Exhibit
10.2
EXPLORATION AND
DEVELOPMENT AGREEMENT
THIS
EXPLORATION AND DEVELOPMENT AGREEMENT dated June 15th, 2006 (the
“Effective Date”).
BIG
SNOWY RESOURCES, LP , whose address is Suite 2100, 27 North 27th
Street, Billings, Montana 59101, U.S.A.
Rancher
Energy Corp. whose
address is 1050-17 th Street, Suite 1700, Denver,
Colorado 80265 USA
A.
BSR holds an 80% net revenue
interest in certain oil and gas leases totalling approximately
7,600 acres in Montana and certain wells located on such
leases;
B.
BSR desires Rancher Energy to shoot
3D seismic on the leases;
C.
BSR desires Rancher Energy to drill
a test well on the leases;
D.
BSR desires Rancher Energy to
construct a pipeline to transport oil and gas produced from the
wells subject to this Agreement to an oil and gas transmission
line;
NOW, THEREFORE,
in consideration of the premises and of the mutual covenants,
agreements, conditions, and obligations in this Agreement, BSR and
Rancher Energy (collectively referred to as the
“Parties”) agree as follows:
“AFE” means authority or authorization for expenditure
regarding drilling costs as set out in this Agreement;
“Agreement”
means this Agreement, including the
attached Schedules;
“
Lands ” means the lands described in
Schedule “A” of this Agreement;
THIS CONTRACT IS SUBJECT TO
ARBITRATION PURSUANT TO THE
MONTANA ARBITRATION ACT
, TITLE 27, CHAPTER 5, MONTANA CODE ANNOTATED
“Leases”
mean collectively, or individually,
as the context may require, those leases, reservations, permits,
licences or other documents of title described in Schedule
“A” of this Agreement, by which the holder of such
leases is entitled to enter, access, drill for, win, take, own or
remove the leased substances within, on or under the
Lands;
“log” means any record obtained by Rancher Energy of
all formations penetrated by the Test Well, or other wells drilled
by Rancher Energy on the Leases, their depth, thickness and sonic,
electrical, radiological and other physical properties of the
formation and water, oil and gas, including, but not limited to mud
logs;
“oil and gas”
includes all minerals and petroleum,
natural gas and other hydrocarbon substances regardless of gravity
or phase (including coal and coalbed gas) including, but not
limited to condensate and helium, hydrogen, nitrogen and other
gases; and
“Payout”
means the occurrence of when Rancher
Energy recoups the costs and expenses of the:
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Construction of
the Pipeline;
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wells drilled
pursuant to this Agreement;
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equipping,
completion and other costs of or in relation to all wells drilled
pursuant to this Agreement, including tie-in and
compression.
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½ of the
cost of the 3D seismic program which seismic is owned 50/50 by the
parties.
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“Schedules”
means Schedule “A”,
Schedule “B” and Schedule “C” of this
Agreement, as the context so requires.
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2.
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SHOOTING OF THE 3D SEISMIC AND TEST
WELL
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Rancher Energy
shall shoot a minimum of 4 square miles of 3D seismic (the
“3D”) on the leases. Rancher Energy shall conduct the
Operations as a reasonable and prudent operator and shall commence
setting the parameters and retaining a seismic contractor as soon
as practical once this agreement is executed. Rancher Energy will
shoot the 3D ASAP. Further, Rancher Energy will be responsible for
identifying and hiring the 3D. BSR agrees to assist when requested
in the process.
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All
expenditures relating to the 3D, whether direct or indirect but
excluding supervision and management costs, shall be to the account
of Rancher Energy and paid entirely by Rancher Energy.
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A copy of all
data contained and derived from the 3D, including all
interpretations shall be forwarded by Rancher Energy to BSR. BSR
shall also be provided with the final interpretation within 10
working days of receipt of the final interpretation by Rancher
Energy. (the “3D Completion Date").
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Rancher Energy
shall have 30 days from the 3D Completion Date to give written
notice to BSR of an intention to drill based on the 3D and propose
a drilling location (the “Test Well”). Failure by
Rancher Energy to provide a notice prior to expiry of the thirty
(30) day period shall be deemed an election by Rancher Energy to
terminate this Agreement. If this Agreement is terminated by
Rancher Energy, it shall have no further obligations or liabilities
hereunder.
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If Rancher
Energy elects not to terminate this Agreement pursuant to paragraph
2(d) above Rancher Energy shall have 120 days to spud the Test
Well. The Test Well shall be at the sole cost of Rancher Energy.
The well will be drilled to the deepest horizon indicated as
hydrocarbon bearing by the 3D seismic.
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Upon receipt by
BSR of the Final Seismic Interpretation and Notice of Drilling
Location, BSR shall assign to Rancher Energy a 55% working interest
in the spacing unit of the Test Well , Upon drilling and
completion of the test well, BSR will assign Rancher Energy a 55%
WI in all lands owned by BSR within the AMI.
