteen
minutes no seconds; thence westerly on a
right line to a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-two degrees thirty
minutes no seconds; thence southerly on a
right line to a point at latitude sixty
degrees no minutes no seconds and longitude
one hundred and twenty-two degrees thirty
minutes no seconds; thence easterly on a
right line to a point at latitude sixty
degrees no minutes no seconds and longitude
one hundred and twenty-two degrees fifteen
minutes no seconds; thence northerly on a
right line to the point of commencement;
said latitudes and longitudes being as
determined by astronomic means, in situ.
Saving and excepting thereout and therefrom
said parcel all that part lying within the
limits of Petroleum and Natural Gas Permit
numbered two hundred and ninety-nine, the
remainder containing forty-one thousand
seven hundred and seventy-four acres, more
or less; also excepting any part thereof
which may be affected by the rights of other
persons acquired through prior staking.
2301 All that portion of the grid area designated September 18th, 1958
60 degrees 10 minutes, 122 degrees 15
minutes, said portion lying within the
limits of surrendered Petroleum and Natural
Gas Permit numbered two hundred and ninety-
nine, in the Mackenzie Mining District, in
the Northwest Territories, said portion
containing twenty-two thousand and eighty
acres, more or less; saving and excepting
thereout and therefrom any part of said
permit which may be affected by the rights
of other persons acquired through prior
staking.
<PAGE>
2302 All that portion of the south half of the grid September 18th, 1958
area designated 60 degrees 20 minutes, 122
degrees 15 minutes, said portion lying
within the limits of surrendered Petroleum
and Natural Gas Permi numbered two hundred
and ninety-nine, in the Mackenzie Mining
District, in the Northwest Territories, said
portion containing six thousand five hundred
and twenty-eight acres, more or less; saving
and excepting thereout and therefrom any
part of said Permit which may be affected by
the rights of other persons acquired through
prior staking.
2713 A rectilinear quadrilateral in the Mackenzie March 9th, 1959
Mining District, in the Northwest
Territories, the whole of the grid area
designated 60 degrees 10 minutes, 122
degrees 00 minutes, containing approximately
63,854 acres for a period of three years
from the date hereof, subject to the
Territorial Oil and Gas Regulations.
1006 All that certain tract of land in the June 14th, 1956
Mackenzie Mining District, in the Northwest
Territories, containing thirty one thousand
eight hundred and seven acres, more or less,
lying to the south of a right line joining
the mid points of the easterly and westerly
limits of the area particularly described as
follows:
Commencing at a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-three
degrees forty-five minutes no seconds thence
westerly on a right line to a point at
latitude sixty degrees twenty minutes no
seconds and longitude one hundred and
twenty-four degrees no minutes no seconds;
thence southerly on a right line to a point
at latitude sixty degrees ten minutes no
seconds and longitude one hundred and
twenty-four degrees no minutes no seconds;
thence easterly on a right line to a point
at latitude sixty degrees ten minutes no
seconds and longitude one hundred and
twenty-three degrees forty-five minutes no
seconds; thence northerly on a right line to
the point of commencement; said latitudes
and longitudes being as determined by
astronomic means, in situ.
1007 All that certain tract of land in the
Whitehorse Mining District, in the June
14th, 1956 Yukon Territory, and in the
Mackenzie Mining District in the Northwest
Territories containing thirty-one thousand
eight hundred and eighty-eight acres, more
or less, lying to the north of a right line
joining the mid points of the easterly and
westerly limits of the area particularly
described as follows:
<PAGE>
Commencing at a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-four degrees no
minutes no seconds; thence westerly on a
right line to a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-four degrees fifteen
minutes no seconds; thence southerly on a
right line to a point at latitude sixty
degrees no minutes no seconds and longitude
one hundred and twenty-four degrees fifteen
minutes no seconds; thence easterly on a
right line to a point at latitude sixty
degrees no minutes no seconds and longitude
one hundred and twenty-four degrees no
minutes no seconds; thence northerly on a
right line to the point of commencement;
said latitudes and longitudes being as
determined by astronomic means, in situ.
1173 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing thirty-one thousand
five hundred and sixty-six acres, more or
less, lying to the north of a right line
joining the mid points of the easterly and
westerly limits of the area particularly
described as follows:
Commencing at a point at latitude sixty
degrees thirty minutes no seconds and
longitude one hundred and twenty-one degrees
fifteen minutes no seconds; thence westerly
on a right line to a point at latitude sixty
degrees thirty minutes no seconds and
longitude one hundred and twenty-one degrees
thirty minutes no seconds; thence southerly
on a right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
thirty minutes no seconds; thence easterly
on a right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
fifteen minutes no seconds; thence northerly
on a right line to the point of
commencement; said latitudes and longitudes
being as determined by astronomic means, in
situ.
1174 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing thirty-one thousand
five hundred and sixty-six acres, more or
less, lying to the north of a right line
joining the mid points of the easterly and
westerly limits of the area particularly
described as follows:
Commencing at a point at latitude sixty
degrees thirty minutes no seconds and
longitude one hundred and twenty-one degrees
no minutes no seconds; thence westerly on a
right line to a point at latitude sixty
degrees thirty minutes no seconds and
longitude one hundred and twenty-one degrees
fifteen minutes no seconds; thence southerly
on a right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
fifteen minutes no seconds; thence easterly
on a right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
no minutes no seconds; thence northerly on a
right line to the point of commencement;
said latitudes and longitudes being
determined by astronomic means, in situ.
<PAGE>
1175 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing sixty two thousand
eight hundred and ninety acres, more or
less, said tract being more particularly
described as follows:
Commencing at a point at latitude sixty
degrees forty minutes no seconds and
longitude one hundred and twenty-one
degrees fifteen minutes no seconds; thence
westerly on a right line to a point at
latitude sixty degrees forty minutes no
seconds and longitude one hundred and
twenty-one degrees thirty minutes no
seconds; thence southerly on a right line to
a point at latitude sixty degrees thirty
minutes no seconds and longitude one hundred
and twenty-one degrees thirty minutes no
seconds; thence easterly on a right line to
a point at latitude sixty degrees thirty
minutes no seconds and longitude one hundred
and twenty-one degrees fifteen minutes no
seconds; thence northerly on a right line to
the point of commencement; said latitudes
and longitudes being as determined by
astronomic means, in situ.
1176 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing sixty-two thousand
five hundred and sixty-eight acres, more or
less, said tract being more particularly
described as follows:
Commencing at a point at latitude sixty
degrees fifty minutes no seconds and
longitude one hundred and twenty-one degrees
fifteen minutes no seconds; thence westerly
on a right line to a point at latitude sixty
degrees fifty minutes no seconds and
longitude one hundred and twenty-one degrees
thirty minutes no seconds; thence southerly
on a right line to a point at latitude sixty
degrees forty minutes no seconds and
longitude one hundred and twenty-one degrees
thirty minutes no seconds; thence easterly
on a right line to a point at latitude sixty
degrees forty minutes no seconds and
longitude one hundred and twenty-one degrees
fifteen minutes no seconds; thence northerly
on a right line to the point of
commencement; said latitudes and longitudes
being as determined by astronomic means, in
situ.
1177 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing sixty-two thousand
five hundred and sixty-eight acres, more or
less, said tract being more particularly
described as follows:
<PAGE>
Commencing at a point at latitude sixty
degrees fifty minutes no seconds and
longitude one hundred and twenty-one degrees
thirty minutes no seconds; thence westerly
on a right line to a point at latitude sixty
degrees fifty minutes no seconds and
longitude one hundred and twenty-one degrees
forty-five minutes no seconds; thence
southerly on a right line to a point at
latitude sixty degrees forty minutes no
seconds and longitude one hundred and
twenty-one degrees forty-five minutes no
seconds; thence easterly on a right line to
a point at latitude sixty degrees forty
minutes no seconds and longitude one hundred
and twenty-one degrees thirty minutes no
seconds; thence northerly on a right line to
the point of commencement; said latitudes
and longitudes being as determined by
astronomic means, in situ.
1178 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing sixty-two thousand
five hundred and sixty-eight acres, more or
less, said tract being more particularly
described as follows:
Commencing at a point at latitude sixty
degrees fifty minutes no seconds and
longitude one hundred and twenty-one degrees
forty-five minutes no seconds; thence
westerly on a right line to a point at
latitude sixty degrees fifty minutes no
seconds and longitude one hundred and
twenty-two degrees no minutes no seconds;
thence southerly on a right line to a point
at latitude sixty degrees forty minutes no
seconds and longitude one hundred and
twenty-two degrees no minutes no seconds;
thence easterly on a right line to a point
at latitude sixty degrees forty-minutes no
seconds and longitude one hundred and
twenty-one degrees forty-five minutes no
seconds; thence northerly on a right line to
the point of commencement; said latitudes
and longitudes being as determined by
astronomic means, in situ.
1179 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing sixty-two thousand
two hundred and forty-four acres, more or
less, said tract being more particularly
described as follows:
Commencing at a point at latitude sixty-one
degrees no minutes no seconds and longitude
one hundred and twenty-one degrees fifteen
minutes no seconds; thence westerly on a
right line to a point at latitude sixty-one
degrees no minutes no seconds and longitude
one hundred and twenty-one degrees thirty
minutes no seconds; thence southerly on a
right line to a point at latitude sixty
degrees fifty minutes no seconds and
longitude one hundred and twenty-one degrees
thirty minutes no seconds; thence easterly
on a right line to a point at latitude sixty
degrees fifty minutes no seconds and
longitude one hundred and twenty-one degrees
fifteen minutes no seconds; thence northerly
on a right line to the point of
commencement; said latitudes and longitudes
being as determined by astronomic means, in
situ.
<PAGE>
1180 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing sixty-two thousand
two hundred and forty-four acres, more or
less, said tract being more particularly
described as follows:
Commencing at a point at latitude sixty-one
degrees no minutes no seconds and longitude
one hundred and twenty-one degrees thirty
minutes no seconds; thence westerly on a
right line to a point at latitude sixty-one
degrees no minutes no seconds and longitude
one hundred and twenty-one degrees forty-
five minutes no seconds; thence southerly on
a right line to a point at latitude sixty
degrees fifty minutes no seconds and
longitude one hundred and twenty-one
degrees forty-five minutes no seconds;
thence easterly on a right line to a point
at latitude sixty degrees fifty minutes no
seconds and longitude one hundred and
twenty-one degrees thirty minutes no
seconds; thence northerly on a right line
to the point of commencement; said
latitudes and longitudes being as determined
by astronomic means, in situ.
1181 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing sixty-two thousand
two hundred and forty-four acres, more or
less, said tract being more particularly
described as follows:
Commencing at a point at latitude sixty-one
degrees no minutes no seconds and longitude
one hundred and twenty-one degrees forty-
five minutes no seconds; thence westerly
on a right line to a point at latitude
sixty-one degrees no minutes no seconds and
longitude one hundred and twenty-two degrees
no minutes no seconds; thence southerly on a
right line to a point at latitude sixty
degrees fifty minutes no seconds and
longitude one hundred and twenty-two degrees
no minutes no seconds; thence easterly on a
right line to a point at latitude sixty
degrees fifty minutes no seconds and
longitude one hundred and twenty-one degrees
forty-five minutes no seconds; thence
northerly on a right line to the point of
commencement; said latitudes and longitudes
being as determined by astronomic means, in
situ.
1149 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing thirty-one thousand
seven hundred and twenty-seven acres, more
or less, lying to the North of a right line
joining the mid points of the Easterly and
Westerly limits of the area particularly
described as follows:
<PAGE>
Commencing at a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
no minutes no seconds; thence westerly on a
right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
fifteen minutes no seconds; thence southerly
on a right line to a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-one degrees fifteen
minutes no seconds; thence easterly on a
right line to a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-one degrees no
minutes no seconds; thence northerly on a
right line to the point of commencement;
said latitudes and longitudes being as
determined by astronomic means, in situ.
1150 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing thirty-one thousand
seven hundred and twenty-seven acres, more
or less, lying to the North of a right line
joining the mid points of the Easterly and
Westerly limits of the area particularly
described as follows:
Commencing at a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
fifteen minutes no seconds; thence westerly
on a right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
thirty minutes no seconds; thence southerly
on a right line to a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-one degrees thirty
minutes no seconds; thence easterly on a
right line to a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-one degrees fifteen
minutes no seconds; thence northerly on a
right line to the point of commencement;
said latitudes and longitudes being as
determined by astronomic means, in situ.
1151 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing thirty-one thousand
seven hundred and twenty-seven acres, more
or less, lying to the North of a right line
joining the mid points of the Easterly and
Westerly limits of the area particularly
described as follows:
Commencing at a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
thirty minutes no seconds; thence westerly
on a right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
forty-five minutes no seconds; thence
southerly on a right line to a point at
latitude sixty degrees ten minutes no
seconds and longitude one hundred and
twenty-one degrees forty-five minutes no
seconds; thence easterly on a right line to
a point at latitude sixty degrees ten
minutes no seconds and longitude one hundred
and twenty-one degrees thirty minutes no
seconds; thence northerly on a right line
to the point of commencement; said latitudes
and longitudes being as determined by
astronomic means, in situ.
<PAGE>
1152 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing thirty-one thousand
seven hundred and twenty-seven acres, more
or less, lying to the North of a right line
joining the mid points of the Easterly and
Westerly limits of the area particularly
described as follows:
Commencing at a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
forty-five minutes no seconds; thence
westerly on a right line to a point at
latitude sixty degrees twenty minutes no
seconds and longitude one hundred and
twenty-two degrees no minutes no seconds;
thence southerly on a right line to a point
at latitude sixty degrees ten minutes no
seconds and longitude one hundred and
twenty-two degrees no minutes no seconds;
thence easterly on a right line to a point
at latitude sixty degrees ten minutes no
seconds and longitude one hundred and
twenty-one degrees forty-five minutes no
seconds; thence northerly on a right line to
the point of commencement; said latitudes
and longitudes being as determined by
astronomic means, in situ.
1153 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing thirty-one thousand
seven hundred and twenty-seven acres, more
or less, lying to the North of a right line
joining the mid points of the Easterly and
Westerly limits of the area particularly
described as follows:
Commencing at a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-two degrees
no minutes no seconds; thence westerly on a
right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-two degrees
fifteen minutes no seconds; thence southerly
on a right line to a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-two degrees fifteen
minutes no seconds; thence easterly on a
right line to a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-two degrees no
minutes no seconds; thence northerly on a
right line to the point of commencement;
said latitudes and longitudes being as
determined by astronomic means, in situ.
1154 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing thirty-one thousand
seven hundred and twenty-seven acres, more
or less, lying to the North of a right line
joining the mid points of the Easterly and
Westerly limits of the area particularly
described as follows:
<PAGE>
Commencing at a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-two degrees
fifteen minutes no seconds; thence westerly
on a right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-two degrees
thirty minutes no seconds; thence southerly
on a right line to a point at latitude sixty
degrees ten minutes no seconds; and
longitude one hundred and twenty-two degrees
thirty minutes no seconds; thence easterly
on a right line to a point at latitude sixty
degrees ten minutes no seconds and longitude
one hundred and twenty-two degrees fifteen
minutes no seconds; thence northerly on a
right line to the point of commencement;
said latitudes and longitudes being as
determined by astronomic means, in situ.
1155 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing thirty-one thousand
six hundred and forty-six acres, more or
less, lying to the South of a right line
joining the mid points of the Easterly and
Westerly limits of the area particularly
described as follows:
Commencing at a point at latitude sixty
degrees thirty minutes no seconds and
longitude one hundred and twenty-one degrees
fifteen minutes no seconds; thence westerly
on a right line to a point at latitude sixty
degrees thirty minutes no seconds and
longitude one hundred and twenty-one degrees
thirty minutes no seconds; thence southerly
on a right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
thirty minutes no seconds; thence easterly
on a right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
fifteen minutes no seconds; thence northerly
on a right line to the point of
commencement; said latitudes and longitudes
being as determined by astronomic means, in
situ.
1156 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing thirty-one thousand
six hundred and forty-six acres, more or
less, lying to the South of a right line
joining the mid points of the Easterly and
Westerly limits of the area particularly
described as follows:
<PAGE>
Commencing at a point at latitude sixty
degrees thirty minutes no seconds and
longitude one hundred and twenty-one degrees
no minutes no seconds; thence westerly on a
right line to a point at latitude sixty
degrees thirty minutes no seconds and
longitude one hundred and twenty-one degrees
fifteen minutes no seconds; thence southerly
on a right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one degrees
fifteen minutes no seconds; thence easterly
on a right line to a point at latitude sixty
degrees twenty minutes no seconds and
longitude one hundred and twenty-one
degrees no minutes no seconds; thence
northerly on a right line to the point of
commencement; said latitudes and longitudes
being as determined by astronomic means, in
situ.
1157 All that certain tract of land in the May 23rd, 1957
Mackenzie Mining District, in the Northwest
Territories, containing sixty-two thousand
eight hundred and ninety acres, more or
less, said tract being more particularly
described as follows:
Commencing at a point at latitude sixty
degrees forty minutes no seconds and
longitude one hundred and twenty-two degrees
fifteen minutes no seconds; thence westerly
on a right line to a point at latitude sixty
degrees forty minutes no seconds and
longitude one hundred and twenty-two degrees
thirty minutes no seconds; thence southerly
on a right line to a point at latitude sixty
degrees thirty minutes no seconds and
longitude one hundred and twenty-two degrees
thirty minutes no seconds; thence easterly
on a right line to a point at latitude sixty
degrees thirty minutes no seconds and
longitude one hundred and twenty-two degrees
fifteen minutes no seconds; thence northerly
on a right line to the point of
commencement; said latitudes and longitudes
being as determined by astronomic means, in
situ.
The Permits herein described as number 1006 and number 1007 are subject to
a gross overriding royalty of 1.5625% to The Catawba Corporation and a gross
overriding royalty of 2.1/2% to Neil W. Tracy. All other Permits herein
described are subject to a gross overriding royalty of 1.5625% to The Catawba
Corporation.
<PAGE>
SCHEDULE "B"
OPERATING PROCEDURE attached to the Agreement dated as of May 28th, 1959,
between Canada Southern Petroleum Ltd., Magellan Petroleum Corporation, Oil
Investments, Inc., Home Oil Company Limited, Kern County Land Company, Alminex
Limited, United Oils, Limited and Signal Oil and Gas Company.
CLAUSE A
DEFINITIONS
A.1 In this Schedule, including this Clause, unless the context otherwise
requires, the expressions following shall have the following meanings, namely:
(a) "accounting procedure" shall mean the procedure set out in Schedule
"C" hereto;
(b) "Agreement" or "the Agreement" shall mean the Agreement dated as of
May 28, 1959, and the schedules thereto;
(c) "commercial production" or "production in commercial quantities" or
similar wording, shall mean the output from a well of petroleum
substances in such quantities as, considering the cost of drilling,
completing and producing operations, the probable life of the well,
the available (or potentially available) market and the price, kind
and quality of such production would, after a reasonable production
test, or, where the well has been completed, after a reasonable
period of production, warrant the drilling of a like well in the
vicinity thereof;
(d) "complete", "completing" or "completion" with respect to a well
shall mean proper abandonment of the well if production in paying
quantities be not encountered or, if production in paying quantities
is encountered, completing the well for the purpose of taking
production, including the supplying and setting of production casing
and the supplying and installing of tubing, wellhead and pumping
equipment, if initially required to produce the well, storage tanks
and such other equipment, material and services necessary for
preparing a well for the taking of production of petroleum
substances therefrom;
(e) "development well" shall mean any well other than an exploratory
well;
(f) "dollars" shall mean Canadian dollars;
(g) "document of title" shall mean any permit, license, lease, sublease
or similar document concerning petroleum substances which is subject
to the Agreement at any given time;
(h) "exploratory well" shall mean a well which at the time of spudding
in is located at least two (2) miles from the nearest well capable
of production in commercial quantities;
<PAGE>
(i) "Manager Operator" shall mean any person appointed to act as Manager
Operator for the Joint Operators under the Agreement;
(j) "paying production" or "production in paying quantities" or similar
wording shall mean an output from a well of petroleum substances
that
(i) in the case of a well not yet completed, considering the
cost of completing and producing operations, the probable life
of the well, the available (or potentially available) market
and the price, kind and quality of such production, would,
after a reasonable production test, warrant the taking of such
production, and
(ii) in the case of a completed well, considering the cost of
producing operations, the probable life of the well, the
available or potentially available market and the price, kind
and quality of such production, would, after a reasonable
period of production (or after a reasonable production test
where the well has not been placed on regular production)
warrant the taking of such production;
(k) "Joint Operator" shall mean any party to the Agreement;
(l) "petroleum substances" shall mean petroleum and/or any other
substance which the parties have the right to recover from any part
of the said lands;
(m) "participating equity" shall mean the undivided share from time to
time of a Joint Operator in that part of the said lands referred to
and the production of petroleum substances therefrom and any jointly
owned property relating thereto;
(n) "re-work" or "re-working" shall mean any operation other than
drilling or pumping necessary to obtain production and without
restricting the generality of the foregoing may include one or more
of the running of production casing, perforating, acidizing, sand
fracing, squeeze cementing or swabbing into production;
(o) "said lands" shall mean the rights to petroleum substances in the
lands described in Schedule "A", which at any given time, are
subject to the Agreement;
(p) "spacing unit" shall mean the area allocated to a well for the
purpose of drilling for or producing petroleum substances and,
except as herein otherwise expressly provided, the subsurface
regions vertically beneath such area comprising the spacing unit for
such well prescribed by and under the laws of Canada now or
hereafter in effect governing the spacing of oil or gas wells,
whichever the well may be and if no area be so allocated shall be
one-quarter Northwest Territory section for oil and one Northwest
Territory section for a gas well.
<PAGE>
CLAUSE B
STATUS OF MANAGER OPERATOR
B.1 Subject to the provisions of the Agreement, the Manager Operator shall
have the sole and exclusive management and control of the exploration,
development and operation of the said lands.
B.2 The Manager Operator may perform any act or do anything which it is
required to do by having it performed or done by an independent contractor but
the Manager Operator shall not make a general delegation of its powers of
management and control.
B.3 If and when a Joint Operator is Manager Operator, such Joint Operator
shall not thereby be deprived of any of the rights or relieved of any of the
duties or liabilities of a Joint Operator but shall have all such rights, duties
and liabilities in addition to those of Manager Operator, including the right to
vote on his removal or appointment as Manager Operator.
CLAUSE C
CHANGE OF MANAGER OPERATOR
C.1 The Manager Operator shall be entitled to retire from its position as
Manager Operator at any time upon giving written notice to the Joint Operators
at least six (6) months in advance of the effective date of its retirement
whereupon the Joint Operators shall appoint a successor Manager Operator.
C.2 The Manager Operator from time to time shall forthwith cease to be the
Manager Operator:
(i) if the Manager Operator purports to make a general delegation
of its powers of management and control,
(ii) in respect of any lands in which it and its parent and
subsidiaries ceases to hold at least a Ten (10%) percent participating
equity,
(iii) if the Manager Operator shall become bankrupt or insolvent, or
shall make any general assignment for the benefit of creditors, or should
any execution or attachment issue against it whereby all or part of its
participating equity shall be taken by any custodian, receiver, trustee or
other legal authority or an effective resolution shall have been passed
for the winding up or liquidation of the business and affairs of the
Manager Operator, whereupon the Joint Operators shall appoint a successor
Manager Operator to take office immediately.
C.3 A meeting may remove a Manager Operator and appoint a successor, but
if such Manager Operator be a person who is not a Joint Operator or a person
owning less than a Ten (10%) percent equity in the lands concerned it shall
require the unanimous consent of the Joint Operators.
<PAGE>
C.4 When the Manager Operator resigns or otherwise ceases to act in that
capacity it shall deliver to its successor Manager Operator exclusive possession
of all jointly owned property including all pertinent books of account and
records of the joint operations and all documents, agreements and other papers
relating thereto.
C.5 A Manager Operator who is removed shall not be released from its
obligations hereunder for a period of three (3) months after its discharge
unless a successor Manager Operator shall have taken over the options hereunder.
CLAUSE D
MEETINGS
D.1 Any Joint Operator may call a meeting of the Joint Operators at any
time upon not less than seven (7) days' written notice (or three (3) days'
notice) if given by telegram) to each other Joint Operator of the time and place
of such meeting. Meetings shall be held in the City of Calgary, Alberta, unless
all of the Joint Operators agree to holding a meeting at some other place. Any
decision of any meeting shall require the affirmative vote of the Joint
Operators owning in the aggregate more than Sixty-six and two-thirds (66 2/3%)
percent of the participating equities in that part of the said lands being the
subject of such decision and any decision so made shall, except as herein
otherwise provided, be binding upon all of the Joint Operators and shall be
carried out by the Manager Operator.
D.2 No decision of a meeting shall be binding on the parties insofar as it
concerns the drilling of a new well, the deepening or reworking of a well, or
any action which would increase or decrease the interest of any or all of the
Joint Operators in the said lands other than as expressly provided herein and
PROVIDED FURTHER Canada Southern, Magellan and Oil Investments shall not have
any vote concerning the program referred to in Article III.
CLAUSE E
BUDGET
E.1 The Manager Operator shall at intervals of six (6) months furnish each
Joint Operator with a budget outlining its program respecting the operations for
the period of six (6) months next ensuing and estimating all expenditures in
connection therewith for such period. Unless any Joint Operator shall disapprove
such budget within ten (10) days after it is submitted, it shall be deemed to
have been approved and it shall not be necessary to hold a meeting, but if
disapproved by the Joint Operators, a new budget shall be submitted to a
meeting.
E.2 Any budget may be revised at any time or from time to time by the
Joint Operators.
E.3 Upon any such budget or revised budget being approved, the Manager
Operator shall thereby be authorized to carry on the operations outlined therein
for the period covered by such budget and to expend the amounts estimated
therefor.
<PAGE>
E.4 The Manager Operator shall make no expenditures in excess of those
authorized by any budget or unless such expenditure is required by any emergency
or to keep any part of the said lands in good standing or to comply with any
law, rule, order or regulation and in any such event the Manager Operator may
make such expenditure and shall forthwith advise the other Joint Operators in
writing thereof.
E.5 Any budget approved at a meeting by Joint Operators owning in the
aggregate more than Sixty-six and two-thirds (66 2/3%) percent of the
participating equities in the said lands to which such budget relates shall be
binding on all Joint Operators; PROVIDED that any budget relating to the program
referred to in Article III shall require the unanimous approval of the H-S group
and shall not require any approval of the C-M-O group.
The items in any budget which provides for the drilling, deepening or
reworking of any wells shall not be binding unless unanimously approved.
CLAUSE F
DUTIES OF THE MANAGER OPERATOR
F.1 The Manager Operator shall, in the conduct of the operations
hereunder:
(a) conduct the same in a good and workmanlike manner and in
accordance with prevailing field practice, conforming to all applicable
laws, rules, orders and regulations,
(b) furnish all material, labour and services. Upon the written
request of the Manager Operator each Joint Operator shall secure and
furnish its proportionate part of any such material in kind or by
satisfactory assignment of priorities or allocations (governmental or
voluntary),
(c) pay and discharge promptly all costs and expenses actually
incurred in connection with the joint operations,
(d) keep the accounts of the joint operations in accordance with
the accounting procedure,
(e) arrange and negotiate for and acquire all surface rights and
rights-of-way required for the joint operations,
(f) make a good faith effort to keep the said lands and any jointly
owned facilities free and clear of any liens or encumbrances and to
maintain in force and effect and protect any title affecting the said
lands,
(g) keep an accurate and itemized record of all production secured
and of the disposition thereof,
(h) regulate the production of petroleum and natural gas in
accordance with market demands and rates allowed by governmental
regulations or the respective maximum efficient rates of flow of the
wells.
<PAGE>
CLAUSE G
G.1 Each Joint Operator shall have the following specific rights in
respect to any lands in which it owns a participating equity, which shall not be
in limitation of any other rights under this Agreement:
(a) The right to receive all information pertaining to exploratory
operations, development work and wells drilled on the said lands. This
information shall include, but not be limited to, copies of all types of
logs, reports, geological maps, geophysical maps and basic data relating
to the exploratory and development work on the lands; the same to be
furnished promptly upon completion of each such log, report, map and other
data. Final reports shall be furnished upon the completion of each job.
(b) The right to receive progress reports and maps from time to time
or immediately upon request. Such reports shall include, but not be
limited to, all facts and data obtained on a drilling well on a daily
basis and the progress, location and data obtained by any other
exploratory operation, including seismic parties, surface geological
parties and core hole programs on a weekly basis.
(c) Access to the said lands and the wells thereon and the right at
all times to inspect and observe the operations being conducted thereon
and therein.
(d) The right to examine the books and records of the Manager
Operator relating to all wells drilled on the said lands and of sales of
production.
(e) Upon request made to the Manager Operator therefor, to be
furnished with copies of driller's reports of wells drilled upon the said
lands, samples of cores and cuttings taken therefrom and copies of all
seismograms obtained upon the properties.
G.2 Each Joint Operator hereto shall treat geological and other
exploratory data obtained in connection with the said lands as confidential
information and will reveal no part of it to any third person, except with prior
written approval of the other Joint Operators; provided that this clause shall
not prevent disclosure to the Government of information required by the
Government in order to establish credit for work requirements, or prevent
disclosure of information relating to the geology and reserves data of known
producing structures to the extent such disclosures may be required in
connection with financing by any Joint Operator, or prevent disclosure of any
information to any experts in order that such Joint Operator may obtain the
opinions of such experts, or disclosure of information relating to its reserves
relating to known producing structures in a report to its shareholders; and
provided further that information obtained from the wells themselves may be
disclosed at the discretion of any Joint Operator, and that purchasers or
prospective purchasers of gas produced from the said lands may, at the
discretion of any Joint Operator, for use in connection with purchases or
prospective purchases, be given all information, whether obtained from wells or
otherwise, of a kind that is reasonably or customarily given to purchasers or
prospective purchasers of gas in like circumstances. Appropriate precautions
will be taken by each Joint Operator to prevent inadvertent disclosures of
confidential information.
<PAGE>
CLAUSE H
COMPETITIVE OPERATING BASIS
H.1 All operations hereunder shall be performed on a competitive basis at
the usual rates prevailing in the area. The Manager Operator, if it so desires,
may employ its own tools and equipment in any such operation but in such event
the charge therefor shall not exceed the prevailing rate in the area and such
work shall be performed by the Manager Operator under the same terms and
conditions as shall be customary and usual in the area in the contracts of
independent contractors who are doing work of a similar nature.
CLAUSE I
INSURANCE
I.1 Any Joint Operator from time to time conducting any operation
hereunder shall comply with the requirements of all Unemployment Insurance and
Workmen's Compensation legislation and shall, if it not already has, prior to
the commencement of such operation, take out, initially pay, and thereafter
maintain and continue to pay for during the period of such operation, at least
the following insurance in a reputable insurance company or companies at the
expense of and on behalf of all the Joint Operators:
(i) employer's liability insurance covering each employee engaged
in the operations hereunder to the extent of $100,000. where such employee
is not covered by Workmen's Compensation;
(ii) comprehensive public liability insurance covering all
operations hereunder, except motor vehicles, to the extent of $150,000.
for any one person injured or killed and $300,000. for two or more persons
injured or killed in any one accident;
(iii) comprehensive property damage insurance covering all
operations hereunder to the extent of $100,000. for damages resulting from
any one accident; including damages resulting from fire or blowouts but
excluding underground damages;
(iv) blanket all risk insurance covering all above ground physical
property engaged in the operations hereunder except motor vehicles, to the
extent of the value of all such property;
(v) automobile public liability insurance covering all automotive
units engaged in the operations hereunder to the extent of $150,000. for
any one person injured or killed and $300,000. for two or more persons
injured or killed in any one accident;
(vi) automobile property damage insurance covering all automotive
units engaged in the operations hereunder to the extent of $100,000. for
damages resulting from any one accident;
which insurance may not be terminated without prior notice to each other Joint
Operator.
<PAGE>
I.2 If so requested by any other Joint Operator, the Joint Operator
conducting the operation hereunder shall deliver to such other Joint Operator
evidence of full compliance with the insurance provisions contained herein, to
be retained in the custody of such other Joint Operator during the continuance
of such operation.
CLAUSE J
ADVANCES
J.1 The Manager Operator at its election from time to time may require any
Joint Operator to advance its proportionate share of authorized expenditures by
furnishing such Joint Operator with an estimate of such expenditures required to
cover operations for a period not in excess of sixty (60) days. Within fifteen
(15) days after receipt of such estimate or within ten (10) days before
commencement of the period covered by the estimate, whichever is the later, such
Joint Operator shall pay its proportionate part thereof.
The accounts between the Joint Operators in respect of any such advance
shall be adjusted at the end of each calendar month in accordance with actual
expenditures. Any amount not paid within the time hereinbefore limited shall
bear interest at the rate of Six (6%) percent per annum.
J.2 In the event that any Joint Operator fails to advance such money as
required or make any other payment required under this Agreement, the other
Joint Operators participating in the operation concerned shall, upon request by
the Manager Operator, pay the share of such defaulting Joint Operator in the
proportions of their respective participating equities, and upon the payment by
the defaulting Joint Operator to the Manager Operator of all or any part of such
sum, or upon the Manager Operator otherwise recovering all or any part of such
sum, the Manager Operator shall immediately pay the amount received or recovered
to the Joint Operators making the advancement in like proportions and such
amount shall be applied first in reduction of interest and second in reduction
of capital. Provided, however, that the members of C-M-O shall not be obligated
in respect of any expenditures to be incurred in respect of the program referred
to in Article III or the payments referred to in Article IV.
CLAUSE K
LIEN
K.1 The Manager Operator shall have a lien on the participating equity of
each other Joint Operator to secure payment of such Joint Operator's share of
all costs and expenses hereunder, but such lien shall not attach to any portion
of such Joint Operator's share of production at any time prior to the
enforcement of the same by the Manager Operator as hereinafter provided.
<PAGE>
K.2 In the event that any Joint Operator shall fail to pay its share of
any costs or expenses hereunder (and such default shall continue for thirty (30)
days after the Manager Operator shall have served written notice upon such Joint
Operator specifying such default and requiring the same to be remedied) the
Manager Operator may enforce such lien by taking possession of all or any part
of the participating equity of such Joint Operator and the Manager Operator may
sell and dispose of all or any part of such participating equity either in whole
or in separate parcels at public auction or by private tender at such time and
on such terms as it shall appoint, having first given notice to such Joint
Operator of the time and place of such sale, and the Manager Operator is hereby
constituted irrevocably the attorney of such Joint Operator for the purpose of
making any such sale and executing such deeds and agreements in the name of such
Joint Operator as may be necessary to carry out the same. The proceeds of any
such sale shall be first applied by the Manager Operator in payment of any costs
or expenses to be paid by such Joint Operator and not paid by it, and any
balance remaining shall be paid to such Joint Operator after deducting the
reasonable costs of such sale. Any such sale shall be a perpetual bar in law and
equity against such Joint Operator and any person claiming all or any part of
the property sold, by, from, through or under such Joint Operator.
K.3 If any Joint Operator advances any money under the preceding clause in
respect of the default of another Joint Operator it shall have the same lien
rights in respect thereto as has the Manager Operator under this clause.
CLAUSE L
DIVISION OF PRODUCTION
L.1 Each Joint Operator shall own its participating equity in the
petroleum substances produced hereunder exclusive of any quantity thereof that
may be delivered in kind as royalty or production which may be used by the
Manager Operator in developing and producing operations hereunder and in
preparing and treating production for marketing purposes and production
unavoidably lost. Each Joint Operator shall, upon payment of or securing the
payment of any royalty with respect thereto, be entitled to take delivery of its
share of production at the point of production. Each Joint Operator electing to
take delivery of its participating equity in the petroleum substances shall
provide at its own risk and expense adequate facilities for receiving its
production and shall bear any additional expense to which the Manager Operator
may be subject in delivering such production separately. In the event any Joint
Operator fails to make arrangements to take delivery of its participating equity
in the petroleum substances the Manager Operator may sell the same upon the same
terms and conditions that it is selling its share of production and such Joint
Operator shall be entitled to receive from the Manager Operator not later than
the last day of the month following such sale, the net proceeds received from
the sale of its participating equity in the petroleum substances so sold. Any
market available to a Joint Operator shall be shared by it with the other Joint
Operators to the intent and purpose that no Joint Operator shall be obligated to
store its participating equity in production except to the proportionate extent
that the production owned by the other Joint Operators is so stored for lack of
market.
<PAGE>
CLAUSE M
OBLIGATORY OPERATIONS
M.1 Upon the completion of the program provided for in Article III of this
Agreement, each Joint Operator shall be obligated, provided that the Manager
Operator has made a bona fide but unsuccessful attempt to obtain a waiver of
such obligations, to join in the renewal of any document of title and to pay a
share equivalent to its participating equity in that part of the said lands
concerned of any rental and of the cost of any operation, including the drilling
of any well, necessary to maintain all or any part of the said lands in good
standing except the drilling obligations contained in any document of title when
the person entitled to enforce the performance thereof is not enforcing the
same, unless such Joint Operator has surrendered or disposed of all of its
participating equity in that part of the said lands to which such obligation
applies at least thirty (30) days prior to the date on which such rental becomes
payable or on which such operation must be commenced in order to maintain such
part of the said lands in good standing. Provided that C-M-O shall not be
obligated to participate in any obligatory well while it enjoys the preferential
rights granted to it by Article 3.1 (C) but if it does not so participate the
applicable penalty under the said Article shall apply.
CLAUSE N
INDEPENDENT OPERATIONS
N.1 Except as hereinbefore provided in Clause M hereof and Article III, no
Joint Operator shall be required to participate in the cost of drilling,
deepening, or reworking any well hereunder.
N.2 Upon completion of the program provided for in Article III, and
provided no well is then being drilled or deepened on the said lands for the
joint account, and provided no drilling or deepening operation on the said lands
has then been approved in any budget, the following provisions shall apply:
(a) Should any Joint Operator desire to deepen or re-work any well
which is incapable of producing petroleum substances in paying quantities
or to drill any new well, such Joint Operator shall notify the other Joint
Operators in writing of its intention to perform the proposed operation at
its own cost and risk. Such notice (hereinafter called "the first notice")
shall contain information as to the location, depth and estimated cost of
the operation. In such event each Joint Operator shall be deemed to be a
participant in such operation unless it has given written notice to the
other Joint Operators within thirty (30) days after receipt by it of the
first notice, of its intention not to participate; PROVIDED that if the
operation is the deepening of a well on which the drilling rig to be
utilized in such operation is then located, the time herein-before limited
for giving written notice of intention not to participate shall be reduced
to three (3) days exclusive of Sundays and statutory holidays, and any rig
time for such three (3) day period shall be paid for by the Joint
Operators participating in the operation.
<PAGE>
(b) The Joint Operator giving first notice shall, together with the
Joint Operators participating, be entitled to have the Manager Operator
commence such operation within sixty (60) days from the receipt by the
other Joint Operators of the first notice and thereafter prosecute the
operation to completion at the sole cost and risk of the participating
Joint Operators in the proportions that their respective participating
equities in the spacing unit concerned are of the sum of such
participating equities.
(c) If the Joint Operators participating in such operation commence
the same within the said period of sixty (60) days and carry it on
diligently and continuously to the depth proposed in the first notice
(i) if the operation is the drilling of an exploratory well,
each non-participating Joint Operator shall forthwith assign to the
participating Joint Operators in the proportions that their
respective participating equities are of the sum of such
participating equities, all of its participating equity in all
formations in:
A. six (6) Northwest Territory sections of the said lands if
such well is drilled to a depth of more than six thousand (6,000)
feet and provided commercial production has not been obtained
above the depth of six thousand (6,000) feet, and
B. four (4) Northwest Territory sections of the said lands
in the case of any other well, such sections to include the
section on which such well is located and the other sections to
be selected by the participating Joint Operators from those
sections laterally or diagonally adjoining the section on which
such well is located.
(ii) if the operation is a deepening or reworking operation or
the drilling of a development well, each non-participating Joint
Operator shall have the right, until the elapse of a period of
thirty (30) days after the participating Joint Operators have served
on each of the non-participating Joint Operators written notice of
the results of all tests carried out on the well concerned (or in
the case of a dry hole, written notice to that effect) and have made
available to such nonparticipating Joint Operators all information
concerning such well which is in the possession of the participating
Joint Operators, to pay to the participating Joint Operators in the
proportions that their respective participating equities are of the
sum of such participating equities, a sum equal to three (3) times
the amount it would have been called upon to pay had all Joint
Operators being entitled to participate originally participated in
the operation, and upon such payment being made, such Joint Operator
shall participate in such well and the production therefrom ab
initio to the extent that it would have been entitled to participate
had all Joint Operators entitled to participate so participated, and
in the event that it does not pay such sum within the time
hereinbefore limited, such Joint Operator shall assign its
participating equity in such well, in the spacing unit on which the
same is located and in the surface location, to the participating
Joint Operators in the proportions that their respective
participating equities are of the sum of such participating
equities, in which case the Joint Operators receiving the assignment
shall have the right to produce the well concerned and to market the
production of petroleum substances therefrom and the Joint Operators
making the assignment shall not be entitled to any share of such
production.
<PAGE>
N.3 Notwithstanding anything hereinbefore contained, if the lands to be
assigned under this clause contain any other well then capable of production of
petroleum substances, such well and any zone or formation, whichever the case
may be, underlying the spacing unit of such other well and from which it is then
capable of obtaining production shall be excluded from the lands to be assigned.
CLAUSE O
SELECTION OF LEASES
O.1 The Joint Operators shall meet to determine the lands to be contained
in an application for petroleum and natural gas leases. The meeting may be
called by any Joint Operator on the same notice as is provided in Clause D. All
decisions relating to any such application and the selection of lands to be
included therein shall be made by mutual agreement and failing such agreement
shall be made by the Joint Operators owning in the aggregate more than Sixty-six
and two-thirds (66 2/3%) percent of the participating equities in such permit
provided that in making such selection leases of sections must be chosen so that
any Joint Operator who is entitled to any section or sections by virtue of an
independent operation may obtain such section or sections.
CLAUSE P
SURRENDER
Upon completion of the program provided for in Article III the following
provisions shall apply:
P.1 Any Joint Operator may, from time to time and at any time, provided
that the Crown must or will accept the same, surrender all of its interest in
all or any part of the said lands except that no such surrender shall be made:
(a) within thirty (30) days before the accrual of the rental or any
other obligation, excepting any drilling obligation contained in any
document of title when the person entitled to enforce the performance
thereof is not enforcing the same, in respect to that part of the said
lands to be surrendered,
(b) respecting an area of less than a spacing unit,
(c) until the Joint Operator desiring to surrender (hereinafter
called "the offeror") shall notify in writing the other Joint Operators
(hereinafter called "the recipients") of the interest it desires to
surrender. The recipients shall have the right for a period of fifteen
(15) days after the receipt of such notice to advise the offeror by notice
in writing that it will accept an assignment of such interest. In the
event any recipient does not notify within the time herein limited the
offeror that it will accept an assignment of such interest, such recipient
shall join in the surrender of such part of the said lands. If any
recipient agrees to accept such assignment, such interest shall be
assigned to such recipient. If more than one recipient agrees to accept
such assignment such interest shall be assigned to such recipients in the
proportions that their respective participating interests bear to the sum
of such participating interests.
<PAGE>
CLAUSE Q
Q.1 No Joint Operator shall dispose of any interest hereunder unless the
person receiving the same agrees with the other Joint Operators to be bound by
all of the terms and provisions of this Agreement. If such disposition imposes
greater obligations or expenses on the Manager Operator or other Joint Operators
then such person shall agree to pay all costs and expenses in connection
therewith.
