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EXHIBIT 10.3 AGREEMENT

Joint Venture JV Agreement

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Title: EXHIBIT 10.3 AGREEMENT
Date: 9/12/2005

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Exhibit 10.3

PROJECT DEVELOPMENT &

PROJECT MANAGEMENT AGREEMENT No. 150

THIS AGREEMENT made this 3rd day of March 2005.

AMONG:

SAPPHIRE ENERGY INC. , a body corporate,

having an office at the city of Vancouver,

in the Province of British Columbia

(hereinafter called " Sapphire ")

BARNABUS ENTERPRISES, LIMITED , a body corporate,

having an offer at the city of Vancouver,

in the Province of British Columbia

(hereinafter called " B.E.L. " :

Sapphire & B.E.L. being jointly & severally referred to herein as " Barnabus ")

- and -

MB GAS INC. , a body corporate,

having an office at the city of Calgary,

in the Province of Alberta

(hereinafter called " MB Gas ")

WHEREAS MB Gas has expertise and resources to work-up opportunities for oil and gas exploration and production; and for oilfield facilities construction, ownership and operation as a general contractor for the rendering of specific services and proposals by registered oil field professionals;

WHEREAS Sapphire and MB Gas have agreed upon an area of mutual interest in which MB Gas will look for such opportunities for Sapphire so that Sapphire might choose to commit to such operations as a participant with MB Gas on a Sapphire:MB Gas = 90:10 basis and the parties wish to put into an Agreement such general intent to enter separate joint venture agreements together on that basis;

WHEREAS Sapphire Energy Inc. is a newly incorporated company, wholly owned by B.E.L. so as to enter this Agreement with Sapphire Energy Inc., MB Gas has required the jointly making of all Sapphire Energy Inc. obligations by its parent, Barnabus Enterprises, Limited.

NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual covenants and agreements herein contained and subject to the terms and conditions hereinafter set forth, the Parties hereto agree as follows:

 

 

 


 

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1.

DEFINITIONS

 

 

i)

" AFE " means the Authority for Expenditure that MB Gas prepares and Sapphire formally approves for B.E.L. and itself on a joint and several basis which once signed and either taxed or delivered to MB Gas shall constitute Barnabus' approval of a Project Implementation Plan, Barnabus' commitment to pay for Sapphire's participating interest share of the Project that is the subject of that approved Project Implementation Plan; and once so delivered to MB Gas with a Project Implementation Plan signed by Barnabus shall comprise Barnabus' full authorization to MB Gas to commence operations for a Project and to pay MB Gas Sapphire's' participating interest share of all costs and expenses MB Gas in good faith incurs to conduct the Approved Project operations in accordance with that approved Project implementation Plan;

 

 

ii)

AMI ” means lands comprising the 36 Townships located within lands West of the 4th Meridian from Range 1 to 6, Township 1 to 6; and which area represents that in which MB Gas shall work-up Projects;

 

 

v)

AMI Exception Lands ” means lands located within the AMI at the commencement of this Agreement but which are removed automatically from the AMI if MB Gas proposes a Project in general concept in a Development Plan or in a Project Implementation Plan and Sapphire chooses not to participate in that Project, and which shall comprise an are for each Project concept or Project included in a Project Implementation Plan equal to the sections of land MB Gas proposes be included in that Project, plus a border around those lands equal in width to one complete section of land and which lands shall be rounded up to complete Sections for any partial sections that would be included in that definition by its strict application, and which lands once so becoming so qualified shall no longer form any basis for joint operations between the Parties under this Agreement;

 

 

vi)

" Approved Projects " means those Projects that MB Gas presents to Barnabus for Sapphire's participation under a Project implementation Plan and for which MB Gas has presented an AFE, which Project Implementation Plan and which supporting AFE (with or without amendments and qualifications) Sapphire for B.E.L. and itself jointly and severally have accepted by signing and returning to MB Gas a signature page of such Project Implementation Plan and the supporting AFE, and for which thereby Sapphire and Barnabus agree for Sapphire to participate in operations for the applicable Project under MB Gas' operatorship in accordance with:

