FARMOUT AGREEMENT HELETZ-KOKHAV LICENSE

Exhibit 10.26

FARMOUT AGREEMENT

HELETZ-KOKHAV LICENSE

By and Among

AVENUE GROUP INC

And

AVENUE ENERGY ISRAEL LTD

And

TOMCO ENERGY PLC

And

LUTON - KENNEDY LTD

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FARMOUT AGREEMENT

THIS AGREEMENT is entered into as of this 1 ^st day of April, 2008  by and among Avenue Group, Inc, a company existing under the laws of the State of Delaware, USA (“Avenue”) and Avenue Energy Israel, Ltd (“AEI”) a company existing under the laws of  the State of Israel and being a wholly owned subsidiary of Avenue  (hereinafter both sometimes referred to as “Farmor”) and TomCo Energy PLC (“TomCo”)  a company existing under the laws of the Isle of Man and Luton-Kennedy Ltd (“Luton”) a company existing under the laws of the State of Israel and being a wholly owned subsidiary of TomCo (hereinafter sometimes both  referred to as “Farmee”).  The companies named above, and their respective successors and assignees (if any), may sometimes individually be referred to as “Party” and collectively as the “Parties”.

WITNESSETH:

WHEREAS, the Heletz-Kokhav License (“Heletz License”) covering an area of approximately 229,600 dunams was awarded to Avenue Energy Israel, Ltd. on August 27, 2007 by the Israel Petroleum Commission (“IPC”) of the State of Israel, for the exploration, development and production of hydrocarbons in an area known as the Heletz-Kokhav block for a period of 3 years from the issuance of the Heletz License;

WHEREAS, as of the date of this Agreement, AEI holds 100% of the rights and obligations in the Heletz License;

WHEREAS, the Iris License (“Iris License”) covering an area of approximately 36,800 dunams was awarded to AEI and Lapidoth-Heletz LP (“Lapidoth”) on February 14, 2008 by the IPC for the exploration, development and production of hydrocarbons in an area known as the Iris block for a period of three years from the issuance of the Iris License;

WHEREAS, as of the date of this Agreement, AEI holds 50% of the rights and obligations in the Iris License;

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WHEREAS, Farmor is willing to assign and transfer an undivided fifty percent (50%) participating interest taken out of its rights and obligations under the Heletz License and an undivided twenty five percent (25%) participating interest taken out of its rights and obligations under the Iris Licence to Farmee in accordance with the terms set forth herein and Farmee wishes to acquire such interests; and

WHEREAS, an Application will be made as quickly as possible following the date of this Agreement  by Farmor and Farmee for the Approval of the Government of the State of Israel to the Assignments of such Participating Interests as contemplated by this Agreement;

NOW, THEREFORE, in consideration of the premises and the mutual covenants and obligations set out below and to be performed, the Farmor and Farmee agree as follows:

ARTICLE 1
DEFINITIONS

As used in this Agreement, the following capitalized words and terms shall have the meaning ascribed to them below.  Any capitalized term used in this Agreement and not specifically defined in this Agreement shall have the same meaning as in the Licenses or the JOA to be entered into pursuant to this Agreement.

1.1

Agreement means this Farmout Agreement together with the Exhibits, and any extension, renewal or amendment hereof agreed to in writing by the Parties.

1.2

Application means a formal application in writing by the parties to the Government for Approval.

1.3

Approval means the formal approval in writing by the Government of the Assignment of the Participating Interests transferred hereunder.

1.4

Approval Date means the date on which the Government notifies Farmor and Farmee of its Approval.

1.5

Assignments means either or both of the documents, attached as Exhibit E, by which the interests in the Licenses are  transferred and conveyed to the Farmee by the Farmor   as provided hereunder.   

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1.6

Block means the areas  covered by the Licenses.

1.7

Closing means the execution of this Agreement and delivery of the items contemplated in Article 3.1.

1.8

Closing Date means the actual date of Closing.

1.9

Consideration means the payments by TomCo of cash and shares as set forth in Article 4.1(C) and (D)

1.10

Documents means the Licenses, the Applications, the JOA, and the agreements listed in the attached Exhibit F.

1.11

Effective Date means the date set out in Article 2.5.

1.12

Government means the government of the State of Israel and any political subdivision, agency or instrumentality thereof.