CLAUSE R
ASSIGNMENTS AMONG PARTIES
R.1 Upon the assignment of any interest hereunder by one Joint Operator to
any other or others:
(a) the Joint Operator agreeing to receive such assignment shall pay all
costs and taxes incurred or levied in connection with such assignment;
(b) the Joint Operator agreeing to receive such assignment shall indemnify
and hold harmless the Joint Operator agreeing to make such assignment from
and against all liabilities in connection with such interest to be
assigned except liabilities which arose prior to the agreement to make
such assignment;
(c) the Joint Operator agreeing to make such assignment shall not be
released from any obligation which arose prior to the date of the
agreement to accept such assignment;
(d) such assignment shall be without warranty of title of the interest of
the assigning party;
(e) all the terms of this Agreement shall continue to apply to such
interest as among the Joint Operators who have not assigned their
interest;
(f) where it is necessary to obtain the consent of any person other than a
Joint Operator to such assignment and such consent cannot be obtained,
such interest shall be held in trust by the Joint Operator required to
make the assignment for the Joint Operators entitled to receive the same.
CLAUSE S
RELATIONSHIP OF PARTIES
S.1 This Agreement shall not be construed to create a partnership.
S.2 Except as otherwise provided in Clause T hereof, where the parties
hereto or any of them incur a liability in connection with any operation
hereunder either to a party hereto or to any third party, such liability shall
not be joint or several but each party shall be separately liable only for a
portion of the total liability calculated in accordance with its participating
equity in that part of the lands to which the liability can be reasonably
allocated.
<PAGE>
S.3 Each Joint Operator agrees to indemnify each other Joint Operator
against any claim of or liability to any third party incurred in connection with
any operation hereunder to the extent but only to the extent that the claim or
liability is asserted against the other Joint Operator in an amount in excess of
the other Joint Operator's share of the liability calculated in accordance with
this clause; PROVIDED that a Joint Operator shall not be required to indemnify
any other Joint Operator for any amount in excess of its own share of the
liability calculated in accordance with this clause.
S.4 The Joint Operators hereby elect that the operations conducted under
this Agreement, and the Joint Operators themselves with respect to such
operations, be excluded from the application of all of the provisions of
Subchapter K of Chapter 1 of Subtitle A of the United States Internal Revenue
Code of 1954, or any amendments thereof, or of such portion or portions thereof
as may be permitted by the Secretary of the Treasury or his delegate, insofar as
such Subchapter or any portion or portions thereof may otherwise be applicable
to such operations or to the Joint Operators with respect to such operations.
CLAUSE T
LIABILITY OF MANAGER OPERATOR
T.1 Except as hereinbefore provided the Manager Operator shall not be
liable to any Joint Operator in damages or otherwise howsoever for anything done
by the Manager Operator hereunder or for the Manager Operator's failure to do
anything hereunder, except for:
(i) acts of fraud, dishonesty or gross neglect on the part of any
officer of the Manager Operator in carrying out the duties of the Manager
Operator under this Agreement,
(ii) the failure of the Manager Operator to remedy any default
hereunder as soon as reasonably possible after the receipt by it from any
Joint Operator of written notice of such default.
CLAUSE U
FORCE MAJEURE
U.1 Any Joint Operator shall be excused from the performance of any of its
obligations hereunder from time to time and at any time, but only so long as it
is prevented from performance by act of God, the Queen's enemies, inclement
weather, accident, breakdown, fire, strike, lock-out, labour shortage, inability
to obtain equipment, materials or supplies in the open market at reasonable
prices, compliance with any law, rule, order or regulation which has not been
declared by a court of competent jurisdiction to be invalid, or any other cause
beyond the reasonable control of such Joint Operator whether similar or
dissimilar, provided that lack of funds shall not be considered a cause beyond
the control of a party.
<PAGE>
CLAUSE V
WAIVER
V.1 No waiver on behalf of any party of any breach of any of the
covenants, conditions and provisos herein contained shall be effective or be
binding upon such party unless the same be expressed in writing and any waiver
so expressed shall not limit or affect such party's rights with respect to any
other or future breach.
CLAUSE W
CONFLICT WITH LAWS
W.1 If any provision herein contained is in conflict with any law, rule,
order or regulation heretofore or hereafter made by any competent governmental
authority or any document of title by virtue of which the parties hereto hold
any interest, this Agreement shall be deemed to be amended so as to conform to
such law, rule, order or regulation or document of title for so long as the same
remains in force.
CLAUSE X
NOTICES
X.1 All notices required to be given under this Agreement shall either be
personally delivered or mailed by prepaid registered mail addressed as
hereinafter set forth or to such other address as may be designated from time to
time by such Joint Operator in writing, and any notice mailed as aforesaid shall
be deemed to have been received by the addressee on the next normal business day
following the day of mailing:
Canada Southern 505-8th Avenue West,
Calgary, Alberta
Magellan 505-8th Avenue West,
Calgary, Alberta
Oil Investments 505-8th Avenue West,
Calgary, Alberta
Alminex 609 Hudson's Bay Oil & Gas Building,
320-7th Avenue West,
Calgary, Alberta
Signal P.O. Box 17126,
Foy Station,
Los Angeles 17, California, U.S. A.
with a copy to 4th Floor, North Canadian Oil Bldg.,
Calgary, Alberta
<PAGE>
Kern 640-7th Avenue West,
Calgary, Alberta
with a copy to 600 California Street,
San Francisco 8, California, U.S.A.
United 304-6th Avenue West,
Calgary, Alberta
Home 304-6th Avenue West,
Calgary, Alberta
CLAUSE Y
FURTHER ASSURANCES
Y.1 Each of the Joint Operators shall from time to time and at all times
do all such further acts and execute and deliver all such further documents and
assurances as shall be reasonably required in order fully to perform and carry
out the terms of this Agreement.
CLAUSE Z
ENTIRE AGREEMENT
Z.1 The Joint Operators agree that they have expressed herein their entire
understanding and agreement concerning the subject matter of this Agreement and
it is expressly agreed that no implied covenant, condition, term or reservation
shall be read into this Agreement relating to or concerning such subject matter.
CLAUSE AA
DIVISION OF EXPENSES
AA.1 The costs and expenses of the program referred to in Article III
shall be borne as to Fifty (50%) percent by Signal, Twenty-five (25%) percent by
Home, Ten (10%) percent by Alminex, Ten (10%) percent by Kern and Five (5%)
percent by United and C-M-O shall not bear any of the said costs or expenses nor
shall the same be recoupable from C-M-O.
AA.2 Except as herein otherwise provided all costs and expenses shall be
allocated equitably by the Manager Operator to the parts of the said lands to
which they apply and each Joint Operator shall bear and pay in accordance with
the accounting procedure a share of the same equivalent to its participating
equity in that part of the said lands to which the same are allocated.
<PAGE>
AA.3 The participating equities of the Joint Operators in the said lands
at the date hereof are as follows:
Canada Southern....................... 37 1/2%
Magellan.............................. 6 1/4%
Oil Investments....................... 6 1/4%
Home.................................. 12 1/2%
Alminex............................... 5%
Kern.................................. 5%
United................................ 2 1/2%
Signal................................ 25%
AA.4 H-S agrees that during the term of the option it will allocate such
part of any excess credits in any year not required by them in connection with
the said lands to the optioned lands in order to keep the option in good
standing for such year.
CLAUSE BB
TERM
BB.1 Subject to the other provisions hereof, including Article V, this
Agreement shall remain in full force and effect and the said lands shall not be
subject to partition so long as any jointly owned document of title to any part
of the said lands, or any renewal or extension thereof pursuant to the
provisions of such document of title, remains in force and effect and thereafter
until all joint facilities have been salvaged and disposed of and final
settlement and accounting had among the Joint Operators.
CLAUSE CC
INTERPRETATION
CC.1 Wherever in this Agreement the singular number or masculine gender
occurs, the same shall be respectively construed as the plural or neuter, and
vice versa, as the context or reference may require.
CC.2 Notwithstanding anything herein elsewhere to the contrary contained,
any right of any party to acquire any interest from any other party hereunder
shall cease, determine and be at an end not later than the expiration of
twenty-one (21) years after the death of the last surviving lawful descendant
now living of His Late Majesty King George VI.
CC.3 The headings of all clauses in this Agreement are inserted for
convenience of reference only and shall not affect the construction hereof.
CC.4 Time shall be of the essence hereof.
CC.5 This Agreement shall, subject to the provisions of Clause Q hereof,
be binding upon and enure to the benefit of the Joint Operators and their
respective successors and assigns.
CC.6 All terms, covenants, provisions and conditions of this Agreement
shall run with and be binding upon the said lands during the term hereof.
<PAGE>
SCHEDULE "C"
Attached to and made a part of an agreement made as of May 28, 1959
between Canada Southern Petroleum Ltd., Magellan Petroleum
Corporation, Oil Investments, Inc.9 Home Oil Company
Limited, Kern County Land Company, Alminex
Limited, United Oils Limited, Signal Oil
and Gas Company.
ACCOUNTING PROCEDURE
(Unit and Joint Lease Operations)
I. GENERAL PROVISIONS
1. DEFINITIONS
The term "joint property" as herein used shall be construed to mean the
subject area covered by the agreement to which this "Accounting Procedure"
is attached.
The term "Operator" as herein used shall be construed to mean the party
designated to conduct the development and operation of the subject area
for the joint account.
The term "Non-Operator" as herein used shall be construed to mean any one
or more of the non-operating parties.
The term "rentals" shall, in addition to its ordinary meaning, be
construed to include delay rentals, renewal fees and generally all
periodical payments of monies required to be made in order to maintain the
rights of the parties in and to the joint property in force and effect.
2. STATEMENTS AND BILLINGS
The Operator shall bill Non-Operator on or before the last day of each
month for its proportionate share of costs and expenditures during the
preceding month. Such bills will be accompanied by statements, reflecting
the total cost and charges as set forth under sub-paragraph A below:
A. Statement in detail of all charges and credits to the joint account.
B. Statement of all charges and credits to the joint account,
summarized by appropriate classifications indicative of the nature
thereof.
C. Statements, as follows:
(1) Detailed statement of material ordinarily considered
controllable by operators of oil and gas properties;
<PAGE>
(2) Statement of all other charges and credits to the joint account
summarized by appropriate classifications indicative of the
nature thereof; and
(3) Statement of any other receipts and credits.
3. PAYMENTS BY NON-OPERATOR
Each party shall pay all such bills within fifteen (15) days after receipt
thereof. If payment is not made within such time, the unpaid balance may
bear interest at the rate of six per cent (6%) per annum until paid.
Operator shall have and be entitled to a prior lien on all the rights and
interests of Non-Operator in said joint properties, the production
therefrom, and the material and equipment thereon, to secure the payment
by Non-Operator of Non-Operator's portion of cost, purchases, and expenses
of developing and operating the joint property as herein provided. Upon
request Operator may require Non-Operator to advance his share of
estimated cash outlay for the current month's operations.
4. AUDITS
Payment of any such bills shall not prejudice the right of Non-Operator to
protest or question the correctness thereof. All statements rendered to
Non-Operator by Operator during any calendar year shall be conclusively
presumed to be true and correct after eighteen months following the close
of any such calendar year, unless within said eighteen months Non-Operator
takes written exception thereto and makes claim on Operator for adjustment
or commences an audit of Operator's accounts and records relating to the
accounting hereunder. Failure on the part of Non-Operator to make claim on
Operator for adjustment, or to commence an audit within such period shall
establish the correctness thereof and preclude the filing of exceptions
thereto or the making of claims for adjustment thereon. A Non-Operator,
upon notice in writing to Operator and all other Non-Operators, shall have
the right to audit Operator's accounts and records relating to the
accounting hereunder, within eighteen months next following the close of
any calendar year. Non-Operator shall have six months next following the
examination of the Operator's records within which to take written
exception to and make any and all claims on Operator. The provisions of
this paragraph shall not prevent adjustments resulting from the physical
inventory of property as provided for in Section VI, Inventories, hereof.
II. DEVELOPMENT AND OPERATING CHARGES
Subject to limitations hereinafter prescribed, Operator shall charge the
joint account with the cost of the following items:
1. RENTALS AND ROYALTIES
Rentals, when such rentals are paid by Operator for the joint account;
royalties, when not paid direct to royalty owners by the purchaser of the
oil, gas, casing-head gas, or other products.
<PAGE>
2. LABOUR, TRANSPORTATION AND SERVICES
Labour, transportation, and other services necessary for the development,
maintenance, and operation of the joint property. Labour shall include
salaries and wages of Operator's employees, other than employees
compensated for under paragraphs (11), (12) and (13) of this Section II,
directly engaged in operations of the joint property and (A) Operator's
cost of vacation, sickness and disability benefits of employees, and
expenditures or contributions imposed or assessed by Governmental
authority applicable to such salaries and wages, and (B) Operator's
current cost of established plans for employees' group life insurance,
hospitalization, pension, retirement, stock purchase, thrift, bonus, and
other benefit plans of like nature, applicable to Operator's payroll;
provided that the charges under part (B) of this paragraph shall not
exceed twelve percent (12%) of the total of such salaries and wages
charged to the joint account.
3. MATERIAL
Material, equipment, and supplies purchased or furnished by Operator, for
use of the joint property. So far as it is reasonably practical and
consistent with efficient and economical operation, only such material
shall be purchased for or transferred to the joint property as required
for immediate use, and the accumulation of surplus stocks shall be avoided
wherever possible.
4. MOVING MATERIAL TO JOINT PROPERTY
Moving material to the joint property from vendors or from Operator's
warehouse in district or from the other properties of Operator, but in
either of the last two events no charge shall be made to the joint account
for a distance greater than the distance from the nearest reliable supply
store or railway receiving point where such material is available, except
by special agreement with Non-Operator.
5. MOVING SURPLUS MATERIAL FROM JOINT PROPERTY
Moving surplus material from the joint property to outside venders, if
sold f.o.b. destination, or minor returns to Operator's warehouse or other
storage point. No charge shall be made to the joint account for moving
major surplus material to Operator's warehouse or other storage point for
a distance greater than the distance to the nearest reliable supply store
or railway receiving point, except by special agreement with Non-Operator;
and no charge shall be made to the joint account for moving material to
other properties belonging to Operator, except by special agreement with
Non-Operator.
6. USE OF OPERATOR'S EQUIPMENT AND FACILITIES
Use of and service by Operator's exclusively owned equipment and
facilities as provided in paragraph 4, of Section III, "Basis of Charges
to Joint Account".
<PAGE>
7. DAMAGES AND LOSSES
Damages or losses incurred by fire, flood, storm or any other causes not
controllable by Operator through the exercise of reasonable diligence.
Operator shall furnish Non-Operator written notice of damage or losses
incurred by fire, storm, flood or other natural or accidental causes as
soon as practicable after report of the same has been received by
Operator.
8. LITIGATION, JUDGMENTS, AND CLAIMS
All costs and expenses of litigation, or legal services otherwise
necessary or expedient for the protection of the joint interest, including
attorneys fees and expenses as hereinafter provided, together with all
judgments obtained against the parties or any of them insofar as the same
relate to the joint account or the subject matter of this agreement;
actual expenses incurred by any party or parties hereto in securing
evidence for the purpose of defending against any action or claim
prosecuted or urged against the joint account or the subject matter of
this agreement.
A. If a majority of the interests hereunder shall so agree, actions or
claims affecting the joint interests hereunder may be handled by the
legal staff of one or more of the parties hereto, and a charge
commensurate with the services rendered may be made against the
joint account, but no such charge shall be made until approved by
the legal department of or attorneys for the respective parties
hereto.
B. Fees and expenses of outside attorneys shall not be charged to the
joint account unless authorized by the majority of the interests
hereunder.
9. TAXES
All taxes, rates, levies and assessments of every kind and nature levied,
assessed or imposed upon or in connection with the joint property or any
part thereof, the production therefrom or the operation thereof, which
shall have been paid by the Operator for the benefit of the parties
hereto.
10. INSURANCE
A. Premiums paid for insurance carried for the benefit of the joint
account together with all expenditures incurred and paid in
settlement of any and all losses, claims, damages, judgments, and
other expenses, including legal services, not recovered from
insurance carrier.
B. If no insurance is required to be carried, all actual expenditures
incurred and paid by Operator in settlement of any and all losses,
claims, damages, judgments, and any other expenses, including legal
services, shall be charged to the joint account.
<PAGE>
11. DISTRICT AND CAMP EXPENSE
A proportionate share of the salaries and expenses of Operator's district
superintendent and other general district or field employees serving the
joint property, whose time is not allocated direct to the joint property
and a proportionate share of the cost of maintaining and operating a
district office and all necessary camps, including housing facilities for
employees if necessary, incurred in conducting the operations on the joint
property and other leases owned and operated by Operator in the same
locality. The expense of, less any revenue from, these facilities shall
include depreciation or a fair monthly rental in lieu of depreciation on
the investment. Such charges shall be apportioned to all leases served on
some equitable basis consistent with Operator's accounting practice.
12. OVERHEAD
Overhead charges, which shall be in lieu of any charges for any part of
the expenses, including salaries or compensation paid to managing officers
and employees, of the division office and/or principal office of the
Operator, but which are not in lieu of district or field office expenses
incurred in developing and operating any joint property; or any other
expenses of Operator, including but not limited to expenses chargeable
under paragraph (2) of this Section II, incurred in the development and
operation of joint property and Operator shall have the right to assess
against the joint property on one of the following overhead bases:
Per Well Basis:
A. (1) $15 per day for each drilling well, beginning on the date the well
is spudded and terminating when it is on production or is plugged,
as the case may be, except that no charge shall be made during the
suspension of drilling operations for fifteen (15) or more
consecutive days.
(2) $100 per well per month for the first five (5) producing wells.
(3) $75 per well per month for the second five (5) producing wells.
(4) $50 per well per month for all producing wells over ten (10).
B. $60.00 per day for each shallow core hole party.
$30.00 per day for each seismograph reflection party.
$30.00 per day for each seismograph refraction party.
$15.00 per day for each gravity meter test party.
$15.00 per day for each magnetometer test party beginning on the date the
party enters the said areas and terminating when the party leaves
the said areas. A charge shall also be made for non-working shifts
for the reason of repairs or other causes beyond the control of
operation.
<PAGE>
In connection with overhead charges, the status of wells shall be as
follows:
(1) In-put or key wells shall be included in overhead schedule the same
as producing oil wells.
(2) Producing gas wells shall be included in overhead schedule the same
as producing oil wells.
(3) Wells permanently shut down but on which plugging-operations are
deferred, shall be dropped from overhead schedule at the time
shutdown is effective. When such wells are plugged, overhead shall
be charged at the producing well rate during the time required for
the plugging operations.
(4) Wells being plugged back or drilled deeper shall be included in
overhead schedule the same as drilling wells.
(5) Various wells may be shut down temporarily and later replaced on
production. If and when a well is shut down (other than for
proration) and not produced or worked upon for a period of a full
calendar month, it shall not be included in the overhead schedule
for such month.
(6) Salt water disposal wells shall not be included in overhead schedule
as producing wells.
The above specific overhead rates may be amended from time to time by
agreement between Operator and Non-Operator if, in practice, they are
found to be insufficient or excessive.
It is specifically understood that the above Overhead rates apply only to
Drilling and Producing Operations and are not intended to cover the
construction or operations of additional facilities such as, but not
limited to, gasoline plants, compressor plants, repressuring projects,
salt water disposal facilities, major road construction projects, and
similar installations. If at any time any or all of these become necessary
to the operation a separate agreement will be reached relative to an
overhead charge and allocation of District Expense.
13. WAREHOUSE HANDLING CHARGES
A handling charge to cover the cost of handling material into and in the
warehouse shall be assessed on new and used material and equipment
furnished from the Operator's warehouse on the following basis:
(A) Five percent (5%) of the cost of tubular goods (2" and over) and
major equipment such as tanks, separators, engines, etc.
(B) Ten percent (10%) of the cost of all other material.
<PAGE>
14. OTHER EXPENDITURES
Any other expenditures incurred by Operator for the necessary and proper
development, maintenance, operation and abandonment of the joint property.
Notwithstanding anything herein contained, no charge shall be made for any
interest or financing charges incurred by the Operator, except where
incurred with the consent of Non-Operator.
III. BASIS OF CHARGES TO JOINT ACCOUNT
1. PURCHASES
Material and equipment purchased and all services procured shall be
charged at their invoiced cost to Operator, after deduction of all
discounts actually received.
2. MATERIAL FURNISHED BY OPERATOR
Material required for operations shall be purchased for direct charge to
joint account whenever practicable, except that Operator may furnish such
material from Operator's stocks under the following conditions:
A. New Material (Condition "A")
(1) New material transferred from Operator's warehouse or other
properties shall be priced f.o.b. the nearest reputable supply
store or railway receiving point, where such material is
available, at current replacement cost of the same kind of
material. This will include material such as tanks, rigs,
pumps, sucker rods, boilers, and engines. Tubular goods (2" and
over) shall be charged on the basis of carload price effective
at date of transfer and f.o.b. railway receiving point nearest
the joint property, regardless of quantity transferred.
(2) Other material shall be priced on basis of a reputable supply
company's preferential price list effective at date of transfer
and f.o.b. the store or railway receiving point nearest the
joint property where such material is available.
B. Used Material (Condition "B" and "C")
(1) Material which is in sound and serviceable condition and is
suitable for re-use without reconditioning shall be classed as
Condition "B" and priced at 75% of current new price.
(2) Material which cannot be classified as Condition "B" but which,
(a) After reconditioning will be further serviceable for
original function as good secondhand material (Condition
"B"), or
(b) Is serviceable for original function but substantially not
suitable for reconditioning, shall be classed as Condition
"C" and priced at 50% of current new price.
<PAGE>
(3) Tanks, derricks, buildings, and other equipment involving
erection costs shall be charged at applicable percentage of
dismantled current new price for similar materials.
(4) There may also be cases where some items of equipment, due to
their unusual condition, should be fairly and equitably priced
by Operator, subject to approval of Non-Operator.
(5) Current new price, wherever used in this sub-paragraph 2B of
this Section III shall have the same meaning and be determined
in accordance with sub-paragraph 2A of this Section III.
3. WARRANTY OF MATERIAL FURNISHED BY OPERATOR
Operator does not warrant the material furnished beyond or back of the
dealer's or manufacturer's guaranty; and, in case of defective material,
credit shall not be passed until adjustment has been received by Operator
from the manufacturers or their agents.
4. OPERATOR'S EXCLUSIVELY OWNED FACILITIES
The following rates shall apply to services rendered by facilities and
equipment owned exclusively by Operator, provided such rates are not in
excess of current prevailing rates of like service and equipment available
in the area:
A. Water service, gas and power, booster and compressor services, etc.,
cost of such services including operation, maintenance, insurance,
taxes and allowance for depreciation.
B. Automotive equipment, at rates commensurate with cost of ownership
and operation and in line with schedule adopted by Operator for use
in his operations. Charges will be based on use in actual service
on, or in connection with the development and operation of the joint
property.
C. Aircraft equipment, at rates commensurate with cost of ownership and
operation. Charges will be made on a flight hour basis, based on use
and actual service in connection with the development and operation
of the joint property.
D. A fair rate shall be charged for the use of drilling and other
machinery and equipment exclusively owned by Operator while used
hereunder to cover maintenance, repairs, depreciation, for the
service furnished the joint property. Drilling equipment lost in the
hole or damaged beyond repair shall be charged to the joint account
at a fair depreciated value.
Whenever requested Operator shall inform Non-Operator in advance of
the rates it proposes to charge.
<PAGE>
Rates shall be revised from time to time when found to be either
excessive or insufficient.
IV. DISPOSAL OF LEASE EQUIPMENT AND MATERIAL
The Operator shall be under no obligation to purchase interest of
Non-Operator in surplus new or secondhand material. Derricks, tanks,
buildings, and other major items shall not be removed by Operator from the
joint property without the approval of Non-Operator. Operator shall not
sell major items of material to an outside party without giving
Non-Operator an opportunity either to purchase same at the price offered
or to take Non-Operator's share in kind.
1. MATERIAL PURCHASED BY OPERATOR
Material purchased by Operator shall be credited to the joint account and
included in the monthly statement of operations for the month in which the
material is removed from the joint property.
2. MATERIAL PURCHASED BY NON-OPERATOR
Material purchased by Non-Operator shall be invoiced by Operator and paid
for by Non-Operator to Operator immediately following receipt of invoice.
The Operator shall pass credit to the joint account and include the same
in the monthly statement of operations.
3. DIVISION IN KIND
Division of material in kind, if made between Operator and Non-Operator,
shall be in proportion to their respective interests in such material.
Each party will thereupon be charged individually with the value of the
material received or receivable by each party and corresponding credits
will be made by the Operator to the joint account, and such credits shall
appear in the monthly statement of operations.
4. SALES TO OUTSIDERS
Sales to outsiders of material from the joint property shall be credited
by Operator to the joint account at the net amount collected by Operator
from vendee. Any claims by vendee for defective material etc., shall be
charged back to the joint account, if and when paid by Operator.
V. BASIS OF PRICING MATERIAL TRANSFERRED FROM PROPERTY
Jointly-owned material and equipment sold to either Operator or
Non-Operator or divided in kind between them, unless otherwise agreed
shall be valued on the following basis of condition and price: (new price
as used in the following sub-divisions shall have the same meaning and be
computed on the same basis as the price for new material in sub-paragraph
2A of Section III hereof).
<PAGE>
1. NEW MATERIAL
New material (Condition "A"), being new equipment or supplies purchased or
procured for the property but never used thereon, at one hundred percent
(100%) of current new price.
2. GOOD USED MATERIAL
Good used material (Condition "B"), being good serviceable material which
is further usable without reconditioning:
(a) At 75% of current new price if material was charged to joint account
as new, or
(b) At 75% of current new price less depreciation consistent with its
usage on and service to the joint property if material was
originally charged to the joint property as secondhand at 75% of new
price.
3. OTHER USED MATERIAL
Other used material (Condition "C"), being material which:
(a) After reconditioning will be further serviceable for original
function as good secondhand material (Condition "B"), or
(b) Is serviceable for original function but substantially not suitable
for reconditioning at 50% of current new price.
4. BAD ORDER MATERIAL
Bad order material (Condition "D"), being material not further usable for
its original function but for possible other service, at a value
commensurate with its use.
5. JUNK
Junk (Condition "E"), being obsolete and unserviceable material, at
prevailing junk prices in the district.
6. There may also be cases where some items of equipment due to their unusual
condition should be fairly and equitably priced by Operator subject to
approval of Non-Operator.
VI. INVENTORIES
1. PERIODIC INVENTORIES
Periodic inventories shall be taken by Operator of the joint account
material at reasonable intervals but at least once in every five years
which shall include all such material as is ordinarily considered
controllable by operators of oil and gas properties.
<PAGE>
2. NOTICE
Notice of intention to take inventory shall be given by Operator at least
ten (10) days before any inventory is to begin, so that Non-Operator may
be represented when any inventory is taken.
3. FAILURE TO BE REPRESENTED
Failure of Non-Operator to be represented at the physical inventory shall
bind Non-Operator to accept the inventory taken by Operator, who shall in
that event furnish Non-Operator with a copy thereof.
4. RECONCILIATION OF INVENTORY
Reconciliation of inventory with charges to the joint account shall be
made by each party at interest, and a list of overages and shortages shall
be jointly determined by said parties.
5. ADJUSTMENT OF INVENTORY
Inventory adjustments shall be made by Operator with the joint account for
overages and shortages, but Operator shall only be held accountable to
Non-Operator for shortages due to lack of reasonable diligence.
6. INVENTORY EXPENSES
The expense of Operator's and Non-Operator's representatives present at
the taking of regular inventory shall not be charged to the joint account.
7. SPECIAL INVENTORIES
Any party shall have the right at any time to request in writing the
taking of a special inventory. The taking of such special inventory shall
be commenced within fifteen (15) days after the receipt of notice thereof.
The expense of Operator's representative in conducting any special
inventory so requested shall be charged to the separate account of the
requesting party.
Home Oil Company Limited
304 Sixth Avenue West
Calgary, Alberta
Telephone
Amherst 6-7041
June 24, 1959
Canada Southern Petroleum Ltd.,
Magellan Petroleum Corporation,
Oil Investments, Inc.,
505 Eighth Avenue West,
Calgary, Alberta
Dear Sirs:
This is to advise you that as further consideration for you entering
into that certain Agreement dated as of May 28, 1959, between the C-M-O group
and the H-S group, this company has agreed with you that they will guarantee the
performance by Kern County Land Company, Alminex Limited and United Oils Limited
of the respective covenants of those said companies contained in Article 3.1 (A)
and Article 3.l (B)(a) and (b).
Yours very truly,
HOME OIL COMPANY LIMITED
Per: _________________________
Per: _________________________
<PAGE>
June 24, 1959
Canada Southern Petroleum Ltd.
505 - 6th Avenue West
Calgary, Alberta
Gentlemen:
This letter will serve as a memorandum confirming our further agreement
with respect to the contract which we have executed with you and certain other
parties today wherein you have agreed to assign a 50 percent interest in certain
Northwest Territories and Yukon Territory properties to us and the others to the
agreement, as follows:
1. We will cooperate with you in your efforts to promote oil and gas
pipe lines from Northeast British Columbia and the Northwest Territories to
market.
2. For purposes of financing we will furnish to you, Magellan and Oil
Investments, or to such third person banking institutions from time to time upon
your request confirmation that the payments provided for under paragraph 3.1 of
the said agreement constitute unconditional obligations.
Yours very truly,
HOME OIL COMPANY LIMITED
Per: _________________________
Per: _________________________
SIGNAL OIL AND GAS COMPANY
Per: _________________________
Per: _________________________
MODIFICATION TO AGREEMENT
THIS MODIFICATION TO AGREEMENT, made as of this 31st day of January,
l96l, by and between
CANADA SOUTHERN PETROLEUM LTD., a corporation incorporated
under the laws of Canada (hereinafter sometimes referred
to as "Canada Southern"),
- and -
MAGELLAN PETROLEUM CORPORATION, a Panama corporation
(hereinafter sometimes referred to as "Magellan"),
- and -
OIL INVESTMENTS, INC., a Panama corporation (hereinafter
sometimes referred to as "Oil Investments"),
(which aforesaid three corporations are hereinafter
collectively referred to as "C-M-O" and individually as a
member of the C-M-O Group)
AND
HOME OIL COMPANY LIMITED, a corporation incorporated under the
laws of Canada (hereinafter sometimes referred to as "Home")
- and -
KERN COUNTY LAND COMPANY, a company incorporated under the
laws of California (hereinafter sometimes referred to as
"Kern"),
- and -
ALMINEX LIMITED, a company incorporated under the laws of
Canada (hereinafter sometimes referred to as "Alminex")
- and -
UNITED OILS, LIMITED, a corporation incorporated under the
laws of Canada (hereinafter sometimes referred to as "United")
<PAGE>
- and -
SIGNAL OIL AND GAS COMPANY, a company incorporated under the
laws of Delaware (hereinafter sometimes referred to as
"Signal")
(the said Home, Kern, Alminex, United and Signal being
hereinafter collectively referred to as "H-S" and individually
as a member of the H-S Group),
WITNESSETH THAT WHEREAS:
A. By Agreement dated May 28, 1959, the parties hereto agreed on a
program for the exploration and development for oil, gas and other hydrocarbons
of certain lands situated in the Northwest Territories and in the Yukon
Territory of Canada, all as more particularly described in said Agreement and
all subject to the terms, conditions and provisions as therein contained.
B. Pursuant to paragraph 3.1 (B)(a) of Article III of said Agreement,
H-S is to drill a minimum of five (5) exploratory wells on the lands subject to
said Agreement, of which at least one such well shall be located on the Western
Block of the properties (as that term is defined in said Agreement), consisting
of Permits Nos. 1006, 1007, 1132, 1133 and 1135.
C. As a result of present information, it now appears that a required
well drilled on said Western Block would not be to the mutual advantages of the
parties hereto.
NOW, THEREFORE, for and in consideration of the sum of Ten Dollars
($10.00) paid by H-S to each member of the C-M-O Group and of the mutual
benefits to be obtained and of other good and valuable consideration, the
receipt and sufficiency of all of which are hereby acknowledged, the parties
hereto hereby agree that said Agreement shall be modified and supplemented as
follows:
1. H-S shall have no obligation under said Agreement dated May 28, 1959,
to C-M-O, or otherwise, to drill any of the five (5) exploratory wells referred
to in paragraph 3.1 (B)(a) of Article III of said Agreement on said Western
Block.
<PAGE>
2. H-S shall in respect of any operations required to be carried out by it
pursuant to Article III of the said Agreement dated May 28, 1959, carry blow out
insurance with a reputable insurance company or companies in the minimum amount
of $1,000,000.00 and with a maximum deductible of $25,000.00 in respect of any
one claim.
3. Expenditures incurred by H-S in respect of any blow out which occurs in
operations conducted by H-S pursuant to Article III of the said Agreement dated
May 28, 1959, whether incurred before or after the date of this agreement, shall
be included in the total cost of the exploratory program referred to in
paragraph 3.1 (B)(b) of the said Agreement, after deduction from such
expenditures of any amount received by H-S pursuant to the insurance required to
be carried by H-S pursuant to clause 2 of this amending agreement. For greater
clarity it is acknowledged that any deductible up to the maximum specified in
clause 2 of this amending agreement which H-S is required to pay on the occasion
of any claim pursuant to such insurance shall be included in the cost of the
said exploratory program. In addition, the cost of premiums in respect of such
insurance shall also be included in the cost of the said exploratory program.
4. The well known as Home Signal C.S.P. Celibeta No. 2 well shall be
deemed to be a well not capable of production in commercial quantities within
the meaning of the said Agreement dated May 28, 1959.
5. Except as expressly provided herein, nothing herein contained shall be
deemed to amend, modify, enlarge or reduce the obligation of H-S to drill a
minimum of five (5) exploratory wells as otherwise provided in the said
Agreement dated May 28, 1959, nor the obligation to incur the total cost of the
exploratory program referred to in paragraph 3.1 (B)(b) of Article III of said
Agreement.
6. Except as herein modified and supplemented, the said Agreement dated
May 28, 1959, is hereby ratified and confirmed and shall remain in full force
and effect.
<PAGE>
7. This agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF the parties hereto have caused this instrument to be
executed as of the date first above written.
CANADA SOUTHERN PETROLEUM LTD. HOME OIL COMPANY LIMITED
per: ______________________________ per: ______________________________
VICE-PRESIDENT
per: ______________________________
per: ______________________________
ASSISTANT SECRETARY
MAGELLAN PETROLEUM CORPORATION
KERN COUNTY LAND COMPANY
per: ______________________________
per: ______________________________
per: ______________________________ VICE-PRESIDENT
per: ______________________________
OIL INVESTMENTS, INC. ASSISTANT SECRETARY
per: ______________________________ ALMINEX LIMITED
per: ______________________________ per: ______________________________
VICE-PRESIDENT
per: ______________________________
ASSISTANT SECRETARY
UNITED OILS, LIMITED
per: ______________________________
VICE-PRESIDENT
per: ______________________________
DIRECTOR
SIGNAL OIL AND GAS COMPANY
per: ______________________________
VICE-PRESIDENT
per: ______________________________
SECRETARY
H-S Group
THIS AGREEMENT is made this 1st day of April, 1966.
A M O N G:
CANADA SOUTHERN PETROLEUM LTD.,
a corporation incorporated under the laws of Canada,
(hereinafter referred to as "Canada Southern")
- and -
MAGELLAN PETROLEUM CORPORATION, a Panama corporation,
(hereinafter referred to as "Magellan")
- and -
OIL INVESTMENTS, INC., a Panama corporation,
(hereinafter referred to as "Oil Investments")
(which said corporations are hereinafter collectively
referred to as "C-M-O" and individually as a member of the
C-M-O group)
- and -
ALMINEX LIMITED, a company incorporated under the
laws of Canada, (hereinafter referred to as "Alminex")
- and -
PAN AMERICAN PETROLEUM CORPORATION, a
company having an office at the City of Calgary, in the
Province of Alberta,
(hereinafter referred to as "Pan American")
- and -
DOME PETROLEUM LIMITED, a company incorporated
under the laws of Canada,
(hereinafter referred to as "Dome")
- and -
<PAGE>
PROVO GAS PRODUCERS LIMITED, a company
incorporated under the laws of Alberta,
(hereinafter referred to as "Provo")
(Alminex, Pan American, Dome and Provo being
hereinafter collectively referred to as "A-D-P" and
individually as a member of the A-D-P group)
WHEREAS C-M-O and A-D-P are each parties or assignees of parties to an
agreement in writing dated May 28, 1959 (herein called "the Main Agreement")
among C-M-O of the one part and Home Oil Company Limited, Kern County Land
Company, Alminex, United Oils Limited and Signal Oil and Gas Company (all
therein collectively called "H-S") of the other part (as amended by
"Modification of Agreement dated January 3l, 1961, among the parties to the Main
Agreement), A-D-P being in the instance of Alminex a party and the others
assignee successors in interest to the said parties of the other part with
respect to the said permits and the Main Agreement and the properties described
in Schedule "A" thereof (hereinafter sometimes referred to as Permits);
AND WHEREAS C-M-O and A-D-P desire to amend certain provisions of the
Main Agreement with effect from the date hereof as it shall apply to them or
their successors and to make further provision for the conduct of operations on
the properties;
AND WHEREAS A-D-P claim to be assignees of the rights of H-S; and
WHEREAS it is not intended by this Agreement to affect any rights C-M-O now has
or may hereafter have for failures to comply with the Main Agreement; and
WHEREAS it is not intended to affect any rights that any of the parties to the
assignments may have as between each other;
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, and for other good and valuable consideration, it is
agreed as follows:
<PAGE>
ARTICLE I
Deletion of Clause 3.1 (C) of Main Agreement in respect of A-D-P
1.1 With respect to operations carried on by A-D-P on the said permits after the
date of this Agreement, the Main Agreement shall be read as if Clause 3.1 (C) of
Article III of the Main Agreement were deleted from the Main Agreement.
Correspondingly, the proviso to Clause M of the Operating Procedure attached as
Schedule "B" to the Main Agreement shall be deleted from the said Clause M with
effect from the date hereof.
ARTICLE II
Addition of Article VIII to Main Agreement
2.1 Effective from the date hereof the Main Agreement shall be amended by the
addition thereto of a new Article VIII thereof, reading as follows:
"ARTICLE VIII
8.1 Notwithstanding anything hereinbefore contained, with respect
to A-D-P the interest of C-M-O in the said permits and in the
properties described therein shall be and become a fifty percent (50%)
carried interest (as defined in Schedule "D" hereto), with C-M-O to
have the right, however, to convert the same as hereinafter provided.
8.2 Forthwith upon the interest of C-M-O becoming a carried
interest as aforesaid, the provisions of Schedule "D" hereto shall come
into effect and shall govern the relationship of the parties hereto
with respect to the said permits and the properties described therein."
ARTICLE III
Addition of Schedule "D" to the Main Agreement
3.1 Effective from the date hereof the Main Agreement shall be amended by adding
thereto Schedule "D", which shall be in the form attached hereto entitled:
<PAGE>
"Schedule "D"
attached to and forming part of an agreement made as of May 28, 1959, between
Canada Southern Petroleum Limited, Magellan Petroleum Corporation, Oil
Investments, Home Oil Company Limited, Kern County Land Company, Alminex
Limited, United Oils, Limited and Signal Oil and Gas Company."
ARTICLE IV
Exception for Existing Wells
4.1 Notwithstanding anything contained in this amending agreement or in Schedule
"D" to the Main Agreement as added by Article III hereof, the interests of the
parties in the spacing units of the Pan Am Home Signal CSP A-l Kotaneelee well
and the Canada Southern et al North Beaver River YT 1-27 well and in any lands
which were not on March 31, 1966, held for the joint account under the said
Operating Procedure by reason of the forfeiture or penalty provisions of the
said Operating Procedure shall not be affected by this amending agreement; and,
notwithstanding any provisions of the Main Agreement or of Schedule "D" thereto
as added by this amending agreement, the said spacing units and lands not held
for the joint account shall, unless the beneficial owners thereof agree
otherwise in writing, be included in leases selected from the said permits when
and if such lease selection is made.
ARTICLE V
Amendment to Article V of the Main Agreement
5.1 Article V of the Main Agreement is hereby amended by inserting after the
word "Agreement" in the second line of Clause 5.1 thereof the words
"and except in respect of any lands in which C-M-O's interest
is held as a carried interest pursuant to Article II of
Schedule "D" above referred to."
<PAGE>
ARTICLE VI
No Waiver of Rights
6.1 Nothing herein or in the said Schedule "D" contained affects or waives any
rights that C-M-O now has or may hereafter have to enforce the Main Agreement,
or any agreements amendatory, collateral or ancillary thereto, as against the
original parties in accordance with the tenor thereof.
6.2 Nothing herein or in the said Schedule "D" contained affects or waives any
right that A-D-P now has or may hereafter have as against their respective
assignors.
ARTICLE VII
General
7.1 This Agreement shall enure to the benefit of, and shall bind, the parties
hereto and their respective successors and assigns.
7.2 This Agreement shall remain in effect for the term of the Main Agreement.
7.3 This Agreement may be executed in several counterparts each of which so
executed shall be deemed to be an original and shall be binding upon the party
executing the same upon its execution and delivery thereof, as soon as each
party hereto has executed and delivered a counterpart thereof.
IN WITNESS WHEREOF the parties hereto have executed this Agreement with
effect on April 1, 1966.
CANADA SOUTHERN PETROLEUM LTD.
----------------------------------------
----------------------------------------
<PAGE>
MAGELLAN PETROLEUM CORPORATION
----------------------------------------
----------------------------------------
OIL INVESTMENTS, INC.
----------------------------------------
----------------------------------------
ALMINEX LIMITED
----------------------------------------
----------------------------------------
PAN AMERICAN PETROLEUM CORPORATION
----------------------------------------
----------------------------------------
DOME PETROLEUM LIMITED
----------------------------------------
----------------------------------------
PROVO GAS PRODUCERS LIMITED
----------------------------------------
----------------------------------------
<PAGE>
AFFIDAVIT OF EXECUTION
C A N A D A )
)
PROVINCE OF ALBERTA )
)
TO WIT: )
I, ANNA THELMA DRAY, of the City of Calgary in the Province of
Alberta, Secretary, MAKE OATH AND SAY:-
1. That I was personally present and did see JOHN C. MEEKER,
Attorney in Fact for Pan American Petroleum Corporation named in the within
instrument, who is personally known to me to be the Attorney in Fact for Pan
American Petroleum Corporation named therein, duly sign and execute the same for
the purposes named therein.
2. That the same was executed at the City of Calgary, in the
Province of Alberta, and that I am the subscribing witness thereto.
3. That I know the said JOHN C. MEEKER and he is in my belief of
the full age of twenty-one years.
SWORN before me at the City of )
)
Calgary, in the Province of )
)
Alberta, this 7th day of )
)
November A.D. 1966 ) ____________________________________
)
)
- ---------------------------------------)
A Commissioner for Oaths in and for the
Province of Alberta
<PAGE>
SCHEDULE "D"
attached to and forming part of an agreement made as of May 28,
1959, between Canada Southern Petroleum Limited, Magellan
Petroleum Corporation, Oil Investments, Inc., Home Oil Company
Limited, United Oils, Limited and Signal Oil and Gas Company.
(as added by amending agreement dated April 1, 1966)
CARRIED INTEREST PROVISIONS
ARTICLE I
Definitions
In this Schedule "D" the following words and phrases shall have the
following respective meanings, namely:
1.1 "Accounting Procedure" means Schedule "C" to the Main Agreement.