 

 

a)

the terms set out in the Project implementation Plan for that Project (as presented or as revised and jointly agreed upon);

 

 

b)

the provisions of the AFE for that Project; and

 

c)

the Project Agreements for that Project;

 

 

 

 

 


 

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vii)

" Barnabus " means Sapphire and B.E.L. jointly and severally in respect of Sapphire's rights and obligations with MB Gas under this Agreement;

 

 

viii)

" Development Plan " means a general business plan that MB Gas shall present to Sapphire each year for the coordinated exploitation of the AMI for both Upstream and Midstream Projects, which plan shall include the concepts for each such Project, budgets for each such Project and an overall statement of the goals MB Gas hopes to achieve for the joint operations between the two parties for the period designated, and which plan shall form the basis for MB Gas subsequent presentations of Project implementation Plans on a Project by Project basis;

 

 

ix)

" Effective Date " means March 3, 2005, the day this Agreement shall come into effect and bind the Parties with regard to the AMI as defined in this Agreement and ALL operations between the Parties in relation to that AMI;

 

 

x)

"' Joint Lands " means lands for which MB Gas acquires Title Documents for an Upstream Project represented by petroleum and natural gas leases or licenses upon the leased or licensed lands for which the Parties agree to conduct Upstream Project operations pursuant to an approved AFE for an Approved Project;

 

 

xi)

" Monthly Fees " means those fees that Barnabus shall pay MB Gas each calendar month in advance for the provision of the services of MB Gas under this Agreement and which fees at the commencement of this Agreement shall be se at Schedule " B " and which fees and the provisions of payment of such fees may change in accordance with each Schedule “ B ” Revision;

 

 

xii)

" Schedule “B” Revision " means one or more changes to Schedule " B " to this Agreement that the Parties agree upon in writing, and which once so agreed upon shall supersede the prior approved Schedule " B " Revision as binding terms and conditions of this Agreement;

 

 

xiii)

" Operating Procedure ” means the Standard Form 1990 CAPL Operating Procedure as amended, together with the 1993 CAPL Assignment Procedure and the 1988 PASC Accounting Procedure with the elections attached hereto as Schedule " B " that will form the standard attachments to Project Agreements for Upstream Projects;

 

 

xiv)

" Participating Interest ” means the percentage interest of both MB Gas and Sapphire in an Approved Project as set out in the Project Agreement for that Project and which shall comprise both the cost and expense participatory commitment of that Party and that Party’s initial ownership interest in the property of that Project;

 

 

xv)

" Party " means a corporation bound by this Agreement, its successors and assignees;

 

 

 


 

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xvi)

" Petroleum Substances " means petroleum and natural gas and every other mineral or substance, or any of them, an interest in which is granted or acquired under Title Documents;

 

 

xvi)

" Project Implementation Plan " means each Plan for the conducting of a Project that MB Gas works-up and presents to Sapphire for its consideration in participating as a joint venture, principal participant; and which Projects may include those operations that MB Gas considers to be an opportunity for development of oilfield business for a location with the AMI that may comprise either an Upstream Project or a Midstream Project;

 

 

xvii)

" Projects " means joint venture oilfield opportunities that MB Gas may choose to work-up for presentation to Barnabus for Sapphire's participation in such opportunities on a joint venture basis with MB Gas as operator for Sapphire and itself, that may include an expansion of an existing Project on assets that Sapphire and MB Gas jointly and currently own, and may comprise either of the following:

 

 

(a)

" Upstream Project " that means those opportunities for joint operations to explore for, win, take and produce hydrocarbons from petroleum and natural gas leases, the rights to which Sapphire and MB Gas may acquire by purchase of existing petroleum and natural gas leases, or by acquisition from the mineral rights holder under new petroleum and natural gas leases, or by way of exploration agreements such as seismic data acquisition agreements, seismic data processing agreements, farmout agreements or other performance option agreements;