1.13

Interim Period means the period commencing from the date of the execution of this Agreement until the Approval.  

1.14

JOA means the Joint Operating Agreements attached as Exhibit  D.      

1.15

Lapidoth means Lapidoth Oil Prospectors, Ltd, an Israeli corporation.  

1.16

Lapidoth Service Agreement means the services agreement dated December 27,2007 and made between Lapidoth and the Farmor.

1.17

Laws/Regulations means those laws, statutes, rules and regulations governing activities under the License.

1.18

Licenses mean the Heletz License and/or the Iris License (attached as Exhibits A-1 and A-2) and any extension, renewal or amendment thereto or any conversion thereof into a Production Lease or any license issued in exchange for, in replacement of or in substitution for either.    

1.19

License Area means the area or blocks more particularly described in the map and set of coordinates  attached Exhibit B.

1.20

Natural Resources Licensing Administration or NRLA means that branch of the Israeli Ministry of Natural Infrastructures which is responsible for approving the Assignments.

1.21

Operator   means the entity designated to conduct operations in the License Area in accordance with the terms of the JOA.

1.22

Participating Interest

  means as to any party to the License, the undivided interest of such party expressed as a percentage of the total interest of all parties in the rights and obligations derived from the License.

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1.23

Preferential Rights   means a right held by any third party under the terms of the License, JOA, Documents or under applicable law rule or regulation to pre-empt the transaction contemplated by this Agreement or affect its terms in any way.

1.24

Production Lease means a 30 years oil production lease granted by the Government.

1.25

Work Program means the description of work attached hereto as Exhibit C.

ARTICLE 2
ASSIGNMENT OF INTEREST

_2.1

Grant

  Subject to the satisfaction of the terms and conditions required of the Farmor, as set out in Article 3 herein, and in exchange for the Consideration as set out in Article 4 herein, Farmor shall assign and transfer to Farmee, and Farmee agrees to accept, a 50% Participating Interest in the Heletz License and a 25% Participating Interest in the Iris License and the Parties shall execute and deliver the Assignments and any other documents necessary to perfect the said Assignments.   In the event Farmee does not fulfill all or part of the earning obligations of Article 4, Farmee shall immediately upon notice sent by Farmor, reassign all or that portion of the interest not earned, and Farmee shall take all steps and sign all documents necessary to carry out the reassignment to Farmor.  In this event, Farmee authorizes Avenue Group, Inc. to make such application for reassignment on its behalf if necessary.

_2.2

Approval

An application for Approval shall be made by Israeli counsel for AEI to the NRLA within 10 days of the date hereof.  Such application is to be completed in consultation with Israeli counsel for Luton and is subject to the advice of Luton’s legal and professional advisors.

_2.3

Joint Operating Agreement  

Contemporaneously with the execution and delivery of the Assignment the Parties    

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agree to execute the appropriate documentation to become parties to the Joint Operating Agreements attached as Exhibit D-1 and D-2.    

_2.4

Binding Effect

Farmor and Farmee shall be bound by this Agreement as of the date hereof and shall fully perform all of their respective obligations under this Agreement.  

_2.5

Ownership

After the Assignment of the full interest to be earned as contemplated under this Article 2, the Participating Interests in the Licenses shall be as set out below subject however to adjustment downward if Farmee does not earn its full interest:

The Parties acknowledge that the Heletz and Iris Licenses are each  burdened by two overriding royalties granted to unrelated parties and aggregating 7% in their entirety for each License  and that the Government of the State of Israel has reserved a 12.5 % royalty in each of the Licenses.  The Parties shall bear their respective share of the royalties in proportion to their Participating interests.         

_2.6

Effective Date

Notwithstanding the date of this Agreement or the date on which the Assignment is executed, the effective date of this Agreement as between the Parties (hereafter the "Effective Date") shall be deemed to be the first day of the first full month preceding the Closing Date.  By way of example only, if the Closing Date occurs on March 18, 2008, then the Effective Date for payment of either party’s share of production or all other matters shall be deemed to be February 1, 2008. The

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consideration payable by Farmee reflects this Effective Date.  Farmor and Farmee agree that they shall make whatever adjustments and payments from one to the other to reflect the Assignment as of the Effective Date, notwithstanding any cost recovery allocations, tax deductions or other benefits or payments received from the Government thereafter as a result of the application of the License or any applicable laws of the Government which reflect the Approval Date and not the Effective Date.