1.2 "Block" means one of the three areas each comprising a number of the said
permits. Block "A" shall comprise Permits 1006, 1007, 1132, 1133 and 1135. Block
"B" shall comprise Permits 1134, 1136, 1157, 1152, 1153, 1154, 2302, 2713 and
the North half of each of Permits 2301 and 1137. Block "C" shall comprise
Permits 1149, 1150, 1151, 1155, 1156 and Permits 1173 to 1181 inclusive.
1.3 "Carried interest" means the interest described in this Schedule "D".
1.4 "The carried interest lands" means the lands which are from time to time
subject to the carried interest of C-M-O under this Schedule "D".
1.5 "The Department" means the Department of Northern Affairs and National
Resources of Canada or its successor or successors in authority.
<PAGE>
1.6 "The Main Agreement" means the Agreement dated May 28, 1959 of which this
Schedule "D" forms part, as amended by agreement dated April 1, 1966 among the
parties to the Main Agreement and/or their assignee successors in interest.
1.7 "The Operating Procedure" means Schedule "B" to the Main Agreement.
1.8 "The Permits" means the said Permits comprised in Blocks A, B and C as
listed in Clause 1.2 hereof; and, except where the context otherwise requires,
includes the lands covered by the said Permits.
1.9 "Petroleum substances" means petroleum, natural gas, sulphur or any other
substances an interest in which is derived under the Permits or under leases or
other documents of title selected therefrom or otherwise made subject hereto.
ARTICLE II
C-M-O Carried Interest
2.1 When this Schedule "D" has become effective pursuant to Clause 8.2 of the
Main Agreement as amended, C-M-O's interest in the Permits shall thereafter be
in the nature of a fifty percent (50%) carried interest and the Permits shall
become carried interest lands. C-M-O's said interest in the Permits is
hereinafter referred to as "the C-M-O carried interest" or "C-M-O's carried
interest".
2.2 The parties hereto hereby transfer and set over among them all such right,
title and interest as shall required to vest in C-M-O the C-M-O carried
interest. No formal transfer need, however, be made of the registered interest
of the parties in the said Permits for this purpose.
<PAGE>
2.3 C-M-O's carried interest shall be and constitute the right of C-M-O (in
addition to the further rights hereinafter set forth) to receive, and the
obligation of A-D-P to pay to C-M-O fifty percent (50%) of the amount by which
the operational receipts from each Block on and after April 1, 1966 exceed the
operational costs from each respective Block on and after April 1, 1966. A-D-P
covenants and agrees to pay to C-M-O in cash the amounts (if any) due to C-M-O
from time to time under this Clause 2.3 with respect to each Block.
2.4 Subject to the provisions of the Operating Procedure relating to a party's
right to decline to participate in an operation and the right to surrender
pursuant to the Operating Procedure, A-D-P shall from April 1, 1966 maintain the
Permits and the leases or other documents of title derived therefrom in good
standing, shall pay all lease rentals, make all required deposits or guarantees
with the Department, perform all exploratory work and development work on the
Permits, and pay any costs or expenses whatever with respect to the further
holding, managing, exploration and development of the Permits (whether held in
permit or lease stage or howsoever). This Clause shall not apply to any
expenditure by C-M-O with respect to any operation instituted by it as
hereinafter provided, nor shall it prevent a full settlement of accounts among
the parties hereto as at March 31, 1966, with respect to matters accruing up to
and including March 31, 1966.
<PAGE>
2.5 The "operational receipts" from a Block for the purposes of Clause 2.3
hereof and wherever used herein shall mean the cumulative total of all receipts
(other than refunds of deposits with the Department) by A-D-P on and after April
1, 1966 from the Block, including the proceeds of sale of petroleum substances
from the Block and any refund of or cash contribution toward any operational
costs charged to that Block and any proceeds realized upon the disposal of any
machinery or equipment charged to the operational costs for that Block, and
including, without limiting the generality of the foregoing, any receipts which
the Operator would be required to credit to the joint account under the
Accounting Procedure.
2.6 The "operational costs" with respect to a Block for the purpose of Clause
2.3 hereof and wherever used herein shall mean the cumulative total of all
expenditures made by A-D-P on and after April 1, 1966 on or with respect to that
Block, including, without limiting the generality of the foregoing, all permit
renewal fees, lease rentals, exploratory costs, development costs, production
costs and marketing costs with respect to that Block, and including all lessor's
royalties and the overriding royalties to which the permits in that Block are
subject as described in Schedule "A" to the Main Agreement; provided that no
cost shall be charged as an operational cost unless it can be charged to the
joint account under the Accounting Procedure (or, with respect to the cost of an
independent operation, could be so charged if the operation were for the joint
account).
2.7 When the operational receipts with respect to a Block exceed the operational
costs with respect to that Block, C-M-O shall become entitled to its share of
such excess, notwithstanding that with respect to the other Block or Blocks the
operational costs may still exceed the operational receipts.
<PAGE>
2.8 If any operational costs are incurred which cover more than one Block in
such a manner that a division of such costs on an acreage basis would not be a
fair division thereof or if it is difficult or impossible to determine to which
Block the operational costs should be attributed, A-D-P shall allocate such
costs according to its best bona fide estimate of the value or relationship to
each Block of the costs thus incurred.
ARTICLE III
Accounting for the C-M-O Carried Interest
3.1 On and from April 1, 1966, C-M-O's rights to receive statements and to make
audits with respect to the C-M-O carried interest shall be the same as though
C-M-O were a joint operator (non-operator) under the Accounting Procedure.
3.2 A-D-P agrees to maintain accounts and render statements for each Block so
that the operational receipts and the operational costs may be separately
determined for each Block and so reported to C-M-O. Paragraph 2 of Schedule "C"
shall be followed in rendering statements.
3.3 Where a statement of the C-M-O carried interest account for any month shows
an amount due C-M-O, payment of the amount due C-M-O shall be forwarded either
with such statement or not more than 15 days thereafter.
3.4 C-M-O shall not be obligated to repay to A-D-P any moneys paid on account of
the C-M-O carried interest with respect to a Block if the operational costs for
that Block again exceed the operational receipts for a Block after a period when
the reverse was the case.
<PAGE>
ARTICLE IV
Right to Access and Information, Etc.
4.1 Except as may be expressly hereinafter provided, C-M-O's rights to
information and data with respect to all operations on the Permits (including
that received in trade which is related to the Permits) shall be the same as
though such operations were being carried on for the joint account of C-M-O and
A-D-P under the Operating Procedure; and, with the said exception, C-M-O's right
of access to the Permits while operations are being conducted thereon shall be
the same as if C-M-O were participating therein as operations for the said joint
account.
4.2 With the consent of all parties hereto, A-D-P or any member or members of
the A-D-P group shall have the right to trade seismic data obtained from or with
respect to the Permits. Such data shall otherwise be kept confidential by the
parties.
4.3 Canada Southern alone or its assigns shall represent C-M-O in exercising the
rights of C-M-O under Clause 4.1 hereof while the C-M-O carried interest is in
effect.
ARTICLE V
Independent Operations While Carried Interest in Effect
5.1 For the purposes of the C-M-O carried interest it shall be immaterial
whether operational costs and operational receipts are incurred or received by
one or more members of the A-D-P group, should independent operations be carried
out by less than all the members of the A-D-P group pursuant to Clause N of the
Operating Procedure (or howsoever).
<PAGE>
5.2 C-M-O shall have the right to propose the drilling, deepening or re-working
of a well (hereinafter called "the operation"), on any lands subject to the
C-M-O carried interest which have been selected under lease from the Permits, in
the same manner and under the same conditions as provided in Clause N.2 of the
Operating Procedure; provided that the approval of a drilling or deepening
operation in a budget of the A-D-P group shall not prevent C-M-O from proposing
an operation under the said Clause N.2 unless A-D-P undertakes to C-M-O to carry
out the operation approved in the said budget within the time proposed in such
budget (or, if earlier, within six months). No such operation may be proposed by
C-M-O unless upon the basis that either all members of the C-M-O group will
participate therein or that the participating members of the C-M-O group shall
bear at least fifty percent (50%) of the cost of the operation. While C-M-O's
interest in a Block is a carried interest and the operation proposed by C-M-O is
with respect to that Block, A-D-P agrees that A-D-P shall act as one party in
electing whether to participate in the operation so proposed by C-M-O. If A-D-P
does elect so to participate, the operation shall be carried out for the joint
account of A-D-P and C-M-O, and C-M-O shall pay in cash its share of the cost of
the operation in the same manner as a Joint Operator. The share of the costs of
the operation paid by C-M-O shall not be operational costs. Otherwise, however,
the well and the lands upon which the operation is carried out shall remain
subject to the C-M-O carried interest.
<PAGE>
5.3 If A-D-P elects not to participate in an operation proposed by C-M-O under
Clause 5.2 hereof, and if C-M-O carries out the operation, C-M-O shall upon
completion of the operation be entitled to the same penalty under Clause N of
the Operating Procedure as if C-M-O had proposed the operation as a Joint
Operator. Any cash paid by A-D-P to participate in the operation with respect to
a development well under Subclause N.2(c) (ii) of the Operating Procedure shall
not be operational costs except to the extent of the amount which A-D-P would
have borne had A-D-P initially participated with C-M-O in the operation. If
A-D-P or one or more members of the A-D-P group elects by payment of cash under
Subclause N.2(c) (ii) of the Operating Procedure to participate in the operation
with respect to a development well after the operation has been carried out by
C-M-O, the spacing unit of that well (subject to Clause N.3 of the Operating
Procedure) shall cease to be subject to the C-M-O carried interest and shall be
held by the parties participating therein as joint lands for their own account
pursuant to the Operating Procedure.
5.4 Any acreage which is forfeited to C-M-O by reason of the provisions of
Clause N of the Operating Procedure, where A-D-P does not participate in an
operation proposed by C-M-O, shall cease to be subject to this Schedule "D" or
to the Main Agreement (except as to lease selection under Clause O of the
Operating Procedure).
5.5 Except as provided in Clauses 5.3 and 5.4 hereof, all lands in a Block upon
which C-M-O has conducted the operation, whether or not A-D-P participated
therein, shall continue to be subject to the C-M-O carried interest.
<PAGE>
5.6 If at the time C-M-O gives notice of election to convert the C-M-O carried
interest to a working interest as hereinafter provided any operations are in
progress pursuant to Clause E of Schedule "B" on the Permits, C-M-O shall be
deemed to have elected to participate in those operations. If, however, notice
of a proposed operation has been given under Clause N.2 of the Operating
Procedure and the period for replying to such notice has not expired, the party
proposing the operation shall give C-M-O a new notice thereof under the said
Clause N.2 when notice of C-M-O's conversion of the C-M-O carried interest to a
working interest has been received; provided that the proposing party may
proceed with the operation, if it so wishes, without awaiting C-M-O's election
with respect to participation in the operation, in which event the election of
C-M-O shall be treated as retroactive for determining costs and participating
interests.
ARTICLE VI
Work Credits
6.1 For the purposes of the C-M-O carried interest the operational costs shall
be calculated as if no grouping of permits or leases (for the purpose of
permitting the allocation of work credits as provided by statute or regulation)
had occurred, whether work credits earned elsewhere are applied to lands subject
to the C-M-O carried interest or whether work credits earned on lands subject to
the C-M-O carried interest are applied to other lands.
<PAGE>
6.2 While the C-M-O carried interest is in effect with respect to one or more
Blocks, A-D-P shall by April 30 of each year after 1966 submit to C-M-O its
proposed allocation of work credits among the Blocks. Unless C-M-O gives notice
to A-D-P within 30 days that it is dissatisfied with such allocation, the
allocation shall be deemed acceptable. If C-M-O gives such notice the parties
will attempt to arrive at a mutually-agreeable allocation. If either party is
dissatisfied with the progress of the negotiations in this respect it may elect
to have the available work credits allocated among the Blocks on an acreage
basis. Allocations of work credits under this Article shall be binding upon
C-M-O if and when it elects to convert the C-M-O carried interest to a working
interest.
6.3 Work credits earned by operations by C-M-O under Article V hereof shall,
except to the extent that they may be applied to reduce costs with respect to
lands forfeited to C-M-O under Article V hereof or lands held jointly as working
interests by C-M-O and A-D-P under the said Article V, be treated as work
credits earned by A-D-P and shall be allocated under Clause 6.2 hereof.
6.4 Upon the surrender of any lands out of a Block to another party or parties
to this Agreement the then existing unused work credits applicable to that Block
shall be deemed to have been allocated equally among each acre in that Block.
ARTICLE VII
Conversion of Permits to lease
7.1 A-D-P shall maintain all the said Permits in permit form until at least
their respective anniversary dates in 1967.
<PAGE>
7.2 A-D-P shall maintain in permit form until the earliest permit anniversary
date falling in the year 1969 all the Permits except the total of
(a) the Permits or parts thereof which may meanwhile be required
to be converted to lease by the Department; and
(b) the Permits or parts thereof which A-D-P may meanwhile
surrender to C-M-O;
and
(c) Permit areas totaling not more than 400,000 acres in area.
7.3 A-D-P shall maintain in permit form until at least the earliest permit
anniversary date falling in the year 1970 all the Permits except the total of
(a) the Permits or parts thereof which may meanwhile be required
to be converted to lease by the Department; and
(b) the Permits or parts thereof which A-D-P may meanwhile
surrender to C-M-O;
and
(c) Permit areas totaling not more than 550,000 acres in area,
inclusive of 7.2 (c) areas above.
7.4 A-D-P shall maintain in permit form until at least the earliest permit
anniversary date falling in 1971 all the Permits except the total of
(a) the Permits or parts thereof which may meanwhile be required
to be converted to lease by the Department; and
(b) the Permits or parts thereof which A-D-P may meanwhile
surrender to C-M-O;
and
(c) Permit areas totaling not more than 650,000 acres in area,
inclusive of 7.2 (c) and 7.3 (c) areas above.
<PAGE>
7.5 Subject to the foregoing Clauses of this Article VII, A-D-P may convert the
remaining Permits to lease as A-D-P sees fit and C-M-O shall Join in such
conversion and shall accept the selection of leases proposed by A-D-P; provided
that if C-M-O has prior to the time of any such lease selection converted the
C-M-O carried interest to a working interest, Clause O of the Operating
Procedure shall apply to the lease selection.
7.6 If, while the C-M-O carried interest is in effect, A-D-P does not propose to
take leases of the maximum area which may by law be leased from any permit,
A-D-P shall so advise C-M-O not less than 30 days before the lease selection is
to be forwarded to the Department. C-M-O shall then have the right to select
further leases for C-M-O's account from that permit up to the maximum area
permitted by law, provided that any such selection by C-M-O shall not cause any
change in the lease selection already made by A-D-P. C-M-O shall promptly
furnish to A-D-P the funds required to take such C-M-O leases.
For the purpose of this Clause 7.6 A-D-P shall be deemed to have taken
the "maximum area" if it selects leases with the intention of converting the
entire permit to lease, notwithstanding that its manner of lease selection may
not result in the maximum acreage which it might be possible to select from the
permit if the selection were made in some other manner.
7.7 If any selection of leases must be made in the names of all parties hereto
or if such leases must be issued in the names of all parties hereto or to
parties not owning the beneficial interest therein in the same manner as
provided herein or in the Main Agreement, the parties shall execute such
assignments and documents as may be necessary to transfer the leases to their
beneficial owners.
<PAGE>
7.8 All such leases selected by A-D-P from the permits (except for C-M-O's
account under Clause 7.6 hereof) shall continue to be subject to the C-M-O
carried interest with respect to the Block in which the respective permit is
contained, unless C-M-O has converted the C-M-O carried interest to a working
interest in that Block prior to the said lease selection.
7.9 All acreage of the permits which is not selected under lease by A-D-P for
A-D-P's account under the foregoing provisions of this Article shall cease to be
subject hereto or to the Main Agreement, except as provided in Article VIII
hereof.
7.10 In selected leases from Permits 1137 and 2301, it is recognized that,
unless otherwise agreed with the owners of the south half of each of Permits
1137 and 2301, the said owners shall be entitled to select one-half the total
acreage which may be acquired under lease out of Permits 1137 and 2301
respectively, such selection to be made from acreage in the south half of each
of the said two permits. By mutual agreement with such owners, lease selection
may be made across the boundaries of the north and south half of each or either
of the said two permits, in which case the portion of such leases falling within
each respective half-permit shall be assigned to the owners of that half-permit.
7.11 A-D-P is hereby given the right to arrange with the Department for a common
renewal date for all or some of the Permits, as a matter of convenience of
administration and programming of work requirements. With respect to each of
those Permits for which such common renewal date is approved by the Department,
the "anniversary date" shall thereafter for all purposes hereof be such common
renewal date.
<PAGE>
7.12 To the extent that A-D-P is required under this Article VII to keep the
said Permits in permit form and therefore to make deposits with the Department
as a guarantee for the performance of exploratory work, A-D-P agrees that it
will in fact expend on exploratory work on the Permits an amount sufficient to
cause to be refunded all such deposits made and to be made in the calendar year
1966. A-D-P agrees to commence on or before February 1, 1967 the exploratory
work necessary to ensure refund of the said deposits made and to be made in the
calendar year 1966.
ARTICLE VIII
After-Acquired Lands
8.1 If any Permit is surrendered to the Department by both C-M-O and A-D-P
(other than for the mere purpose of selecting oil and gas leases therefrom), the
area of the surrendered Permit shall cease to be subject in any way hereto.
8.2 If any lease selected from a Permit is surrendered to the Department by both
C-M-O and A-D-P (except for replacement or amendment) the area of that lease
shall cease to be subject in any way hereto.
8.3 If any lease is acquired by A-D-P or C-M-O in such circumstances that the
acquiror is expressly required hereunder to offer an interest therein to the
other party and such other party declines such offer, the lease shall cease to
be in any way subject hereto.
<PAGE>
8.4 If, prior to March 31, 1973, any lands (hereinafter called "the acquired
lands") all or not less than twenty-five (25%) percent of which fall within the
original area of a Permit or Permits and any part of which lie within one mile
of the lands then subject to the C-M-O carried interest (excluding lands which
become subject to the C-M-O carried interest by reason of this Clause 8.4)
should be for sale, and provided the acquired lands are not lands which have
ceased to be subject hereto by reason of Clauses 8.1, 8.2 or 8.3 hereof, the
parties shall take the following action:
(a) If no well is then being drilled by A-D-P on lands subject to the
C-M-O carried interest, and if A-D-P acquires any of the acquired
lands, A-D-P shall advise C-M-O what parcels of the acquired lands
A-D-P has acquired. C-M-O shall then have the right for a period of ten
(10) days after receipt of such advice to elect to have all the
acquired lands which have been acquired by A-D-P included in the lands
subject to the C-M-O carried interest.
(b) If A-D-P is then drilling a well on lands subject to the C-M-O
carried interest, and if A-D-P advises that the well is being timed
for a Crown sale (and such is the case) A-D-P shall have the right to
withhold from C-M-O all information and derrick floor privileges with
respect to the well until after the Crown sale, and the offer to C-M-O
to have any acquisition by A-D-P at the Crown sale included in the
lands subject to the C-M-O carried interest shall be made to C-M-O not
later than ten (10) days after the Crown sale, accompanied by all the
information which A-D-P had with respect to the said well at the time
it submitted its bid for the posted lands. Subclause (a) shall then
apply to such offer. If, however, A-D-P does not propose to bid at the
Crown sale where a well is timed for the sale as aforesaid, A-D-P shall
<PAGE>
so advise C-M-O not later than forty-eight (48) hours before the Crown
sale and give C-M-O all the information (including derrick floor
privileges) available to A-D-P from the said well at that time. If
C-M-O then bids at the Crown sale and acquires any of the posted
lands, such acquisition shall cease to be subject in any way hereto.
(c) C-M-O agrees that, except as provided in Subclause (b), C-M-O
will not bid independently on any posted lands in which it must be
offered a carried interest under Subclause (b) of this Clause 8.4.
8.5 If prior to March 31, 1973, and while it holds the C-M-O carried interest
position in a Block, C-M-O should acquire from other than A-D-P any lands in
that Block (or which lie at least twenty-five (25%) percent in that Block) and
provided such lands have not then ceased to be subject hereto by reason of the
provisions of Clauses 8.1 to and including 8.4 hereof, C-M-O shall promptly
offer such lands to A-D-P at C-M-O's cost thereof; and if A-D-P promptly pays
for such lands, they shall become subject to the C-M-O carried interest
hereunder in that Block. Such offer shall be accompanied by all the information
which C-M-O has with respect to the acquisition and shall be open for acceptance
by payment for ten (10) days (only) after the receipt thereof.
This Clause 8.5 shall not apply to leases selected for C-M-O's own
account from the Permits under Clause 7.6 hereof.
<PAGE>
If C-M-O elects to have any acquired lands made subject to the C-M-O
carried interest pursuant to Clause 8.4 hereof, or should any acquisition of
lands be taken over by A-D-P from C-M-O pursuant to this Clause 8.5 the
acquisition thus made subject to the C-M-O carried interest shall be added to
the Block in which are situated or partly situated the lands which are the
subject of such acquisition. Should such acquisition include lands in two
Blocks, both of which are subject to the C-M-O carried interest, the acquisition
(and the cost thereof) shall be divided between the respective Blocks in which
they lie. If such division causes a parcel to be divided between two Blocks, the
acquisition cost of that parcel shall be divided on an acreage basis.
Any such acquisition thus added to a Block shall thereupon become
subject to all the provisions hereof (including the right of conversion)
relating to the C-M-O carried interest lands in that Block.
The operational costs for the Block to which is added any acquisition
made subject to the C-M-O carried interest under Clause 8.4 or this Clause 8.5
hereof shall be increased by the bonus consideration and other costs to A-D-P of
the acquisition thereof, and in the case of a bonus consideration there shall be
added to the operational costs for the Block six (6%) percent per annum of the
said bonus consideration until such time as either (i) the operational receipts
for that Block have exceeded the operational costs (including such bonus
consideration and interest) for that Block or (ii) the operational receipts from
the acquired parcel have exceeded the said bonus consideration plus interest
with respect to that parcel, whichever time is earlier.
8.6 No party hereto shall, by use of a parent company, subsidiary, affiliate or
associate company or any company nominee or person employed by or controlled by
such party, evade any of its obligations under this Article VIII.
<PAGE>
8.7 Should C-M-O convert the C-M-O carried interest to a working interest, the
provisions of this Clause 8.7 shall apply thereafter in lieu of the foregoing
provisions of this Article VIII, (except Clauses 8.1, 8.2 and 8.3 hereof, which
shall remain in full force and effect):
(a) If prior to March 31, 1973, any lands, all or not less than 25% of
which lie within an area bounded by lines drawn (1) outside of a Permit
area (2) parallel to the respective boundaries of that Permit area and
(3) one mile from the respective boundaries of that Permit, should be
posted for Crown sale (as to the petroleum and/or natural gas rights
thereunder), the parties hereto shall meet to attempt to arrive at a
joint bid for such posted lands or for one or more parcels thereof. If
the parties do not agree upon a joint bid, each of the parties shall
disclose to the other parties the bid it proposes to make at such Crown
sale for the respective parcels upon which it intends to bid. If a
joint bid is agreed upon, it shall be submitted by the Manager-Operator
for the account of the parties, each of whom shall be required to
provide its pro rata share of the moneys required to be tendered with
such bid. If a joint bid is not agreed upon and any party is successful
in acquiring at such Crown sale a parcel or parcels at a price which
varies more than 5% from the amount the acquiror revealed as its
proposed bid for such parcel or parcels, the acquirer shall be required
to offer a pro rata share of the acquisition at cost to the other
parties hereto. The said offer shall remain open for a period of ten
days only (or for 48 hours only if a well is then being drilled within
one mile of the parcel or parcels subject to the offer).
<PAGE>
(b) If any party hereto should acquire any interest in lands to which
Subclause (a) of this Clause 8.7 would apply if such lands were the
subject of a Crown sale, but such acquisition is made by way of other
than Crown sale, the acquiror shall offer participation at cost in such
acquisition to the other parties hereto. Subclause (a) shall apply as
to acceptance of such offer.
(c) For the purposes of this Clause 8.7, references to parties hereto
shall refer to the individual parties to this agreement rather than to
the A-D-P group and the C-M-O group as such; and a "pro rata share"
shall mean pro rata to the following percentages:
Canada Southern - 45.00%
Magellan - 4.00%
Oil Investments - 1.00%
Alminex - 2.50%
Pan American - 25.00%
Dome - 15.00%
Provo - 7.50%
(d) Any party hereto who (in default of its obligation so to do) does
not comply with the foregoing provisions of this Clause as to bidding
at the Crown sale shall in any event be obliged to offer to the other
parties hereto an interest in every acquisition at such Crown sale in
the same manner and extent as above provided for a party hereto who is
required to offer an interest in its acquisition to the other parties
hereto.
8.8 The provisions of this Article shall not apply to any lands within the
south half of Permit 1137 and the south half of Permit 2301.
<PAGE>
ARTICLE IX
Gas Plants and Gathering Systems
9.1 If A-D-P during the period in which C-M-O holds the C-M-O carried interest
in the Blocks or any of them as aforesaid, proposes to construct gas gathering
systems and a gas processing plant for the purpose of putting natural gas from
that Block or those Blocks in a marketable state or otherwise to process it for
the removal of liquids and/or sulphur, A-D-P shall advise C-M-O of such
proposal, giving C-M-O the cost estimates and proposed specifications of such
gathering systems and plant. C-M-O shall have ninety (90) days after receipt of
such information to advise A-D-P whether C-M-O elects to participate in the said
gathering systems and plant as a fifty (50%) percent working interest owner. If
C-M-O elects so to participate it shall be required to bear and pay in cash its
fifty (50%) percent share of the cost of construction of the said gathering
systems and plant.
9.2 If C-M-O does not elect so to participate, A-D-P may proceed to construct
the gathering systems and the plant for A-D-P's account and risk. Whether the
said plant and gas gathering systems are constructed by C-M-O and A-D-P or
solely by A-D-P, the cost of construction, operation and maintenance thereof,
and the receipts and revenues therefrom, shall not be added to the operational
costs or the operational receipts respectively for the purposes of the C-M-O
carried interest, but the following provisions of this Article shall apply
thereto:
(a) The said gathering systems and plant shall be owned and operated by
the parties hereto who bear the cost thereof as provided in this Clause
9.2 and as a project separate and apart from the ownership and
operation of the lands subject hereto.
<PAGE>
(b) The owners of the said gathering systems and plant shall have and
are hereby exclusively granted the right to gather and process the gas
produced from the lands subject hereto and to the Main Agreement which
are (or are to be) served by the said gathering systems and plant, and
to charge for such gathering and processing a fee or charge which will
limit cumulative net revenue to the said owners of the said gathering
systems and plant in accordance with the principles expounded in the
Alberta Public Utilities Board's Shell-Jumping Pound decision of
December, 1961, assuming the following in applying such principles:
(a) a rate of return of 8 1/2% on rate base;
(b) a 50/50 debt - equity ratio;
(c) a 6% interest rate on debt;
(d) a 11% return on equity capital;
(e) an income tax allowance to be computed as 50% of the
taxable income consisting of the allowed return on
equity and debt capital plus income tax allowance,
less interest on debt capital;
(f) depreciation on a unit of throughput basis (that is,
the factor to be used in determining the amount of
depreciation to be allowed in any year is arrived at
by dividing the throughput of the gathering systems
and plant by the remaining recoverable gas reserves
at the beginning of the period under review);
(g) and provisions for working capital equal to 25% of
annual operating costs.
(c) The operational costs for a Block shall include the fee or charge
which is made under Subclause (b) for gathering and processing gas
produced from that Block while C-M-O holds the C-M-O interest therein.
<PAGE>
(d) If any plant to which this Clause 9.2 applies is also used in any
calendar year to process gas from sources other than the lands subject
hereto (and the right to process such other gas is expressly hereby
given) then all costs (including depreciation) of processing gas at the
plant in that year, and the rate base for that year, shall for the
purposes of determining the charge or fee to be made under Subclause
(c) of this Clause 9.2 be divided among such other gas and gas from the
lands subject hereto in proportion to the respective volumes of gas
processed from such other lands and from the lands subject hereto.
(e) If the said gathering systems or any part thereof are used to
transport such other gas, an allocation of the costs of the gathering
systems or parts thereof so used shall be made in the same manner
mutatis mutandis in proportion to the respective volumes of gas
transported in the calendar year.
ARTICLE X
Proposed Surrender of Carried Interest Lands
10.1 If A-D-P proposes to surrender to the Department any lands which are
subject to the C-M-O carried interest, and if the lands proposed to be
surrendered are then held in permit form, A-D-P shall give notice of such
proposed surrender not less than 90 days before the next ensuing anniversary
date of the permit (or respective permits, if more than one) which it is
proposed to surrender. Unless within 60 days after receipt of such notice C-M-O
requests in writing an assignment to C-M-O of the lands which A-D-P has proposed
to surrender, C-M-O shall be deemed to have elected to join in such surrender
and shall in fact join therein.
<PAGE>
If C-M-O requests such assignment, A-D-P shall assign to C-M-O the
interest which A-D-P had proposed to surrender, and such interest shall cease to
be subject hereto or to the Main Agreement.
10.2 If A-D-P proposes to surrender to the Department any lands which are
subject to the C-M-O carried interest but which are not then in permit form, the
provisions of Clause P of the Operating Procedure shall apply to such surrender,
for which purpose A-D-P and C-M-O shall each act as one party. If the interest
proposed to be surrendered is assigned to C-M-O pursuant to the said Clause P,
that interest shall cease to be subject in any way hereto.
ARTICLE XI
Operations Generally
11.1 With respect to lands subject to the C-M-O carried interest C-M-O shall not
be "Joint Operators" under the Operating Procedure, except as otherwise
expressly provided herein. C-M-O shall be entitled to vote, however, for the
appointment of a Manager Operator under the Operating Procedure as if the C-M-O
carried interest were a working interest; provided that the Manager Operator
while the C-M-O carried interest is in effect shall be a member of the A-D-P
group unless A-D-P otherwise unanimously agrees or unless no member of the A-D-P
group fills the position of Manager Operator for a period of thirty (30)
consecutive days.
11.2 If C-M-O fails to exercise its vote to join in the appointment of a Manager
Operator as aforesaid, the Manager Operator shall be appointed by A-D-P, and
each member of the A-D-P group shall have a percentage vote for this purpose pro
rata to its working interest as if the working interests of the A-D-P group
totaled 100%.
<PAGE>
ARTICLE XII
Conversion of C-M-O Carried Interest
12.1 With respect to each Block, C-M-O shall have the right at any time during
the term hereof to convert the C-M-O carried interest in that Block to a fifty
(50%) percent undivided working interest therein by paying to A-D-P one-half of
the amount by which the operational costs for that Block exceed the operational
receipts for that Block; provided that if at the effective date of such
conversion the operational receipts exceed the operational costs with respect to
that Block, such conversion may be made without any payment to A-D-P.
12.2 Upon converting the C-M-O carried interest in a Block to a working interest
as provided in Clause 12.1 and making the payment, if any, due thereunder, C-M-O
shall, without further formality or assignment, have and hold an undivided
one-half working interest in all wells, batteries, dehydrators, treaters,
compressors, tanks, flow lines, and equipment and material of all kinds in that
Block, the cost of which had been paid as operational costs or incurred prior to
the date hereof (subject to Article IV of the said amending agreement of April
1, 1966).
12.3 Upon converting the C-M-O carried interest to a working interest in a
Block, C-M-O shall then become and be subject to all the rights and liabilities
of a Joint Operator under the Operating Procedure with respect to that Block.
12.4 C-M-O shall give A-D-P written notice of its intention to convert the C-M-O
carried interest to a working interest in any Block or Blocks, and such
conversion shall become effective on the first day of the calendar month which
falls next after the notice, provided the payment, if any, due A-D-P under
Clause 12.1 hereof is made. Such payment will be adjusted as of the effective
date as soon as a statement to that date is prepared and submitted to C-M-O by
A-D-P.
<PAGE>
12.5 Where any lands cease to be subject to the C-M-O carried interest, that
fact shall not affect the operational receipts and the operational costs
theretofore credited or charged to the account of the C-M-O carried interest.
ARTICLE XIII
Conversion By Less Than All C-M-O
13.1 Each member of the C-M-O group shall have the right separately to convert
that member's share of the C-M-O carried interest to a working interest in a
Block or Blocks. The working interest obtained upon such conversion by such
member (hereinafter called "a converting member") shall be that shown opposite
the converting member's name below, namely:
Canada Southern - 45.00%
Magellan - 4.00%
Oil Investments - 1.00%
13.2 In making such separate conversion the converting member
(1) Shall for the purposes of Clause 12.1 hereof pay A-D-P a fraction
of one-half the amount by which the operational costs exceed the
operational receipts, which fraction shall be
(i) in the case of Canada Southern - 45/50ths
(ii) in the case of Magellan - 4/50ths
(iii) in the case of Oil Investments - 1/50th
(2) Shall for the purposes of Clause 12.2 hereof obtain a working
interest in wells and other items listed in Clause 12.2 hereof equal to
the same fraction as in Subclause 13.2(1) hereof of one-half the entire
working interest therein.
<PAGE>
13.3 After any such conversion is made by less than all the members of the C-M-O
group, the percentage carried interest held by each non-converting member of the
C-M-O group shall be that shown opposite its name where first listed in Clause
13.1 hereof. A converting member shall bear no share of the burden of the C-M-O
carried interest held by the non-converting members of the C-M-O group.
13.4 The payment (if any) made under Clause 12.1 hereof by a converting member
of the C-M-O group shall not be considered as operational receipts, nor shall
any receipts accruing to or expenditures made by a converting member be
considered as operational receipts or operational costs for the purposes of this
agreement.
13.5 Unless and until such time as Canada Southern is a converting member with
respect to a Block, a converting member who proposes an operation under Clause N
of the Operating Procedure shall not be entitled to proceed with the operation
unless all members of the C-M-O group participate therein. If less than all the
members of the A-D-P group participate in any such proposed operation, the
participating members of the A-D-P group shall bear pro rata the same share of
the cost of the operation as if all members of the A-D-P group had elected to
participate in the operation and shall be entitled to the entire penalty
accruing from the non-participating member or members of the A-D-P group,
subject to the C-M-O carried interest still held by the non-converting members
of the C-M-O group.
13.6 A converting member of the C-M-O group shall not thereby become a member of
the A-D-P group.
<PAGE>
13.7 For the purposes of Article VIII hereof with respect to after-acquired
lands, a converting member of the C-M-O group (provided all members of the C-M-O
group are not then converting members) shall, as between A-D-P and such
converting member, be considered a member of the C-M-O group except that any
interest acquired by A-D-P which is to be offered to C-M-O shall, with respect
to the converting member only, be offered at cost as a working interest rather
than as a carried interest.
13.8 For the purposes of Clause 8.5 hereof, if a converting member acquires any
lands which if acquired by C-M-O would be offered to A-D-P under that clause,
the converting member shall offer A-D-P such acquisition except for a percentage
thereof equal to the converting member's percentage working interest in the
Permits. If A-D-P accepts the offer, A-D-P shall then, as provided in Clause 8.4
hereof, offer to include the acquisition by A-D-P in the lands subject to the
C-M-O carried interest.
ARTICLE XIV
C-M-O Rights Re Sale of Production
14.1 Subject to Article IX of this Schedule "D", while C-M-O holds the C-M-O net
carried interest in a Block C-M-O shall have the right to dispose of 50% of the
petroleum substances produced and saved from that Block (except the portion
thereof required for use in operations on that Block), and to make such
contracts for the sale of the said 50% of such petroleum substances as C-M-O may
wish, provided such contracts shall be at arm's length (or on terms no less
favourable to C-M-O than if made at arm's length) and provided such contracts
are not at terms less favourable than those which A-D-P offers C-M-O in writing
before such contracts are made for the same. The rights of C-M-O under this
clause may be exercised separately with respect to oil and natural gas.
<PAGE>
l4.2 The rights of C-M-O under Clause 14.1 may be exercised only upon the
condition that the proceeds of all such sales shall be assigned to A-D-P and
made payable directly to A-D-P to be applied towards the operational receipts
for the respective Block from which the petroleum substances so sold were
produced, unless and until A-D-P agrees in writing to the contrary after the
operational receipts exceed the operational costs for that Block.
ARTICLE XV
Notice
15.1 For the purposes of Clause X of the Operating Procedure (which shall apply
hereto) and for the purposes of this Schedule D, the addresses of the parties
hereto shall be as follows:
(a) C-M-O and Alminex - as provided in Clause X of the
Operating Procedure
(b) Pan American - 444 Seventh Avenue S. W., Calgary,
Alberta
(c) Dome and Provo - 706 Seventh Avenue S. W., Calgary,
Alberta
Provided that with respect to the C-M-O carried interest, C-M-O agrees that all
notices and communications to be given to or by the members of the C-M-O group
may be given to or by Canada Southern on behalf of the C-M-O group.
COLUMBIA GAS DEVELOPMENT OF CANADA LTD.
1420 STANDARD LIFE BUILDING
639 - 5TH AVENUE S.W.
CALGARY, ALBERTA, CANADA T2P 0M9
(403) 261-8680
February 1, 1977
Canada Southern Petroleum Ltd. Dome Petroleum Limited
505 - 8th Avenue S.W. P.O. Box 200
Calgary, Alberta Calgary, Alberta
T2P 1G2 T2P 2H8
Attention: Mr. M. A. Reasoner Attention: Mr. D. Alan Espey
Amoco Canada Petroleum Company Ltd. Alminex Limited
444 - 7th Avenue S.W #300, 407 - 8th Avenue S.W.
Calgary, Alberta Calgary, Alberta
T2P 0Y2 T2P 1E5
Attention: Mr. Jack Lee Attention: Mr. Jim McDonald
Gentlemen:
Re: North Beaver River Prospect
The following is a summary of the basic terms and conditions under
which Columbia Gas Development of Canada Ltd. (Columbia) will acquire an
interest in the Block A lands (as hereinafter defined) from Canada Southern
Petroleum Ltd. (Canada Southern), Dome Petroleum Limited (Dome), Amoco Canada
Petroleum Company Ltd. (Amoco), and Alminex Limited (Alminex), collectively
referred to as the Farmors.
I. DEFINITIONS
In this agreement:
a) Block A lands shall mean the Block I lands and the Block II
lands.
b) Block I lands shall mean the lands so described in Schedule A
attached hereto.
c) Block II lands shall mean the lands so described in Schedule A
attached hereto.
<PAGE>
d) Leases shall mean the documents of title under which the Block
A lands are held which Leases are more particularly described
in Schedule A attached hereto.
e) HS-CMO Agreement shall mean that agreement dated May 28, 1959
and entered into by Canada Southern Petroleum Ltd., Magellan
Petroleum Corporation, Oil Investments, Inc., Home Oil Company
Limited, Kern County Land Company, Alminex Limited and Signal
Oil and Gas Company.
f) ADP-CMO Agreement shall mean that agreement dated April 1,
1966 and entered into by Canada Southern Petroleum Ltd.,
Magellan Petroleum Corporation, Oil Investments, Inc., Alminex
Limited, Pan American Petroleum Corporation, Dome Petroleum
Limited, and Provo Gas Producers Limited.
g) Existing Agreements shall mean the HS-CMO and the ADP-CMO
Agreements.
h) Carried Interest Provisions shall mean those provisions
contained within Schedule D attached to and forming part of
the HS-CMO Agreement as added by the ADP-CMO Agreement.
i) Carried Interest Account shall mean the amount by which the
operational costs relating to the Block A lands exceed the
operational receipts relating to the Block A lands as those
costs and receipts are defined in the Carried Interest
Provisions.
j) "spacing unit" shall have the meaning given to it in the
HS-CMO Agreement.
II. BLOCK A LANDS
It is Columbia's understanding and the Farmors represent that:
a) The Block A lands are held by the parties hereto in the
percentages of working interest (WI) and carried interest (CI)
as shown in Schedule A attached hereto.
b) The Block A lands are in good standing and are unencumbered
with the exception of:
(1) applicable lessor's royalties.
(2) a 1.5625% Gross Overriding Royalty payable to the
Catawba Corporation.
(3) a 2.5% Gross Overriding Royalty payable to Neil Tracy
by virtue of an agreement dated May 28, 1957 between
Canada Southern Petroleum Ltd. and Neil Tracy.
<PAGE>
c) The Carried Interest Account presently stands at approximately
$360,000.00.
d) Operations on the Block A lands are governed by the Existing
Agreements.
III. RENTALS
Columbia will reimburse the Farmors on a per diem basis for
all rentals attributable to the Block I lands from the date hereof
until Columbia has earned its interest in the Block I lands as herein
provided. Columbia will also reimburse the Farmors for its
proportionate share of the rentals attributable to the Block II lands
on a per diem basis from and after the date hereof. After Columbia has
earned its interest hereunder rentals shall be shared by the parties in
accordance with the Existing Agreements.
IV. TEST WELL
Columbia undertakes, during the 1976-77 winter drilling season
to make its best efforts to commence a well (Test Well) at a location
of its choice, but in proximity to the North Beaver River YT I-27 well,
and will thereafter, at its sole cost, risk and expense, drill the same
to a depth sufficient to test the Nahanni Formation or to a depth of
10,000 feet sub-sea, whichever occurs first (hereinafter called
Contract Depth), and upon reaching Contract Depth will test and
complete or abandon the same in accordance with generally accepted
oilfield practice and applicable government regulations. If due to
circumstances beyond its control Columbia is unable to commence the
Test Well during the 1976-77 winter drilling season, Columbia
undertakes to drill the Test Well in the 1977-78 winter drilling
season.
V. SUBSTITUTIONAL WELL
If in the drilling and/or completing of the Test Well Columbia
encounters severe operating difficulties of a mechanical nature or
impenetrable formations which render further drilling or completion
impractical or impossible Columbia shall give notice thereof to the
Farmors and may then abandon the well. Upon abandonment Columbia shall
have the right, but not the obligation, to commence within 60 days the
drilling of a like well in close proximity to the Test Well and in this
event the substitute well shall be deemed to be the Test Well.
<PAGE>
VI. ABANDONMENT
If Columbia wishes at any time to abandon the Test Well
Columbia shall give notice thereof to the Farmors. The Farmors shall
have the right, jointly or severally, within 48 hours of receipt of the
notice to elect to take over and attempt to complete the Test Well. If
the Farmor(s) successfully completes the well for the production of
petroleum substances, Columbia shall assign to the Farmor(s) all of its
right, title and interest in the Test Well and the spacing unit on
which the same is located. Concurrently, the Farmor(s) shall reimburse
Columbia for the estimated salvage value of the salvagable material and
equipment assigned to the Farmor(s) and Columbia shall not be
responsible for any subsequent abandonment or completion costs.
VII. DATA
In the drilling of the Test Well Columbia shall furnish to the
Farmors on a current basis all pertinent data relating to the drilling
and/or completion of the Test Well. All information acquired by the
parties hereto relating to the Test Well shall be held confidential by
the parties and shall not be divulged to any third party unless agreed
to in writing by each of the Farmors and Columbia.
VIII. COMPLETION
In the event the Test Well is capable of producing natural gas
in paying quantities, Columbia undertakes at its sole cost, risk and
expense, to provide and install the necessary facilities to place the
Test Well on production.
IX. INTEREST EARNED FROM DOME, AMOCO AND ALMINEX
Upon drilling the Test Well to Contract Depth and completing
or abandoning same as herein provided, Columbia will have earned and
Dome, Amoco and Alminex will assign to Columbia, an undivided one-half
of each of such parties beneficial interest (working interest) in and
to the Block I lands.