 

 

(b)

" Midstream Projects " that means those opportunities for joint operations to build facilities for joint ownership and operation for the measuring, transporting, processing, treating and compressing of hydrocarbons, including the separation of water from emulsions and the disposition of such water so extracted, and in respect of hydrocarbons that are both sweet and sour;

 

 

xvii)

" Project Agreements " means the written agreements under which MB Gas shall hold property and shall operate property and property rights for Sapphire and itself (with and without the inclusion of third parties) the following:

 

 

a)

all agreements in effect at the Effective Date, including without limitation such agreements as may not have been fully agreed upon, signed and delivered on the Effective Date and all such agreements when so fully agreed upon or as agreed upon by way of amendment and so signed and delivered and relating to the assets jointly owned by Sapphire and MB Gas on the Effective Date as set out in Schedule "D" to this Agreement;

 

 

b)

all agreements for Approved Projects and which agreements for each Approved Project shall come into effect in MB Gas's standard form (or as

 

 

 


 

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customized if so presented in advance or by way of conditions in the applicable Project Implementation Plan):

 

i.

for Upstream Projects under a Joint Operating Agreement with attached Operating Procedure; and

 

 

ii.

for Midstream Projects under a PJVA Model Form Agreement of Construction Ownership & Operation;

and which Agreements shall come into effect between Sapphire and MB Gas with B.E.L. as jointly obligated Party with Sapphire for all Approved Project costs and expenses the day and time that MB Gas acquires for the joint account of Sapphire and MB Gas the first property rights of any description for an Approved Project;

 

xviii)

" Term " the initial term of this Agreement shall be from the Effective Date to and including December 31, 2006 ;

 

 

xix)

" Title Documents " means the documents more particularly described in Schedule " A ", by virtue of which Sapphire and MB Gas are entitled to drill for, win, take and remove Petroleum Substances underlying petroleum and natural gas leasehold and license interests in which MB Gas acquires rights for the joint venture account of Sapphire and MB Gas to an Upstream Project;

 

 

xx)

Work-Up AFE " means a combination of two documents that MB Gas shall prepare and deliver to Sapphire for Barnabus approval and signature once Barnabus approves a Development Plan:

 

 

a)

a Plan Outline to comprise a brief overview of MB Gas's proposal for a Project, its general scope and very general budget outline; AND.

 

 

b)

a pre-AFE for MB Gas's retaining the services of professionals and oilfield personnel to enable MB Gas to prepare a Project Implementation Plan and supporting AFE to approve and authorize the payment of MB Gas for the services of preparing a Project Implementation Plan and its supporting AFE for Barnabus' approval;

which documents once signed and delivered by Barnabus to MB Gas shall comprise Barnabus' approval and authorization to MB Gas to conduct such Project Implementation Plan preparation and AFE preparation and to pay for such services as approved in that pre-AFE;

2.

SCHEDULES

 

2.1

All schedules attached hereto are incorporated herein by reference as fully as though contained in the body hereof. The Schedules are as follows:

 

 

i)

Schedule " A " that sets forth and describes the first Development Plan;

 

 

 


 

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ii)

Schedule " B " that sets forth and describes the Monthly Fees & Payment Provisions for Monthly Fees;

 

 

iii)

Schedule " C " which is a table of the elections under the Operating Procedure & Accounting Procedure;

 

 

iv)

Schedule " D " which is a table of all the assets jointly owned by Sapphire and MB Gas as of the Effective Date,

 

3.

CONFLICT OF PROVISIONS, INTERPRETATION & TERM

 

3.1

Wherever There is a conflict between this Agreement and the Operating Procedure, the terms and provisions of this Agreement shall prevail, and wherever there is a conflict between this Agreement and any Title Document, the terms and provisions of the Title Document shall prevail. Whenever the singular or neuter or neuter is used herein, the same shall be construed as meaning plural feminine or body politic or corporate and vice versa as the context requires.