ARTICLE 3
CLOSING

_3.1

Closing

The assignment and transfer of the Participating Interest by the Farmor to the Farmee as provided in Article 2.1 shall be closed on the date of this Agreement when the following shall take place:-

A.

The Farmor shall deliver to the Farmee the duly executed Assignments.

B.

The Farmor shall deliver to the Farmee a certificate in respect of 50% of the issued and fully diluted share capital of AEI (in case shares in AEI are to be delivered to Farmee as an alternative way of achieving the parties’ intent under Article 3.4)

C.

The Farmee shall deliver to the Farmor the cash consideration stated in Article 4.1(C) and (D) and the share consideration stated in Article 4.1 (C).  

_3.2

Approval

A.

Within the period of  ten days commencing on the Approval Date (“Notice Period”), either the Farmor or the Farmee (“Notifying Party”) may notify the other (“Notice”) in writing that any conditions imposed by the Government in giving Approval are, in its reasonable opinion, unusual or

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onerous to it in which case the parties shall for a period of twenty        days commencing ten days after the date of Approval (“Negotiation Period”) use commercially reasonable efforts to secure the removal or relaxation of such conditions.  In order to maintain momentum necessary to diligently carry out the work program of the License, during this same thirty day period the Parties shall also determine and prepare for implementation if necessary the alternative method of transferring the interest to Farmee referred to in Paragraph 3.4 herein below.

B.

If Approval is not given (which includes the situation where Approval is given to the Assignment of a Participating Interest in one License, but not the other) within three months from the date of this Agreement or if Approval is given but any onerous or unusual condition imposed by the Government have not been removed or relaxed to the reasonable satisfaction of the Notifying Party by the expiry of the Negotiation Period, the Parties shall endeavor to enter into the arrangements contemplated in Paragraph 3.4 herein below.  

_3.3

Acts to be Performed:

Each party shall use commercially reasonable efforts to execute all documents, and do and procure to be done all such acts and things as are reasonably within its power to ensure that Approval is obtained as soon as is reasonably practicable after execution of this Agreement.

_3.4

Alternative Way

If the Government has not approved the Assignments to the Farmee within three months from the date of this Agreement, or otherwise imposes conditions for approval of the Assignments in excess of those which are usually imposed in similar circumstances or which approval contains unusual and onerous conditions which either Party is not reasonably willing to accept, then the Parties commit to find and devise a legally permissible alternative way (whether by means of a trust,

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agency or corporate transaction i.e. where both Licenses are affected,  the transfer to Farmee of 50% of the shares of AEI) to enable the Farmee to enjoy the same interest in the Licenses as would have been acquired by a direct assignment. However, in the event Farmee is not willing to accept any of the alternative ways referred to herein, Farmee shall then upon notice to Farmor given within thirty days from the aforesaid three month period, be entitled to withdraw from this Agreement.   Upon such notice of withdrawal, Farmee shall forfeit any amounts previously advanced to Farmor whether by advance payments, work obligation payments, security deposit payments,  loan arrangements or any other manner of payment.  The Consideration paid by Farmee shall however be returned forthwith to Farmee. Notwithstanding the implementation of an alternative way to convey the interest contemplated herein to Farmee, the Parties upon mutual agreement  shall continue to endeavor for a period of nine additional months from the date of implementation of the alternative way to obtain the Approval of the Government.  If such Approval is obtained within this period, the Parties shall cancel whatever alternative way of transferring the economic interest to the Farmee had been implemented and shall thereupon immediately carry out the original assignments of interest contemplated by this Agreement.

_3.5

Loan Arrangements

Recognizing that Farmor must commence work obligations under the Licenses before such time as the Approval is obtained or alternative arrangements for transferring the interest are reached, TomCo agrees to provide a loan to Avenue in the amount of $500,000 to be used to satisfy various obligations under the License.   This loan shall bear interest at the rate of 2% per annum and shall be due on a date no later than three months from Closing.  At such time, the loan amount together with interest shall be applied towards Farmee’s financial obligations under this Agreement and the JOA. If Farmee elects pursuant to Paragraph 3.4 neither to accept an interest in the License nor a shareholding in AEI, then the Loan shall be deemed cancelled and Farmor shall have no obligation to repay the loan.