<PAGE>
X. INTEREST EARNED FROM CANADA SOUTHERN
Upon drilling the Test Well to Contract Depth and completing
or abandoning the same as herein provided, Canada Southern will reduce
its 50% carried interest in and to the Block A lands (excepting
therefrom Sections 27 and 50 contained within Lease No. 411-68) to a
33.33% carried interest and convert the remaining 16.66% carried
interest to a 16.66% working interest which will thereupon be assigned
to Columbia. In addition, Canada Southern will assign to Columbia an
undivided 16.66% working interest in and to Sections 27 and 50
contained within Lease No. 411-68.
XI. CARRIED INTEREST
Upon Columbia earning its interest as herein provided,
Sections 27 and 50 contained within Lease No. 411-68 shall thereupon
also be subject to the Carried Interest Provisions so that Canada
Southern's resultant interest in all of the Block A lands will be in
the nature of a 33.33% carried interest and be subject to the Carried
Interest Provisions.
For greater certainty, each of the working interest owners,
including Columbia, will thereafter bear its proportionate share of the
obligation to advance the operational costs on Canada Southern's behalf
so that the obligations and beneficial interest of each party would be
as follows:
(a) Section 27 contained within Lease No. 411-68:
Company Obligation Beneficial Interest
Dome 34.69% 23.13% working interest
Columbia 65.31% 43.54% working interest
Canada Southern 0.00% 33.33% carried interest
(b) Balance of the Block I lands:
Company Obligation Beneficial Interest
Dome 15.61% 10.41% working interest
Columbia 63.77% 42.51% working interest
Amoco 18.75% 12.50% working interest
Alminex 1.87% 1.25% working interest
Canada Southern 0.00% 33.33% carried interest
<PAGE>
(c) Block II lands:
Company Obligation Beneficial Interest
Dome 33.75% 22.50% working interest
Columbia 25.00% 16.67% working interest
Amoco 37.50% 25.00% working interest
Alminex 3.75% 2.50% working interest
Canada Southern 0.00% 33.33% carried interest
XII. ALLOCATION OF REVENUE
Notwithstanding anything herein contained to the contrary, the
parties agree that all revenue generated from the Block I lands (after
deducting all royalties and operating costs) shall accrue concurrently
and proportionately to:
(1) Columbia until Columbia has recovered the total cost incurred
by Columbia related to the drilling, completing and placing on
production of the Test Well and,
(2) the Farmors (excluding Canada Southern) until such time as
they have recovered an amount equal to that portion of the
Carried Interest Account which is attributable to the Block I
lands. Columbia shall be entitled to conduct an audit of those
amounts which have been included in the Carried Interest
Account.
For greater certainty it is intended that the Carried Interest
Account (as the same relates to the Block I lands) shall be recovered
by the parties advancing the same concurrently and proportionately with
Columbia recovering its costs as herein stated. Thereafter, all revenue
generated from the Block I lands (after deducting all royalties and
operating costs), shall accrue to Columbia in an amount equal to
Columbia's beneficial interest in the spacing unit from which the
revenue is obtained and the balance shall accrue to the Farmors
(excepting Canada Southern) until such time as the Farmors have
recovered the balance of the Carried Interest Account. Thereafter,
revenue shall be shared by the parties in accordance with their working
or carried interest, whichever the case may be, in the spacing unit
from which such revenue is obtained.
<PAGE>
XIII. OPERATIONS
After Columbia has earned its interest hereunder, operations
on the Block I lands shall be conducted in accordance with the Existing
Agreements as hereby amended, and Columbia shall act as Operator. It is
proposed that the overhead rates in the existing accounting procedure
be revised to more accurately reflect current rates. Notwithstanding
the above, the parties undertake to enter into a more formal agreement
which would incorporate the terms hereof and incorporate also those
provisions of the Existing Agreements which remain in effect.
With respect to the Block II lands the Existing Agreements as
hereby amended shall continue in full force and effect.
XIV. PRIOR AGREEMENTS TERMINATED
That Agreement entered into by Canada Southern Petroleum Ltd.,
Dome Petroleum Limited and Provo Gas Producers Ltd. dated January 10,
1963 is hereby terminated. Furthermore, that Letter Agreement dated
June 24, 1959 entered into by Canada Southern, Home Oil Company Limited
and Signal Oil and Gas Company is hereby also terminated.
XV. ALLOCATION OF CREDITS
Any grouping or work credits generated by the drilling of the
Test Well shall be shared equally between Columbia and the Farmors.
XVI. INDEMNITY
Columbia undertakes to indemnify and hold harmless the Farmors
from and against any or all claims, demands, suits or actions arising
out of Columbia's operations hereunder.
XVII. INSURANCE
Columbia will comply with the requirements contained in Clause
I of the HS-CMO Agreement relating to insurance and workman's
compensation. The limits of insurance required therein will be
increased to reflect current costs.
<PAGE>
XVIII. ALLOCATION OF COSTS
The parties agree that all items of cost under this agreement
(including without limitation intangible drilling and development
expenses, depletion, lease rentals, dry hole costs and depreciation)
shall be allocated to the party which contributed the funds therefore.
If the above sets out your understanding of the terms of our agreement
please so indicate by signing and returning the attached copy hereof to the
writer at your earliest convenience.
When accepted by all parties this letter will form a binding agreement
and continue in effect until replaced by more formal documentation.
It is our understanding that in executing this Letter Agreement Canada
Southern is acting on its own behalf and is authorized also to act on behalf of
its partners, Magellan Petroleum Corporation and Oil Investments, Inc.
Yours very truly,
COLUMBIA GAS DEVELOPMENT OF CANADA LTD.
R. W. Prather
CANADA SOUTHERN PETROLEUM LTD. DOME PETROLEUM LIMITED
Per: ____________________________ Per: ____________________________
AMOCO CANADA PETROLEUM COMPANY ALMINEX LIMITED
LIMITED
Per: ____________________________ Per: ____________________________
Enc.
<PAGE>
Page 1 of 2
SCHEDULE A attached to and forming part of
Letter Agreement Dated January 27, 1977
Between Canada Southern Petroleum Ltd.,
Dome Petroleum Limited, Amoco Canada Petroleum
Company Ltd. and Alminex Limited and Columbia
Gas Development of Canada Ltd.
----------------------------------------------
In the attached Letter Agreement "Block A lands" shall mean Block I lands and
Block II lands as hereinafter described, and "leases" shall mean the leases
hereinafter stated.
BLOCK I LANDS
<TABLE>
<CAPTION>
Lease Date Description Ownership
----- ---- ----------- ---------
<S> <C> <C> <C> <C>
DIAND Oil & Gas Jan. 7/69 60(degree)10' N - 124(degree)00' W: Dome 20.81% WI
Lease #442-R-68 Sec's 6-10 & 16-20 Columbia 1.69% WI
Amoco 25.00% WI
Alminex 2.50% WI
Can Southern 50.00% CI
DIAND Oil & Gas Jan. 7/69 60(degree)10' N - 124(degree)00' W: Section 50
----------
Lease #411-68 Sec's 26-30, 36-40 and Dome 20.81% WI
46-50. Columbia 1.69% WI
Amoco 25.00% WI
Alminex 2.50% WI
Can Southern 50.00% WI
Section 27
----------
Dome 46.25% WI
Columbia 3.75% WI
Can Southern 50.00% WI
Sections 26, 28-30, 36-40
and 46-49
-------------------------
Dome 20.81% WI
Columbia 1.69% WI
Amoco 25.00% WI
Alminex 2.50% WI
Can Southern 50.00% CI
DIAND Oil & Gas Jan. 7/69 60(degree)10' N - 124(degree)00' W: Dome 20.81% WI
Lease #443-R-68 Sec's 56-60 Columbia 1.69% WI
Amoco 25.00% WI
Alminex 2.50% WI
Can Southern 50.00% CI
</TABLE>
<PAGE>
Page 2 of 2
BLOCK I LANDS (Cont'd)
<TABLE>
<CAPTION>
Lease Date Description Ownership
----- ---- ----------- ---------
<S> <C> <C> <C> <C>
DIAND Oil & Gas Jan. 7/69 60(degree)10' N - 124(degree)00' W: Dome 20.81% WI
Lease #412-68 Sec's 66-70 Columbia 1.69% WI
Anioco 25.00% WI
Alminex 2.50% WI
Can Southern 50.00% CI
DIAND Oil & Gas Jan. 7/69 60(degree)10' N - 124(degree)00' W: Dome 20.81% WI
Lease #444-R-68 Sec's 76-80 Columbia 1.69% WI
Amoco 25.00% WI
Alminex 2.50% WI
Can Southern 50.00% CI
BLOCK II LANDS
Lease Date Description Ownership
----- ---- ----------- ---------
DIAND Oil & Gas Apr. 18/68 60(degree)20' N - 123(degree)30' W: Dome 22.50% WI
Lease #210-67 Sec's 5-10, 15-20, Amoco 25.00% WI
25-30. Alminex 2.50% WI
Can Southern 50.00% CI
DIAND Oil & Gas Jan. 7/69 60(degree)30' N - 123(degree)15' W: Dome 22.50% WI
Lease #414-68 Sec's 6-10, 16-20, Amoco 25.00% WI
16-30. Alminex 2.50% WI
Can Southern 50.00% CI
DIAND Oil & Gas Jan. 7/69 60(degree)30' N - 123(degree)15' W: Dome 22.50% WI
Lease #413-68 Sec's 13, 14, 23 & 24. Amoco 25.00% WI
Alminex 2.50% WI
Can Southern 50.00% CI
DIAND Oil & Gas Apr. 18/68 60(degree)30' N - 123(degree)15' W: Dome 22.50% WI
Lease #208-67 Sec's 41-45, 51-55, Amoco 25.00% WI
61-65. Alminex 2.50% WI
Can Southern 50.00% CI
</TABLE>
AGREEMENT MADE BETWEEN PANARCTIC OILS LTD.
AND CANADA SOUTHERN PETROLEUM LTD.
TABLE OF CONTENTS
CLAUSE NO. PAGE NO.
1 INTERPRETATION.................................. 1
2 OPERATIONS...................................... 3
3 ASSIGNMENT TO FARMEE............................ 4
4 FARMEE'S UNDERTAKING TO MAINTAIN
PERMITS......................................... 4
5 ASSUMPTION OF SEISMIC COMMITMENTS
BY FARMEE FOR FARMOR............................ 5
6 FARMEE'S DRILLING PROGRAM....................... 6
7 SUPPLYING INFORMATION TO FARMOR................. 7
8 RIGHT OF CONVERSION BY FARMOR TO
NET CARRIED INTEREST............................ 8
9 WELL PROPOSALS.................................. 9
10 HEMBDT OVERRIDE................................. 9
11 FORCE MAJEURE................................... 10
12 FURTHER ASSURANCES.............................. 10
13 WAIVER.......................................... 10
14 ENTIRE AGREEMENT................................ 10
15 MISCELLANEOUS................................... 11
16 CONFORMANCE WITH LAWS........................... 11
17 TITLE........................................... 11
<PAGE>
TABLE OF CONTENTS (Cont'd)
CLAUSE NO. PAGE NO.
18 NOTICES......................................... 12
19 INDEMNIFICATION BY FARMEE....................... 12
20 SURFACE RIGHTS.................................. 12
21 PERFORMANCE OF PERMITS BY FARMEE................ 13
22 DEFAULT......................................... 13
23 PERPETUITIES.................................... 14
24 PAYMENT OF ACCOUNTS............................. 14
25 ASSIGNMENT BY THE FARMEE........................ 14
26 AREA OF COMMON INTEREST......................... 16
<PAGE>
THIS AGREEMENT dated this 28th day of January, A.D. 1972 BETWEEN:
CANADA SOUTHERN PETROLEUM LTD., a
body corporate, having an office in the City of
Calgary, in the Province of Alberta, (hereinafter
called the "Farmor")
OF THE FIRST PART
AND:
PANARCTIC OILS LTD., a body corporate
incorporated under the laws of Canada and having
its principal place of business in the City of
Calgary, in the Province of Alberta, (hereinafter
called the "Farmee")
OF THE SECOND PART
WHEREAS the Farmor is the holder of the Permits (as hereinafter
defined) subject to the "Hembdt override" (as hereinafter defined); and
WHEREAS the Farmee desires to acquire an interest in the Permits from
the Farmor subject to the terms and provisions of this Agreement;
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the
premises and of the covenants and agreements of the parties hereto in this
Agreement set forth, the parties hereto do hereby covenant and agree as follows:
1. INTERPRETATION
(a) In this Agreement, including the recitals and this clause, unless
the context otherwise requires:
(i) "the lands" means the lands set forth and described
and from time to time remaining in Schedule "A"
attached to and made part of this Agreement and
includes the right to recover petroleum substances
within such lands;
<PAGE>
(ii) "the Permits" means the Oil and Gas Exploratory
Permits more particularly described in said Schedule
"A" hereto (and includes any Leases selected
therefrom) but insofar only as such Permits comprise
the lands; Permits include all leases or other
instruments conferring petroleum substances rights
granted or to be granted pursuant to the laws of
Canada, directly or indirectly, out of or in
relationship to said Permits as set forth in Schedule
"A", or any extension, variation or renewal thereof
or in substitution therefore, or in substitution for
any part thereof as a result of the holding of said
Permits;
(iii) "Block I", "Block II", "Block III", "Block IV",
"Block V", "Block VI", and "Block VII", respectively,
means those portions of the Permits and lands so
designated under each of such respective Blocks in
said Schedule "A";
(iv) "Petroleum Substances" means the substances which
Farmor has the right to explore for or recover from
the lands by virtue of the Permits, and where the
context so requires, may mean any one or more of such
substances.
(v) "Spacing Unit" means the area prescribed for or
allocated to a well by or under the Regulations for
the purpose of drilling for or producing petroleum
substances or, if no area is so prescribed or
allocated, means one section as defined in the Canada
Oil and Gas Land Regulations;
<PAGE>
(vi) "Operating Agreement" means that Operating Procedure
attached to and made part of this Agreement as
Schedule "B", which Operating Agreement becomes
effective in the manner and on the terms provided for
in this Agreement and requires no further execution
to be effective;
(vii) "Hembdt Override" means the 1.5625% gross override
royalty interest and rights held by Misses Mildred
and Ethel Hembdt, as trustees in the Permits;
(viii) "Regulations" means the statutes, ordinances, laws,
governmental orders, regulations, rules and
directions from time to time purporting to be in
force and applicable to the Lands, the Permits and
the petroleum substances or the operations
contemplated by this Agreement.
(b) The headings of the clauses of this Agreement are inserted for
convenience of reference only and shall not affect the meaning or construction
thereof.
(c) Whenever the plural or masculine or neuter is used in this
Agreement, the same shall be construed as meaning singular or feminine or body
politic or corporate and vice versa where the context so requires.
(d) If any term or condition of this Agreement conflicts with the term
or condition of the Permits then such term or condition in the Permits shall
prevail and this Agreement shall be deemed to be modified accordingly.
2. OPERATIONS
(a) All operations by Farmee pursuant to this Agreement shall be at
Farmee's sole risk and expense unless the contrary is specifically stated.
(b) All operations by Farmee pursuant to this Agreement shall be
conducted in a lawful manner and in accordance with good oilfield practice.
3. ASSIGNMENT TO FARMEE
(a) Forthwith upon the execution of this Agreement, Farmor shall
execute and deliver to Farmee, registrable assignment Agreements respecting the
Permits sufficient to register the Permits in the name of the Farmee and will
also deliver the original Permits to Farmee (said registration to be at Farmee's
sole cost and expense);
<PAGE>
(b) Upon receipt of the said assignments, Farmee agrees that it shall
hold the Permits subject to the Hembdt override in trust for the parties hereto
subject to the terms of this Agreement and of the Operating Agreement on the
following percentage interests, namely:
Farmor 50%
Farmee 50%
Farmee shall not encumber or dispose of all or any part of the Permits so held
in trust without the written consent of the Farmor or without being entitled or
required to do so under the other provisions of this Agreement.
4. FARMEE'S UNDERTAKING TO MAINTAIN PERMITS
(a) Farmee undertakes to apply sufficient allowable expenditures or
cash to the Permits from time to time as required in order to maintain the
Permits in good standing up to the anniversary date of each respective Permit
falling due in the year 1977 at no cost to Farmor;
<PAGE>
(b) In the event Farmee desires to surrender any Permit, lease or
portion of either constituting a part of the properties in 1977 or any time
thereafter, Farmee shall notify Farmor at least sixty (60) days in advance of
the next ensuing anniversary date of such Permit and/or lease. Farmor will
thereupon notify Farmee within thirty (30) days following receipt of such notice
whether or not Farmee elects to join in the release of such lease or Permit. In
the event Farmor does not within said period of time elect to join in the
release of said properties Farmee shall reassign said properties described in
its notice to Farmor. Farmee will likewise insure that there are sufficient
allowable expenditures or cash on any Permit or lease which is to be reassigned
to maintain the property in good standing for a period not less than one year
from the date of reassignment. Said assignment of such Permits or leases shall
be a form satisfactory for registration, free and clear of encumbrances and
exceptions other than those set forth in paragraph 10 and the responsibility,
cost and expense of registering such assignment of Permits and leases shall be
borne solely and exclusively by Farmor.
5. ASSUMPTION OF SEISMIC COMMITMENTS BY FARMEE FOR FARMOR
(a) Farmee agrees to assume the seismic commitments arranged by Farmor
prior to entering into this Agreement, as follows:
(i) 150 miles of marine reflection seismic on Block V to
be shot by Kenting Limited at an agreed price of
$550.00 per mile, with a total expenditure commitment
of $82,500.00;
(ii) 250 miles of reflective seismic and gravity meter
surveys in the area of Cameron and Vanier Islands to
be shot by Polar Quest, survey 727 A, with a total
commitment not exceeding $68,750.00;
<PAGE>
(iii) letter from Department of Energy, Mines and Resources
dated November 2, 1971 and Farmee's response dated
November 15, 1971. PROVIDED THAT the total commitment
assumed by Farmee under the three contracts shall not
exceed the sum of $201,250.00.
(b) Farmee shall have the right to make any changes or alterations in
the seismic program referred to in subclause (a) hereof, PROVIDED THAT Farmor is
relieved of its obligations respecting participation in these programs. All
allowable expenditures and the benefits accruing from participation in the
aforesaid survey programs shall accrue to Farmee.
6. FARMEE'S DRILLING PROGRAM
Farmee has agreed with Farmor to cause a drilling program to be
conducted in the vicinity of the Permits, consisting of the following:
(a) If seismic work conducted during the Spring of 1972 establishes a
drill site on Permit No. 484, 200 or more feet structurally higher than the
Hecla J-60 then a well will be commenced not later than the Fall of 1973 and
drilled to a depth of 5,000 feet, to Paleozoic formation or production whichever
occurs first.
(b) A well in the Drake Point area west of Block V at a location of
Farmee's choice to be commenced on or before the first day of April, 1974.
(c) A well on a location of Farmee's choice on the Isachsen Penninsula
on Ellef Ringnes Island east of Block I to be commenced on or before the first
day of October, 1973.
<PAGE>
(d) Additional seismic will be conducted on Permit No. 688 during 1972
on the Louise Anticline and if 300 feet or more of structural closure is
established at 8,000 feet or a shallower depth then a well at a location of
Panarctic's choice will be commenced by the Spring of 1974 and drilled to test
the stratigraphic equivalent of the gas productive sand found in the Kristoffer
Bay G-06 and King Christian D-18A wells.
7. SUPPLYING INFORMATION TO FARMOR
(a) Farmee shall supply immediately Farmor with all information
acquired by it from work performed on the Permits or off permit work that is
part of a program conducted on the Permits. Farmor shall not be obligated to
participate in the costs of any exploratory work (excluding drilling) on the
Permits up to the anniversary date of the respective Permits in 1977.
Notwithstanding that Farmor may not be participating in the cost of such
exploratory work other than drilling, as aforesaid, Farmor shall nevertheless be
entitled to receive from Farmee copies of all basic data (exclusive of
interpretation) derived therefrom, provided that the provisions of clause 33 of
the Operating Agreement shall be deemed to be applicable thereto.
(b) The parties acknowledge that by virtue of the provisions of
agreements with other companies in which Farmee is a party, the Farmee may be
unauthorized to provide exploratory information on any lands adjoining the
Permits.
(c) Farmor has the right to request and Farmee shall have the
obligation subject to clause 7(b) to give information on off permit work
conducted by Panarctic or on its behalf that affects the value of Canada
Southern's interest in any of the Permits hereunder or in the Permits covered by
the previous agreement dated June 30, 1966, as amended, wherein Canada Southern
and Panarctic are the parties; the information to be given on the following
basis:
<PAGE>
(i) Not more frequently than sixty (60) day periods and
on a three (3) day notice.
(ii) Panarctic can withhold information that is less than
two (2) weeks old.
(iii) Information to be given on a verbal basis and between
appropriate technical staff members of each company.
(d) Farmee shall use its best effort to immediately supply Farmor with
the technical information received under 5(a).
8. RIGHT OF CONVERSION BY FARMOR TO NET CARRIED INTEREST
(a) The right of conversion reserved to the Farmor under the provisions
of this clause may be exercised as to any one or more of the Blocks described in
Schedule "A" hereto.
(b) Subject to clause 9 hereof, the Farmor shall be entitled by notice
in writing to Farmee given at any time prior to the earliest anniversary date in
1977 of any permit in said Block to convert its 50% working interest to a 30%
net carried interest in any Block or Blocks. The provisions of Schedule "C"
hereto (Carried Interest Procedure) shall apply to such Block or Blocks so
converted.
(c) The effective date for conversion of the rights of the Farmor's
interest from a working interest to a carried interest shall be the date on
which notice is given by the Farmor as aforesaid.
(d) Upon the effective date of any such conversion, then the provisions
of Schedule "C" shall apply to the Block or Blocks with respect to which such
conversion is effected whereupon the provisions of Schedule "B" (Operating
Agreement) shall have no application to such Block or Blocks, except as provided
in Schedule "C".
<PAGE>
9. WELL PROPOSALS
If Farmee proposes a well on any Block on which Farmor has not elected
to convert its interest to a carried interest, pursuant to Clause 8 hereof, and
prior to the final date for election to so convert Farmor shall, notwithstanding
the provisions of Clause 8 hereof, exercise its right to elect to convert its
interest in the Block on which the well is proposed to be drilled to a thirty
(30%) percent carried interest within thirty (30) days of the date of receipt of
notice proposing the well. If Farmor fails to elect to so convert within the
said thirty (30) day period, it will have no further right to elect on such
Block and such Block shall continue to be subject to the Operating Agreement.
10. HEMBDT OVERRIDE
(a) The parties acknowledge that the Permits are subject to the Hembdt
override, and the Farmor and Farmee shall proportionately assume their
respective share of the Hembdt override on all Permits remaining subject to the
Operating Agreement which is hereby charged to the joint account under the
Operating Agreement. If Farmor elects to convert its working interest to a
carried interest pursuant to the provisions of clause 8 hereof, then with
respect to those Permits in which the interest has been so converted, Farmee
shall pay the Hembdt royalty and all sums so paid shall be expenses chargeable
to the carried interest account.
(b) Farmor shall supply Farmee forthwith upon the execution of this
Agreement with the agreement or other documents setting forth the particulars of
the Hembdt override.
<PAGE>
11. FORCE MAJEURE
No party sha1l be deemed to be in default in respect of nonperformance
of its obligations under this Agreement if and so long as its nonperformance is
due to strikes, lockouts, fire, tempest, or acts of God of the Queen's enemies,
or any other cause (whether similar or dissimilar to those enumerated) beyond
its control, but lack of finances shall in no event be deemed to be a cause
beyond a party's control; and in the case of any obligation contained in a
Permit, the rights of the parties hereto with respect to force majeure shall not
exceed those granted to the Permitee named therein.
12. FURTHER ASSURANCES
Each of 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.
13. WAIVER
No waiver on behalf of either party hereto of any breach of any of the
covenants and provisions in this Agreement contained, whether negative or
positive in form, shall take effect or be binding upon such party, unless the
same be expressed in writing, and any waiver so expressed shall not limit or
affect such party's rights with respect to any other of future breach.
14. ENTIRE AGREEMENT
The terms of this Agreement express and constitute the entire agreement
between the parties, and no implied covenant or liability of any kind on
Farmor's or Farmee's part is created or shall arise by reason of these presents
or anything in this Agreement contained.
<PAGE>
15. MISCELLANEOUS
(a) All terms and provisions of this Agreement shall run with and be
binding upon the lands during the term of this Agreement.
(b) Time is of the essence of this Agreement.
(c) Subject to the terms of this Agreement, this Agreement shall enure
to the benefit of and be binding upon the parties hereto, their successors and
assigns.
16. CONFORMANCE WITH LAWS
This Agreement and the respective rights and obligations of the parties
hereunder shall be subject to all applicable laws, rules, regulations and orders
of governmental authorities, Federal, Territorial and Municipal, and in the
event this Agreement or any provision hereof, or the operations or any matter
contemplated hereby, is found to be inconsistent with or contrary to any such
law, rule, regulation or order, the latter shall be deemed to control, and this
Agreement shall be regarded as modified accordingly, and as so modified shall
continue to full force and effect.
17. TITLE
Farmor represents and warrants that it is the holder of the Permits and
that such Permits are presently in good standing and as of the date hereof
Farmor has not assigned, conveyed, mortgaged or hypothecated its interest in the
Permits and warrants that it holds the Permits free and clear of all
encumbrances, except the Hembdt override.
Except as above provided, the Farmor does not warrant title, nor does
it convey, purport, promise or agree to convey, to Farmee any better or greater
right, title or interest in and to any of the Lands than those which it now has
by virtue of the Permits.
<PAGE>
18. NOTICES
The addresses for service of the parties hereto shall be as follows:
PANARCTIC OILS LTD., CANADA SOUTHERN PETROLEUM LTD.,
P.O. Box 190, Fifth Floor,
703 - 6th Avenue S.W., 505 - 8th Avenue S.W.,
CALGARY 2, Alberta CALGARY 2, Alberta
Any party from time to time may change its address for service by giving written
notice to the other. Any notice may be served by mailing the same, by registered
post, postage prepaid, in a properly addressed envelope addressed to the party
to whom the notice is to be given at such party's stated address for service and
if mailed in the Province of Alberta, any such notice so served shall be deemed
to be given to and received by the addressee on the second business day after
the mailing thereof.
19. INDEMNIFICATION BY FARMEE
Farmee shall indemnify the Farmor against all actions, suits, claims,
costs and demands which may be brought against or suffered by the Farmor by
reason of any matter or thing arising out of or in any way attributable to any
operations carried on by Farmee, its servants, agents or employees, on the Lands
prior to right of conversion (paragraph 8) by Farmor.
20. SURFACE RIGHTS
Farmee shall acquire all necessary licenses, surface rights and
rights-of-way, including without limitation the exploratory licenses required
under the provisions of the Regulations for the purpose of work at its sole
cost, risk and expense.
<PAGE>
21. PERFORMANCE OF PERMITS BY FARMEE
Except as otherwise provided in this Agreement, Farmee shall, as of the
date of this Agreement, assume, carry out, observe and perform all the
obligations of the Permittee contained in the Permits and, in the event of
Farmee's failure so to do, Farmee shall at all times indemnify Farmor against
all actions, proceedings, claims and demands, costs, damages and expenses which
may be brought or made against it or which it may sustain, pay or incur by
reason of such failure, including in such indemnity any and all sums paid by
Farmor pursuant to a bona fide settlement made with any claimant having a claim
arising out of or consequent upon any such failure.
22. DEFAULT
Should Farmee make any default in any term, covenant or condition of
this Agreement or of any Permit and Farmee does not commence to remedy such
default within thirty (30) days after notice thereof in writing has been given
to it by Farmor and does not thereafter continue with reasonable diligence, then
Farmor may, by notice in writing to Farmee, cancel and determine the conveyance
and the entire interest of Farmee under this Agreement, and it shall be lawful
for Farmor, into and upon the lands (or any part thereof in the name of the
whole), to re-enter and the same to have again, repossess and enjoy. The rights
hereby granted to Farmor shall be in addition to and not in substitution for any
other right or remedy which Farmor may have under this Agreement, and
specifically the exercise of such rights shall not serve to deprive Farmor
either wholly or partially of any other right or remedy including damages and
indemnity.
<PAGE>
23. PERPETUITIES
Notwithstanding anything in this Agreement elsewhere contained or
implied, any right or any party to acquire any interest from any other party
shall cease, terminate and be at an end not later than the expiration of 21
years after the death of the last surviving lawful descendant now living of His
Late Majesty, King George VI.
24. PAYMENT OF ACCOUNTS
Farmee shall
(a) pay, when they become due and payable, all claims for wages or
salaries for service rendered or performed and for materials supplied on, to or
in respect of the Lands;
(b) permit no mechanic's or other lien of any nature whatsoever to be
registered or filed against the Lands, the Permits, or any well thereon, unless
there be a bona fide dispute respecting such claim or account;
(c) permit no claims of, or dues to, or on behalf of the Workmen's
Compensation Board to become in arrears.
25. ASSIGNMENT BY THE FARMEE
(a) This Agreement may be assigned or transferred by Farmee as a whole,
but no such assignment or transfer shall be valid until written notice thereof
has been delivered to Farmor, together with a written and enforceable assumption
by Farmee's assignee or transferee of the obligations of Farmee under this
Agreement.
<PAGE>
(b) No assignment or transfer of any interest, other than the interest
contemplated by subclause (a) of this clause, or grant of any equitable interest
in this Agreement, the Permits, the lands, or any portion thereof, by Farmee
shall be valid unless Farmee delivers to Farmor a written notice thereof and any
such transaction shall be subject to this Agreement and, in particular, to the
following conditions:
(i) Farmee shall continue to remain solely liable for the
performance of the obligations and liabilities set forth in this Agreement;
(ii) Farmor shall continue to deal exclusively with Farmee
under this Agreement and, without restricting the generality of the
foregoing, all notices to or from Farmee required under this Agreement
shall only be forwarded to and accepted from Farmee and Farmor shall
neither honor notices from nor give notice to Farmee's assignee or
grantee;
(iii) Farmor shall never be obliged to deal with more than
one party under this Agreement and should Farmee at some future date,
assign or otherwise alienate its entire interest in this Agreement, the
Permits and the lands, or any portions thereof, Farmor shall have the
option of choosing the interest holder with which they wish to deal;
(iv) any person acquiring an interest by way of a
mortgage, pledge or hypothecation, including the granting of security
to a chartered bank pursuant to Section 82 of the Bank Act of Canada,
shall, on any reali1zation of the security afforded thereby, deliver to
Farmor a written and enforceable assumption of the obligations of
Farmee under this Agreement as they relate to the interest so acquired.
(c) Any notice from Farmee under this clause shall be accompanied by
original or photostatic copies of all instruments evidencing the transaction
concerned.
<PAGE>
26. AREA OF COMMON INTEREST
The provisions of Clause 38 of the Operating Procedure (Schedule B)
shall apply from the date of this Agreement until the Operating Procedure
becomes effective.
IN WITNESS WHEREOF the parties hereto have duly executed this Agreement
as of the day and year first above written.
PANARCTIC OILS LTD.
---------------------------------------
Vice-President Land and Administration
---------------------------------------
Treasurer
CANADA SOUTHERN PETROLEUM LTD.
---------------------------------------
President
---------------------------------------
Director
<PAGE>
THIS IS SCHEDULE "A" to Agreement made as of the 28th day of January, 1972,
between PANARCTIC OILS LTD. and CANADA SOUTHERN PETROLEUM LTD.
<TABLE>
<CAPTION>
Block Permit Number Date of Issuance Location Acreage
<S> <C> <C> <C> <C> <C>
I A-3784 November 27, 1968 78(degree)50',105(degree)30' 50,099
A-3785 November 27, 1968 78(degree)50',106(degree)00' 50,099
A-3786 November 27, 1968 78(degree)50',106(degree)30' 50,099
A-3787 November 27, 1968 78(degree)50',107(degree)00' 50,099
A-3788 November 27, 1968 78(degree)50',107(degree)30' 50,099
A-3789 November 27, 1968 78(degree)50',108(degree)00' 50,099
A-3790 November 27, 1968 78(degree)50',108(degree)30' 50,099
A-3791 November 27, 1968 78(degree)50',109(degree)00' 50,099
A-3796 November 27, 1968 W1/2 79(degree)10',105(degree)30' 24,316
A-3797 November 27, 1968 79(degree)10',106(degree)00' 48,633
A-3798 November 27, 1968 79(degree)10',106(degree)30' 48,633
A-3799 November 27, 1968 79(degree)00',105(degree)30' 49,366
A-3800 November 27, 1968 79(degree)00',106(degree)00' 49,366
A-3801 November 27, 1968 79(degree)00',106(degree)30' 49,366
A-3802 November 27, 1968 79(degree)00',107(degree)00' 49,366
A-3803 November 27; 1968 79(degree)00',107(degree)30' 49,366
A-3804 November 27, 1968 79(degree)00',108(degree)00' 49,366
A-3806 November 27, 1968 79(degree)00',108(degree)30' 49,366
A-3817 November 27, 1968 W1/2 79(degree)20',105(degree)30' 23,950
II A-3780 November 27, 1968 N1/2 78(degree)10',112(degree)00' 26,420
A-3781 November 27, 1968 N1/2 78(degree)10',112(degree)30' 26,420
A-3782 November 27, 1968 N1/2 78(degree)10',113(degree)00' 26,420
A-3783 November 27, 1968 N1/2 78(degree)10',113(degree)30' 26,420
III A-3248 October 8, 1968 77(degree)30',114(degree)00' 55,938
A-3249 October 8, 1968 77(degree)30',113(degree)30' 55,938
A-3250 October 8, 1968 77(degree)30',113(degree)00' 55,938
A-3251 October 8, 1968 77(degree)20',113(degree)30' 56,666
A-3252 October 8, 1968 N1/2 77(degree)20',113(degree)00' 28,242
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Block Permit Number Date of Issuance Location Acreage
<S> <C> <C> <C> <C> <C>
III A-3253 October 8, 1968 77(degree)20',112(degree)30' 56,666
A-3254 October 8, 1968 S1/2 77(degree)20',112(degree)00' 28,424
A-3255 October 8, 1968 S1/2 77(degree)20',111(degree)30' 28,424
A-3256 October 8, 1968 77(degree)10',112(degree)00' 57,392
A-3257 October 8, 1968 77(degree)10',111(degree)30' 57,392
A-3258 October 8, 1968 S1/2 77(degree)20',111(degree)00' 28,424
A-3259 October 8, 1968 77(degree)20',110(degree)30' 56,666
IV A-2715 August 7, 1968 W1/2 76(degree)20',110(degree)30' 30,510
A-2716 August 7, 1968 76(degree)20',111(degree)00' 61,021
A-2717 August 7, 1968 76(degree)20',111(degree)30' 61,021
A-2718 August 7, 1968 W1/2 76(degree)30',110(degree)30' 30,148
A-2719 August 7, 1968 76(degree)30',111(degree)00' 60,296
A-2720 August 7, 1968 76(degree)30',111(degree)30' 60,296
A-2721 August 7, 1968 76(degree)30',112(degree)00' 60,296
A-2722 August 7, 1968 N1/2 76(degree)30',112(degree)30' 30,057
A-2723 August 7, 1968 76(degree)40',112(degree)00' 59,571
A-2724 August 7, 1968 76(degree)40',112(degree)30' 59,571
A-2725 August 7, 1968 76(degree)40',113(degree)00' 59,571
A-2726 August 7, 1968 E1/2 76(degree)40',113(degree)30' 29,785
A-3130 September 19, 1968 76(degree)40',111(degree)30' 59,571
A-3131 September 19, 1968 76(degree)40',111(degree)00' 59,571
A-3132 September 19, 1968 W1/2 76(degree)40',110(degree)30' 29,785
A-3124 September 19, 1968 77(degree)10',106(degree)30' 57,392
A-3125 September 19, 1968 77(degree)10',106(degree)00' 57,392
A-3126 September 19, 1968 76(degree)40',107(degree)00' 59,571
A-3127 September 19, 1968 76(degree)40',106(degree)30' 59,571
A-3128 September 19, 1968 76(degree)40',106(degree)00' 59,571
A-3129 September 19, 1968 76(degree)40',105(degree)30' 59,571
A-3133 September 19, 1968 76(degree)30',106(degree)30' 60,296
A-3134 September 19, 1968 76(degree)30',106(degree)00' 60,296
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Block Permit Number Date of Issuance Location Acreage
<S> <C> <C> <C> <C> <C>
IV A-3135 September 19, 1968 76(degree)30',105(degree)30' 60,296
A-3136 September 19, 1968 W1/2 76(degree)30',105(degree)00' 30,148
A-3137 September 19, 1968 76(degree)50',106(degree)30' 58,846
V A-3138 September 19, 1968 76(degree)50',107(degree)00' 58,846
A-3139 September 19, 1968 E1/2 76(degree)50',107(degree)30' 29,423
A-3260 October 8, 1968 77(degree)00',107(degree)00' 58,120
A-3261 October 8, 1968 E1/2 77(degree)00',107(degree)30' 29,060
VI A-3807 November 27, 1968 79(degree)30',96(degree)00' 47,167
A-3808 November 27, 1968 79(degree)40',96(degree)00' 46,434
A-3809 November 27, 1968 79(degree)40',96(degree)30' 46,434
A-3810 November 27, 1968 79(degree)40',97(degree)00' 46,434
A-3811 November 27, 1968 79(degree)40',97(degree)30' 46,434
A-3812 November 27, 1968 79(degree)50',96(degree)30' 45,699
A-3813 November 27, 1968 79(degree)50',97(degree)00' 45,699
A-3814 November 27, 1968 79(degree)50',97(degree)30' 45,699
A-3815 November 27, 1968 W1/2 80(degree)00',100(degree)00' 22,482
A-3816 November 27, 1968 W1/2 80(degree)10',100(degree)00' 22,114
VII A-3792 November 27, 1968 W1/2 78(degree)50',101(degree)30' 25,049
A-3793 November 27, 1968 N1/2 78(degree)50',102(degree)00' 24,958
A-3794 November 27, 1968 N1/2 78(degree)50',102(degree)30' 24,958
A-3795 November 27, 1968 79(degree)20',102(degree)30' 47,901
</TABLE>
<PAGE>
THIS IS SCHEDULE "B" to Agreement made as of
the 28th day of January A.D. 1972 between
PANARCTIC OILS LTD. (herein called "Panarctic")
and CANADA SOUTHERN PETROLEUM LTD.
(herein called "Canada Southern")
INDEX
-----
CLAUSE TITLE PAGE
------ ----- ----
1 INTERPRETATION 1
2 PARTICIPATING INTERESTS 4
3 OPERATOR 5
4 FORECAST OF OPERATIONS 5
5 AUTHORIZATION FOR EXPENDITURES 5
6 INDEPENDENT DRILLING AND DEEPENING:
I. Voluntary Operations 6
II. Obligation Wells 11
7 MAINTENANCE OF THE PERMITS 13
8 GENERAL ACCOUNTING 14
9 ADVANCES 14
10 OPERATION'S LIEN 15
11 OWNERSHIP OF PRODUCTION 15
12 PRE-COMMENCEMENT INFORMATION TO NON-OPERATOR 17
13 DRILLING INFORMATION TO NON-OPERATOR 17
14 TESTING INFORMATION TO NON-OPERATOR 18
15 LOGGING INFORMATION TO NON-OPERATOR 18
16 VELOCITY SURVEYS 18
17 COMPLETION INFORMATION TO NON-OPERATOR 19
<PAGE>
CLAUSE TITLE PAGE
------ ----- ----
18 ADDITIONAL TESTS 20
19 ACCOUNTS 20
20 TESTING AND GAUGING 21
21 OPERATIONAL PRACTICES 21
22 INDEMNITY 22
23 INSURANCE 23
24 ABANDONMENT OF WELLS 24
25 SURRENDER 26
26 CHANGE OF OPERATOR 27
27 LEASE SELECTION 29
28 RESTRICTIONS ON INDEPENDENT DRILLING 30
29 TERM OF AGREEMENT 30
30 FORCE MAJEURE 31
31 RELATIONSHIP OF PARTIES 31
32 CONFORMANCE WITH LAWS 32
33 CONFIDENTIAL INFORMATION 32
34 FURTHER ASSURANCES 33
35 OVERRIDING ROYALTIES 34
36 ENCUMBRANCES 34
37 UNITED STATES TAX PROVISION 35
38 AREA OF COMMON INTEREST 36
39 ALIENATION 37
40 PARTITION 37
41 NOTICES AND ADDRESSES FOR SERVICE 38
<PAGE>
OPERATING PROCEDURE
This Operating Procedure is entered into between and agreed upon by the
parties to the Agreement to which this Operating Procedure is annexed as
Schedule "B" and each of the said parties shall be a party to this Operating
Procedure and be bound by all of the terms, covenants and conditions hereof as
fully and effectively as if named herein as a party and if executed by it.
1. INTERPRETATION:
(a) In this Operating Procedure, this clause and the schedules hereto,
unless the context otherwise requires:
(i) "Accounting Procedure" means the rules, provisions
and conditions set forth and contained in Exhibit "A"
attached hereto and made a part hereof;
(ii) "affiliate corporation" means a corporation
fulfilling one of the following requirements:
(1) a corporation the majority of whose voting
stock is owned by a party hereto;
(2) a corporation owning the majority of the
voting stock of a party hereto;
(3) a corporation the majority of whose voting
stock is owned by any other corporation,
which other corporation also owns the
majority of the voting stock of a party
hereto;
<PAGE>
(iii) "completion costs" with respect to a well means all
monies actually expended for acquiring and installing
casing left in the hole, (exclusive of surface and
intermediate casing), and the cost of acquiring and
installing tubing, wellhead and pumping equipment,
flowlines, tanks and other related equipment,
material and services necessary for preparing such
well for the taking of production of petroleum
substances therefrom including, but not to restrict
the generality of the foregoing, the applicable
charges more particularly set forth in the Accounting
Procedure;
(iv) "drilling costs" means all monies expended, exclusive
of completion costs, for drilling and equipping a
well for the recovery and taking of production of
petroleum substances including, but not to restrict
the generality of the foregoing, the applicable
charges more particularly set forth in the Accounting
Procedure;
(v) "Farmout Agreement" means the agreement to which this
Operating Procedure is annexed as Schedule "B";
(vi) "joint account" or "joint account of the parties"
means the record of expenditures, receipts and other
financial transactions which is kept by Operator
regarding any operations conducted pursuant to this
Operating Procedure at the joint risk and expense of
the parties;
(vii) "the Lands" means the lands, and lands under water,
including the geological formations thereunder from
time to time made subject to this Operating Procedure
pursuant to the provisions of the Farmout Agreement
and also includes the petroleum substances within
such lands or formations;
<PAGE>
(viii) "Non-Operator" means any party to this Operating
Procedure which is not Operator;
(ix) "Operator" means the party to this Operating
Procedure designated as Operator pursuant to the
provisions hereof;
(x) "operating costs" means all monies necessarily
expended, exclusive of drilling and completion costs,
to operate a well for the recovery of petroleum
substances as more particularly set forth in the
Accounting Procedure under the heading of
Exploration, Development and Operating Charges;
(xi) "the Permits" means the petroleum and natural gas
permits and leases, together with any leases issued
out of such permits, made subject to this Operating
Procedure pursuant to the provisions of the Farmout
Agreement, but only insofar as such documents demise
the Lands;
(xii) "petroleum substances" means the substances to be
granted to the holder of the Permits pursuant thereto
and only insofar and to the extent the same are
granted by Permits;
(xiii) "spacing unit" means the area prescribed for or
allocated to a well for the purposes of drilling for
or producing the petroleum substances, or any of
them, by or under any laws, rules, orders or
regulations now or hereafter in effect governing the
spacing of petroleum and natural gas wells, or either
of them.