 

3.2

The duration of this Agreement shall be the Term, and if neither MB Gas nor Barnabus gives to the other written notice to terminate this Agreement on the last day of the Term by no fewer then three clear months prior to the last day of the Term, the Term shall be deemed to be extended by agreement one month at a time afterwards until terminated by either Barnabus or MB Gas or on notice one to the other to be received no later than three clear months prior to the termination date proposed in that notice.

 

3.3

If this Agreement is terminated unilaterally by Barnabus during the Term , or if this Agreement is extended beyond the Term as defined in Clause 1 of this Agreement, the meaning of Term and balance of the Term for the purposes of Clause 8 . of this Agreement shall be a period ending:

 

 

i)

If Barnabus gives MB Gas notice of termination prior to December 31, 2005, the balance of the Term shall mean from that date of delivery of notice to the latter to occur of December 31, 2005 and the last day of the third clear month after the month in which Barnabus delivers notice of such termination to MS Gas;

 

 

ii)

If Barnabus gives MB Gas notice of termination after December 31, 2005 and before the end of the Term, the balance of the Term shall mean from that date of delivery of notice to the last day of the third clear month after the month in which Barnabus delivers notice of such termination to MB Gas;

 

 

iii)

If Barnabus gives MB Gas notice of termination during an extension of the Term, the balance of the Term shall mean from that date of delivery of notice the last day of the third clear month after the month in which Barnabus delivers notice of such termination to MB Gas.

 

4.

DEVELOPMENT PLANS

 

 

 

 


 

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4.1.

MB Gas shall conduct periodic meetings in person or by telephone conferencing to establish a series sequentially presented and approved Development Plans for the Term of this Agreement.

Barnabus and MD Gas shall approve a Development Plan either by signed memorandum or by voting at a meeting between them; and in so doing MB Gas’s concepts for future Projects (and the development of existing Projects) shall receive general approval. Once MB Gas and Barnabus approve such a Development Plan, such Development Plan shall form the general mandate for MB Gas's working-up a series of Project Implementation Plans, the concepts for which are included in a Development Plan. The Parties may change a Development Plan and the budget contained within in at any time by joint written agreement.

4.2

No agreement by Barnabus to a Development Plan shall commit Barnabus to advance funds and to participate in the Projects that MB Gas later presents to Barnabus for approval under individual Project Implementation Plans, unless such continent is clearly and specifically agreed to.

 

4.3

MB Gas shall prepare all Development Plans to contain concepts for separate Projects and the Parties shall agree upon or disapprove the Development Plans in units of concepts for Projects only. When MB Gas includes a concept for a Project in a Development Plan, MR Gas shall be deemed to have approved that Development Plan for all Project concepts contained within it, subject to approval or rejection by Barnabus.

 

4.4

Barnabus shall have until 3:00 MST on the 10th business day following the day of Sapphire's first receiving a Development Plan (the " Development Plan Approval Time ") to send MB Gas Barnabus' written approval of that Development Plan in whole or in part to MB Gas, failing which Sapphire shall be deemed to have chosen not to approve that Development Plan (or the Project Concepts not specifically approved) and which Development Plan or such non-approved Project concepts shall be deemed made void as of the Development Plan Approval Time.

 

5.

PHASE 1 PROJECT OPERATIONS

 

5.1

Upon the approval of a Development Plan, MB Gas shall prepare separate Work-Up AFE's and present them to Sapphire for itself and Barnabus to approve for either of both Upstream and Mainstream Project development and exploitation.

 

5.2

Barnabus shall have until 3:00 MST on the 10th business day following the day of Sapphire's first receiving a Work-Up AFE (the " Work-Up AFE Approval Time ") to send MB Gas Barnabus' written approval of that Work-Up AFE, failing which Sapphire shall be deemed to have chosen not to approve that Work-Up AFE, and which Work-Up AFE shall be deemed made void as of the Work-Up AFE Approval Time.