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If the Test
Well is commercial then Rancher Energy shall be entitled to 100% of
net revenue from the Test Well Interest until Payout. After Payout,
the revenue from the Test Well Interest shall be distributed in
proportion to the working interest share of each Party.
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3.
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PIPELINE AND TRANSPORTATION
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Unless this
Agreement has been earlier terminated or has expired Rancher Energy
shall:
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use
commercially reasonable efforts to obtain required government and
administrative regulatory approvals and other necessary consents
for the construction and operation of a pipeline of approximately
twelve (12) miles in length, with a tie-in at Sec.14 1N 21E in
the NENW4, Stillwater County, Montana (the “Pipeline”),
to transport gas from the Test Well, and other wells producing in
commercial quantities on the Leases in which Rancher Energy and BSR
have joint working interest (the "Joint Wells") to a gas
transmission line; and
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if Rancher
Energy is able to secure all required approvals and consents noted
in paragraph 3(a)(i), Rancher Energy shall thereafter finance,
construct, operate and maintain (the “Construction”)
the Pipeline,
provided that
Rancher Energy shall be entitled to, instead of constructing the
Pipeline, make mutually acceptable arrangements to transport all
produced gas from the Joint Wells to market.
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If the Pipeline
is to be constructed pursuant to paragraph 3(a) (including
sufficient compression to produce gas from the Test Well), such
construction shall occur within eighteen (18) months of the
Effective Date.
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Upon Payout,
Rancher Energy shall assign 20% of its right, title and interest in
the Pipeline to BSR. Rancher Energy grants BSR an option to
purchase an additional 25% of Rancher Energy’s right, title
and interest in the Pipeline (the “Pipeline Option”).
The Pipeline Option may be exercised incrementally by BSR where the
minimum percentage of such increments is 1%. If BSR exercises the
Pipeline Option, it shall do so within eighteen (18) months of the
Completion of Construction of the Pipeline (after which the
Pipeline Option automatically terminates). BSR shall notify Rancher
Energy of its exercise of the Pipeline Option and within thirty
(30) days of such exercise it shall pay to Rancher Energy the
equivalent of 25%, or the corresponding lesser incremental
percentage, of the independently verifiable costs and expenses (the
“Costs”) of the Construction, and thereupon Rancher
Energy shall assign a further 25%, or applicable lesser incremental
percentage, of Rancher Energy’s right, title and interest in
the Pipeline to BSR on a proportionate incremental basis. If BSR
fails to make the required payment before the expiry of the thirty
(30) day period noted above, the exercise of the Pipeline Option
shall be void for all purposes.
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If BSR's
interest in the Pipeline is at any time insufficient to transport
its joint share of production from any of the Lands or any other
lands within the AMI, Rancher Energy shall be entitled to charge
BSR those tariffs and fees respecting any required compression and
transportation in connection with the Pipeline that it would have
be entitled to charge a third party.
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Construction
Costs are deemed not to include supervision or management costs and
expenses incurred by Rancher Energy.
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Subject to
section 7 of this Agreement, once the terms of (a) and (b) above
are satisfied then BSR shall transfer to Rancher Energy a 55%
working interest in all of the Leases and the Lands, all wells
thereon, and in all other lands and wells that BSR owns an interest
in within the AMI, other than the Test Well, which shall be
governed by the terms of this Agreement. BSR shall not encumber or
assign any interest in any of the aforementioned Leases, Lands,
wells and other lands whatsoever to any person or entity during the
period from the date of this Agreement until BSR transfers the 55%
working interest to Rancher Energy as noted above.
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The rights,
title and interests in the Leases to be conveyed by one Party to
the other Party are without warranty, either express or
implied.
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4.
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OPERATIONS AND DRILLING
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In the drilling
of the Test Well Rancher Energy shall conduct its operations as a
reasonable and prudent operator and shall test all zones or
formations penetrated in the wells which Rancher Energy believes to
have a reasonable possibility of producing in paying quantities.
Rancher Energy shall restore the surface of the land of the Test
Well to the condition required by law, and in absence of law, then
as nearly as possible to its original condition.
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All well
operations on the Leases will be governed by the terms and
provisions of an operating agreement (the “Operating
Agreement”) which will be circulated by Rancher Energy for
signature by the Parties at least 30 days prior to the commencement
of the Test Well . The Operating Agreement will be
on a A.A.P.L. Form 610 - 1982 Model Form Operating Agreement which
shall be modified to delete portions of the printed language and to
add certain provisions as are usual and customary among independent
oil and gas exploration operators. Rancher Energy shall be
designated the Operator in the Operating Agreement.
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Except for
those costs and expenses which are expressly identified in this
Agreement as being the sole responsibility of Rancher Energy, all
costs and expenses relating to all land
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