<PAGE>
(xiv) "prevailing market price" means the price prevailing
in a competitive market in the area of production or,
in the absence of such a competitive market, the
price prevailing at Montreal, Quebec less reasonable
costs of transportation computed back to the area of
production.
The headings of the clauses of this Operating Procedures are inserted
for convenience of reference only and shall not affect the meaning or
construction thereof.
(c) Whenever the plural or masculine or neuter is used in this
Operating Procedure the same shall be construed as meaning singular or feminine
or body politic or corporate and vice versa where the context so requires.
(d) If any term or condition of this Operating Procedure conflicts with
a term or condition of the Permits, then such term or condition in the Permits
shall prevail and this Operating Procedure shall be deemed to be modified
accordingly. Wherever any term or condition, expressed or implied, of any
Exhibit conflicts with or is at variance with any term or condition of this
Operating Procedure, the latter shall prevail.
2. PARTICIPATING INTERESTS:
Except as otherwise provided herein, the parties to this Operating
Procedure shall bear all costs and expenses paid or incurred under this
Operating Procedure and shall own the Permits and the Lands, all wells thereon
and information obtained therefrom, the equipment pertaining thereto and the
petroleum substances produced therefrom in accordance with the following
respective undivided shares or interests:
Panarctic Oils Ltd. - 50%
Canada Southern Petroleum Ltd. - 50%
(hereinafter called "participating interests");
<PAGE>
3. OPERATOR:
Panarctic is hereby designated as Operator of the Lands and, subject to
the provisions of this Operating Procedure, shall have the sole and exclusive
control and management of all operations hereunder.
4. FORECAST OF OPERATIONS:
Operator shall, from time to time at the request of Non-Operator,
furnish Non-Operator with a written forecast outlining all operations which it
proposes to carry out on the Lands during the forecast period (which shall be no
less than Three (3) months and no more than Twelve (12) months), together with
the estimated costs thereof. It is specifically understood that such forecasts
are for informational purposes only and shall not bind either of the parties to
this Operating Procedure.
5. AUTHORIZATION FOR EXPENDITURES:
Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of Fifteen Thousand ($15,000.00) Dollars on
behalf of the parties hereto, and provided further that the aggregate amount of
those expenditures not in excess of Fifteen Thousand ($l5,000.00) Dollars shall
not exceed Thirty Thousand ($30,000.00) Dollars in any sixty (60) day period
unless the same:
(i) is authorized by agreement of the parties, or
(ii) is required to keep the Permits in full force and
effect but not including the drilling of an
obligation well, or
(iii) is required by any law or regulation, or
(iv) is necessary because of an unforeseen contingency
endangering the property of the parties,
<PAGE>
and in the event of any expenditure made under items (ii), (iii) or (iv) above,
Operator shall forthwith advise Non-Operator in writing thereof;
PROVIDED THAT the approval of the parties of a detailed estimate of the
cost of the drilling, reworking, deepening or plugging back of any well shall
include approval of all necessary expenditures required therefor and for
completing, testing and equipping the same, including necessary flowlines,
separators and lease tankage.
6. INDEPENDENT DRILLING AND DEEPENING:
I. Voluntary Operations:
(a) Any party (hereinafter called "proposing party") at any time may give
written notice (hereinafter called "the proposal notice") to the other
party of a proposal to drill a well on the Lands, and the proposal
notice shall include the proposed location of the well, the proposed
depth of same and a detailed estimate of the cost thereof. If, prior to
the expiration of sixty (60) days from receipt of the proposal notice,
the other party notifies proposing party in writing of agreement to the
drilling of the well in accordance with the proposal notice, Operator
shall drill same on the terms set out in the proposal notice and the
well shall be deemed to be a well drilled for the joint account of the
parties.
(b) If, upon the expiration of sixty (60) days from receipt of the proposal
notice, the other party does not agree in writing to the drilling of
such well (and failure to advise proposing party shall be deemed
non-agreement), proposing party may, prior to the expiration of one
hundred and twenty (120) days from receipt of the proposal notice,
commence the drilling of such well and thereafter drill same to the
proposed depth. If such well is not commenced within the aforesaid one
hundred and twenty (120) day period, the well proposed shall not be
drilled without a new proposal notice.
<PAGE>
(c) Operations pursuant to subclause (b) hereof shall be performed by
proposing party and such well shall be drilled, completed, capped or
abandoned at the sole risk and expense of proposing party and, if
abandoned, the provisions of Clause 24 hereof shall not apply to the
other party.
Agreement of 1-1-75: Exploratory well defined as a well 2 or more miles
from producing well. Penalty for not participating
in exploratory well is 6 N.W.T. sections.
(d) If production of petroleum substances is encountered in such well and
the same is capable of such production and is not abandoned, then such
well shall be operated by proposing party for its sole account, and all
proceeds of production therefrom shall accrue to proposing party until
proposing party receives from the proceeds of production from such well
Three Hundred (300%) percent of all drilling and completion costs of
such well, together with One Hundred (100%) percent of all operating
and any other costs incurred with respect to such well subsequent to
the "on production" date (as set by the applicable governmental agency)
to the date of recoupment by proposing party of such drilling,
completion, and operating and other costs (the total of the foregoing
costs is hereinafter referred to as "penalty expenses"). All such
costs are to be computed and charged in accordance with the Accounting
Procedure.
<PAGE>
(e) During the period in which proposing party is recouping the penalty
expenses, it shall supply to the other party a monthly statement
setting forth all costs incurred in the operation of such well, the
revenues received from the sale of production therefrom and a current
statement each month setting forth a comparison of the total of such
revenues to the total of the penalty expenses incurred to such date.
If proposing party receives out of the proceeds of production the
penalty expenses, it shall, within twenty (20) days of such receipt,
give written notice to the other party of its receipt of same, and on
or before the expiration of thirty (30) days from receipt of such
written notice, the other party shall have the right to advise
proposing party in writing of its election to participate in such
well. If the other party so elects to participate it shall be deemed
to have participated as of the date the penalty expenses were recovered
by proposing party. Failure of the other party to advise proposing
party in writing within the time hereinbefore specified of its election
to participate shall be deemed an election not to participate.
(f) If the other party elects to participate in such well as in subclause
(e) hereof provided, Operator shall assume operation thereof and the
well shall be construed as a well being operated for the joint account
of the parties from and after the effective participation date. In
such event each party shall participate in the well to the extent of
its participating interest.
<PAGE>
(g) Until such time as any well drilled pursuant to this clause is
abandoned or is operated as a well for the account of both of the
parties, as hereinbefore provided, proposing party shall own the well,
the equipment pertaining thereto and all production of petroleum
substances therefrom excepting production from such well of any
petroleum and/or natural gas that is being produced, or that is capable
of being produced, from any other well or wells the production from
which is attributable to any horizons or formations of that spacing
unit on which the well drilled by proposing party is located. At the
request of proposing party, the other party shall execute and deliver
to proposing party all documents as proposing party may reasonably
request to further evidence the foregoing.
(h) Proposing party shall initially pay and bear for its own account all
royalties and taxes applicable to the production obtained from a well
drilled by it pursuant to this clause, and the other party shall be
under no liability whatsoever for same, provided that all royalties so
paid shall be first deducted before deducting the penalty expenses.
(i) All wells drilled on the Lands shall be drilled at a rate substantially
the same as that prevailing in the area in which the proposed well is
to be located.
(j) If proposing party is unable to recover from the proceeds of production
the penalty expenses, it shall own all material, equipment and supplies
placed or installed by it at its sole expense in the well or on the
Lands in connection therewith, but if such material, equipment and
supplies have a salvage value, less the estimated cost of salvaging
(such value to be determined in accordance with the Accounting
Procedure), in excess of the unrecovered amount of the penalty
expenses, such excess shall be owned by both parties in proportion to
their participating interests.
<PAGE>
(k) Proposing party shall indemnify and save harmless the other party from
and against all actions, suits, claims and demands whatsoever by any
person or persons whomsoever in respect of any loss, injury or damage
or obligation to compensate arising out of or connected with the
operations carried on by proposing party pursuant to this clause and
prior to the operation of such well by Operator for the joint account
of the parties.
(l) Proposing party shall supply to the other party, on or before the
expiration of ninety (90) days from the rig release date or the on
production date of any well drilled by it, whichever is the later,
all factual data obtained from such well covering the drilling,
testing and completion, capping or abandonment, operations and the
other party shall be entitled to have access, after the period
hereinbefore specified, to all samples and cores taken from such
well.
(m) The foregoing provisions of this clause shall, mutatis mutandis, apply
to any deepening, reworking and plugging-back operations, with the
under-noted explicit restrictions:
(i) Unless otherwise mutually agreed, no well producing, or
capable of producing, petroleum substances in paving
quantities shall be deepened, reworked or plugged-back;
(ii) The period for accepting the proposal notice shall be forty-
eight (48) hours when a rig is present on the location;
(iii) The period for commencing deepening, reworking or plugging-
back operations shall be ninety-six (96) hours from receipt of
the proposal notice when a rig is present on the location.
<PAGE>
II. Obligation Wells:
For the purposes of this clause, an obligation well is a well which is
required to be commenced and drilled on the Lands under the terms of the Permits
or under the terms of any regulations or statutes applicable thereto and that
failure to commence and drill the same will result in forfeiture of all or a
portion of the Lands.
(a) If a notice of the obligation is given, the party who receives notice
of the obligation shall notify the other party hereto of the accrual of
an obligation to commence the drilling of an obligation well
immediately upon receipt by it of notice or information that such well
is required to be commenced. If the parties hereto, within thirty (30)
days of both parties having such notice, do not elect to drill such
obligation well as a joint account well or either of them do not elect
to drill such obligation well pursuant to the provisions of subclause I
hereof, the Operator shall forthwith:
(i) Attempt to secure release ofthe obligation bythe party to whom
the obligation is owed; or
(ii) Attempt by settlement or compromise to make other reasonable
arrangements in lieu of drilling the obligation well with the
party to whom the obligation is owed; or
(iii) Attempt to have the obligation performed by an outside party
without privity to this Operating Procedure upon terms
agreeable to the parties hereto.
<PAGE>
(b) If none of the foregoing alternatives can be agreed upon and put into
effect within thirty (30) days of the expiration of the aforesaid
thirty (30) day period, and one of the parties hereto desires to drill,
the party desiring to drill the said well (hereinafter called the
"drilling party") may proceed to do so at its sole cost, risk and
expense provided it commences the drilling of such well at least
thirty-one (31) days prior to the date upon which the well must be
drilled to satisfy the obligation, and continues with due diligence to
complete the drilling thereof. Any such well shall conform to the then
existing well spacing program. On completion or abandonment of any such
well, the party which did not participate in the drilling thereof,
shall assign or transfer to the drilling party all of its interest in
and to that portion of the Lands which, under the terms of the Permit
in question or the applicable regulations or statutes, as the case may
be, would have been surrendered or forfeited if such obligation well
had not been drilled.
In the event the period of time between the date that both parties have
notice of the requirement to drill the obligation well and the date
within which such well must be drilled is less than the period of time
allowed above to comply with the foregoing procedures, then each of the
thirty (30) day periods referred to above shall be reduced accordingly
with a view to maintaining such procedures but decreasing the time
limits within which they must be effected.
(c) If neither of the parties hereto is desirous of drilling the obligation
well, the parties hereto shall join in taking the steps necessary to
surrender those portions of the Lands which are required to be
surrendered by the terms of the Permit in question or by the applicable
regulations or statutes.
<PAGE>
(d) If the obligation may not be avoided by surrender of the Lands in whole
or in part and failure to perform the same would support an action for
specific performance or damages, then if none of the foregoing
provisions apply and if the parties hereto cannot mutually agree upon
the nature, location, extent and cost of a program necessary to satisfy
such obligation, then notwithstanding anything elsewhere in this
Operating Procedure contained, Operator shall have the sole right to
determine such program and shall notify the other party hereto in
writing of the nature, location, extent and anticipated cost of
conducting such program. In such event, and notwithstanding anything
elsewhere in this Operating Procedure contained, both parties hereto
shall participate in and shall bear their proportionate share of the
cost thereof to the same extent as if and to the intent and purpose
that such program were in fact conducted by mutual agreement of both
parties in accordance with the provisions of this Operating Procedure.
7. MAINTENANCE OF THE PERMITS:
Except as otherwise provided in this Operating Procedure, Operator, on
behalf of both parties, shall comply with all the expressed and implied
covenants and conditions contained in the Permits and shall do all things
necessary to maintain the Permits in full force and effect but, subject to the
provisions of Clause 6 hereof, Operator shall not drill any well on the Lands
unless and until the parties have agreed to such drilling.
<PAGE>
8. GENERAL ACCOUNTING:
(a) Subject to subclause (b) hereof, Operator shall initially pay and
charge to the account of the parties all costs and expenses of whatsoever nature
made or incurred with respect to any operations whatsoever on, maintenance of,
and production from the Lands, and all such costs and expenses shall be borne by
the parties in accordance with their respective participating interests, and the
method of handling the accounting with respect thereto shall be in accordance
with the provisions of the Accounting Procedure.
(b) Any costs or expenses made or incurred pursuant to the provisions
of Clause 6 hereof shall be borne solely by the party which made or incurred
same pursuant to said provision, and all taxes based on or calculated on
production of petroleum substances from the Lands shall be borne by that party
which was entitled to said petroleum substances in the proportion in which it
was entitled to same.
9. ADVANCES:
Operator may, at its option and from time to time, require both parties
to advance their respective shares of the estimated costs and expenses of all
operations of whatsoever nature carried out by Operator on behalf of the
parties. If Operator elects to so require any advance it shall, during the first
fifteen (15) days of any month, request in writing that Non-Operator advance its
estimated share for the month of any costs and expenses authorized by agreement
of the parties or otherwise permitted under Clause 5 herein, and if so requested
Non-Operator shall pay its share of such estimated monthly costs and expenses
within fifteen (15) days of receipt of the request from Operator.
The accounts between the parties shall be adjusted to actual costs by
Operator in the month's statement following the month in which the actual costs
are ascertained.
<PAGE>
10. OPERATOR'S LIEN:
Operator shall have a first and prior lien on all rights and the
interest of Non-Operator in and to the Lands, the Permits and in any production
obtained therefrom and the material and equipment thereon, and shall have a
right of set-off against monies otherwise payable to Non-Operator pursuant to
this Operating Procedure, to secure the payment by Non-Operator of any amounts
owing by it to Operator pursuant to the terms of this Operating Procedure. If
Non-Operator does not pay to Operator its share of such monies within thirty
(30) days after demand, Operator shall have the right to enforce payment
thereof, together with interest thereon at Six (6%) percent per annum, in any
manner in which it is entitled either pursuant to this Operating Procedure, or
at law, or both. The lien and other rights herein granted to Operator shall be
in addition to and not in substitution for any other rights or remedies Operator
may have with respect to the non-payment of any amount owing by Non-Operator to
Operator.
11. OWNERSHIP OF PRODUCTION:
(a) Each party shall own and, at its own expense, may take in kind and
separately dispose of for its own account its proportionate share of all
petroleum substances produced and saved from all wells operated on the Lands on
behalf of the parties, subject, however, to deduction from each party's share of
production its proportionate share (where applicable) of all lessors' and other
royalties paid in kind and to the terms and provisions of the Permits and the
Accounting Procedure and to the right of Operator to use such of the petroleum
substances as may be required for the development and operation of the Lands on
behalf of the parties and in preparing and treating such petroleum substances
for marketing purposes, and exclusive of production unavoidably lost.
<PAGE>
(b) If Non-Operator at any time and from time to time fails to notify
Operator of the arrangements it has made to take in kind or separately dispose
of its proportionate share of production, Operator may purchase the
Non-Operator's share of production at prices not less than the prevailing market
price for products of like kind and quality, or sell the same to others at
prices not less than those which Operator receives for its own share of
production in an arm's length transaction for a monetary consideration to a
purchaser other than an affiliate of the Operator. If Operator is itself
purchasing Non-Operator's share of production, the right is revocable at will by
written notice to Operator. If Operator is selling Non-Operator's proportionate
share of production to others, the right is revocable by Non-Operator by giving
written notice to be effective within a time not less than the period of notice
which Operator must give in order to terminate its sale arrangements. In no
event shall Operator enter into any sales contract with respect to
Non-Operator's share of production which is for a period greater than that
usually entered into in the area or for a period of one (1) year, whichever is
the lesser.
(c) If Operator purchases and/or sells the share of production to which
Non-Operator is entitled as aforesaid, Operator shall deliver to Non-Operator,
on or before the last day of each and every calendar month, a complete statement
or statements properly verified, including Statutory Declarations if requested
by Non-Operator, with respect to the quantity and kind of that portion of the
petroleum substances produced and saved from the Lands during the previous
calendar month attributable to the interest of Non-Operator. Operator shall,
with each such statement, pay to Non-Operator the proceeds from the sale of
Non-Operator's portion of such production subject to all deductions of royalties
applicable thereto.
<PAGE>
(d) Any market available to Operator shall be shared by it with
Non-Operator to the intent and purpose that Non-Operator shall not be obligated
to store its participating interest in petroleum substances produced, except to
the proportionate extent that petroleum substances produced are so stored for
lack of market.
12. PRE-COMMENCEMENT INFORMATION TO NON-OPERATOR:
Prior to commencing any well on behalf of the parties, Operator shall
furnish to Non-Operator:
(a) the proposed program of drilling, coring, logging and
drillstem testing;
(b) particulars of the well location;
(c) well co-ordinates and surface elevations.
13. DRILLING INFORMATION TO NON-OPERATOR:
During the drilling of any well on behalf of the parties, Operator
shall furnish to Non-Operator:
(a) immediate written notice of commencement including Kelly
Bushing elevations;
(b) daily drilling and geological reports;
(c) if requested in writing, a complete set of washed samples of
the cuttings of the formations penetrated;
(d) access to all cores taken;
(e) immediate advice of any porous zones or showings of the
petroleum substances encountered, and Non-Operator may have a
representative present to witness and observe the test of any
such porous zones or showings;
and complete access of Non-Operator's employees or agents, at Non-Operator's
sole cost, risk and expense, to the well including derrick floor privileges.
<PAGE>
14. TESTING INFORMATION TO NON-OPERATOR:
During the drilling of any well on behalf of the parties, Operator
shall:
(a) test it in accordance with the proposed program;
(b) make such further tests in accordance with good oilfield
practice of any porous zones or showings of the petroleum
substances encountered or indicated by any survey;
(c) take representative mud samples and drillstem test fluid
samples in order to obtain accurate resistivity mud filtrate
and formation water readings and supply Non-Operator with all
information relative thereto;
(d) supply Non-Operator with copies of the drillstem test and
service report on each drillstem test run, including copies of
pressure charts.
15. LOGGING INFORMATION TO NON-OPERATOR:
During the drilling of any well on behalf of the parties and upon such
well reaching the proposed depth, Operator shall run all log surveys agreed upon
among the parties hereto, prior to the drilling of such well to provide the
optimum evaluation possible of the horizons penetrated. In addition to the
foregoing, Operator shall run such other logs as may be agreed upon among the
parties subsequent to the drilling of any such well. Operator shall supply Non-
Operator with copies as requested of each log so run.
16. VELOCITY SURVEYS:
(a) Operator, on its own behalf and at its own expense, in accordance
with good oilfield and established modern and scientific practices, may run a
velocity survey in any well drilled on behalf of the parties.
<PAGE>
(b) If Operator does not elect to run a velocity survey pursuant to
subclause (a) hereof, Non-Operator, on its own behalf and at its own expense,
including rig time and any other costs relating to such survey which would be in
excess of normal drilling or operating costs, may run such survey with the
written consent of Operator, and in so doing Non-Operator shall proceed in
accordance with good oilfield and established modern and scientific practices.
(c) If a velocity survey is run by Operator pursuant to subclause (a)
or by Non-Operator pursuant to subclause (b) hereof, the party not bearing the
costs of same may obtain a copy thereof, together with all basic
non-interpretative geological and geophysical data (including check shots)
obtained from the well in which such velocity survey is run, by paying to the
other party one-eighth (1/8) of the costs thereof (which costs include rig time
costs). The party running the velocity survey shall, notwithstanding Clause 33
hereof, have the exclusive right to trade and sell the results of the said
velocity survey to any third party or parties. Any party which runs a velocity
survey shall indemnify the other party to this Operating Procedure from and
against all actions, causes of action, claims and demands for all loss, injury
or damages such other party may incur or suffer by reason of the exercise of the
rights herein granted.
17. COMPLETION INFORMATION TO NON-OPERATOR:
Upon the completion of any well drilled on behalf of the parties,
Operator shall supply to Non-Operator:
(a) copies as requested of any directional, temperature, caliper
or other well surveys or oil, gas, water or other analyses
made;
(b) samples as requested of at least one (1) quart of water and/or
petroleum substances other than natural gas recovered from
each test if Operator does not make analyses of such water
and/or petroleum substances other than natural gas;
(c) a complete summary of the drilling and completion;
<PAGE>
(d) written notice of the commencement of production of any of the
petroleum substances;
(e) all production information and other data relating to the
completion of the well.
18. ADDITIONAL TESTS:
In addition to its rights in connection with velocity surveys,
Non-Operator shall have the right at its sole cost, risk and expense to make any
other test or survey in any well drilled by the Operator for the joint account,
provided that Non-Operator shall not make any test or survey in any such well in
the event that the hole is in unsatisfactory condition for such purposes as
determined by the Operator and provided further that Non-Operator shall
indemnify and save harmless the other party hereto from and against all loss,
damage, or cost which such other party may incur or suffer by reason of
Non-Operator exercising the rights herein granted.
19. ACCOUNTS AND INFORMATION:
Operator shall:
(a) at all times keep true and correct books, records and accounts
showing all operations carried on and the quantity and
disposition of the petroleum substances taken from each well;
(b) permit Non-Operator the right of access and to make copies at
all reasonable times to any and all non-interpretative
information, and any interpretative information charged to the
joint account, pertaining to wells drilled, production
secured, petroleum substances marketed [exploratory
operations, seismic operations, development work] and any
other operations conducted hereunder, and the books, records
and vouchers relating to the operation of the Lands;
<PAGE>
(c) pay when they become due and payable all claims for wages or
salaries for services rendered or performed and for materials
supplied on, to or in respect of the Lands, or any work, works
or operations thereon;
(d) permit no liens of any nature whatsoever to remain registered
or field against the Lands, the Permits, or any well thereon,
unless there be a bona fide dispute respecting such claim or
account;
(e) permit no claims of, or dues to, or on behalf of the Workmen's
Compensation Board to become in arrears.
20. TESTING AND GAUGING:
All sampling, testing, gauging, measuring and taking of gravities which
may be required to be done in order to determine the gasoline content of gas,
the gravity of oil, the amount of water content and the amount of any other
foreign substances contained in any petroleum substances, or the qualities of
any other substances shall be taken, done and performed by Operator by any
method or process generally recognized in the industry where the work is to be
done and is considered as reliable and in accordance with good oilfield
practice.
21. OPERATIONAL PRACTICES:
Operator shall carry on all operations in a proper manner in accordance
with good oilfield and established modern and scientific practices, with due
skill and vigour, with good and sufficient equipment in accordance with the
terms and provisions of the Permits and this Operating Procedure, and in
compliance with all applicable laws, rules, orders and regulations but with
reasonable allowances having regard to the adverse and unusual conditions
encountered in operations in Arctic areas.
<PAGE>
22. INDEMNITY:
(a) Each party who carries on any operations at its own risk and
expense pursuant to this Operating Procedure shall and does hereby indemnify and
save harmless the other party from and against oil actions, causes of action,
suits, claims and demands by any person or persons whomsoever in respect of any
loss, injury, damage or obligation to compensate arising out of or connected
with such operations.
(b) Operator shall be solely responsible for and shall and does hereby
indemnify and save harmless Non-Operator from and against all actions, causes of
action, suits, claims and demands by any person or persons whomsoever in respect
of any loss, injury, damage or obligation to compensate to the extent of the
risks against which Operator is required to cause to be carried insurance as
provided in Clause 23 hereof, and within the limits of such insurance, except
that if an insurer is financially unable to pay all or any portion of a valid
claim, Operator shall be released from the indemnity and responsibility assumed
by it under this subclause.
(c) In addition to the provisions of subclause (b) hereof, Operator
shall be solely liable for any loss or damage of whatsoever nature when such
loss or damage is caused by Operator's gross negligence or willful misconduct,
and in such event Operator shall indemnify and save harmless Non-Operator from
and against all actions, causes of action, suits, claims and demands by any
person or persons whomsoever in respect of any loss, injury, damage or
obligation to compensate.
(d) Except as provided in the foregoing provisions of this clause, all
liabilities incurred by Operator in the carrying out of any operations pursuant
to this Operating Procedure, whether contractual or tortious, shall be charged
to the account of the parties and shall be borne by the parties in accordance
with their respective participating interests.
<PAGE>
23. INSURANCE:
(a) As to all operations hereunder, Operator shall, for the joint
account of the parties, carry Workmen's Compensation Insurance meeting the
requirements of law.
(b) In conducting all operations hereunder, Operator shall comply with
all laws respecting labour and all other applicable federal and territorial laws
and applicable rules and regulations of federal and territorial governmental
agencies having jurisdiction.
(c) Operator shall, for the joint account of the parties, at all times
during the term of this Operating Procedure maintain, and make a good faith
attempt to have its contractors maintain, with a reputable insurance company or
companies insurance of at least the kinds specified in subclause (d) hereto and
within limits not less than those therein set forth.
(d) The insurance referred to in this clause is as follows:
(i) Employer's liability insurance covering each employee
engaged in the operations hereunder to the extent of
$100,000.00 where such employee is not covered by
Workmen's Compensation;
(ii) Public liability insurance covering all operations
hereunder within limits of $300,000.00 for any one
person injured or killed and $500,000.00 for two or
more persons injured or killed in any one accident;
(iii) Property damage liability insurance covering all
operations hereunder to the extent of $300,000.00 for
damages to third parties resulting from any one
accident, including damages to third parties
resulting from fire or blowouts but excluding
subsurface damage;
(iv) Automobile public liability insurance covering all
automotive units engaged in the operations hereunder
within limits of $300,000.00 for any one person
killed or injured and $500,000.00 for two or more
persons killed or injured in any one accident;
(v) Automobile property damage liability insurance
covering all automotive units engaged in the
operations hereunder up to the extent of $100,000.00
for damages resulting from any one accident.
<PAGE>
(e) Operator shall furnish Non-Operator with appropriate certificates
of insurance, if requested, evidencing full compliance with the requirements
outlined above. The policy and certificates shall include the Non-Operator as
additional named insured. Non-Operator shall be provided with thirty (30) days
advance written notice of cancellation or of any amendment or material change in
the policies.
(f) Each party which carries on any operations pursuant to this
Operating Procedure shall maintain insurance to the limits not less than those
set forth in subclause (d) hereof and shall include the other parties hereto as
additional named insureds.
24. ABANDONMENT OF WELLS:
(a) If either party desires to abandon any well being drilled,
deepened, reworked or operated pursuant to this Operating Procedure, or one
which is suspended, it shall give to the other party written notice of same
(hereinafter called "the abandonment notice"). The party not wishing to abandon
shall, within forty-eight (48) hours of the receipt of the abandonment notice in
the case of a well on which a drilling rig is located, and within thirty (30)
days of the receipt of the abandonment notice in all other cases, notify the
party wishing the abandon of its intention not to abandon, and shall, as soon as
reasonably possible, tender to the party desiring to abandon a sum of money
equal to the interest of the party desiring to abandon in the fair salvage value
of all salvable materials and equipment attributable to the well, less the
estimated cost of salvaging the same, such value determined in accordance with
the provisions of the Accounting Procedure. Failure to respond to the
abandonment notice shall be deemed an election to participate in the proposed
abandonment.
<PAGE>
(b) Upon receipt of notice from the party not wishing to abandon, the
abandoning party shall execute and deliver all necessary documents to convey to
the party tendering such notice its entire interest in and to the said well and
the casing and equipment therein, together with all of its rights in all future
production therefrom which may be produced from the interval from which such
well last produced, provided however it is specifically understood and agreed
that such conveyance shall exclude production from such well of petroleum
substances or any of them that are being produced, or that are capable of being
produced, from any other well or wells, the production from which is
attributable to any horizons or formations of that spacing unit on which the
well subject to the abandonment notice is located.
(c) Upon the execution and delivery of the conveyance by the abandoning
party, the well and spacing unit covered thereby shall cease to be subject to
this Operating Procedure and the abandoning party shall be released and
discharged from all obligations thereafter accruing with respect to such well,
but such conveyance shall not release the abandoning party from its
proportionate share of any obligation or liability which ought to have been
performed or may have accrued prior to such conveyance.
(d) In the event both parties desire to abandon the well which is the
subject of the abandonment notice, then Operator shall abandon such well,
provided however that, where such well was drilled by one of the parties only,
pursuant to provisions of Clause 6 hereof, then that party shall abandon such
well.
<PAGE>
25. SURRENDER:
(a) Either party may at any time and from time to time surrender its
entire interest with respect to any portion or portions of the Lands by giving
to the other party, at least sixty (60) days before the date for payment of
rentals attributable to those portions of the Lands proposed to be surrendered
or the accrual of any obligation thereon other than the obligation to pay
royalties, a written notice (hereinafter called the "surrender notice"), which
shall be duly executed and which shall specify the portions of the Lands
proposed to be surrendered (which portions are hereinafter called the
"surrendered rights"). It is specifically understood that the surrendered rights
shall be of a size and dimension which the other party hereto can in turn
surrender should it wish to do so.
(b) If the party to whom the surrender notice is given fails to advise
the party giving the notice, in writing, within twenty (20) days after receipt
of the surrender notice, that it elects to join in the surrender of the
surrendered rights, the party giving the surrender notice shall convey to the
other party its entire interest in and to the surrendered rights, and the wells,
equipment and material located thereon and attributable thereto, and thereupon
the parties hereto shall do all things and complete and deliver all documents
necessary to register the entire interest in the surrendered rights in the name
of the party who did not elect to join in the surrender, and upon such
conveyance "the Lands" shall be deemed to be amended so as to exclude therefrom
the surrendered rights. If Panarctic is the surrendering party as to any Permit
or lease or portion thereof, Panarctic will in addition to its obligations above
insure at its expense that there are sufficient allowable expenditures, cash,
rent or otherwise to maintain the properties in good standing for a period not
less than one year from the date of conveyance. The party receiving such
conveyance shall forthwith pay to Operator for credit to the account of the
parties a sum equal to the fair salvage value of all recoverable material and
<PAGE>
equipment located upon and attributable to the surrendered rights less the
estimated cost of salvaging, such value to be determined in accordance with the
Accounting Procedure. Upon the execution and delivery of the conveyance by the
surrendering party, the surrendering party shall be released and discharged from
all obligations thereafter accruing with respect to the surrendered rights, but
such conveyance shall not release the surrendering party from its proportionate
share of any obligation or liability which ought to have been performed or may
have accrued prior to the conveyance of the surrendered rights.
26. CHANGE OF OPERATOR:
(a) An Operator shall be discharged forthwith and its powers, rights
and duties as Operator shall be terminated if, subject to clause 42 hereof:
(i) it dissolves, becomes bankrupt, liquidates or
terminates its corporate existence, or
(ii) it sells or otherwise disposes of a majority of its
interest in the Lands other than to an affiliate
corporation, or
(iii) having defaulted in the performance of any term or
condition of this Operating Procedure, it fails to
commence to remedy such default within fifteen (15)
days after receipt of written notice from a
Non-Operator and thereafter to diligently proceed to
remedy such default.
(b) Subject to subclause (a) hereof, an Operator may resign its duties
as such after giving to Non-Operator six (6) months' written notice of its
intention to resign.
(c) At any time after an Operator has acted in that capacity for two
(2) years, Non-Operator may, if dissatisfied with the manner in which Operator
is performing its obligations hereunder, serve notice in writing on Operator,
advising Operator of such dissatisfaction and set forth the terms and conditions
under which it is prepared to operate the Lands, and which will be more
efficient and beneficial to the parties hereto; or if the dissatisfaction
results from uneconomical operations, then advising of the specific economies
that it will effect as Operator. Unless within sixty (60) days after receipt of
<PAGE>
such notice Operator agrees in writing to operate the Lands subject to the same
terms and conditions and to effect the same specific economies and in fact does
so, then Operator shall be discharged and the party serving the notice shall
become Operator. If the party serving the notice becomes Operator pursuant to
this subclause then it shall operate the Lands on the same terms and conditions
mentioned in the notice and with the specific economies described therein; and
it shall not charge nor be entitled to any costs or reimbursement in respect of
amounts spent by it on the subject of the specified economies except as set
forth in the said notice. It is understood and agreed that the provisions of
this subclause shall not be utilized by any party at intervals more frequent
than at least two (2) years from any previous utilization of same.
(d) If an Operator is discharged, the other party shall become
Operator. If an Operator submits its resignation, the other party shall become
Operator.
(e) If at any time neither of the parties is able or willing to act as
Operator pursuant to the foregoing, then the parties, on notice by either of
them, shall meet together for the purpose of appointing an independent third
party to operate the Lands. In the event the parties cannot reach agreement on
an independent third party, then the party holding a majority in interest in the
Permits shall appoint a third party to operate the Lands. Such third party shall
operate the Lands on the terms and subject to the conditions as set forth in
this Operating Procedure and on such further terms and conditions as may, in the
opinion of the parties or the party holding a majority interest, as the case may
be, be necessary for such operation.
<PAGE>
(f) Should any Operator for any cause cease to be Operator, its rights
and interests in the Lands shall be unaffected thereby and it shall become
Non-Operator herein and shall be thenceforth bound by the terms and provisions
hereof as Non-Operator. Either party hereto becoming a successor Operator shall
thereupon succeed to all the duties, powers, obligations, rights and authorities
given to Operator herein with respect to all operations of every kind thereafter
conducted on the Lands. In every case of a change of Operator, the proper
adjustments in the accounts of parties shall be made as of the date of such
change in order that no party shall suffer any penalty or loss as a result of
such change. The outgoing Operator shall surrender possession of and deliver to
a party hereto becoming new Operator the exclusive possession of the operating
rights hereunder and all undistributed cash on hand, together with copies of all
pertinent books of account and records of the operations and true copies of all
documents, agreements or other papers relating thereto.
27. LEASE SELECTION:
(a) The parties shall consult at least sixty (60) days prior to the
date upon which Petroleum and Natural Gas Leases may be selected from the lands
and the parties agree that such lands shall remain in the Non-Lease stage for as
long a period as possible. If the parties can agree on a Lease selection then
such Lease selection shall be the Lease selection of the parties. If, however,
the parties cannot agree as to the Leases to be selected to the full extent of
the fifty (50%) percent of the initial area allowed under the Canada Oil and Gas
Land Regulations, then those upon which agreement can be reached shall be
selected and the balance up to the fifty (50%) percent limitation shall be
selected, with each party designating Sections in an order determined by lot for
the account of the parties.
<PAGE>
(b) In the event of disagreement as to a Lease selection, then if a
party does not wish to select Leases to the full fifty (50%) percent areal
extent referred to under subclause (a) above, those Leases upon which agreement
can be reached will be selected and the party wishing to select the balance up
to the fifty (50%) percent limitation may do so and such balance shall be held
by such selecting party for its sole account and any lands comprised in such
solely selected Leases shall be held by such party free and clear of any
obligations under this Agreement.
(c) Subclause (a) and (b) shall apply, mutatis mutandis, to the
selection of the remaining fifty (50%) percent of Leases permissible, pursuant
to Section 58 of the Canada Oil and Gas Land Regulations in conjunction with
Canada Oil and Gas Land Order No. 1, as amended, or similar provisions from time
to time in force.
(d) It is understood that any lease acquired under this Clause 37 by
either or both of the parties shall be subject to the Hembdt overriding royalty.
28. RESTRICTIONS ON INDEPENDENT DRILLING:
Notwithstanding anything to the contrary in this Operating Procedure,
and in particular Clause 6 hereof, no party shall be entitled to drill a well on
the Lands pursuant to the provisions of Clause 6 if at that time a well is being
drilled on the Lands either as a joint operation of the parties or pursuant to
the independent drilling provisions of Clause 6 hereof.
29. TERM OF AGREEMENT:
Except as otherwise herein provided, this Operating Procedure shall
continue in full force and effect as long as any portion of the Lands is jointly
owned by the parties hereto or at that later date (joint ownership continuing)
all documents of title (and all renewals and extensions thereof) to the Lands
have terminated and all wells on jointly owned Lands have been plugged or
abandoned, all equipment thereon and therein salvaged, and final settlement of
accounts had between the parties hereto.
<PAGE>
30. FORCE MAJEURE:
The obligations of a party to this Operating Procedure shall be
suspended and it shall not be liable for damages during the time and to the
extent that such party is prevented from complying with its obligations
hereunder in whole or in part by strikes, lockouts, acts of God or the Queen's
enemies, war, laws, orders or regulations of governmental bodies or agencies,
unavoidable accidents, delays in transportation, inclement weather, adverse
terrain, failure of communications, inability to obtain necessary materials in
the open market, or any other cause, except lack of finances, whether similar or
dissimilar to those specifically enumerated, beyond the reasonable control of
the party affected.
31. RELATIONSHIP OF PARTIES:
Except as otherwise in this Operating Procedure provided, where the
parties hereto incur a liability to any other person, such liability shall not
be joint or several but each party shall be separately liable to the other
person for a portion of the total liability calculated in accordance with its
participating interest. It is not the purpose of this Operating Procedure to
create any partnership, mining partnership or joint venture relationship, and
neither this Operating Procedure nor the operations hereunder shall be construed
or considered as creating any such relationship. Any trust or fiduciary
relationship which may be created by this Operating Procedure shall be limited
only to matters directly related to those operations upon the Lands which are
expressly provided for herein.
<PAGE>
32. CONFORMANCE WITH LAWS:
This Operating Procedure and the respective rights and obligations of
the parties hereunder shall be subject to all applicable laws, rules,
regulations and orders, and in the event this Operating Procedure or any
provision hereof is, or the operations contemplated hereby are, found to be
inconsistent with or contrary to any such law, rule, regulation or order, the
latter shall be deemed to control and this Operating Procedure shall be regarded
as modified accordingly, and as so modified shall continue in full force and
effect.
33. CONFIDENTIAL INFORMATION:
All data and information of whatsoever nature acquired by the parties
from any operations pursuant to this Operating Procedure or supplied by one
party to the other pursuant hereto shall be for the sole and exclusive use and
benefit of the parties unless the parties agree in writing to the dissemination
of such information or unless a party is required to give such information to
any recognized association within the petroleum industry, of which it is a
member, that engages in the exchange of factual information relating to the type
of operations contemplated by this Operating Procedure.
Notwithstanding the foregoing, any party shall be at liberty, without
the written consent of the other party, to release such data and information to
(a) an affiliate corporation provided such affiliate corporation
undertakes in writing with the other party hereto that the
affiliate corporation shall treat such data and information in
the strictest of confidence and shall not further disclose, or
permit to be disclosed, such data and information to any other
person, firm or corporation, or
<PAGE>
(b) to any nationally recognized lending institution or
underwriting organization for the bona fide purpose of a
proposed borrowing or sale of securities PROVIDED ALWAYS that
any subsequent release of data and information or studies
resulting therefrom shall be solely for the purpose of such
lending or sale and shall be limited to the minimum required
for that purpose, or
(c) to any governmental authority when required by law. In no
event shall information relating to wells drilled on a
confidential basis to the parties, or either of them, be
disclosed, or
(d) to any of the parties (and their assigns) to a certain
agreement between Panarctic Oils Ltd. and Tenneco Oils and
Minerals Ltd., Columbia Gas System, Inc., Northern Natural Gas
Company and Texas Eastern Transmission Corporation dated the
first day of May, 1971 (hereinafter referred to as the
"Tenneco Agreement"), or
(e) to J. C. Sproule and Eric Connelly (and their assigns)
pursuant to an Agreement between Panarctic and the said J. C.
Sproule and Eric Connelly, respectively, both dated October
1st, 1967, or
(f) to a prospective purchaser of the interest of either party.
34. FURTHER ASSURANCES:
Each of the parties hereto shall 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
Operating Procedure.
<PAGE>
35. OVERRIDING ROYALTIES:
In the event the working interest of a party hereto is presently
subject to other than the Hembdt royalty or may hereafter become subject to any
overriding royalty, production payment or other burden and the same is not
charged to the joint account of the parties, such royalty, payment or burden
shall be borne by the party creating the same or against whom the same is
enforced. Provided that if a party hereto shall conduct any operation or make
any election as a result of which it becomes entitled to receive the working
interest production otherwise belonging to the other party hereto, the party
entitled to receive the working interest production of the non-participating
party shall receive such production free and clear of all royalties, payments
and burdens (other than those charged to the joint account as aforesaid) against
such production which may have been created prior to or subsequent to this
Operating Procedure and the party creating such royalties, payments or burdens
shall save the party acquiring such interest harmless with respect to the
receipt of such working interest production. The Hembdt royalty is to be charged
to the joint account.
36. ENCUMBRANCES:
Subject to the terms of this Operating Procedure, each of the parties
hereto covenants that it will not encumber or permit or cause to be encumbered
in any way the Lands or the Permits without the written consent of the other
party hereto being first had and obtained, except by means of instruments
evidencing the bona fide loan of money to the encumbering party, and then only
if such instrument is restricted to the interest of the encumbering party, and
subject to the provisions of this Operating Procedure and all the rights and
interests of the other party hereto.
<PAGE>
37. UNITED STATES TAX PROVISION:
Notwithstanding any provisions herein that the rights and liabilities
of the parties hereto are separate and not joint or collective or that this
Operating Procedure and the operations hereunder shall not constitute a
partnership, if for United States Federal Income Tax purposes this Operating
Procedure and the operations hereunder are regarded as a partnership, then each
of the parties hereto which is now or at any time shall become subject to United
States Income Tax provisions hereby elects that it shall be excluded from the
application of all of the provisions of Subchapter K of Chapter 1, Subtitle A,
of the Internal Revenue Code of 1954, as permitted and authorized by Section 761
of the said Code and the Regulations promulgated thereunder. Operator is hereby
authorized and directed to execute such evidence of this election as may be
required by the Secretary of the Treasury of the United States, or the Federal
Internal Revenue Service, including specifically, but not by way of limitation,
all of the returns, statements and data required by the Code and applicable
Regulations. Should there be any requirement that a party hereto provide further
evidence of this election, each party hereto hereby agrees to execute such
documents and furnish such other evidence as may be required by the Federal
Internal Revenue Service or as may be necessary to evidence this election,
PROVIDED ALWAYS that under no circumstances shall a party not subject to United
States Income Tax be required to make its books and accounts available to United
States authorities. Each party hereto further agrees not to give any notice or
take any other action inconsistent with the election made hereby. In making this
election, each of the parties hereto hereby states that the income derived from
the operations under this Operating Procedure can be adequately determined
without the computation of partnership taxable income. Any notices or
information which a party hereto, not subject to United States Income Tax
provisions, is required to provide pursuant to this Clause 37 shall be provided
at the sole cost and expense of the party hereto who is subject to United States
Income Tax provisions and on behalf of which the notices and information are
provided.