 

5.3

When Sapphire for Barnabus taxes or sends to MB Gas an approved and signed Work-Up AFE and Barnabus sends MB Gas the approved amount of the Work-Up AFE as prepayment of MB Gas' costs and expenses to prepare a Project Implementation Plan and supporting AFE, MB Gas shall be authorized to so prepare such Project Implementation

 

 

 


 

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Plan and supporting AFE for the joint participation of Sapphire and MB Gas in either an Upstream Project or a Midstream Project.

5.4

When MB Gas submits a Project Implementation Plan and supporting AFE to Sapphire for Barnabus to approve, the following shall apply:

 

 

i)

MB Gas shall make its representatives available in Calgary Alberta to meet representatives of Barnabus to discuss the Project Implementation Plan and all aspects of it from those exploration and production to those of accounting and budgeting;

 

 

ii)

Sapphire for itself and Barnabus shall have until 3:00 MST on the 20th business day following the day of first receiving the Project Implementation Plan (the " PIP Approval Time ");

 

 

a)

To approve the Project Implementation Plan by signing and delivering it to MB Gas;

 

 

b)

To approve the AFE by signing and delivering it to MB Gas; and

 

 

c)

Delivering to Colin Q. Winter Professional Corporation In Trust (003 00009 111 145 9) at 1550, 333 - 5th Avenue S.W. Calgary AB. T2P 3B6 by bank draft or bank-to-bank account electronic transfer/bank account deposit to the approved AFE amount for MB Gas's draw down as provided in this Agreement for the development of the Approved Project.

 

5.5

If Barnabus fails to fully and timely delivery the two documents and payment described in paragraph 5.4(ii) the following, shall apply:

 

 

i)

Sapphire shall be deemed to have declined to have approved the Project Implementation Plan and the supporting AFE;

 

 

ii)

MB Gas shall not be obligated to make any further contact with Sapphire regarding the unapproved Project Implementation Plan;

 

iii)

that Project Implementation Plan shall be deemed to have been made void as of the PIP Approval Time for that Project Implementation Plan - a “ Voided PIP ”.

 

5.6

If Sapphire chooses not to timely and fully approve:

 

 

i)

a Development Plan as a whole; or

 

 

ii)

any Project concepts in a Development Plan; or

 

 

iii)

a Project Implementation Plan becomes a Voided PIP; or

 

 

iv)

Sapphire fails to timely approve and pay for an AFE for an approved Project under a Project Implementation Plan;

 

 

 


 

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the following shall apply:

 

 

v)

All business proposed under a Development Plan not approved as a whole shall be deemed only the property of MB Gas and for its use absolutely and be deemed never to have been subject to potential joint ownership under this Agreement; and all MB Gas costs, expenses (and third party liabilities, if any) to prepare that Development Plan shall be to MB Gas' sole account;

 

 

vi)

For an Upstream Project - as a Project concept in a Development Plan or as full Project - the upstream operations that MB Gas proposes be included in that Project shall be excluded from being subject to this Agreement, the lands that MB Gas proposes be included in that Project shall form the basis of the creation of a block of AMI Excluded Lands and no joint obligations or joint rights shall exist between the Parties for those AMI Excluded Lands after that date;

 

 

vii)

For a Midstream Project - as a Project concept in a Development Plan or as full Project - the following shall apply:

 

 

a)

If the Midstream Project is a new Project, the facilities that MB Gas proposes be included in that Project shall be excluded from being subject to this Agreement, the lands that MB Gas proposes be included in that Project shall form the basis of the creation of a block of AMI Excluded Lands; and no joint obligations or joint rights shall exist between the Parties for those AMI Excluded Lands after that date;

 

 

b)

If the Midstream Project is a continuation/expansion of an existing Project, the facilities that MB Gas proposes be included in that Project shall be excluded from being subject to this Agreement (or any Project Agreements the Parties may have already entered with regard to such existing Project and its facilities) and no joint obligations or joint rights shall exist between the Parties for proposed Project facilities after that date;