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ARTICLE 4
CONSIDERATION

_4.1

Earning Obligations

In consideration for receiving the assignment of the Participating Interest hereunder, or the transfer of an equivalent economic interest by an alternative way as contemplated by Paragraph 3.4, Farmee agrees to perform or cause to be performed the following obligations:    

A.

TomCo shall transfer to Avenue a Security Deposit in the amount of $75,000 which shall be applied against the financial obligations described in Article 4.1(C) below. It is acknowledged that TomCo has fulfilled this obligation.

B.

TomCo shall assume one hundred percent (100%) of the expenditure of the first $3,500,000 of the costs associated with implementing the Three Year Work Program required by the Heletz License or b) the costs associated with implementing the Three Year Work Program required by the License, a description of which is attached hereto and made a part hereof as Exhibit C., whichever is greater. It is understood that the expenditure includes only expenditure incurred by the operator in accordance with the work program (excluding Farmee’s own internal G & A expenditures) and that there shall be a cap of $4,500,000 in the event that the minimum work program is not completed by the expenditure of $3,500,000.    Upon total expenditure of $3,500,000 by TomCo and assuming that the minimum work program has been fulfilled, the parties shall bear further expenditures equally, but TomCo shall pay the first $500,000 of expenditures beyond $3,500,000 and Avenue the next $500,000 thereafter.   Upon the cumulative expenditure of $4,500,000,and assuming the minimum work program has been fulfilled,  the Parties shall thereafter pay their proportionate participating interest share of all future

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expenditures in conformity with the JOA.

C.

On the Closing Date, TomCo shall pay to Avenue the sum of $1,000,000 (less the Security Deposit) and an additional equivalent of $500,000 in ordinary TomCo shares as quoted on the AIM market in London (with restricted sale conditions) Each share shall be valued at the average middle market price of the shares for the seven days prior to the Closing Date.   

D.

TomCo shall pay its proportionate share, in this case fifty percent (50%) of all costs already incurred by Avenue in connection with the Heletz and if applicable, the Iris License, including but not limited to all bona fide costs related to the use of production equipment,  installation costs and lease fees. A definitive list of these costs and of the facilities is attached hereto and made a part hereof as Exhibit G.

E.

TomCo shall if requested by the Government provide proof of its ability to fund its obligations under the License and its proportionate share of a $100,000 Plugging and Abandonment bond.   

_4.2

License Conversion Bonuses

In addition to those amounts to be paid or obligations to be fulfilled by Luton, Luton shall pay the following license conversion bonuses to Avenue:

A.

If at any time during the life of the Heletz or Iris License, the Israel Petroleum Commission agrees to convert either License to a Production Lease, then Luton shall pay Avenue within ninety (90) days following such determination, the cash sum of $1,500,000.

B.

If at any time it is determined that the Block contains petroleum reserves greater than ten (10) million barrels of proven producing (“PDP”) proven developed non producing (“PDNP”) or proven undeveloped (“PUD”) oil reserves as confirmed by an internationally recognized United States or United Kingdom based reservoir engineering firm, Luton shall pay to Avenue within ninety (90) days following such determination, the cash

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sum of $5,000,000. The definitions of PUD, PDP and PDNP reserves shall be as recognized by the Society of Petroleum Engineers.   Those engineering firms set out in Exhibit I hereof shall be deemed approved by the Parties.  Any other firm may be deemed acceptable to the parties if mutually agreed in writing at the time.

_4.3

Payment Terms and Certain Remedies

All payments called for by this Agreement shall be made by wire transfer to Avenue’s account pursuant to the wiring instructions attached hereto as Exhibit J.  In the event that Farmee fails to make any payments as required in this Article, or otherwise fails to fully perform any of its obligations set forth in this Article and has not remedied such breach of its obligations within 45 days of receipt of written notice from Farmor then the following shall apply:

A.

It is the intent of this Agreement that Farmee will spend at least $3,500,000 or such sum as necessary to fulfill the minimum obligations of the Heletz and Iris License subject to a cap of $4,500,000  to earn a full fifty percent (50%) interest in the