<PAGE>
38. AREA OF COMMON INTEREST:
Except as hereinafter in this Clause 38 expressly provided, if at any
time prior to December 31st, l984, either party shall acquire directly or
indirectly any interest of any nature or kind, beneficial or otherwise, in any
permits or leases of or pertaining to oil and/or gas, including mineral or other
substances produced in association with oil and/or gas, covering lands, any part
of which is located in the area outlined in blue on the map attached hereto
marked Schedule "D" to the Farmout Agreement (hereinafter called the "Acquiring
Party"), it shall forthwith give notice in writing to the other party hereto of
such acquisition to the extent only that such acquisition relates to the area
located within the blue outline on Schedule "D" (hereinafter called the
"Acquired Interest"), specifying the description of the lands and documents of
title, extent of interest and the consideration paid or payable and the terms
and conditions, if any, attached thereto (if the consideration is other than
cash then a cash equivalent shall be specified) as well as any factual
information which is then being withheld under Clause 6(1). The party receiving
such notice shall have the right and option for a period of twenty (20) days
thereafter within which to elect to acquire that portion of the Acquired
Interest which is equivalent to its participating interest at such time by
paying to the Acquiring Party a like proportion of the consideration (or cash
equivalent) paid for the Acquired Interest and assumption of a similar share of
all obligations attached thereto. In the event that the party receiving such
notice shall elect to acquire an interest in the Acquired Interest, then the
lands covered by the Acquired Interest shall thereafter be included in and form
part of the Lands and be subject to this Operating Procedure and shall be
thereafter owned and operated by the parties hereto in accordance with and
subject to all applicable terms and conditions of this Operating Procedure in
the proportions of their respective interests therein. Each of the parties
covenants and agrees to execute and deliver all such assignments, conveyances
and other documents as may be necessary to vest title to the Acquired Interest
in the parties to this Operating Procedure but if the party receiving such
notice fails to exercise the aforesaid rights within the time stipulated, it
shall thereafter have no right or interest whatsoever in the Acquired Interest
or the lands covered thereby.
The provisions of this Clause shall not apply to
(a) any acreage located in the half grid corridors surrounding the
Permits which is subject to a now existing after acquired
provision between Farmee and third parties, or the Farmor, or
(b) interests acquired by either party in any lands by virtue of
the selection of leases pursuant to the provisions of this
Operating Procedure, or
(c) interests acquired in any lands by virtue of an assignment to
either party pursuant to the provisions of Clause 24 or
subclause II of Clause 6, or which are surrendered or assigned
pursuant to the provisions of Clause 25.
39. ALIENATION:
(a) Either party may dispose of any interest hereunder, provided that
no such disposition hereinabove referred to shall be effective to increase or
multiply the obligations of the other party, whether as Operator or Non-Operator
under this Operating Procedure, and any disposition made as aforesaid shall be
subject to this express provision, and the disposing party and such third party
shall enter into, execute and deliver any documents necessary to give effect to
this provision and assume all the obligations attributable to the interest
affected. The remaining party hereto shall not be bound to take notice of any
such disposition until such documents are executed end delivered to it by the
disposing party.
(b) Subject to the foregoing, this Operating Procedure shall be binding
upon and enure to the benefit of the parties hereto and their respective
successors and assigns.
40. PARTITION:
Each party to this Operating Procedure covenants by its execution
hereof that it will not at any time while this Operating Procedure is in effect
commence an action for partition of the ownership of the Lands or any interest
therein which are or may become subject to this Operating Procedure unless both
parties hereto concur in the partition thereof.
<PAGE>
4l. NOTICES AND ADDRESSES FOR SERVICE:
The addresses for service hereunder of the parties hereto shall be as
follows:
Panarctic Oils Ltd.,
P.O. Box 190
703 - 6th Avenue S.W.
Calgary 2, Alberta
Canada Southern Petroleum Ltd.,
Fifth Floor, 505 Eighth Avenue Building,
Calgary, Alberta
Any party may from time to time change its address for service hereunder on
written notice to the other party. Any notice may be served by personal
delivery or by mailing the same by registered post, postage prepaid, in a
properly addressed envelope addressed to the party to whom the notice is to be
given at its address for service hereunder, and shall be deemed to be received
seventy-two (72) hours after the mailing thereof in one of Her Majesty's Postal
Stations in Canada, Saturdays, Sundays and statutory holidays excepted. Any
notice may also be served by prepaid telegram addressed to the party to whom
such notice is to be given at such party's stated address for service and any
such notice so served shall be deemed to be given to and received by the
addressee eighteen (18) hours after the time of delivery to the telegraph
office, Saturdays, Sundays and statutory holidays excepted. Any notice may also
be given by telephone to a responsible officer or employee during business
hours, followed immediately by letter or telegram, and any notice so given shall
be deemed to have been received as of the date and time of the telephoned
notice.
42. Notwithstanding the provisions of clause 26 hereof, if Panarctic assigns
interests in the Permits pursuant to the Tenneco Agreement to any of the other
parties to such Agreement or their assigns, such assignment shall not be a sale
of a majority of its interest in the lands as contemplated by clause 26 hereof.
*************
<PAGE>
EXHIBIT "A"
THIS IS EXHIBIT "A" to an Operating Procedure entered into between PANARCTIC
OILS LTD. and CANADA SOUTHERN PETROLEUM LTD.
ACCOUNTING PROCEDURE
I. GENERAL PROVISIONS
1. Definitions
"Joint property" shall mean the properties subject to the Operating
Procedure to which this "Accounting Procedure" is attached.
"Material" shall include equipment and supplies.
"Operator" shall mean the Operator as defined in the Operating
Procedure to which this "Accounting Procedure" is attached.
"Non-Operator" shall mean any one or more of the parties to the
Operating Procedure who are not the Operator.
2. Statements and Billings
The Operator shall bill Non-Operator either on or before the last day
of each month for its share of charges and credits during the preceding
month. Such bills will be accompanied by statements, as follows:
(1) Detailed statement of material ordinarily considered
controllable by operators of oil and gas properties;
(2) Statement of ordinary charges and credits to the joint
account, summarized by appropriate classifications indicative
of the nature thereof; and
(3) Detailed statement of any other charges and credits.
3. Payments by Non-Operator
Each Non-Operator shall pay all such bills within fifteen (15) days
after receipt thereof. If payment is not made within such time, the
unpaid balance may, at the Operator's option, and without further
notice to the Non-Operator, bear interest at the rate of six (6%)
percent per annum until paid.
<PAGE>
4. Advances
Unless otherwise provided for in the Operating Procedure, the Operator
may require the Non-Operator to advance its share of estimated cash
outlay for the current month's operation.
5. Adjustments
Payment of any such bills shall not prejudice the right of Non-Operator
to protest or question the correctness thereof. All statements rendered
to Non-Operator by Operator during any calendar year shall conclusively
be presumed to be true and correct after twenty-four (24) months
following the end of any such calendar year, unless within the said
twenty-four (24) month period Non-Operator takes written exception
thereto and makes claim on Operator for adjustment. Failure on the part
of Non-Operator to make claim on Operator for adjustment within such
period shall establish the correctness thereof and preclude the filing
of exceptions thereto or making of claims for adjustment thereon.
The provisions of this paragraph shall not prevent adjustments
resulting from physical inventory of materials as provided for in
Section VI, Inventories, hereof.
6. Audits
A Non-Operator, upon notice in writing to Operator and all other
Non-Operators, shall have the right at its sole cost and expense to
audit Operator's accounts and records relating to the accounting
hereunder for any calendar year within the twenty-four (24) month
period following the end of such calendar year, provided, however, that
Non-Operator must take written exception to and make claim upon the
Operator for all discrepancies disclosed by said audit within said
twenty-four (24) month period. Where there are two or more
Non-Operators the Non-Operators shall make every reasonable effort to
conduct joint or simultaneous audits in a manner which will result in a
minimum of inconvenience to the Operator.
II. EXPLORATION, DEVELOPMENT AND
OPERATING CHARGES
Subject to limitations hereinafter prescribed, Operator shall charge
the joint account with the cost of the following items:
1. Rentals and Royalties
All deposits, rentals, renewal and extension fees, payments in lieu of
actual production (where applicable), and royalties, paid by Operator
for the joint account.
<PAGE>
2. Labor
A. Salaries and wages of Operator's employees directly engaged on
the joint property in the exploration, development,
maintenance and operation thereof including salaries and wages
paid to technical employees such as geologists, engineers and
other employees who are temporarily assigned to and located at
and directly engaged on the joint property.
B. Holiday, vacation, sickness and disability benefits, and other
customary allowances applicable to the salaries and wages
chargeable under Sub-paragraph 2 A and Paragraph 11 of this
Section II. Costs under this Sub-paragraph 2 B may be charged
on a "when and as paid basis" or by "percentage assessment" on
the amount of such salaries and wages. If percentage
assessment is used, the rate shall be based on the Operator's
cost experience.
C. Expenditures or contributions made pursuant to assessments
imposed by governmental authority which are applicable to
Operator's labor costs as provided under Sub-paragraphs 2 A, 2
B and Paragraph 11 of this Section II.
3. Employee Benefits
Operator's current cost of established plans for employees' group life
insurance, hospitalization, pension, retirement, stock purchase,
thrift, bonus, and other benefit plans of a like nature, applicable to
Operator's labor cost, provided that the total of such charges shall
not exceed fifteen (l5%) percent of Operator's labor costs as provided
under Sub-paragraphs A and B of Paragraph 2 of this Section II and in
Paragraph 11 of this Section II.
4. Material
Material purchased or furnished by Operator, for use of the joint
property. So far as it is reasonably practical and consistent with
efficient and economical operation, only such material shall be
purchased for or transferred to the joint property as required for
immediate use, and the accumulation of surplus stocks shall be avoided.
5. Transportation
Transportation of personnel and material necessary for the exploration,
development, maintenance, and operation of the joint property subject
to the following limitations:
A. When material is moved to the joint property, no charge shall
be made to the joint account for a distance greater than the
distance from the nearest practical supply store or railway or
seaport receiving point where such material is available,
except by agreement with Non-Operator.
<PAGE>
B. If surplus material is moved from the joint property to
Operator's warehouse or other storage point, no charge shall
be made to the joint account for a distance greater than the
distance from the nearest practical supply store or railway
receiving point to such warehouse or other storage point
except by agreement with Non-Operator. No charge shall be made
to the joint account for moving material to properties in
which persons other than the parties hereto have an interest
except by agreement with Non-Operator.
6. Service
A. Outside Services:
The cost of contract services (including without limitation,
professional consultants) and utilities procured from outside
sources.
B. Use of Operator's Equipment and Facilities:
Use of and service by Operator's exclusively owned equipment
and facilities as provided in Paragraph 5 of Section III,
"Basis of Charges to Joint Account."
7. Damages and Losses to Joint Property and Equipment
Replacement or repair resulting from damages or losses incurred by
fire, explosion, flood, storm or any other causes not controllable by
Operator through the exercise of reasonable diligence. Operator shall
furnish Non-Operator written notice of damage or loss howsoever caused
as soon as practicable after report of the same has been received by
Operator.
8. Litigation, Judgments and Claims
All costs and expenses of litigation, or legal services necessary or
expedient for the protection of the joint interests, including
attorney's fees and expenses, together with all judgments obtained
against the parties or any of them and agreed settlements insofar as
the same relate to the joint account or the subject matter of the
Operating Procedure; actual expenses incurred by any party or parties
hereto in securing evidence for the purpose of defending or prosecuting
any action or claim or negotiating any settlement relating to the joint
account or the subject matter of the Operating Procedure.
9. Taxes
All taxes, rates, levies and assessments of every kind and nature
levied, assessed or imposed upon or in connection with the joint
property or any part thereof, the production therefrom or the operation
thereof, which shall have been paid by the Operator for the benefit of
the parties hereto.
<PAGE>
10. Insurance
Premiums paid for insurance required to be carried for the benefit of
the joint account together with all expenditures incurred and paid in
settlement of any and all losses, claims, damages, judgments, and other
expenses, including legal services, not recovered from the insurer.
11. Camp Expense
The expense of operating and maintaining all necessary camps, housing
facilities for employees and boarding employees, including salaries and
wages relative thereto. When other operations are served by these
facilities the expense, including depreciation or a fair monthly rental
in lieu of depreciation, less any revenue therefrom, shall be prorated
against all operations served on an equitable basis.
12. District Expense and Administrative Overhead
District expense and administrative overhead on the following fixed
rate basis which shall be in lieu of district expense and
administrative overhead as defined hereunder:
District expense, means the salaries and expenses of
Operator's district superintendent and other general district
and field employees serving the joint property, whose time is
not allocated direct to the joint property and the cost of
maintaining and operating a district office and sub-offices
incurred in the development and operations on the joint
property and other properties operated by Operator in the same
locality.
Administrative overhead, means the expenses of all offices of
the Operator, including the salaries or compensation and other
expenses of personnel assigned thereto which are incurred in
the exploration, development and operation of the joint
property, except those expenses chargeable under paragraphs 2,
3 and 11 of this Section II.
The fixed rate basis will be as follows:
(i) [This paragraph was deleted.]
(ii) (a) A Management Fee of $50.00 per day for each
drilling well, charges to commence on the date the
well is spudded and terminate when the drilling or
completion rig is released from the well except that
if the drilling operations are suspended for a period
of fifteen (15) or more consecutive days, no charge
shall be made for any part of such period of
suspension without approval of the Non-Operator.
<PAGE>
(b) A Management Fee of $50.00 per day for costs
incurred during the move-in and move-out periods,
charges to commence the day the preparatory work
begins and end when the move-out has been finalized,
provided such charges shall not exceed $4,500.00 for
the move-in and $4,500.00 for the move-out, and
provided further that such charges shall only apply
when a drilling rig, camp equipment, supplies etc.
are being moved into or out of the joint property.
(iii) $50.00 per day Management Fee for seismic work
commencing with the date of entry into the work area
by the seismic party and ending on the date of
departure from the work area by the seismic party.
(iv) For surface work (i.e. geological, surveying, etc.)
and for gravity meter operations the sum of $15.00
per day Management Fee beginning on the date of entry
into the work area by the party concerned and ending
on the date of departure from the work area.
(v) A Management Fee for producing wells within a field
at the following rate per well per month:
First 5 wells - $225.00;
Next 5 wells - $200.00;
All wells over 10 - $175.00.
(vi) It is specifically understood that the above rates
shall apply only to the above mentioned operations
and are not intended to cover the construction or
operation of additional facilities such as, but not
limited to, gasoline plants, compressor plants, salt
water disposal facilities and similar installations.
If such additional facilities are required a
Management Fee will be negotiated between the
Operator and the Non-Operator.
13. Application of Management Fees for Exploration Drilling, Development
Drilling and Producing Wells
A. In connection with the Management Fee for exploration
drilling, development drilling and producing wells, the status
of wells shall be as follows:
(1) Each well which produces for any period during a
month shall be deemed to have produced for the full
month in determining the Management Fee applicable to
producing wells.
(2) Injection wells for recovery operations, such as for
repressure or water flood, shall be included in the
Management Fee the same as producing oil wells.
<PAGE>
(3) Water supply wells utilized for water flooding
operations shall be included in the Management Fee
the same as producing oil wells.
(4) Wells permanently shut down but on which plugging
operations are deferred shall be dropped from the
Management Fee at the time the shutdown is effective.
When such wells are plugged, a Management Fee shall
be charged at the drilling well rate during the time
required for the plugging operation.
(5) Wells being plugged back, drilled deeper, or
converted to a source or input well, shall be
included in the Management Fee the same as drilling
wells.
(6) Various wells may be shut down temporarily and later
replaced on production. If and when a well is shut
down and not produced or worked upon for a period of
a full calendar month, it shall not be included in
the Management Fee for such month; however, wells
shut in by government regulatory body shall be
included in the Management Fee only in the event the
allowable production is transferred to other wells on
the joint property.
(7) Gas wells shall be included in the Management Fee if
directly connected to a permanent sales outlet even
though temporarily shut in due to overproduction or
failure of purchaser to take scheduled allowable.
(8) Wells completed in dual or multiple horizons shall be
considered as one well for each such completion in
the Management Fee whenever the production is
segregated.
(9) Salt water disposal wells shall not be included in
Management Fee as producing wells unless such wells
are used in a secondary recovery program on the joint
property.
B. The Management Fee for exploration drilling, development
drilling and producing wells shall be applied to the total
number of wells operated under the Operating Procedure to
which this accounting procedure is attached, irrespective of
individual leases or permits.
14. Warehouse Handling Charges
All operating and maintenance costs of a jointly owned warehouse shall
be for the joint account.
A charge to cover the cost of handling material into and in the
warehouse shall be assessed on new and used material furnished from the
Operator's warehouse on the following basis:
<PAGE>
A. Two and one-half percent (2 1/2%) of the cost of tubular goods
(2" and over) and major items such as tanks, separators,
engines, etc.
B. Five percent (5%) of the cost of all other material.
15. Other Expenditures
Any other expenditures incurred by Operator for the necessary and
proper development, exploration, maintenance, operation and abandonment
of the joint property. Notwithstanding anything herein contained, no
charge shall be made for any interest or financing charges incurred by
the Operator, except where incurred with the consent of Non-Operator.
III. BASIS OF CHARGES
TO JOINT ACCOUNT
1. Purchases
Material purchased and all services procured shall be charged at the
price paid by the Operator, after deduction of all discounts actually
received.
2. Material Furnished by Operator
Material required for operations shall be purchased for direct charge
to joint account whenever practicable, except that Operator may furnish
such material from Operator's stocks under the following conditions:
A. New Material (Condition "A")
(1) New material transferred from Operator's warehouse or
other properties shall be priced f.o.b. the nearest
receiving point, at current replacement cost of the
same kind of material. This will include material
such as tanks, rigs, pumps, sucker rods, boilers, and
engines. Tubular goods (2" and over) shall be charged
on the basis of effective price at date of transfer
and f.o.b. nearest receiving point.
(2) Other material shall be priced on the basis of a
reputable supply company's preferential price list
effective at date of transfer and f.o.b. the
receiving point nearest the joint property where such
material is available.
(3) Cash discount shall not be deducted in determining
prices provided for in this Paragraph 2 of Section
III.
<PAGE>
B. Used Material (Condition "B" and "C")
(1) Material which is in sound and serviceable condition
and is suitable for re-use without reconditioning
shall be classed as Condition "B" and priced at 75%
of current new price.
(2) Material which cannot be classified as Condition "B"
but which,
(a) After reconditioning will be further
serviceable for original function as good
secondhand material (Condition "B") or
(b) Is serviceable for original function but
substantially not suitable for
reconditioning, shall be classed as
Condition "C" and priced at 50% of current
new price.
(3) Tanks, derricks, buildings, and other material
involving erection costs shall be charged at
applicable percentage of dismantled current new price
for similar materials.
(4) There may also be cases where some items of material,
due to their unusual condition, should be fairly and
equitably priced by Operator, subject to approval of
Non-Operator.
(5) Current new price, wherever used in this
sub-paragraph 2 B of this Section III shall be
determined in accordance with sub-paragraph 2 A of
this Section III.
3. Premium Prices
Whenever materials are not readily obtainable at the customary supply
point and at prices specified in Paragraphs 1 and 2 of this Section III
because of national emergencies, strikes or other unusual causes over
which the Operator has no control, the Operator may charge the joint
account for the required materials on the basis of the Operator's
direct cost and expense incurred in procuring such materials, in making
it suitable for use, and in moving it to the location, provided,
however, that notice in writing is furnished to Non-Operator of the
proposed charge prior to billing the Non-Operator for the material
acquired pursuant to this provision, whereupon Non-Operator shall have
the right, by so electing and notifying Operator within forty-eight
(48) hours after receiving notice from the Operator, to furnish in
kind, or in tonnage as the parties may agree, at the location, nearest
receiving point, or Operator's storage point within a comparable
distance, all or part of his share of material suitable for use and
acceptable to the Operator and shall furnish such new material within a
reasonable period of time after making such election. Transportation
costs on any such material furnished by Non-Operator, at any point
other than at the location, shall be borne by such Non-Operator. If,
pursuant to the provisions of this paragraph, any Non-Operator
furnishes material in kind, the Operator shall make appropriate credits
therefor to the account of said Non-Operator.
<PAGE>
4. Warranty of Material Furnished by Operator
Operator does not warrant the material furnished beyond or back of the
dealer's or manufacturer's guaranty or warranty; and in case of
defective material, credit shall not be passed until adjustment has
been received by Operator from the manufacturers or their agents.
5. Operator's Exclusively Owned Facilities
The following rates shall apply to services rendered by facilities and
equipment owned exclusively by Operator, provided such rates are not in
excess of current prevailing rates of like service and equipment
available in the area where the joint property is located:
A. Water service, gas and power, booster and compressor services,
and other auxiliary services; cost of such services including
operation, maintenance, insurance, taxes and allowance for
depreciation.
B. Automotive and aircraft equipment, at rates commensurate with
cost of ownership and operation and in line with schedule
adopted by Operator for use in his operations. Charges will be
based on use in actual service on, or in connection with, the
development, exploration operation and maintenance of the
joint property.
C. A fair rate shall be charged for the use of drilling,
exploration and other machinery and equipment exclusively
owned by Operator while used hereunder to cover maintenance,
repairs, depreciation, for the service furnished the joint
property; provided that such charges shall not exceed those
currently prevailing in the field where the joint property is
located.
D. A fair rate shall be charged for laboratory services performed
by Operator for the benefit of the joint account, such as gas,
water, core and any other analyses and tests; provided such
charges shall not exceed those currently prevailing if
performed by outside service laboratories.
E. Whenever requested, Operator shall inform Non-Operator in
advance of the rates it proposes to charge.
<PAGE>
IV. DISPOSAL OF MATERIAL
The Operator shall be under no obligation to purchase interest of
Non-Operator in surplus new or secondhand material. Tanks, buildings,
and other major items shall not be removed by Operator from the joint
property without the approval of Non-Operator. Operator shall not sell
major items of material to an outside party without giving Non-Operator
an opportunity either to purchase same at the price offered or to take
Non-Operator's share in kind. Operator shall have the right to dispose
of normal accumulations of junk and scrap material from the joint
property.
1. Material Purchased by Operator
Material purchased by Operator shall be credited to the joint account
and included in the monthly statement of operations for the month in
which the material is removed from the joint property.
2. Material Purchased by Non-Operator
Material purchased by Non-Operator shall be invoiced by Operator and
paid for by Non-Operator within fifteen (15) days following receipt of
invoice. The Operator shall pass credit to the joint account and
include the same in the monthly statement of operations.
3. Division in Kind
Division of material in kind, if made between Operator and
Non-Operator, shall be in proportion to their respective interests in
such material. Each party will thereupon be charged individually with
the value of the material received or receivable by each party and
corresponding credits will be made by the Operator to the joint
account, and such credits shall appear in the monthly statement of
operations.
4. Sales to Outsiders
Sales to outsiders of material from the joint property shall be
credited by Operator to the joint account at the net amount collected
by Operator from vendee. Any claims by vendee for defective material
etc. shall be charged back to the joint account, if and when paid by
Operator.
V. BASIS OF PRICING MATERIAL TRANSFERRED
FROM JOINT PROPERTY
Jointly-owned material sold to either Operator or Non-Operator or
divided in kind between them, unless otherwise agreed, shall be valued
on the following basis of condition and price: (new price as used in
the following sub-divisions shall have the same meaning and be computed
on the same basis as the price for new material in Sub-paragraph 2 A of
Section III hereof.)
<PAGE>
1. New Material
New material (Condition "A") being new material purchased or procured
for the joint property but never used thereon, at one hundred percent
(100%) of current new price.
2. Good Used Material
Good used material (Condition "B"), being good serviceable material
which is further usable without reconditioning:
A. At 75% of current new price if material was charged to joint
account as new, or
B. At 75% of current new price less depreciation consistent with
its usage on and service to the joint property, if material
was originally charged to the joint property as secondhand at
75% of new price.
3. Other Used Material
Other used material (Condition "C"), being material which:
A. After reconditioning will be further serviceable for original
function as good secondhand material (Condition "B"), or
B. Is serviceable for original function but substantially not
suitable for reconditioning,
at 50% of current new price.
4. Bad Order Material
Bad order material (Condition "D"), being material not further usable
for its original function but for possible other service, at a value
commensurate with its use.
5. Junk
Junk (Condition "E"), being obsolete and unserviceable material, at
prevailing junk prices in the district.
6. There may also be cases where some items of material due to their
unusual condition should be fairly and equitably priced by Operator
subject to approval of Non-Operator.
<PAGE>
VI. INVENTORIES
1. Periodic Inventories
Periodic inventories of material which is ordinarily considered
controllable shall be taken by Operator at reasonable intervals but at
least once in every five years.
2. Notice
Notice of intention to take inventory shall be given by Operator at
least thirty days before any inventory is to begin, so that
Non-Operator may be represented when any inventory is taken.
3. Failure to be Represented
Failure of Non-Operator to be represented at the physical inventory
shall bind Non-Operator to accept the inventory taken by Operator, who
shall in that event furnish Non-Operator with a copy thereof.
4. Reconciliation of Inventory
Reconciliation of inventory with charges to the joint account shall be
made by each party at interest, and a list of overages and shortages
shall be jointly determined by said parties.
5. Adjustment of Inventory
Inventory adjustments shall be made by Operator to the joint account
for overages and shortages, but Operator shall be held accountable to
Non-Operator only for shortages due to lack of reasonable diligence.
6. Inventory Expenses
The expense of more than one representative of the Operator, and more
than one representative for all of the Non-Operators jointly, present
at the taking of regular inventory, shall not be charged to the joint
account.
7. Special Inventories
Non-Operator shall have the right at any time to request in writing the
taking of a special inventory. The taking of such special inventory
shall be commenced within thirty (30) days after the receipt of notice
thereof. All expenses incurred by Operator in conducting any special
inventory so requested shall be charged to the separate account of the
requesting party.
<PAGE>
VII. REVISIONS TO ACCOUNTING PROCEDURE
The parties to the Operating Procedure acknowledge and agree that the
purpose of this Accounting Procedure is to establish equitable methods
for determining charges and credits applicable to operations under the
Operating Procedure, it being the parties' intention that the Operator
as such, should not profit by or suffer any losses by its operations as
Operator; the parties also recognize that operations north of
70(degree) Latitude differ substantially from operations in more
southerly locations and that at the date of negotiation of the terms
and provisions of this Accounting Procedure there is comparatively
little knowledge or experience in the conduct of operations in the area
in which the joint property is located. Accordingly the parties to the
Operating Procedure agree that notwithstanding the provisions of that
Clause of the Operating Procedure entitled "Change of Operator" (which
Clause shall remain in full force and effect but shall not be or be
deemed to be a limitation or restriction on the provisions of this
Section VII), this Accounting Procedure shall be subject to review and
possible revision from time to time but only in the manner hereinafter
provided for.
If in practice the charges, rates, and/or other terms and provisions
(whether similar or dissimilar) of this Accounting Procedure are found
to be insufficient or excessive then any party hereto may serve upon
the other parties hereto, at any time during the calendar month of
January in any calendar year, a notice setting forth the specific
revisions to the Accounting Procedure requested by it, whereupon the
parties shall meet together, at the instigation of any of them, during
the following calendar month of February and in good faith endeavor to
agree on such revisions as may be necessary to remedy such
insufficiency or excess and to establish the effective date of such
revisions, which effective date may be retroactive.
In the event the parties cannot reach agreement within the said
calendar month of February then Operator shall during the following
calendar month of March serve upon the other parties notice of such
specific revisions to this Accounting Procedure, together with a
suggested effective date of such revisions (which effective date may be
retroactive to a date not earlier than January 1st of the preceding
calendar year) which it is prepared to accept, or in the alternative
that it does not desire any revisions, and, unless one or more of the
other parties serves a notice of objection on all other parties within
fifteen (15) days of receipt of the notice from the Operator, this
Accounting Procedure shall be and be deemed to be revised or not
revised, as the case may be, in accordance with the Operator's notice,
and any revisions shall be effective on that date so specified in the
Operator's notice. In the event a Non-Operator files a notice of
objection as to either the specific revisions or the effective date, or
both, the matter shall be submitted to arbitration in accordance with
the provisions of the Arbitration Act of the Province of Alberta (in
the event the parties cannot reach agreement on a single arbitrator,
each shall appoint an arbitrator and those arbitrators so appointed
shall appoint a third) for the purpose of reaching a decision as to the
most equitable revision, if any, required to this Accounting Procedure
and to establish the most equitable effective date thereof (which
effective date may be retroactive to a date not earlier than January
1st of the preceding calendar year) provided always that only those
items or matters specifically contained in the notices of the parties,
including the Operator, served in accordance with all of the foregoing
provisions of this Section VII, shall be considered in such
arbitration.
<PAGE>
Any revisions made to this Accounting Procedure shall continue in full
force and effect and be applicable as, of and from the effective date
thereof as established in accordance with the foregoing and this
Accounting Procedure shall be and be deemed to be amended accordingly.
<PAGE>
THIS IS SCHEDULE "C" to Agreement made as of
the 28th day of January 1972 between Panarctic
Oils Ltd. (herein called "Panarctic") and
Canada Southern Petroleum Ltd. (herein called
"Canada Southern")
CARRIED INTEREST PROCEDURE
In the event that the Farmor exercises its right to convert its working
interest in any Block or Blocks to a net carried interest pursuant to the
provisions of the said Farmout Agreement, then this Carried Interest Procedure
shall be and be deemed to be an agreement entered into between Panarctic and the
Farmor and each of them shall be bound by all of the terms, covenants and
conditions hereof as fully and effectively as if named herein as a party and if
executed by it.
1. INTERPRETATION:
(a) In this Carried Interest Procedure, this Clause, the foregoing, and
any Schedules attached hereto or incorporated herein by reference, unless the
context otherwise requires:
(i) "Farmout Agreement" means the Agreement to which this
Carried Interest Procedure is annexed as Schedule
"C".
(ii) "Operating Procedure" means Schedule "B" to the
Farmout Agreement.
(iii) "Block" means those Lands having the same block Roman
numeral designation, described or referred to in
Schedule "A" to the Farmout Agreement, PROVIDED
HOWEVER that where no such block designation is
provided for therein, then all of the Lands contained
in Schedule "A" to the Farmout Agreement shall
constitute a Block.
<PAGE>
(iv) "Lands" means the lands, and lands under water,
including the geological formations thereunder, made
subject to this Carried Interest Procedure pursuant
to the provisions of the Farmout Agreement and also
includes the petroleum substances within such lands
or formations.
(v) "Permits" means the petroleum and natural gas permits
and leases, together with any leases issued out of
such permits, made subject to this Carried Interest
Procedure pursuant to the provisions of the Farmout
Agreement, but only insofar as such documents demise
the Lands.
(vi) "petroleum substances" means the substances to be
granted to the holder of the Permits pursuant thereto
but only insofar and to the extent the same are
granted by the Permits.
(vii) "Carried Interest Owner" means the party to this
Carried Interest Procedure other than Panarctic.
(viii) "affiliate corporation", "completion costs",
"drilling costs", "operating costs" and "spacing
unit" shall have the meanings assigned to those words
or phrases respectively in Clause 1 of the Operating
Procedure.
(ix) "gross proceeds of production" shall mean the amount
actually received by Panarctic in an arms-length
transaction for a monetary consideration to a
purchaser other than an affiliate of Panarctic, in
the absence of which it shall mean the gross proceeds
which Panarctic would have received for the
production if sold at the prevailing market price as
defined in the Operating Procedure.
<PAGE>
(b) The headings of the Clauses of this Carried Interest Procedure are
inserted for convenience of reference only and shall not affect the meaning or
construction thereof.
(c) Wherever the plural or masculine or neuter is used in this Carried
Interest Procedure, the same shall be construed as meaning the singular or
feminine or body politic or corporate and vice versa where the context so
requires.
(d) If any term or condition of this Carried Interest Procedure
conflicts with a term or condition of the Permits, then such term or condition
in the Permits shall prevail and this Carried Interest Procedure shall be deemed
to be modified accordingly.
2. EXTENT OF NET CARRIED INTEREST:
The percentage of net carried interest of the Carried Interest Owner in
a Block or Blocks held by it pursuant to this Carried Interest Procedure shall
be THIRTY (30%) percent, subject to the terms and conditions of this Carried
Interest Procedure and, to the extent that the same are incorporated herein or
applicable hereto, the terms and conditions of the Operating Procedure.
3. EFFECT ON WORKING INTEREST OF PANARCTIC OF CONVERSION:
Upon the exercise by the Carried Interest Owner of its right to convert
its interest in a Block or Blocks from a working interest to a net carried
interest, the working interest of Panarctic in such Block or Blocks, which it
would otherwise have earned pursuant to the Farmout Agreement, shall be
increased to One Hundred (100%) percent and thereupon the entire working
interest held by Panarctic in such Block or Blocks shall be subject to the net
carried interest herein provided for.
<PAGE>
4. PAYMENTS TO CARRIED INTEREST OWNER:
After Panarctic shall have recovered out of the gross proceeds of
production of petroleum substances produced, saved or deemed to be produced and
saved and marketed from any Block, together with the salvage of all recoverable
material and equipment from such Block (hereinafter collectively referred to as
"gross proceeds of production") an amount equal to the total of all costs and
expenses incurred by it on or with respect to such Block after the effective
date of this Carried Interest Procedure, including without limitation drilling
costs, completion costs, operating costs, and all other expenditures set forth
in the Accounting Procedure (but excluding any amounts which form any portion of
the total expenditures required to be made by Panarctic to earn its interest in
any of the Lands described in Schedule "A" to the Farmout Agreement) it shall
pay to the Carried Interest Owner in each calendar month thereafter a share of
the net proceeds of production of petroleum substances produced, saved and
marketed from such Block for such month equal to the percentage of its net
carried interest in such Block, as determined in accordance with Clause 3
hereof. In calculating such net proceeds of production in any month, there shall
be deducted from the gross proceeds of production the operating costs relating
to such Block and all wells located thereon, in accordance with the Accounting
Procedure. If at any time after the commencement of payments to the Carried
Interest Owner on any Block as aforesaid,
(a) Panarctic makes additional expenditures on such Block for
drilling costs, completion costs, operating costs and/or other
amounts set forth in the Accounting Procedure, or
(b) the monthly operating costs exceed the monthly gross proceeds
of production,
<PAGE>
it shall be entitled to recover the amount thereof out of the gross proceeds of
production from such Block before commencing to make payments again to the
Carried Interest Owner as aforesaid, and so on from time to time.
5. APPLICATION OF OPERATING PROCEDURE:
Subject to the specific provisions of this Carried Interest Procedure,
all of the provisions of the Operating Procedure shall apply mutatis mutandis
between the parties hereto and be deemed to be incorporated herein except to the
extent that any such terms and conditions are inconsistent with the specific
provisions and intent of this Carried Interest Procedure and generally accepted
understandings in the industry of a net carried interest, and the Carried
Interest Owner shall have the same rights as a Non-Operator and Panarctic shall
have the same rights as the Operator under such applicable provisions of the
Operating Procedure. In particular, but not so as to restrict the generality or
the foregoing, the Carried Interest Owner shall be entitled to the same
information and statements furnished by the Operator to a Non-Operator under the
Operating Procedure and all operations shall be carried on by Panarctic in the
same manner as operations are to be carried on under the provisions of the
Operating Procedure.
Notwithstanding anything to the contrary, expressed or implied above or
in the Operating Procedure,
(a) Panarctic shall have the sole and exclusive control and
management of the development and operation of the said Lands
and shall not require the consent of the Carried Interest
Owner to any such development or operation, drilling or
otherwise, or to the expenditure of monies thereon;
<PAGE>
(b) Panarctic agrees to advance or obtain the advancement of all
monies for the conduct of operations on the said Lands such
that no monies need be advanced by the Carried Interest Owner;
(c) the Carried Interest Owner's entire interest in the operations
conducted on the said Lands, while subject to this Carried
Interest Procedure, the equipment pertaining thereto, and the
petroleum substances produced therefrom shall be the
percentage of the net carried interest in net proceeds of
production of petroleum substances produced, saved and
marketed as provided for above;
(d) under the provisions of the Clause in the Operating Procedure
entitled "Area of Common Interest", the interest entitled to
be acquired by any party shall be the participating interest
of that party as set out in the Operating Procedure and, if
acquired, the provisions of the Operating Procedure shall
apply thereto;
(e) the Carried Interest Owner shall have no rights under the
provisions of the Clause of the Operating Procedure entitled
"Independent Drilling and Deepening".
6. EFFECTIVE DATE:
The effective date of this Carried Interest Procedure shall be the
effective date of the exercise of conversion rights, as provided for in the
Farmout Agreement.
7. INTEREST IN PERMITS:
The Carried Interest Owner shall have an interest in the Permits and
Lands subjected to this Carried Interest Procedure of the kind described in, and
subject to the terms and conditions of, this Carried Interest Procedure.
<PAGE>
8. TERM OF AGREEMENT:
This Carried Interest Procedure shall continue in full force and effect
so long as any portion of the Lands is subject to this Carried Interest
Procedure.
9. ENUREMENT:
This agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators, successors
and assigns.
Agreement 1-1-75
Canada Southern and/or its assigns shall have the right from time to
time Block by Block to revert from a 30% net C.I. position to a 30%
W.I. position in two stages with no interest so converted to be less
than 1/6th of the 30% C.I. The following procedure shall apply to such
conversion mutatis mutandis.
10. CONVERSION TO WORKING INTEREST:
(a) At any time when Panarctic has recovered from the gross
proceeds of production from any Block all costs and expenses
made by it on such Block, as hereinbefore provided in clause 4
(or at any date prior thereto if the Carried Interest Owner
pays to Panarctic an amount equal to thirty 30% percent of all
such costs and expenses incurred to that date by Panarctic on
such Block and which have not been recovered by Panarctic as
above provided for) the Carried Interest Owner may elect to
convert its net carried interest in such Block to an undivided
Thirty (30%) percent working interest. Such election may be
made by notice in writing served upon Panarctic in the manner
provided in the Operating Procedure.
<PAGE>
Thereafter all the provisions of the Operating Procedure shall
apply and the participating interests of the parties shall be
adjusted accordingly and the provisions of this Carried
Interest Procedure shall no longer apply with respect to such
Block. After converting its net carried interest to a working
interest, as in this clause 10 provided, the Carried Interest
Owner shall have no further right of conversion and its
interest shall remain as a working interest.
(b) [Replaced by new clause giving C.S. right to sell & commit
products except for 42 sections in Permit #2719.]
CANADA SOUTHERN PETROLEUM LTD.
1992 STOCK OPTION PLAN
1. Purpose of Plan. The purpose of this stock option plan (the "Plan")
is to further the success of Canada Southern Petroleum Ltd., a Canadian
corporation, chartered under the laws of the Province of Nova Scotia (the
"Company"), and its subsidiaries or affiliates, by making available stock of the
Company for purchase by eligible directors, officers, key employees and
consultants of the Company and its subsidiaries or affiliates, and thus to
provide an additional incentive to such persons to continue their affiliation
with the Company and its subsidiaries or affiliates and to give them a greater
interest as stockholders in the success of the Company.
2. Stock Subject to Plan. There shall be reserved for issuance or
transfer upon the exercise of options to be granted from time to time under the
Plan an aggregate of 600,000 shares of the Company's Limited Voting Shares,
$1.00 par value (the "Shares"), which shares, as the Board of Directors shall
from time to time determine, may be in whole or in part authorized and unissued
shares of stock or issued shares of stock which shall have been reacquired by
the Company. If any option granted under the Plan shall expire or terminate for
any reason without having been exercised in full, the unpurchased shares subject
thereto shall again be available for the purposes of the Plan.
3. Administration. The Board of Director of the Company shall act as a
committee of the whole (the "Committee") to administer the Plan. No director who
is at that time eligible to receive an option under the Plan shall participate
as a member of the Committee in the granting of an option to such director.
The Committee shall have absolute authority in its discretion, but
subject to the express provisions of the Plan, to determine (i) the purchase
price of the Shares covered by each option, (ii) the persons to whom options
shall be granted, (iii) the time or times at which options shall be granted,
(iv) the number of shares to be subject to each option, and (v) the time or
times at which an option can be exercised and whether in whole or installments;
to interpret the Plan; to prescribe, amend and rescind rules and regulations
relating to the Plan; to determine the terms and provisions (and amendments
thereof) of the respective option agreements (which need not be identical),
including such terms and provisions (and amendments) as shall be required in the
judgment of the Committee to conform to any change in any law or regulation
applicable thereto; and to make any and all other determinations deemed
necessary or advisable for the administration of the Plan. The Committee's
determination on the foregoing matters shall be conclusive.
The Committee shall select one of its members as its chairman and shall
hold its meetings at such times and places as it may determine. A majority of
the members shall constitute a quorum, and all determinations of the Committee
shall be made by not less than a majority of its members. The Committee shall
establish such rules and regulations for the conduct of its business as it shall
deem advisable.
4. Eligibility. Options under the Plan may be granted only to
directors, officers, key employees and consultants of (i) the Company, (ii)
subsidiary corporations of the Company from time to time ("Subsidiaries") and
(iii) any business entity in which the Company shall from time to time have a
substantial interest ("Affiliate"). In determining the persons to whom options
shall be granted and the number of shares to be covered by each option, the
Committee may take into account the nature of the services rendered by such
persons, their present and potential contribution to the Company's success, and
such other factors as the Committee in its discretion shall deem relevant.
5. Option Prices. The purchase price of Shares under each option
shall be determined by the Committee. The purchase price may be less than fair
market value of the Shares at the time of granting, but may not be less than the
greater of (i) the par value thereof and (ii) the fair value of the shares less
any discount permitted by The Toronto Stock Exchange.
6. Exercise of Option. Unless otherwise provided in the option
agreement, an option granted under the Plan shall become exercisable in
installments as follows: to the extent of twenty-five (25%) percent of the
number of shares originally covered thereby, in the calendar year next
succeeding the date of grant of the option, and to the extent of an additional
twenty-five (25%) percent of such number of shares in each of the three
succeeding years thereafter. Such installments shall be cumulative. The
Committee shall have authority in its discretion to prescribe in any option
agreement that the option may be exercised in different installments during the
term of the option. In any event, options granted to individuals who have been
associated with the Company for not less than ten years may be exercisable
immediately. The purchase price of the shares to be acquired shall be paid in
full upon the exercise of the option, and the Company shall not be required to
deliver certificates for such shares until such payment has been made. The term
of each option shall be for such period as the Committee shall determine, but
not more than ten years from the date of granting thereof, or such shorter
period as described in Paragraphs 8 and 9 hereof. As to employees, except as
provided in Paragraphs 8 and 9, an option granted to an employee of the Company
or one of its Subsidiaries or Affiliates, may not be exercised unless the holder
thereof is at the time of such exercise (and has been since the date or grant),
an employee or a retiree of the Company or one of its then Subsidiaries or a
then Affiliate. The holder of an option shall not have any of the rights of a
stockholder with respect to the shares subject to option until such shares shall
be issued or transferred to him upon exercise of his option.
7. Limited Transferability of Options. No options granted under the
Plan shall be transferable, except that options may be transferred to and be
exercised by members of an optionee's immediate family, and each option granted
pursuant to the Plan may be exercised during an optionholder's lifetime, or
pursuant to Paragraph 9 hereof.
8. Termination of Employment. In the event of termination of employment
of an employee to whom an option has been granted under the Plan, other than (a)
a termination that is either (i) for cause or (ii) voluntary on the part of the
employee and without the written consent of the Company, or (b) a termination by
reason of death, the employee may (unless otherwise provided in his option
agreement) exercise his option at any time within three months after such
termination of employment, or such other time as the Committee shall authorize,
but in no event after ten years from the date of granting thereof, to the extent
of the number of shares covered by his option which were purchasable by him at
the date of termination of his employment. In the event of the termination of
the employment of an employee to whom an option has been granted under the Plan
that is either (i) for cause or (ii) voluntary on the part of the employee
without the written consent of the Company, any options held by him under the
Plan, to the extent not theretofore exercised, shall forthwith terminate.
Nothing in the Plan or any option granted pursuant to the Plan shall confer on
any individual any right to continue in any capacity his relationship with the
Company or any of its Subsidiaries or Affiliates or interfere in any way with
the right of the Company or any of its Subsidiaries or Affiliates to terminate
such relationship at any time.