 

 

viii)

For either class of Project, if Barnabus for Sapphire has already participated in any part of such Project, such participation shall have been under the applicable Project Agreement and the rights in respect of that Project of Sapphire and MB Gas shall be governed thereby;

5.7          Once Barnabus approves both a Project Implementation Plan and its supporting AFE and Barnabus has advanced funds to Colin Q. Winter Professional Corporation for MB Gas as approved in that AFE for that Project, the following shall apply:

 

i)

MB Gas shall be entitled to draw down on such advanced funds pursuant to the Project Implementation Plan in accordance with each of Sapphire's and MB Gas's participating interests and subject to these general draw-down rights in MB Gas:

 

 

a)

For an Upstream Project, if those Project operations include the acquisition of oil and gas leasehold rights by purchase, MB Gas shall been

 

 

 


 

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titled to immediately draw down 105% of Sapphire's participating share of such budgeted acquisition costs and expenses;

 

b)

For a Midstream Project, MB Gas shall be entitled to immediately draw down all the AFE approved amount that Barnabus advances to Colin Q. Winter Professional Corporation;

 

 

ii)

once MB Gas acquires property of any description such property and all developments therefore shall become subject to a Project Agreement to be entered into between them.

 

5.8

If for any reason Barnabus does not timely advance funds pursuant to an Approved Project and its AFE, MB Gas shall not have any obligation to proceed with the applicable Project.

 

6.

PROJECT OPERATIONS

 

6.1

If an Approved Project is an Upstream Project the following shall apply:

 

 

i)

Once MB Gas enters into a third party agreement for the benefit of the Parties in accordance with their agreed Participating Interests (such as a farmout agreement) the Parties shall continue their Project operations under a joint operating agreement between Sapphire and MB Gas (with B.E.L. as co-obligor with Sapphire) in the MB Gas standard form, and when they may earn an interest in the lands which are the subject to Sapphire's and MB Gas' earning rights in such an agreement, Sapphire and MB Gas shall be subject to whatever operation agreement with the applicable operating procedure by which they shall become bound by the terms of that third party agreement, with Sapphire and MB Gas becoming bound thereby in accordance with their agreed Participating Interests- and thereby, in all such agreements, B.E.L. shall be an included party to jointly and severally commit with Sapphire to discharge the Sapphire obligations and liabilities under such agreements;

 

 

ii)

Once MB Gas acquires Title Documents by way of purchase of petroleum and natural gas leases from a lessee of such rights or by way of initial lease as lessee under either an Alberta Crown lease or a freehold mineral lease, the ownership and operation of those Title Documents from the effective date of acquisition shall become subject to a Joint Operating Agreement between Sapphire and MB Gas in the MB Gas standard form with the Operating Procedure attached with the Parties becoming bound thereby in accordance with their agreed Participating Interests;

iii) If the Approved Project is an expansion of an already Approved Project and such Approved Project is already subject to the participation of Sapphire and MB Gas under a joint operating agreement, the newly Approved Project shall then become subject to the same agreement.

6.2

If the Approved Project is an Midstream Project the following shall apply:

 

 

 

 


 

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i)

If MB Gas enters into a third party agreement for the benefit of Sapphire and MB Gas in accordance with their agreed Participating Interests (such as a facilities ownership and operating agreement) Sapphire (with B.E.L. as co-obligor with Sapphire) and MB Gas shall continue their Project operations under a participation agreement between Sapphire and MB Gas in the MB Gas standard form to the extent the terms and conditions of that third party agreement may permit and subject thereto, with Sapphire and MB Gas becoming bound thereby in accordance with their agreed Participating Interests; and thereby in all such agreements, B.E.L. shall be an included party to jointly and severally commit with Sapphire to discharge the Sapphire obligations and liabilities under such agreements;

 

 

ii)

If the Approved Project is to be a new operation by which Sapphire and MB Gas are not already bound betwe


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