This Paragraph 8 is applicable only to options granted to and held by
full time officers and employees and is not applicable to options granted to
directors, retirees of the Company and consultants.
9. Death of Holder of Option. In the event of the death of any holder
of an option which has been granted under the Plan, such option (unless
previously terminated) may be exercised (to the extent of the number of shares
covered by such option which were purchasable by such person at the date of his
death) by a legatee or legatees of such option under such person's will, or by
such person's personal representative or distributees, at any time within a
period of one year after his death, but not after ten years from the date of
granting thereof.
10. Retirement of Holder of Option. In the event of the retirement of
a holder of an option which has been granted under the Plan, such option (unless
previously terminated) shall continue to be exercisable in accordance with
Paragraph 6 hereof but no more than ten years from the date of granting or such
shorter period as described in paragraph 9 hereof.
11. Adjustment Upon Changes in Capitalization. Notwithstanding any
other provisions of the Plan, each option agreement may contain such provisions
as the Committee shall determine to be appropriate for the adjustment of the
number and class of shares subject to such option and of the option price in the
event of changes in the outstanding Stock by reasons of any stock dividend,
split-up, recapitalization, combination or exchange of shares, merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation and the like, and, in the event of any such change in the
outstanding Stock, the aggregate number and class of shares available under the
Plan shall be appropriately adjusted by the Committee, whose determination of
such adjustment shall be conclusive.
12. Amendment and Termination. The Board of Directors of the Company
may terminate the Plan or make such modifications or amendments thereof as it
shall deem advisable, or in order to conform to any change in any law or
regulation applicable thereto. Without the consent of any person to whom any
option shall therefore have been granted, no termination, modification or
amendment of the Plan shall adversely affect any rights which may previously
have been granted under the Plan to such person.
13. Effectiveness of Plan. The Plan shall be effective upon its
approval by the shareholders of the Company.
Consent of Independent Petroleum Engineers
The undersigned firm of Independent Petroleum Engineers, of Calgary, Alberta,
Canada, knows that it is named as having prepared an evaluation of the interests
of Canada Southern Petroleum Ltd., dated March 26, 1999, prepared for filings
with the Securities and Exchange Commission on Form 10-K 1998, and hereby gives
its consent to the use of its name and to the use of the said estimates.
Paddock Lindstrom & Associates Ltd.
/s/ L. K. Lindstrom
L. K. Lindstrom, P. Eng.
President
<PAGE>
Consent of Independent Auditors
We consent to the inclusion in the Annual Report (Form 10-K) and to the
incorporation by reference in the Registration Statement (Form S-8) pertaining
to the Stock Option Plan of Canada Southern Petroleum Ltd. of our report dated
March 18, 1999, with respect to the consolidated financial statements of Canada
Southern Petroleum Ltd. included in the Annual Report (Form 10-K) for the year
ended December 31, 1998.
/s/ Ernst & Young LLP
Chartered Accountants
Calgary, Canada
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> Canadian Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 0.6535
<CASH> 6,208,634
<SECURITIES> 751,511
<RECEIVABLES> 266,116
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,545,958
<PP&E> 18,832,076
<DEPRECIATION> (8,832,066)
<TOTAL-ASSETS> 17,545,968
<CURRENT-LIABILITIES> 670,045
<BONDS> 0
0
0
<COMMON> 14,234,740
<OTHER-SE> 2,405,138
<TOTAL-LIABILITY-AND-EQUITY> 17,545,968
<SALES> 1,809,658
<TOTAL-REVENUES> 3,409,361
<CGS> 0
<TOTAL-COSTS> 6,115,898
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,706,537)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,706,537)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,706,537)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
Statement of Claim No. 127 Suit No. 8901-15660
------------------------------------
NOTICE In the Court of Queen's Bench
of Alberta
JUDICIAL DISTRICT OF CALGARY
To the Defendant(s): ------------------------------------
BETWEEN:
COLUMBIA GAS DEVELOPMENT OF
CANADA LTD., AMOCO PRODUCTION CANADA SOUTHERN PETROLEUM LTD.
COMPANY, DOME PETROLEUM LIMITED,
AMOCO CANADA PETROLEUM COMPANY Plaintiff
LTD., MOBIL OIL CANADA LTD., and ESSO
RESOURCES OF CANADA LTD. and
COLUMBIA GAS DEVELOPMENT OF CANADA
You are hereby notified that the LTD., AMOCO PRODUCTION COMPANY, DOME
Plaintiff may enter judgment in PETROLEUM LIMITED, AMOCO CANADA
accordance with this Statement of PETROLEUM COMPANY LTD., MOBIL OIL
Claim or such judgment as, according CANADA LTD., and ESSO RESOURCES OF
to the practice of the Court, he is CANADA LTD.
entitled to, without any further notice to
you unless within fifteen (15) days after Defendants
service
------------------------------------
hereof upon you, excluding the day of STATEMENT OF CLAIM
service, you cause to be filed in the
office of the Clerk of the Court from ------------------------------------
which the Statement of Claim has
issued either: This Statement of Claim is issued by
(1) A Statement of Defence; or POOLE LAYCRAFT McMAHON
Solicitor for the Plaintiff who
(2) A Demand that notice of any resides at
application to be made in the action be CALGARY, ALBERTA
given to you;
and
And unless within the same time a
copy of your Statement of Defence or whose address for service is in the
Demand be served upon the Plaintiff or care of said solicitor at
his Solicitor at his stated address for #212, 908 - 17th Avenue S.W.
service. CALGARY, ALBERTA
T2T 0A3
and is addressed to the Defendant
whose residence as far as known to
the Plaintiff is
CALGARY, ALBERTA
------------------------------------
Solicitor's File No. 1387/JPM
<PAGE>
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
BETWEEN:
CANADA SOUTHERN PETROLEUM LTD.
Plaintiff
- and -
COLUMBIA GAS DEVELOPMENT OF CANADA LTD.,
DOME PETROLEUM LIMITED, AMOCO CANADA PETROLEUM
COMPANY LTD., MOBIL OIL CANADA LTD., and
ESSO RESOURCES OF CANADA LTD.
Defendants
STATEMENT OF CLAIM
1. The Plaintiff Canada Southern Petroleum Ltd. (hereinafter referred to as
Canada Southern) is a body corporate, incorporated pursuant to the laws of Nova
Scotia (formerly incorporated under the laws of Canada), registered to carry on
business in the Province of Alberta with head office in the City of Calgary, in
the Province of Alberta.
2. The Defendant Columbia Gas Development of Canada Ltd. ("Columbia") is a body
corporate incorporated pursuant to the laws of Canada, registered to carry on
business in the Province of Alberta, with head office located in the City of
Calgary, in the Province of Alberta.
3. The Defendant Dome Petroleum Limited ("Dome") is a body corporate
incorporated pursuant to the laws of Canada, registered to carry on business in
the Province of Alberta, with head office located in the City of Calgary, in the
Province of Alberta.
4. The Defendant Amoco Canada Petroleum Company Ltd. ("Amoco Canada") is a body
corporate incorporated pursuant to the laws of Canada, registered to carry on
business in the Province of Alberta, with head office located in the City of
Calgary, in the Province of Alberta.
<PAGE>
5. The Defendant Mobil Oil Canada Ltd. ("Mobil") is a body corporate
incorporated pursuant to the laws of Canada, registered to carry on business in
the Province of Alberta, with head office in the City of Calgary, in the
Province of Alberta. Mobil is a successor-in-interest to Canadian Superior Oil
Company, which, in turn, is the successor to Alminex Limited.
6. The Defendant Esso Resources Limited ("Esso") is a body corporate
incorporated pursuant to the laws of Canada, registered to carry on business in
the Province of Alberta, with head office in the City of Calgary, in the
Province of Alberta.
7. Amoco Canada, Dome, Columbia, Esso and Mobil are currently working interest
owners in properties known as the Kotanelee area located in the Yukon Territory.
Columbia has been the managing operator of the Kotanelee lands since on or about
February 1, 1977.
8. Canada Southern is formerly a working interest owner and is currently a
carried interest owner in those same properties in the Kotanelee area.
9. The parties, or their predecessors or assignors, entered into agreements in
writing dated May 28, 1959 and April 1, 1966, which provided for the
exploration, operation, management and development of the Kotanelee field and
specified the working interests and carried interests to be held by the parties.
The l959 Agreement contained a detailed Operating Procedure and Accounting
Procedure. The April 1, 1966 agreement added a schedu1e of Carried Interest
Provisions to the 1959 Agreement.
10. On or about February 1, 1977, Canada Southern together with Dome, Amoco
Canada and the predecessor of Mobil, entered into a written agreement with
Columbia. Canada Southern agreed to reduce its 50% carried interest in and to
the Kotanelee field to a 33 1/3% carried interest and assigned a 16 2/3%
interest to Co1umbia. Columbia undertook to drill a test well under the terms of
the agreement and to act as the operator of the lands.
<PAGE>
11. As to Canada Southern's carried interest, the agreements provided that a
portion of certain expenditures made for the joint account would be deducted
from revenues from production before any payments would be made to Canada
Southern by the Defendants. Columbia has reported that the expenditures for the
joint account, for exploration and development costs, including gathering lines
and dehydration equipment, amount to over $61,000,000, which amount is not
admitted by Canada Southern.
12. In early 1987, Columbia, as managing operator, advised Canada Southern, for
the first time, that interest would accrue on all expenditures for the joint
account and would be charged against Canada Southern's carried interest. There
is no provision in the agreements expressly allowing interest to accrue upon the
expenditures for the joint account and no interest was shown previously on any
statements of operations provided to Canada Southern.
13. Essentially, Columbia, and the other Defendants, are contending that they
are entitled to receive interest upon their investment in the Kotanelee lands
before Canada Southern will receive any revenue from gas produced.
14. Canada Southern denies that the working interest owners may accrue and
charge interest on expenditures for the joint account and states that any
attempt to charge interest is contrary to the terms of the agreements relating
to the Kotanelee field.
15. Further, Canada Southern stated that the expenditures for gathering lines
and dehydration equipment are, as has always been reported in the past by
Columbia, expenditures made for the joint account, notwithstanding any contrary
position that may be taken by certain of the Defendants.
16. This actual controversy and dispute will have a dramatic effect upon the
expected revenues to be received by Canada Southern from production from the
Kotanelee field.
WHEREFORE the Plaintiff Canada Southern Petroleum Ltd. claims against
the Defendants and each of them:
(a) A declaration that interest cannot accrue or be charged upon
expenditures for the joint account made by the Defendants;
<PAGE>
(b) A declaration that expenditures for gathering lines and
dehydration equipment are expenditures for the joint account;
(c) Costs of this action; and
(d) Such further and other relief as this Honourable Court may
deem fit.
DATED at the City of Calgary, in the Province of Alberta, this 27th day
of October, 1989, AND DELIVERED by Messrs. Poole Laycraft McMahon, Barristers
and Solicitors, solicitors for the Plaintiff whose address for service is in
care of the said solicitors at #212, 908 - 17th Avenue S.W., Calgary, Alberta,
T2T 0A3.
ISSUED out of the office of the Clerk of the Court in the Judicial
District of Calgary, Province of Alberta, at the City of Calgary, in the
Province of Alberta, this 27th day of October, 1989.
/s/ James McLaughlin
Clerk of the Court
NOTICE: Action No: 9001-03466 1990
----------------------------------------
To the Defendant(s): IN THE COURT OF QUEEN'S BENCH
OF ALBERTA
Amoco Canada Petroleum Company Ltd. JUDICIAL DISTRICT OF CALGARY
Amoco Production Company, Dome ----------------------------------------
Petroleum Limited, Columbia Gas
Development of Canada Ltd., Mobil BETWEEN:
Oil Canada Ltd. and Esso Resources
Canada Limited CANADA SOUTHERN PETROLEUM LTD.
You are hereby notified that the Plaintiff
Plaintiff may enter judgment in
accordance with this Statement of - and -
Claim or such judgment as, according
to the practice of the Court, he is
entitled to, without any further AMOCO CANADA PETROLEUM COMPANY LTD.,
notice to you unless within AMOCO PRODUCTION COMPANY, DOME PETROLEUM
LIMITED, COLUMBIA GAS DEVELOPMENT OF
FIFTEEN (15) DAYS CANADA LTD., MOBIL OIL CANADA LTD.,
ESSO RESOURCES CANADA LIMITED and
after service hereof upon you, AMOCO CANADA RESOURCES LTD.
excluding the day of service, you
cause to be filed in the office of the Defendants
Clerk of the Court from which the
Statement of Claim has issued either: ----------------------------------------
(1) A Statement of Defence; or AMENDED STATEMENT OF CLAIM
(2) A Demand of Notice of any ----------------------------------------
application to be made in the
action be given to you; This Statement of Claim is issued by
POOLE LAYCRAFT McMAHON
and unless within the same time a copy
of your Statement of Defence or Demand Solicitors for the Plaintiff who resides
of Notice is served upon the Plaintiff at:
and unless within the same time a copy
or his solicitor at his stated address CALGARY, ALBERTA
for service.
and whose address for service is in care
of the said solicitors at:
#212, 908 - 17th Avenue S.W.
Calgary, Alberta
and is addressed to the Defendant whose
residence as far as is known to the
Plaintiff is:
Calgary, Alberta
----------------------------------------
Our File No: 1387/JPM
<PAGE>
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
BETWEEN:
CANADA SOUTHERN PETROLEUM LTD.
Plaintiff
- and -
AMOCO CANADA PETROLEUM COMPANY LTD.,
AMOCO PRODUCTION COMPANY, DOME PETROLEUM LIMITED,
COLUMBIA GAS DEVELOPMENT OF CANADA LTD.,
MOBIL OIL CANADA LTD., ESSO RESOURCES CANADA LIMITED
and AMOCO CANADA RESOURCES LTD.
Defendants
AMENDED STATEMENT OF CLAIM
1. The Plaintiff, Canada Southern Petroleum Ltd. (hereinafter referred to as
"Canada Southern") is a body corporate, incorporated pursuant to the laws of
Nova Scotia (formerly under the laws of Canada), registered to carry on business
in the Province of Alberta, with head office in the City of Calgary, in the
Province of Alberta.
2. The Defendant, Amoco Production Company, (hereinafter referred to as "Amoco
Production") is a body corporate incorporated pursuant to the laws of the State
of Delaware, of the United States of America, registered to carry on business in
the Province of Alberta.
3. The Defendant, Amoco Canada Petroleum Company Ltd. (hereinafter referred to
as "Amoco Canada") is a body corporate incorporated pursuant to the laws of
Canada, registered to carry on business in the Province of Alberta, with head
office located in the City of Calgary, in the Province of Alberta. Amoco Canada
is the assignee and successor in interest to Amoco Production.
<PAGE>
4. The Defendant, Dome Petroleum Limited (hereinafter referred to as "Dome") is
a body corporate incorporated pursuant to the laws of Canada, registered to
carry on business in the Province of Alberta, with head office located in the
City of Calgary, in the Province of Alberta. On May 1, 1989, Dome and another
corporation amalgamated, pursuant to the laws of Canada, to form the Defendant
Amoco Canada Resources Ltd. (hereinafter referred to as "Amoco Resources").
5. The Defendant, Columbia Gas Development of Canada Ltd. (hereinafter referred
to as "Columbia") is a body corporate incorporated pursuant to the laws of
Canada, registered to carry on business in the Province of Alberta, with head
office located in the City of Calgary, in the Province of Alberta.
6. The Defendant, Mobil Oil Canada Ltd. (hereinafter referred to as "Mobil") is
a body corporate incorporated pursuant to the laws of Canada, registered to
carry on business in the Province of Alberta, with head office located in the
City of Calgary, in the Province of Alberta.
7. The Defendant, Esso Resources Canada Limited (hereinafter referred to as
"Esso") is a body corporate incorporated pursuant to the laws of Canada,
registered to carry on business in the Province of Alberta, with head office
located in the City of Calgary, in the Province of Alberta.
8. Amoco Canada, Columbia, Esso, Mobil and Amoco Resources are currently
interest owners in the nature of a working interest in properties now known as
the Kotaneelee area located in the Yukon Territory (hereinafter referred to as
the "current working interest owners"). Columbia has been the managing operator
of the Kotaneelee lands since on or about February 1, 1977.
9. Canada Southern was formerly the only working interest owner and is currently
in the nature of a 33 1/3% carried interest owner, on behalf of itself and two
other parties, in these same properties in the Kotaneelee area.
10. The Kotaneelee lands were acquired and held by Canada Southern prior to
1959, as part of oil and gas permits granted in the Yukon and Northwest
Territories. Canada Southern conducted exploration upon the Kotaneelee lands
prior to any involvement of the Defendants.
<PAGE>
11. In 1959, pursuant to an oil and gas exploration, development and marketing
contract dated as of May 28, 1959 (the "1959 Agreement"), Canada Southern agreed
to transfer a 50% interest in the oil and gas permits to the predecessors or
assignors of Amoco Canada, Dome and Mobil. One of the express recited
considerations for the transfer of this 50% interest was that the transferees
would, pursuant to Article III 3.1 (D) "... assure the earliest feasible
development and marketing of oil and/or gas found on the properties."
12. This express consideration was a fundamental term of the 1959 Agreement and
Canada Southern relied upon the assurance that the properties would be developed
and gas sold at the earliest feasible opportunity.
13. Amoco Production and Dome expressly agreed to be bound by all the terms and
provisions of the 1959 Agreement, when they acquired their interests by
assignment, in the Kotaneelee lands, in the period from 1959 to 1966, and they
were expressly bound to assure such earliest feasible development and marketing
of Kotaneelee oil and/or gas, for the benefit of Canada Southern. Amoco Canada
as the assignee and successor in interest to Amoco Production is bound by all
the terms and provisions of the 1959 Agreement. Amoco Resources as the assignee
and successor in interest to Dome is bound by all the terms and provisions of
the 1959 Agreement.
14. Mobil is the successor in interest to one of the original parties to the
1959 Agreement and is bound by such party's assurance to develop and market
Kotaneelee gas at the earliest feasible time.
15. The 1959 Agreement was modified, by an agreement in writing dated April 1,
1966, in which Canada Southern's 50% interest in the Kotaneelee lands was
converted to a 50% interest in the nature of a carried interest. From that date
to the present, Canada Southern has had no rights in the operation of the
properties, save and except for a vote on which of the current working interest
owners would be manager operator, if the existing operator resigned or was
replaced, and certain other options. In all other respects, Canada Southern
relied upon the working interest owners who exercised their discretion
concerning operations.
<PAGE>
16. Columbia acquired an interest in the nature of a working interest in the
Kotaneelee lands pursuant to an agreement in writing dated February 1, 1977 (the
"1977 Agreement"). Columbia agreed to drill a test well on the Kotaneelee lands
and to act as managing operator of those lands and it further agreed to conduct
all operations in accordance with the terms and provisions of the 1959
Agreement, as modified. In turn, Canada Southern again agreed to reduce its
interest in the Kotaneelee lands to an interest in the nature of 33 1/3% carried
interest.
17. Columbia, either expressly or impliedly, agreed with Canada Southern that it
would be bound by the obligation to assure the earliest feasible development and
marketing of oil or gas from the Kotaneelee field.
18. Esso acquired an interest in the nature of a working interest in the
Kotaneelee lands from Columbia in 1977. Since that date, it has taken an active
role in discussions and decisions relating to the operation of the Kotaneelee
field and it is bound, expressly or impliedly, by all the terms and provisions
of the 1959 Agreement which remain in effect.
19. Canada Southern states that the effect of the 1959, 1966 and 1977 Agreements
is that the exploration, development and production of the Kotaneelee lands was
to be a joint venture between Canada Southern and the current working interest
owners, for the benefit of all parties. As such, Canada Southern states that the
current working interest owners owe a fiduciary duty to Canada Southern with
respect to any dealings with the Kotaneelee field.
20. Further, the current working interest owners, by undertaking to produce and
sell gas at the earliest feasible time, and by agreeing to operate the
Kotaneelee lands, became the agents of Canada Southern to sell or market any gas
found in the Kotaneelee field. As agents, the current working interest owners
owe Canada Southern a fiduciary duty, requiring that they act with the utmost
good faith.
21. Further, Canada Southern placed its trust and confidence in the current
working interest owners and relied upon them to produce and market the gas found
in the Kotaneelee field. Canada Southern was informed by the managing operator,
and other Defendants, of efforts to market the gas discovered and relied upon
these reports. As a result of those dealings, the current working interest
owners owe a fiduciary duty to Canada Southern.
<PAGE>
22. In the period from 1977 to 1980, three gas wells were drilled in the
Kotaneelee field and it was known that there were extensive proven and probable
reserves of gas in the structure underlying the lands. By 1980, a gas
dehydration system had been constructed on the lands and the Kotaneelee field
had been tied into the Westcoast Transmission raw gas pipeline, which ran
through the field.
23. Since 1980, the current working interest owners have not marketed or sold
any gas from the Kotaneelee field, except to test the gas dehydration system,
notwithstanding that the field has been ready and able to produce.
24. In November, 1986, Canada Southern, without any prior knowledge, was advised
by Columbia that a current working interest owner had declined a market for
Kotaneelee gas, earlier in 1986, as to which Canada Southern had no knowledge.
25. In 1988, Canada Southern, without any prior knowledge, discovered that the
operator of the field, Columbia, had thereafter refused, in 1986, to undertake
any further efforts to market Kotaneelee gas, after the market had been declined
earlier in 1986.
26. At the present time, gas from the Kotaneelee field is not being sold,
notwithstanding that the gas fields directly to the north and south of
Kotaneelee have been produced and marketed to near depletion and notwithstanding
that the current working interest owners have, since 1980, produced and marketed
gas from other fields in which they hold an interest. The gas field to the
immediate south of the Kotaneelee field has recently been reopened and gas is
apparently being marketed from that field.
27. Canada Southern states that the current working interest owners have
breached their fiduciary duty, have breached the express agreement to assure the
earliest feasible marketing of gas from the Kotaneelee lands and have breached
their obligation to act as prudent operators, by:
(a) refusing or failing to sell gas from the Kotaneelee field;
(b) declining the market for gas in 1986;
<PAGE>
(c) refusing or declining other potential markets for gas, the
particulars of which will be provided prior to the trial of
this action;
(d) refusing to undertake any further efforts to market gas after
1986;
(e) failing to make full and complete disclosure to Canada
Southern;
(f) producing and marketing gas from fields other than Kotaneelee,
in direct conflict with the duty owed to Canada Southern;
(g) failing to act in good faith or in the best interests of
Canada Southern in dealings with the Kotaneelee lands.
28. By reason of the matters aforesaid, Canada Southern has suffered loss and
damage, equal to Canada Southern's interest in the proceeds from sales of gas
which should have been realized and has been deprived of all economic benefit in
the Kotaneelee lands.
29. By reason of the matters aforesaid, Canada Southern states that the actions
and decisions of the current working interest owners constitute a complete
repudiation of the joint venture to produce and sell gas from the Kotaneelee
field and are in disregard of the fiduciary duty owed to Canada Southern.
30. Further, as to Canada Southern's interest, the 1959 Agreement, as amended,
provided that a portion of certain expenditures made for the joint account would
be deducted from revenues from production before any revenue would be paid to
Canada Southern. Columbia has reported that the expenditures for the joint
account for exploration and development costs, including gas dehydration
equipment, amount to over $61 million.
31. Canada Southern disputes and takes exception to the amount stated by
Columbia and claims an adjustment to the joint account, the particulars of which
shall be provided prior to the trial of this action.
32. Canada Southern proposes that the trial of this action be held at the Court
House, in the City of Calgary, in the Province of Alberta.
<PAGE>
WHEREFORE the Plaintiff Canada Southern claims against the Defendants:
(a) an order vesting the interests of the Defendants, in the
Kotaneelee field, in the Plaintiff, for breach of fiduciary
duty;
(b) in the alternative, a declaration that the Defendants hold
their interests in the Kotaneelee field in trust for the
Plaintiff and an order directing the conveyance of those
interests to the Plaintiff;
(c) in the alternative, an order rescinding the 1959, 1966 and
1977 Agreements and terminating any interest of the Defendants
in the Kotaneelee lands, for breach of fiduciary duty;
(d) further, or in the alternative, a mandatory order requiring
and directing the Defendants promptly market gas from the
Kotaneelee field, in default of which the interests of the
Defendants in the Kotaneelee lands shall be forfeited;
(e) in the alternative, an order directing division of the
Kotaneelee lands between Canada Southern and the Defendants;
(f) damages for breach of fiduciary duty, in an amount to be
proven at the trial of this action;
(g) in the alternative, damages for breach of contract in an
amount to be proven at the trial of this action;
(h) an order directing that the joint account be reduced in an
amount to be proven at trial;
(i) an order that all necessary accounts, inquiries and direction
may be taken, made or given;
<PAGE>
(j) interest on any damages awarded herein pursuant to the
Judgment Interest Act, S.A. 1984, c. J-0.5;
(k) costs of this action on a solicitor/client basis; and
(l) such further and other relief as this Honourable Court may
deem just.
DATED at the City of Calgary, in the Province of Alberta, this 7th day
of March, 1990, AND DELIVERED BY MESSRS. POOLE LAYCRAFT McMAHON, Barristers and
Solicitors, solicitors for the Plaintiff, whose address for service is in care
of the said solicitors at #212, 908 - 17th Avenue S.W., Calgary, Alberta, T2T
0A3.
ISSUED from the Clerk of the Court of Queen's Bench of Alberta,
Judicial District of Calgary, this 7th day of March, 1990.
/s/ James McLaughlin
CLERK OF THE COURT
NO: 9001-03466 A.D. 1993
----------------------------------------
IN THE COURT OF QUEEN'S BENCH
OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
----------------------------------------
BETWEEN:
CANADA SOUTHERN PETROLEUM LTD.
Plaintiff
- and -
AMOCO CANADA PETROLEUM COMPANY
LTD., AMOCO PRODUCTION COMPANY,
DOME PETROLEUM LIMITED, COLUMBIA
GAS DEVELOPMENT OF CANADA LTD.,
MOBIL OIL CANADA LTD., ESSO
RESOURCES CANADA LIMITED and
AMOCO CANADA RESOURCES LTD.
Defendants
- and -
COLUMBIA GAS DEVELOPMENT OF
CANADA LTD., CANADIAN SUPERIOR
OIL LTD., ESSO RESOURCES CANADA
LIMITED, MOBIL OIL CANADA LTD.,
ALLIED-SIGNAL INC., HOME OIL
COMPANY LIMITED, KERN COUNTY LAND
COMPANY and MOBIL OIL CANADA
PROPERTIES
Third Parties
<PAGE>
AND BETWEEN:
COLUMBIA GAS DEVELOPMENT OF
CANADA LTD.
Plaintiff by Counterclaim
- and -
CANADA SOUTHERN PETROLEUM LTD.,
AMOCO CANADA RESOURCES LTD.,
AMOCO CANADA PETROLEUM COMPANY
LTD., CANADIAN SUPERIOR OIL LTD.,
MOBIL OIL CANADA LTD., IMPERIAL
OIL LIMITED and ESSO RESOURCES
CANADA LIMITED
Defendants by Counterclaim
----------------------------------------
ORDER
----------------------------------------
BALLEM McDILL MacINNES EDEN
BARRISTERS AND SOLICITORS
4000 Petro-Canada Centre
West Tower
150 - 6 Avenue, S.W.
Calgary, Alberta, T2P 3Y7
J. Peter McMahon
Ph: 292-9836
Solicitor's File: 27,207.37
<PAGE>
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
BETWEEN:
CANADA SOUTHERN PETROLEUM LTD.
Plaintiff
- and -
AMOCO CANADA PETROLEUM COMPANY LTD.,
AMOCO PRODUCTION COMPANY, DOME PETROLEUM LIMITED,
COLUMBIA GAS DEVELOPMENT OF CANADA LTD.,
MOBIL OIL CANADA LTD., ESSO RESOURCES CANADA LIMITED
and AMOCO CANADA RESOURCES LTD.
Defendants
- and -
COLUMBIA GAS DEVELOPMENT OF CANADA LTD.,
CANADIAN SUPERIOR OIL LTD., ESSO RESOURCES
CANADA LIMITED, MOBIL OIL CANADA LTD., ALLIED-
SIGNAL INC., HOME OIL COMPANY LIMITED, KERN
COUNTY LAND COMPANY AND MOBIL OIL CANADA PROPERTIES
Third Parties
AND BETWEEN:
COLUMBIA GAS DEVELOPMENT OF CANADA LTD.
Plaintiff by Counterclaim
- and -
CANADA SOUTHERN PETROLEUM LTD., AMOCO CANADA
RESOURCES LTD., AMOCO CANADA PETROLEUM COMPANY LTD.,
CANADIAN SUPERIOR OIL LTD., MOBIL OIL CANADA LTD.,
IMPERIAL OIL LIMITED and
ESSO RESOURCES CANADA LIMITED
Defendants by Counterclaim
Before the Honourable Mr. ) At the Court House, in the
Chief Justice W. K. Moore ) City of Calgary, on Wednesday,
In Chambers ) the 17th day of November, 1993.
<PAGE>
ORDER
UPON THE APPLICATION of the Plaintiff; AND UPON READING the Affidavit
of Charles J. Horne filed; AND UPON HEARING counsel for the Plaintiff; AND UPON
HEARING counsel for the Defendants; AND UPON NOTING that Magellan Petroleum
Corporation and Pantepec International, Inc. have consented to be added as
Plaintiffs herein; AND UPON NOTING that the Defendants Amoco Production Company,
Amoco Canada Petroleum Ltd. and Amoco Resources Canada Ltd. filed a Notice of
Motion, in this action, on April 24, 1991, seeking an order adding Magellan
Petroleum Corporation and Pantepec International, Inc. as party Plaintiffs;
1. IT IS ORDERED that Magellan Petroleum Corporation and Pantepec International,
Inc. be added as Plaintiffs in this action, subject to any existing rights of
the Defendants herein to plead or raise limitation or other defences as against
Magellan Petroleum Corporation and Pantepec International, Inc. up to and
including the date of the granting of this Order.
2. AND IT IS FURTHER ORDERED that Mobil Resources Ltd. and Mobil Oil Canada
Properties shall be added as Defendants in this action, subject to any existing
rights of the Defendants named in the Amended Amended Statement of Claim to
plead or raise limitation or other defences as against the Plaintiffs herein up
to and including the date of the granting of this Order.
3. AND IT IS FURTHER ORDERED that the style of cause in this action shall be
amended accordingly.
4. AND IT IS FURTHER ORDERED that the Plaintiffs shall be at liberty to amend
the Amended Statement of Claim, in the form of Amended Amended Statement of
Claim attached to this Order as Schedule "A."
5. AND IT IS FURTHER ORDERED that, as a term of the amendments hereby permitted,
if the Plaintiffs shall by any amendment made under or pursuant to this Order
set up any new cause of action, as to such new cause of action, this action
shall be deemed to have been brought on the date of the granting of this Order
and the Defendants named in the Amended Amended Statement of Claim shall be
entitled to the benefit of any limitation or other defenses as though the
Statement of Claim in respect of such new cause of action had been issued on the
date of the granting of this Order.
<PAGE>
6. AND IT IS FURTHER ORDERED that the Plaintiffs shall deliver the Amended
Amended Statement of Claim, a copy of which is attached to this Order as
Schedule "A," to all other parties in this action.
7. AND IT IS FURTHER ORDERED that the Defendants shall be at liberty to deliver
Amended Statements of Defence and/or Amended Third Party Notices, as they may be
advised, within thirty (30) days after service upon them of the Amended Amended
Statement of Claim.
8. AND IT IS FURTHER ORDERED that costs of this application shall be in the
cause.
/s/ __________________________
J.C.C.Q.B.A.
ENTERED THIS 17th DAY OF
NOVEMBER, A.D. 1993.
/s/ James McLaughlin
CLERK OF THE COURT
<PAGE>
Consented to and approved as to form and content:
Bennett Jones Verchere
per: /s/ ___________________
R.W. Thompson
Solicitors for Amoco Canada
Petroleum Company Ltd., Amoco
Production Company and Dome
Petroleum Limited (now
Amoco Canada Resources Ltd.)
McCarthy Tetrault
per: /s/ J. Glenn Friesen
J. Glenn Friesen
Solicitors for Columbia Gas
Development of Canada Ltd.
(now Anderson Oil & Gas Inc.)
Code Hunter
per: /s/ Kenneth J. Warren
Kenneth J. Warren
Solicitors for Mobil Oil
Canada Ltd., Mobil Oil Canada
Properties, Mobil Resources Ltd.
and Canadian Superior Oil Ltd.
Blake Cassels & Graydon
per: /s/ Michael McCachen
Michael McCachen
Solicitors for Esso Resources
Canada Limited (now Imperial
Oil Resources Limited)
Burnet Duckworth & Palmer
per: /s/ Douglas G. Mills
Douglas G. Mills
Solicitors for Allied Signal
Inc.
<PAGE>
Macleod Dixon
per: /s/ John J. Marshall
John J. Marshall, Q.C.
Solicitors for Home Oil
Company Limited
Atkinson Milvain
per: /s/ G. Sean Dunnigan
G. Sean Dunnigan
Solicitors for Kern County
Land Company
<TABLE>
<CAPTION>
<S> <C>
NOTICE No. 9001-03466
------------------------------------------------------------------
IN THE COURT OF QUEEN'S BENCH
TO: The Third Parties OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
YOU ARE HEREBY NOTIFIED that these ------------------------------------------------------------------
Defendants may enter judgment in accordance with
this Third Party Notice or such judgment as, BETWEEN:
according to the practice of this Court, they are
entitled to, without further notice to you, unless,
within fifteen (15) days after service hereof upon CANADA SOUTHERN PETROLEUM LTD.
you, excluding the day of service, you cause to be MAGELLAN PETROLEUM CORPORATION and
filed in the office of the Clerk of this Court, and to PANTEPEC INTERNATIONAL INC.
be served upon these Defendants, or their solicitors,
a Statement of Defence or a Demand that notice of PLAINTIFF
any application to be made in the action be given to - and -
you;
AMOCO CANADA PETROLEUM COMPANY LTD., AMOCO PRODUCTION
AND FURTHER TAKE NOTICE that if you wish COMPANY, AMOCO CANADA RESOURCES LTD. (formerly DOME PETROLEUM
to dispute the Plaintiff's claim as against these LIMITED), ANDERSON OIL AND GAS INC. ( formerly COLUMBIA GAS
Defendants, or these Defendants' claim as against DEVELOPMENT OF CANADA LTD., MOBIL OIL CANADA LTD., IMPERIAL
you, you must cause to be filed and served a OIL RESOURCES LIMITED (formerly ESSO RESOURCES OF CANADA
Statement of Defence; LIMITED), MOBIL RESOURCES LTD. AND MOBIL OIL CANADA PROPERTIES
AND FINALLY TAKE NOTICE that if you do not DEFENDANTS
dispute the liability of these Defendants to the - and -
Plaintiff you will be deemed to admit the validity of
any judgment which may be obtained against these ANDERSON OIL AND GAS INC. (formerly COLUMBIA GAS DEVELOPMENT OF
Defendants, and if you do not dispute your liability CANADA LTD.), MOBIL RESOURCES LTD. (formerly CANADIAN SUPERIOR
to these Defendants, you shall be deemed to admit OIL LTD.), IMPERIAL OIL RESOURCES LIMITED (formerly ESSO RESOURCES
your liability to these Defendants to the extent CANADA LIMITED, MOBIL OIL CANADA LTD., ALLIED-SIGNAL INC., HOME
claimed in the Third Party Notice. OIL COMPANY LIMITED, KERN COUNTY LAND COMPANY and MOBIL OIL
CANADA PROPERTIES
These Defendants' address for service is: THIRD PARTIES
c/o Bennett Jones Verchere AND BETWEEN:
Barristers and Solicitors
4500 Bankers Hall East COLUMBIA GAS DEVELOPMENT OF CANADA LTD. (now ANDERSON OIL
855 - 2nd Street S.W. AND GAS INC.)
Calgary, Alberta
T2P 4K7 PLAINTIFF BY COUNTERCLAIM
- and -
CANADA SOUTHERN PETROLEUM LTD., AMOCO CANADA RESOURCES
LTD., AMOCO CANADA PETROLEUM COMPANY LTD., CANADIAN
SUPERIOR OIL LTD. (now MOBIL RESOURCES LTD.), MOBIL OIL CANADA
LTD., IMPERIAL OIL LIMITED and ESSO RESOURCES CANADA LIMITED (now
IMPERIAL OIL RESOURCES LIMITED)
DEFENDANTS BY COUNTERCLAIM
------------------------------------------------------------------
AMENDED THIRD PARTY NOTICE FILED BY AMOCO
CANADA PETROLEUM COMPANY LTD.,
AMOCO PRODUCTION COMPANY AND
AMOCO CANADA RESOURCES LTD.
(FORMERLY DOME PETROLEUM LIMITED)
------------------------------------------------------------------
BENNETT JONES VERCHERE
(John N. Craig, 298-3464)
Barristers and Solicitors,
4500, 855 - 2nd Street S.W.,
Calgary, Alberta
T2P 4K7
File: 1102-643/DOS/RWT
</TABLE>
<PAGE>
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
CANADA SOUTHERN PETROLEUM LTD.
MAGELLAN PETROLEUM CORPORATION and
PANTEPEC INTERNATIONAL, INC.
PLAINTIFF
- and -
AMOCO CANADA PETROLEUM COMPANY LTD.,
AMOCO PRODUCTION COMPANY, AMOCO CANADA RESOURCES LTD.
(formerly DOME PETROLEUM
LIMITED), ANDERSON OIL AND GAS INC. (formerly
COLUMBIA GAS DEVELOPMENT OF
CANADA LTD.), MOBIL OIL CANADA LTD.,
IMPERIAL OIL RESOURCES LIMITED (formerly ESSO
RESOURCES OF CANADA LIMITED), MOBIL RESOURCES
LTD. AND MOBIL OIL CANADA PROPERTIES
DEFENDANTS
- and -
ANDERSON OIL AND GAS INC. (formerly COLUMBIA
GAS DEVELOPMENT OF CANADA LTD.,
MOBIL RESOURCES LTD. (formerly CANADIAN
SUPERIOR OIL LTD.), IMPERIAL OIL RESOURCES
LIMITED (formerly ESSO
RESOURCES CANADA LIMITED, MOBIL OIL
CANADA LTD., ALLIED-SIGNAL INC., HOME
OIL COMPANY LIMITED, KERN COUNTY LAND
COMPANY and MOBIL OIL CANADA PROPERTIES
THIRD PARTIES
AND BETWEEN:
COLUMBIA GAS DEVELOPMENT OF CANADA LTD.
(now ANDERSON OIL AND GAS INC.)
PLAINTIFF BY COUNTERCLAIM
- and -
CANADA SOUTHERN PETROLEUM LTD., AMOCO CANADA
RESOURCES LTD., AMOCO CANADA PETROLEUM
COMPANY LTD., CANADIAN SUPERIOR OIL LTD.
(now MOBIL RESOURCES LTD), MOBIL OIL CANADA LTD.,
IMPERIAL OIL LIMITED and ESSO RESOURCES
CANADA LIMITED (now IMPERIAL OIL RESOURCES LIMITED)
DEFENDANTS BY COUNTERCLAIM
AMENDED THIRD PARTY NOTICE FILED BY AMOCO CANADA
PETROLEUM COMPANY LTD., AMOCO PRODUCTION
COMPANY AND AMOCO CANADA RESOURCES LTD.
(FORMERLY DOME PETROLEUM LIMITED)
TO: ANDERSON OIL AND GAS INC. (formerly
<PAGE>
COLUMBIA GAS DEVELOPMENT OF CANADA LTD.)
MOBIL RESOURCES LTD. (formerly CANADIAN SUPERIOR OIL LTD.)
IMPERIAL OIL RESOURCES LIMITED (formerly ESSO RESOURCES CANADA LIMITED)
MOBIL OIL CANADA LTD.
ALLIED-SIGNAL INC.
HOME OIL COMPANY LIMITED
KERN COUNTY LAND COMPANY
MOBIL OIL CANADA PROPERTIES
TAKE NOTICE that an action has been commenced by the Plaintiffs
against, inter alia, Amoco Canada Petroleum Company Ltd., Amoco Production
Company and Amoco Canada Resources Ltd. (formerly Dome Petroleum Limited)
(hereinafter "these Defendants"), which Statement of Claim was amended May 8,
1990 and November 17, 1993, a copy of which is delivered herewith;
AND FURTHER TAKE NOTICE that these Defendants dispute the Plaintiffs'
claim on the grounds which appear in the Statement of Defence filed herein but,
in the event these Defendants are held liable to the Plaintiffs they and each of
them claim to be entitled to indemnity or, alternatively, indemnity and
contribution from the Third Parties with respect to any amounts which the
Plaintiff may recover against these Defendants, whether for judgment, interest
or costs;
AND FURTHER TAKE NOTICE that the grounds of these Defendants' claims
against the Third Parties are as follows:
1. These Defendants are bodies corporate and each of the Third Parties are
bodies corporate save for Mobil Oil Canada Properties which is a partnership.
Anderson Oil and Gas Inc. ("Anderson") was formerly known as Columbia Gas
Development of Canada Ltd., Imperial Oil Resources Limited ("Imperial") was
formerly known as Esso Resources Canada Limited and Mobil Resources Ltd. ("Mobil
Resources") was formerly known as Canadian Superior Oil Limited. Additional
particulars of each body corporate being set forth in the Statement of Defence
filed by these Defendants and as adopted by reference in the Counterclaim filed
by these Defendants in action 8801-13549. The terms H-S Group, C-M-O Group,
PanAmerican Assignment, Dome Assignment, 1959 Agreement, 1966 Settlement, the
Columbia Farmout, the Properties, and the Kotaneelee area are terms defined in
the said Statement of Defence and Counterclaim filed in action 8801-13549, which
said terms have the same meaning in this Third Party Notice as they do in the
Statement of Defence and Counterclaim.
<PAGE>
2. The Defendants, Amoco Canada Petroleum Company Ltd. (Amoco Canada) and Amoco
Production Company (Amoco Production) claim contribution and indemnity as set
forth herein:
(a) any liability of Amoco Canada and Amoco Production to the
Plaintiffs, whether arising through the 1959 Agreement or the
PanAmerican Assignment, the 1966 Settlement, the Columbia
Farmout, or otherwise for any alleged obligation to the
Plaintiff, which obligation is not admitted but denied, was a
shared obligation with the members of the H-S Group, namely
Allied-Signal Inc. (Allied-Signal), Home Oil Company Limited
(Home), Kern County Land Company (Kern County), Mobil
Resources (formerly Canadian Superior Oil Ltd., formerly
Alminex Limited), and United Oils, Limited (United) and their
successors and assigns, namely Anderson (formerly Columbia Gas
Development of Canada Ltd.) Imperial (formerly Esso Resources
Canada Limited) Mobil Oil Canada Ltd. (Mobil), and Mobil Oil
Canada Properties (Mobil Properties);
(b) in the event Amoco Canada and Amoco Production are liable to
the Plaintiffs for any amount in excess of Amoco Canada's and
Amoco Production's shared obligation as hereinbefore
described, which obligation is not admitted but denied, then
Amoco Canada and Amoco Production seek contribution and
indemnity from the Third Parties for each one's respective
share of the said joint obligation.
3. The Defendant, Amoco Canada Resources Ltd. (formerly Dome Petroleum Limited)
(hereinafter Amoco Resources), claims contribution and indemnity as set out
herein:
(a) any liability of Amoco Resources to the Plaintiffs, whether
arising through the 1959 Agreement or the Dome Assignment, the
1966 Settlement or the Columbia Farmout or otherwise, for any
alleged obligation to the Plaintiffs, which obligation is not
admitted but denied, was a shared obligation with the members
of the H-S Group, namely Allied Signal, Home, Kern County,
Mobil Resources and United and their successors and assigns,
namely Anderson, Imperial, Mobil, and Mobil Properties;
<PAGE>
(b) in the event Amoco Resources is obliged to pay damages to the
Plaintiffs for any amount in excess of Amoco Resources' shared
obligation as hereinbefore described, which obligation is not
admitted but denied, then Amoco Resources seeks contribution
and indemnity from the Third Parties for each one's respective
share of the said joint obligation.
4. Additionally, the Defendants, Amoco Canada and Amoco Resources, seek
indemnification from the Third Party, Anderson, for the claim of the Plaintiffs
on the following bases:
(a) (i) On February 1, 1977 Anderson, in accordance with the
terms of the Columbia Farmout, undertook to Amoco
Resources and Amoco Canada to indemnify and hold each
of them harmless from and against any and all claims,
demands, suits or actions arising out of Columbia's
operation thereunder.
(ii) With respect to paragraphs 30-32 of the Amended
Amended Statement of Claim these defendants state
that if the Court determines there should be an
adjustment to the joint account and the carried
interest account to reduce the amount of otherwise
recoverable operational costs as pleaded, then such
adjustment and this resulting claim, demand, suit or
action arises out of Columbia's operation under the
1977 Agreement. Particulars of the aforesaid
operation alleged by these Defendants against
Anderson include those matters alleged in paragraph
31 of the Amended Amended Statement of Claim.
(b) Alternatively or further:
(i) On February 1, 1977 Anderson, in accordance with the
terms of the Columbia Farmout, agreed to act as
operator and conduct operations in accordance with
the 1959 Agreement, and accordingly is liable for
gross negligence in carrying out or failing to carry
out its duties;
<PAGE>
(ii) With respect to paragraphs 30-32 of the Amended
Amended Statement of Claim these defendants state
that if the Court determines there should be an
adjustment to the joint account and the carried
interest account to reduce the amount of otherwise
recoverable operational costs as pleaded, then such
adjustment is necessitated by damages and
expenditures caused by acts and failures of Anderson
which constitute gross neglect under the 1959
Agreement. Particulars of the aforesaid acts and
failures alleged by these defendants against Anderson
include those matters alleged in paragraph 31 of the
Amended Amended Statement of Claim.
(c) Alternatively, or further:
(i) By virtue of an agreement effective December 1, 1980
entitled Kotaneelee Production Facilities
Construction, Ownership and Operating Agreement ("the
Production Facilities Agreement"), Anderson became
the Operator under the Production Facilities
Agreement and agreed to be liable for any loss or
damage resulting or arising from its gross negligence
or wilful or wanton misconduct in conducting
operations under the Production Facilities Agreement.
(ii) With respect to paragraphs 30-32 of the Amended
Amended Statement of Claim these defendants state
that if the Court determines there should be an
adjustment to the joint account and the carried
interest account to reduce the amount of otherwise
recoverable operational costs as pleaded, then such
adjustment is necessitated by loss or damage
resulting or arising from the gross negligence or
wilful or wanton misconduct of Anderson in conducting
Operations under the Production Facilities Agreement.
Particulars of the aforesaid gross negligence or
wilful or wanton misconduct alleged by these
Defendants against Anderson include those matters
alleged in paragraph 31 of the Amended Amended
Statement of Claim.
AND FURTHER TAKE NOTICE if you do not dispute your liability to these
Defendants you will be deemed to admit liability to these Defendants to the
extent claimed in this Notice.
<PAGE>
WHEREFORE these Defendants claim against the Third Parties:
(a) contribution and indemnity for any amounts including judgment,
interest and costs that any of these Defendants may be obliged
to pay to the Plaintiffs in excess of any shared obligation
with the said Third Parties, whether arising pursuant to the
1959 Agreement, the PanAmerican Assignment, the Dome
Assignment, the 1966 Settlement, the Columbia Farmout, or
otherwise;
(b) costs of the Third Party proceedings.
WHEREFORE the Defendants, Amoco Resources and Amoco Canada,
additionally claim against the Third Party, Anderson:
(a) indemnity for Amoco Resources' and Amoco Canada's pro rata
share of any amount by which otherwise recoverable operational
costs in the joint account and the carried interest account
are reduced, along with an associated interest and costs;
(b) costs of these Third Party proceedings.
DATED at the City of Calgary, in the Province of Alberta, this 5th day
of February, A.D. 1991 and DELIVERED BY Bennett Jones Verchere, Solicitors for
these Defendants who address for service is in care of the said solicitors at
4500, 855 - 2nd Street S.W., Calgary, Alberta, T2P 4K7.
ISSUED out of the office of the Clerk of the Court of Queen's Bench
this 6 day of February, A.D. 1991.
/s/ James McLaughlin
CLERK OF THE COURT
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
NOTICE: No.: 9001-03466 A.D. 1990
-----------------------------------------
To The Defendants(s):
IN THE COURT OF QUEEN'S BENCH
Amoco Canada Petroleum Company OF ALBERTA
Ltd., Amoco Production Company, JUDICIAL DISTRICT OF CALGARY
Amoco Canada Resources Ltd. (formerly
Dome Petroleum Limited), Anderson Oil -----------------------------------------
and Gas Inc. (formerly Columbia Gas
Development of Canada Ltd.), Mobil Oil BETWEEN:
Canada Ltd., Imperial Oil Resources
Limited (formerly Esso Resources CANADA SOUTHERN PETROLEUM
Canada Limited), Mobil Resources Ltd. MAGELLAN PETROLEUM
and Mobil Oil Canada Properties CORPORATION and PANTEPEC
INTERNATIONAL, INC.
You are hereby notified that the Plaintiff Plaintiffs
may enter judgment in accordance with
this Statement of Claim or such judgment - and -
as, according to the practice of the
Court, he is entitled to, without any AMOCO CANADA PETROLEUM COMPANY LTD.,
further notice to you unless within AMOCO PRODUCTION COMPANY,
AMOCO CANADA RESOURCES LTD.,
FIFTEEN (15) DAYS (formerly DOME PETROLEUM LIMITED),
ANDERSON OIL AND GAS INC. (formerly
after service hereof upon you, excluding COLUMBIA GAS DEVELOPMENT OF CANADA LTD.,
the day of service, you cause to be filed MOBIL OIL CANADA, LTD.,
in the office of the Clerk of the Court IMPERIAL OIL RESOURCES LIMITED
from which the Statement of Claim has (formerly ESSO RESOURCES CANADA LIMITED),
issued either: MOBIL RESOURCES LTD. and
MOBIL OIL CANADA PROPERTIES
(1) A Statement of Defence; or,
Defendants
(2) A Demand of Notice of any
application to be made in the -----------------------------------------
action be given to you;
AMENDED AMENDED
and unless within the same time a copy STATEMENT OF CLAIM
of your statement of Defence or Demand
of Notice is served upon the Plaintiff or -----------------------------------------
his solicitor at his stated address for
service. This Statement of Claim is issued by:
BALLEM McDILL MacINNES EDEN
Solicitors for the Plaintiff who resides
at:
Calgary, Alberta
and whose address for services is in care
of the said solicitors at:
4000 Petro-Canada Centre
West Tower
150 - 6th Avenue S.W.
Calgary, Alberta
T2P 3Y7
Phone: 292-9836
and is addressed to the Defendant whose
residence as far as is known to the
Plaintiff is:
Calgary, Alberta
Our File: 27,207.37
</TABLE>
<PAGE>
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
BETWEEN:
CANADA SOUTHERN PETROLEUM LTD.
MAGELLAN PETROLEUM CORPORATION and
PANTEPEC INTERNATIONAL, INC.
Plaintiffs
- and -
AMOCO CANADA PETROLEUM COMPANY LTD.,
AMOCO PRODUCTION COMPANY, AMOCO CANADA RESOURCES LTD.
(formerly DOME PETROLEUM LIMITED),
ANDERSON OIL AND GAS INC.
(formerly COLUMBIA GAS DEVELOPMENT OF CANADA LTD.),
MOBIL OIL CANADA, LTD., IMPERIAL OIL RESOURCES LIMITED
(formerly ESSO RESOURCES CANADA LIMITED),
MOBIL RESOURCES LTD. and MOBIL OIL CANADA PROPERTIES
Defendants
AMENDED AMENDED STATEMENT OF CLAIM
THE PARTIES
1. The Plaintiff, Canada Southern Petroleum Ltd. (hereinafter referred to as
"Canada Southern") is a body corporate, incorporated pursuant to the laws of
Nova Scotia (formerly under the laws of Canada), registered to carry on business
in the Province of Alberta, with head office in the City of Calgary, in the
Province of Alberta.
1A. The Plaintiff, Magellan Petroleum Corporation (hereinafter referred to as
"Magellan") is a corporation incorporated pursuant to the laws of the State of
Delaware, of the United States of America.
1B. The Plaintiff, Pantepec International, Inc. (hereinafter referred to as
"Pantepec") is a corporation incorporated pursuant to the laws of the State of
Delaware, of the United States of America.
<PAGE>
2. The Defendant, Amoco Production Company, (hereinafter referred to as "Amoco
Production") is a body corporate incorporated pursuant to the laws of the State
of Delaware, of the United States of America, registered to carry on business in
the Province of Alberta.
3. The Defendant, Amoco Canada Petroleum Company Ltd. (hereinafter referred to
as "Amoco Canada") is a body corporate incorporated pursuant to the laws of
Canada, registered to carry on business in the Province of Alberta, with head
office located in the City of Calgary, in the Province of Alberta. Amoco Canada
is the assignee and successor in interest to Amoco Production.
4. The Defendant, Amoco Canada Resources Ltd. (hereinafter referred to as "Amoco
Resources") is a body corporate incorporated pursuant to the laws of Canada,
registered to carry on business in the Province of Alberta, with head office
located in the City of Calgary, in the Province of Alberta. On May 1, 1989, Dome
Petroleum Limited and another corporation amalgamated, pursuant to the laws of
Canada, to form the Defendant Amoco Resources.
5. The Defendant, Anderson Oil and Gas Inc. (hereinafter referred to as
"Anderson") is a body corporate incorporated pursuant to the laws of Canada,
registered to carry on business in the Province of Alberta, with head office
located in the City of Calgary, in the Province of Alberta. Anderson was known
as Columbia Gas Development of Canada Ltd. until Articles of Continuance, dated
February 28, 1992, changed the name of the corporation.
5A. The Defendant, Mobil Resources Ltd. (hereinafter referred to as "Mobil
Resources") is a corporation incorporated pursuant to the laws of Canada,
registered to carry on business in the Province of Alberta, with head office
located in the City of Calgary, in the Province of Alberta. Mobil Resources,
which was formerly known as Canadian Superior Oil Ltd., resulted from the
amalgamation of Alminex Limited and Canadian Superior, pursuant to the laws of
Canada, on December 31, 1980.
6. The Defendant, Mobil Oil Canada Ltd. (hereinafter referred to as "Mobil") is
a body corporate incorporated pursuant to the laws of Canada, registered to
carry on business in the Province of Alberta, with head office located in the
City of Calgary, in the Province of Alberta. Mobil Resources is the wholly owned
subsidiary of Mobil. On or about June 1, 1988, Mobil and Mobil Resources formed
a general partnership, the Defendant Mobil Oil Canada Properties.
<PAGE>
7. The Defendant, Imperial Oil Resources Limited (formerly Esso Resources Canada
Limited) (hereinafter referred to as "Imperial") is a body corporate
incorporated pursuant to the laws of Canada, registered to carry on business in
the Province of Alberta, with head office located in the City of Calgary, in the
Province of Alberta.
BACKGROUND
8. Amoco Canada, Amoco Resources (formerly Dome), Anderson (formerly Columbia),
Imperial (formerly Esso), and Mobil and Mobil Resources carrying on business in
partnership as Mobil Oil Canada Properties, are currently interest owners in the
nature of a working interest in properties now known as the Kotaneelee lands,
located in the Yukon Territory (hereinafter referred to as the "current working
interest owners"). Anderson (formerly Columbia) has been the managing operator
of the Kotaneelee lands since on or about February 1, 1977.
9. The Plaintiffs were formerly the only working interest owners and currently
hold an interest in the nature of a 33 1/3% carried interest in these same
properties in the Kotaneelee area. Of the 33 1/3% carried interest, Canada
Southern holds a 2 2/3% carried interest and a 2/3% carried interest as trustee
for Magellan and Pantepec respectively.
10. The Kotaneelee lands were acquired and held by Canada Southern prior to
1959, as part of oil and gas permits granted in the Yukon and Northwest
Territories. Canada Southern conducted exploration upon the Kotaneelee lands
prior to any involvement of the Defendants.
GAS MARKETING OBLIGATIONS
11. In 1959, pursuant to an oil and gas exploration, development and marketing
contract dated as of May 28, 1959 (the "1959 Agreement"), the Plaintiffs agreed
to transfer a 50% interest in the oil and gas permits to the predecessors or
assignors of Amoco Canada, Amoco Resources (formerly Dome) and Mobil Resources
(formerly Canadian Superior). One of the express recited considerations for the
transfer of this 50% interest was that the transferees would, pursuant to
Article III 3.1(D) ". . . assure the earliest feasible development and marketing
of oil and/or gas found on the properties."
<PAGE>
12. This express consideration was a fundamental term of the 1959 Agreement and
the Plaintiffs relied upon the assurance that the properties would be developed
and gas sold at the earliest feasible opportunity.
12A. It was a further express provision of Clause L of Schedule "B" to the 1959
Agreement that each of the parties to the agreement would share available
markets for production with the other parties, including the Plaintiffs.
13. Amoco Production and Amoco Resources (formerly Dome) expressly agreed to be
bound by all the terms and provisions of the 1959 Agreement, when they acquired
their interests by assignment, in the Kotaneelee lands, in the period from 1959
to 1966, and they were expressly bound to assure such earliest feasible
development and marketing of Kotaneelee oil and/or gas, for the benefit of the
Plaintiffs. Amoco Canada as the assignee and successor in interest to Amoco
Production is bound by all the terms and provisions of the 1959 Agreement. Amoco
Resources as the assignee and successor in interest to Dome is bound by all the
terms and provisions of the 1959 Agreement.
14. Mobil Resources (formerly Canadian Superior) as the successor in interest or
assignee of Alminex Limited, one of the original parties to the 1959 Agreement,
is bound by such party's assurance to develop and market Kotaneelee gas at the
earliest feasible time. Mobil and Mobil Oil Canada Properties, as the successors
in interest or assignees of Mobil Resources, are bound by the terms and
provisions of the 1959 Agreement. Alternatively, Mobil and Mobil Oil Canada
Properties have assumed and agreed to be bound by all duties, obligations and
liabilities under the 1959 Agreement.
15. The 1959 Agreement was modified by an agreement in writing dated April 1,
1966, in which the Plaintiffs' 50% interest in the Kotaneelee lands was
converted to a 50% interest in the nature of a carried interest (the "1966
Agreement"). From that date to the present, the Plaintiffs have had no rights in
the operation of the properties, save and except for a vote on which of the
current working interest owners would be manager operator, if the existing
operator resigned or was replaced, and certain other options. In all other
respects, the Plaintiffs relied upon the working interest owners who exercised
their discretion concerning operations.
<PAGE>
16. Anderson (formerly Columbia) acquired an interest in the nature of a working
interest in the Kotaneelee lands pursuant to an agreement in writing dated
February 1, 1977 (the "1977 Agreement"). Anderson (formerly Columbia) agreed to
drill a test well on the Kotaneelee lands and to act as managing operator of
those lands and it further agreed to conduct all operations in accordance with
the terms and provisions of the 1959 Agreement, as modified. In turn, the
Plaintiffs again agreed to reduce their interest in the Kotaneelee lands to an
interest in the nature of 33 1/3% carried interest.
17. Anderson (formerly Columbia), either expressly or impliedly, agreed with the
Plaintiffs that it would be bound by the obligation to assure the earliest
feasible development and marketing of oil or gas from the Kotaneelee lands.
17A. In addition, Anderson (formerly Columbia) claims a further 1.69% working
interest in the Kotaneelee lands, which it alleges was acquired from Dome
pursuant to an agreement in writing dated November 13, 1970. Anderson (formerly
Columbia) agreed that, upon earning its interest, it would assume and agree to
be bound by the terms and provisions of the 1959 Agreement, as amended.
18. Imperial (formerly Esso) acquired an interest in the nature of a working
interest in the Kotaneelee lands by assignment from Imperial Oil Limited, in or
around 1978, Imperial Oil Limited, in turn, acquired its interest by transfer or
assignment from Anderson (formerly Columbia), in or around 1977. Since 1978,
Imperial (formerly Esso) has taken an active role in discussions and decisions
relating to the operation of the Kotaneelee lands and it is bound, expressly or
impliedly, by all the terms and provisions of the 1959 Agreement which remain in
effect.
18A. Further, or in the alternative, the Plaintiffs plead and rely upon Clause
CC.6 of Schedule "B" to the 1959 Agreement which provides that:
"CC.6 All terms, covenants, provisions and conditions of this Agreement
shall run with and be binding upon the said lands during the term
hereof."
Accordingly, all of the Defendants who claim a working interest in the
Kotaneelee lands are expressly bound by all terms, covenants, provisions and
conditions of the 1959 Agreement, which run with and bind the lands.
<PAGE>
18B. Further, or in the alternative, the Plaintiffs plead and rely upon Clause Q
of Schedule "B" to the 1959 Agreement which provides that:
"Q.1 No Joint Operator shall dispose of any interest hereunder
unless the person receiving the same agrees with the other
Joint Operators to be bound by all of the terms and provisions
of this Agreement."
Those Defendants who claim an interest in the Kotaneelee lands by assignment or
transfer are obligated to recognize and accept all of the terms and provisions
of the 1959 Agreement.
19. The Plaintiffs further state that the effect of the 1959, 1966 and 1977
Agreements is that the exploration, development and production of the Kotaneelee
lands was to be a joint venture between the Plaintiffs and the current working
interest owners, for the benefit of all parties. As such, the Plaintiffs state
that the current working interest owners owe a fiduciary duty to the Plaintiffs
with respect to any dealings with the Kotaneelee lands.
20. Further, the current working interest owners, by undertaking to produce and
sell gas at the earliest feasible time, and by agreeing to operate the
Kotaneelee lands, become the agents of the Plaintiffs to sell or market any gas
found in the Kotaneelee lands. As agents, the current working interest owners
owe the Plaintiffs a fiduciary duty, requiring that they act with the utmost
good faith.
21. Further, the Plaintiffs placed their trust and confidence in the current
working interest owners and relied upon them to produce and market the gas found
in the Kotaneelee lands. Canada Southern was informed by the managing operator,
and other Defendants, of efforts to market the gas discovered and relied upon
these reports. As a result of those dealings, the current working interest
owners owe a fiduciary duty to the Plaintiffs.
2lA. Further, the terms and provisions of the 1966 Agreement obligated Amoco
Canada, Amoco Resources (formerly Dome) and Mobil Resources (formerly Canadian
Superior) to maintain the Kotaneelee lands in good standing, to perform and pay
the cost of managing, exploration and development of the lands, to maintain
accounts and render statements and to generally operate the lands for the
benefit of the carried interest owners. As such, the current working interest
owners owe a fiduciary duty to the Plaintiffs.
<PAGE>
22. In the period from 1977 to 1980, three gas wells were drilled in the
Kotaneelee field and it was known that there were extensive proven and probable
reserves of gas in the structure underlying the lands. By 1980, a gas
dehydration system had been constructed on the lands and the Kotaneelee field
had been tied into the Westcoast Transmission raw gas pipeline, which ran
through the field.
23. In the period from 1980 to 1991, the current working interest owners did not
market or sell any gas from the Kotaneelee lands, except to test the gas
dehydration system and for brief periods in 1979 and 1980, notwithstanding that
the lands were ready and able to produce.
24. In November, 1986, Canada Southern, without any prior knowledge, was advised
by Anderson (formerly Columbia) that a current working interest owner had
declined a market for Kotaneelee gas, earlier in 1986, as to which Canada
Southern had no knowledge.
25. In 1988, Canada Southern, without any prior knowledge, discovered that the
operator of the field, Anderson (formerly Columbia), had thereafter refused, in
1986, to undertake any further efforts to market Kotaneelee gas, after the
market had been declined earlier in 1986.
26. Except as referred to in paragraph 23 hereof, the Kotaneelee lands were not
put into production until 1991, after the commencement of these proceedings,
notwithstanding that the gas fields directly to the north and south of
Kotaneelee, in which the Defendant Amoco Canada held a 100% working interest,
have been produced and marketed to near depletion and notwithstanding that the
current working interest owners have, since 1980, produced and market gas from
other fields in which they hold an interest. The gas field to the immediate
south of the Kotaneelee field has recently been reopened and gas is apparently
being marketed from that field. Although gas is now being marketed from
Kotaneelee, there is no assurance that the lands will be kept in production by
the current working interest owners, notwithstanding that there are other
available markets for the gas.
27. The Plaintiffs state that the current working interest owners have breached
their fiduciary duty, have breached the express agreement to assure the earliest
feasible marketing of gas from the Kotaneelee lands and have breached their
obligation to act as prudent operators, by:
(a) refusing or failing to sell gas from the Kotaneelee lands;
<PAGE>
(b) declining the market of gas in 1986;
(c) refusing or declining other potential markets for gas, the
particulars of which will be provided prior to the trial of
this action;
(d) refusing to undertake any further efforts to market gas after
1986;
(e) failing to make full and complete disclosure to the
Plaintiffs;
(f) producing and marketing gas from fields other than Kotaneelee,
in direct conflict with the duty owed to the Plaintiffs;
(g) failing to act in good faith or in the best interests of the
Plaintiffs in dealings with the Kotaneelee lands;
(h) failing to share available markets for production.
28. By reason of the matters aforesaid, the Plaintiffs have suffered loss and
damage, equal to the Plaintiffs' interest in the proceeds from sales of gas
which should have been realized and have been deprived of all economic benefit
in the Kotaneelee lands.
29. By reason of the matters aforesaid, the Plaintiffs state that the actions
and decisions of the current working interest owners constitute a complete
repudiation of the joint venture to produce and sell gas from the Kotaneelee
lands and are in disregard of the fiduciary duty owed to the Plaintiffs.
THE CARRIED INTEREST ACCOUNT
30. Further, as to the Plaintiffs interests, the 1959 Agreement, as amended,
provided that a portion of certain expenditures made for the joint account
("operational costs") would be deducted from revenues from production
("operational revenues"), before any revenue would be paid to the Plaintiffs.
<PAGE>
30A. As of June 30, 1988, Anderson (formerly Columbia) reported that the total
operational costs incurred in relation to the Kotaneelee lands were
$63,504,409.00, including capital costs and operating expenses for three wells
and a dehydration facility. This amount has not been challenged by the
Plaintiffs and they acknowledge that these expenditures are properly charged to
the carried interest account.
30B. Since the commencement of these proceedings, Anderson (formerly Columbia)
has reported that the total operational costs have now increased to over $97
million, without the drilling of any new wells or any further development work
in the field.
31. The Plaintiffs dispute, take exception to and challenge the increase in
total operational costs. The increase, as reported by Anderson (formerly
Columbia), amounts to over $34 million. The Plaintiffs claim an adjustment to
the joint account and the carried interest account, to reduce the total
operational costs from over $97 million, to the amount of $63,504,409.00, which
was reported in 1988. The particulars of this claim for adjustment are as
follows:
(a) The parties expressly agreed that operational costs would not
include damages or loss which could have been controlled
through the exercise of reasonable diligence by the operator.
Certain of the costs which the current working interest owners
seek to charge to the joint account and recover from the
Plaintiffs are for damages or loss which could have been
avoided through reasonable diligence. In particular, the
operator failed to take any steps to protect wells, that were
shut-in, from corrosion.
(b) Further, it was not an express or implied term of the 1966
Agreement that "operational costs," as defined therein, would
include unnecessary, improper or wasteful expenditures.
(c) Alternatively, the current working interest owners owed a duty
in law, as fiduciaries, or otherwise, to the Plaintiffs, to
avoid or prevent over-expenditure or waste in the conduct of
operations that might be chargeable to the carried interest
owners.
<PAGE>
(d) The Plaintiffs state that unnecessary, improper, and wasteful
costs have been incurred in developing and operating the
field. The current working interest owners failed to avoid
gross over-expenditure in the conduct of operations.
(e) The unnecessary, improper and wasteful expenditures, to the
present knowledge of the Plaintiffs, resulted from among other
things:
(i) The entire delegation of the management and control
of operations to outside contractors;
(ii) failing to properly supervise or control field
operations;
(iii) failing to conduct adequate on-site supervision:
(iv) failing to establish cost controls or to follow sound
business practices with respect to expenditures;
(v) The waste of the investment in the dehydration
facility which had to be re-built due to design,
construction and operation defects and which is now
reported to have cost over $20 million;
(vi) shutting-in the wells without proper corrosion
protection, which resulted in the waste of the
drilling and completion costs of those wells;
(vii) the over-expenditures on the I-48 well which had to
be side-tracked and recompleted, at a cost of
approximately $10 million, because it was neither
properly suspended nor put into production when
markets were available.
<PAGE>
(f) Further, or in the alternative, the carried interest
provisions in Schedule D to the 1959 Agreement provided that
operational costs could not be deducted from operational
revenues unless certain statements and accounts were rendered
to the Plaintiffs and certain conditions were met. Since 1988,
the current working interest owners have failed to maintain
proper accounts and the required statements have not been
rendered to the Plaintiffs. In addition, the conditions for
the recording and charging of operational costs to the carried
interest owners were not fulfilled by the Defendants.
32. It is anticipated that when and if revenues are recovered from the field,
the current working interest owners will attempt to recover the entire $97
million of reported operational costs. The result will be that the Plaintiffs
will be denied the right to receive their full 33 1/3 percent carried interest
share of revenues from the Kotaneelee lands. Accordingly, the Plaintiffs seek an
order of this Honourable Court declaring that the proper amount of the
operational costs which may be deducted from operational revenues is
$63,504,409.00 and adjusting the joint account and carried interest account
accordingly.
33. The Plaintiffs propose that the trial of this action be held at the Court
House, in the City of Calgary, in the Province of Alberta.
WHEREFORE the Plaintiffs claim against the Defendants:
(a) an order vesting the interests of the Defendants, in the
Kotaneelee lands, in the Plaintiffs, for breach of fiduciary
duty;
(b) in the alternative, a declaration that the Defendants hold
their interests in the Kotaneelee lands in trust for the
Plaintiffs and an order directing the conveyance of those
interests to the Plaintiffs;
(c) in the alternative, an order rescinding the 1959, 1966 and
1977 Agreements and terminating any interest of the Defendants
in the Kotaneelee lands, for breach of fiduciary duty;
<PAGE>
(d) in the alternative, a declaration that the Defendants have no
claim to any interest in the Kotaneelee field.
(e) further, or in the alternative, a mandatory order requiring
and directing the Defendants promptly market gas from the
Kotaneelee lands, in default of which the interest of the
Defendants in the Kotaneelee lands shall be forfeited;
(f) in the alternative, an order directing division of the
Kotaneelee lands between the Plaintiffs and the Defendants;
(g) damages for breach of fiduciary duty, in an amount to be
proven at the trial of this action;
(h) in the alternative, damages for breach of contract in the
amount to be proven at the trial of this action;
(i) an order declaring that the proper amount of operational costs
included in the carried interest account which may be deducted
from operational revenues before any revenues are paid to the
Plaintiffs is $63,504,409.00;
(j) an order that all necessary accounts, inquiries and direction
may be taken, made or given;
(k) interest on any damages awarded herein pursuant to the
Judgment Interest Act, S.A. 1984, c.J-0.5;
(l) costs of this action on a solicitor/client basis; and,
(m) such further and other relief as this Honourable Court may
deem just.
DATED at the City of Calgary in the Province of Alberta, this 7th day
of March, 1990, AND DELIVERED BY MESSRS. BALLEM McDILL MacINNES EDEN, Barristers
and Solicitors, solicitors for the Plaintiffs, whose address for service is in
care of the said solicitors at 4000, 150 - 6th Avenue S.W., Calgary, Alberta T2P
3Y7, telephone number 292-9800.
ISSUED from the Clerk of the Court of Queen's Bench of Alberta,
Judicial District of Calgary, this 7th day of March, 1990.
---------------------------------------
CLERK OF THE COURT
Action No. 9001-03466
-----------------------------------------------------------
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
-----------------------------------------------------------
BETWEEN:
CANADA SOUTHERN PETROLEUM LTD.
MAGELLAN PETROLEUM CORPORATION and
PANTEPEC INTERNATIONAL, INC.
Plaintiffs
- and -
AMOCO CANADA PETROLEUM COMPANY LTD., AMOCO PRODUCTION
COMPANY, AMOCO CANADA RESOURCES LTD. (formerly DOME
PETROLEUM LIMITED), ANDERSON OIL AND GAS INC. (formerly
COLUMBIA GAS DEVELOPMENT OF CANADA LTD.), MOBIL OIL
CANADA LTD., IMPERIAL OIL RESOURCES LIMITED (formerly ESSO
RESOURCES CANADA LIMITED), MOBIL RESOURCES LTD. and MOBIL
OIL CANADA PROPERTIES
Defendants
- and -
ANDERSON OIL AND GAS INC. (formerly COLUMBIA GAS
DEVELOPMENT OF CANADA LTD.), MOBIL RESOURCES LTD. (formerly
CANADIAN SUPERIOR OIL LTD.), IMPERIAL OIL RESOURCES LIMITED
(formerly ESSO RESOURCES CANADA LIMITED), MOBIL OIL CANADA
LTD., ALLIED-SIGNAL INC., HOME OIL COMPANY LIMITED, KERN
COUNTY LAND COMPANY and MOBIL OIL CANADA PROPERTIES
Third Parties
- and -
IMPERIAL OIL LIMITED and ESSO RESOURCES CANADA LIMITED
(now IMPERIAL OIL RESOURCES LIMITED)
Fourth Parties
AND BETWEEN:
COLUMBIA GAS DEVELOPMENT OF CANADA LTD.
(now ANDERSON OIL AND GAS INC.)
Plaintiff by Counterclaim
- and -
CANADA SOUTHERN PETROLEUM LTD., AMOCO CANADA RESOURCES
LTD., AMOCO CANADA PETROLEUM COMPANY LTD., CANADIAN
SUPERIOR OIL LTD. (now MOBIL RESOURCES LTD.), MOBIL OIL
CANADA LTD., IMPERIAL OIL LIMITED and ESSO RESOURCES CANADA
LIMITED (now IMPERIAL OIL RESOURCES LIMITED)
Defendants by Counterclaim
-----------------------------------------------------------
AMENDED STATEMENT OF DEFENCE OF ANDERSON OIL AND GAS INC.
(formerly COLUMBIA GAS DEVELOPMENT OF CANADA LTD.) TO
AMENDED THIRD PARTY NOTICE FILED BY AMOCO CANADA
PETROLEUM COMPANY LTD., AMOCO PRODUCTION COMPANY AND
AMOCO CANADA RESOURCES LTD. (formerly DOME PETROLEUM
LIMITED)
-----------------------------------------------------------
McCarthy Tetrault
Barristers and Solicitors
Suite 3300, 421 Seven Avenue S.W.
Calgary, Alberta
T2P 4K9
J. Glenn Friesen
Phone: (403) 260-3508
File No.: 126169-108505
<PAGE>
Action 9001-03466
THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
BETWEEN:
CANADA SOUTHERN PETROLEUM LTD., MAGELLAN
PETROLEUM CORPORATION and PANTEPEC INTERNATIONAL,
INC.
Plaintiffs
-and-
AMOCO CANADA PETROLEUM COMPANY LTD., AMOCO
PRODUCTION COMPANY, AMOCO CANADA RESOURCES LTD.
(formerly DOME PETROLEUM LIMITED), ANDERSON OIL AND GAS
INC. (formerly COLUMBIA GAS DEVELOPMENT OF CANADA LTD.),
MOBIL OIL CANADA LTD., IMPERIAL OIL RESOURCES LIMITED
(formerly ESSO RESOURCES OF CANADA LIMITED) MOBIL
RESOURCES LTD. and MOBIL OIL CANADA PROPERTIES
Defendants
-and-
ANDERSON OIL AND GAS INC. (formerly COLUMBIA GAS
DEVELOPMENT OF CANADA LTD.), MOBIL RESOURCES LTD.
(formerly CANADIAN SUPERIOR OIL LTD.), IMPERIAL OIL
RESOURCES LIMITED (formerly ESSO RESOURCES CANADA
LIMITED), MOBIL OIL CANADA LTD., ALLIED-SIGNAL INC.,
HOME OIL COMPANY LIMITED, KERN COUNTY LAND COMPANY
and MOBIL OIL CANADA PROPERTIES
Third Parties
-and-
IMPERIAL OIL LIMITED and ESSO RESOURCES CANADA LIMITED
(now IMPERIAL OIL RESOURCES LIMITED)
Fourth Parties
AND BETWEEN:
COLUMBIA GAS DEVELOPMENT OF CANADA LTD. (now
ANDERSON OIL AND GAS INC.)
Plaintiff by Counterclaim
-and-
CANADA SOUTHERN PETROLEUM LTD., AMOCO CANADA
RESOURCES LTD., AMOCO CANADA PETROLEUM COMPANY
LTD., CANADIAN SUPERIOR OIL LTD. (now MOBIL RESOURCES
LTD.), MOBIL OIL CANADA LTD., IMPERIAL OIL LIMITED and
ESSO RESOURCES CANADA LIMITED (now IMPERIAL OIL
RESOURCES LIMITED)
Defendants by Counterclaim
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AMENDED STATEMENT OF DEFENCE OF ANDERSON OIL AND GAS INC. (formerly COLUMBIA
GAS DEVELOPMENT OF CANADA LTD.) TO AMENDED THIRD PARTY NOTICE FILED BY AMOCO
CANADA PETROLEUM COMPANY LTD., AMOCO PRODUCTION COMPANY AND AMOCO CANADA
RESOURCES LTD. (formerly DOME PETROLEUM LIMITED)
1. Except as hereinafter admitted, or as admitted in the Amended Statement of
Defence filed by Anderson Oil and Gas Inc. (formerly Columbia Gas Development of
Canada Ltd.) ("Columbia"), Columbia denies each and every allegation in the
Amended Amended Statement of Claim and the Amended Third Party Notice. The said
Amended Statement of Defence is incorporated herein by reference.
2. Columbia denies the liability of the defendants Amoco Canada Petroleum
Company Ltd. ("Amoco Canada"), Amoco Production Company ("Amoco Production") and
Amoco Canada Resources Ltd. (formerly Dome Petroleum Limited) ("Amoco
Resources") to the Plaintiffs.
3. In the alternative to paragraph 2 herein, if any of the said defendants Amoco
Canada, Amoco Production or Amoco Resources are liable to the Plaintiffs, which
is not admitted but is expressly denied, the said defendants are not entitled to
claim contribution and indemnity from Columbia for any portion of the said
liability.
4. In answer to paragraphs 2 and 3 of the Amended Third Party Notice, Columbia
specifically denies that there is any shared obligation as alleged.
5. In answer to paragraph 4 of the Amended Third Party Notice, Columbia
specifically denies any obligation as alleged. Columbia admits entering into the
Columbia Farmout, but denies that the Columbia Farmout has been properly
characterized or described in the Amended Third Party Notice. Columbia will
refer at trial to the Columbia Farmout for its precise terms and effect.
6. Columbia specifically denies any agreement to indemnify and hold harmless
Amoco Canada or Amoco Resources as alleged in paragraph 4 of the Amended Third
Party Notice. The indemnity given by Columbia was restricted in scope and
duration in the following ways:
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a) The indemnity was restricted to claims by third parties arising out
of Columbia's operations prior to earning. Earning has occurred, and
the indemnity is therefore no longer in force and effect.
b) In the alternative, if the indemnity extends to claims by other
parties to the Columbia Farmout, which is not admitted but is expressly
denied, it was limited to claims prior to earning, and is therefore no
longer in force and effect.
c) In the alternative to (a) and (b), if the indemnity is still in
force and effect, which is not admitted but is expressly denied, it is
limited to third party claims arising from Columbia's operations of the
Block I lands following earning, and is not related in any way to the
claims in this action.
d) In the alternative to (c), if the indemnity is still in force and
effect, and if it extends to claims by other parties to the Columbia
Farmout, all of which is not admitted but is expressly denied, the
indemnity is limited to claims arising from Columbia's operations of
the Block I lands, and is not related in any way to the claims in this
action.
e) The indemnity relates only to claims arising from operations
actually undertaken by Columbia, and not to any claims for operations
not undertaken.
6A. In further answer to paragraph 4 of the Amended Third Party Notice, even if
the Plaintiffs are granted an adjustment of the Carried Interest Account, such
adjustment would not reduce the liability of Amoco Canada or Amoco Resources
with respect to the Joint Account, nor would this provide any basis for
indemnity. As among Columbia, Amoco Canada and Amoco Resources, the amount of
the Joint Account is established by expenditures made by Columbia on behalf of
the Joint Operators.
6B. The right of Amoco Canada and Amoco Resources to challenge Operational
Costs is as set out in Clause 4 of the relevant Accounting Procedure which
states:
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"...All statements rendered to Non-Operator by Operator during any
calendar year shall be conclusively presumed to be true and correct
after eighteen months following the close of any such calendar year,
unless with said eighteen months Non-Operator takes written exception
thereto and makes claim on Operator for adjustment or commences an
audit of Operator's accounts and records relating to the accounting
hereunder. Failure on the part of Non-Operator to make claim on
Operator for adjustment, or to commence an audit within such period
shall establish the correctness thereof and preclude the filing of
exceptions thereto or the making of claims for adjustment thereon..."
6C. Neither Amoco Canada nor Amoco Resources has commenced an audit or made any
written exception to expenditures since June 30, 1988. These amounts are
therefore conclusively presumed to be true and correct.
6D. In the alternative and in further answer to paragraph 4 of the Amended Third
Party Notice, the Plaintiffs have not alleged gross negligence or willful or
wanton misconduct. Columbia will seek further particulars of these allegations
in the Amended Third Party Notice. Furthermore, since these allegations are
based on a different cause of action than the Plaintiffs' claim, they cannot
form the basis for a claim for indemnity. Further or in the alternative, the
liability of Columbia as operator is limited to where there has been fraud,
dishonesty or gross neglect, or where there has been failure to remedy a default
after receipt of written notice of such default. No allegations of fraud,
dishonesty or gross neglect have been pleaded by the Plaintiffs, and no notice
of default has been given by the Plaintiffs, Amoco Canada or Amoco Resources for
any operations for any operations conducted by Columbia.
6E. In further answer to paragraph 4 of the Amended Third Party Notice, the
Production Facilities Agreement does not form an basis for the alleged claim of
indemnity. Furthermore, neither Amoco Canada nor Amoco Resources has commenced
any audit of expenditures, nor has any written execution or claim for adjustment
been made. Statements rendered by Columbia are therefore conclusively presumed
to be true and correct.
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7. In answer to the entire Amended Third Party Notice, Columbia has never
assumed any obligation, by way of indemnity or otherwise, relating to Clause III
3.1(D) of the 1959 Agreement. But although Columbia has never assumed any
obligation to assure the earliest feasible development and marketing of oil or
gas, Columbia has in fact made every effort to market and develop the gas from
the Block I lands. Columbia has continually researched marketing opportunities,
Columbia has from time to time proposed marketing opportunities to the other
working interest owners, and there has been production and marketing of gas from
the Kotaneelee lands.
8. If Amoco Canada, Amoco Production or Amoco Resources have any liability to
the Plaintiffs, which is not admitted, but is specifically denied, this
liability was caused by or contributed to by the actions of Amoco Canada, Amoco
Production or Amoco Resources or any one or more of them, and not by any actions
of Columbia.
Particulars
a) Amoco Canada, Amoco Production or Amoco Resources, or any one or
more of them, developed and marketed gas from other lands in the area
in which they had an interest and not from the Kotaneelee area;
b) Amoco Canada, Amoco Production or Amoco Resources, or any one or
more of them rejected gas marketing proposals made by Columbia;
c) Amoco Canada, Amoco Production or Amoco Resources, or any one or
more of them initiated the decision to require the gas plant to be
taken out of service; this decision was voted on affirmatively by all
parties except Columbia;
d) Amoco Canada, Amoco Production or Amoco Resources, or any one or
more of them (hereinafter referred to as "the Amoco Companies"),
resisted Columbia's efforts to put the gas plant back in service and to
produce and market the gas. In particular,
i) The Amoco Companies initially refused to authorize
expenditures to put the gas plant back in service until such
time as the Production Facilities Agreement was entered into;
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ii) The Amoco Companies refused to include any provision as to
sharing of markets in the Production Facilities Agreement; the
Amoco Companies indicated that they wanted to market their own
share of production of gas;
iii) Once the Production Facilities Agreement was signed,
Amoco Canada moved to take over operatorship under that
Agreement on the limited grounds of supposed greater cost
efficiency. Amoco Canada, Esso and Mobil voted in favour of
Amoco Canada becoming Operator under that Agreement, Columbia
undertook to assign Operatorship to Amoco Canada at such times
as Amoco Canada (1) agreed to execute Authorizations for
Expenditure committing to the project, (2) Brought its
outstanding account into good standing, (3) Assumed existing
third party obligations already in place and (4) Assumed
Operatorship of the entire project so that there would be only
one Operator. Amoco Canada did not agree to these requirements
and specifically advised Columbia that it did not want to
operate the wells. Amoco Canada has subsequently executed
Authorizations for Expenditure and has paid its share of
expenditures.
iv) In 1989, Columbia and Esso entered into one year contracts
for marketing Kotaneelee gas to Canwest Gas Supply Inc. The
Amoco Companies refused to sign similar contracts and did not
sign any other contract so that in net result, Columbia and
Esso carried the Amoco Companies, crediting to them a share of
the revenue received under those contracts, and depriving
Columbia of its full share of revenue, and reducing the amount
of revenue that would have been Operational Receipts credited
to the Carried Interest Account had the Amoco Companies signed
a contract.
e) Amoco Resources has at all times remained the operator of all lands,
save and except to the extent of obligations assumed by Columbia in the
Block I lands pursuant to the Columbia Farmout.
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8D. In further answer to the whole of the Amended Third Party Notice, the Amoco
Companies have authorized all expenditures made for the Joint Account and have
paid their share of expenditures. The Amoco Companies were advised on an ongoing
basis of all operations and activities, and had the opportunity to participate
in decisions involving operations and activities. The Amoco Companies also had
full opportunity to audit the Joint Account but chose not to do so. The Amoco
Companies have also acknowledged in writing that they are satisfied with the
operations conducted by Columbia. Columbia has relied on this conduct of Amoco.
Amoco is therefore estopped from now asserting that Columbia's operations were
not carried out properly.
9. In further answer to the entire Amended Third Party Notice, any claim for
indemnity against Columbia is barred by the Limitation of Actions Act, R.S.A.
1980, c.L-15, or the Limitation of Actions Act, R.S.Y. 1986, c. 104, or
alternatively by laches.
WHEREFORE Columbia prays that the claims against it in the Amended
Third Party Notice be dismissed with costs in favour of Columbia on a solicitor
and client basis, or such other basis as to this Honourable Court may seem just.
DATED at the City of Calgary, in the Province of Alberta, this 25th day
of January, 1994 AND DELIVERED by McCarthy Tetrault, Barristers and Solicitors,
Solicitors for the Third Party Columbia, whose address for service is in care of
the said Solicitors at Suite 3300,421 Seven Ave. S.W., Calgary, Alberta T2P 4K9.
