PURCHASE AND OPTION AGREEEMENT

1.1

Definitions

a)

“ Agreement ”, “ this Agreement ”, “ herein ”, “ hereby ”, “ hereto ” and “ hereof ” and similar expressions mean and refer to this Agreement and includes any Schedules attached hereto and any agreement amending this Agreement or any agreement or instrument which is supplemental or ancillary hereto; and the expressions “Article”, “Paragraph” and “Subparagraph” followed by a number or letter or combination thereof, or “Schedule” followed by a letter, mean and refer to the specified Article, Paragraph, Subparagraph of, or Schedule to, this Agreement;

b)

“ Assets ” means an undivided sixty-five (65%) percent working interest and an undivided * percent net revenue interest in and to the Petroleum Rights, and an undivided sixty-five (65%) percent interest in the Tangibles and the Miscellaneous Interests;

c)

“ Closing ” means the delivery by Fellows Energy to Quaneco of the Initial Payment, the commitment by Fellows Energy to its share of the Phase One Drilling Program, and such other actions, all as further detailed in Paragraph 3.1, occurring on the Closing Date, at the offices of Fellows Energy, Ltd. in Broomfield, Colorado;

d)

“ Closing Conditions ” means the conditions set out in Paragraph 3.2, which are for the sole benefit of Fellows Energy and which may be waived in whole or in part by Fellows Energy at any time on or before the Closing Date;

e)

“ Closing Date ” means the hour of 2:00 p.m. MST on March 16 , 2004, or such other time and date as may be agreed upon in writing by Quaneco and Fellows Energy;

*

Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

f)

“ Dollars” or “$ ” means the official and legal currency of the United States of America;

g)

“ Force Majeure ” means any acts of God, including flood, fire, storms, lightning, landslides and earthquakes; any strikes, lockouts or other industrial disturbances; acts of war, blockades, insurrections, riots, arrests and restraints of rulers and peoples, civil disturbances and explosions; the binding order of any court or governmental authority; the issuance of a moratorium or significant restriction on drilling activity by any court or governmental authority; and any other cause, whether of the kind herein enumerated or otherwise, not within the control of the Party claiming suspension and which, by the exercise of due diligence, is unpreventable or incapable of being overcome. Lack of funds and economic hardship will not constitute Force Majeure;

h)

“ Initial Payment ” means the non-refundable payment, to be made by Fellows Energy to Quaneco at Closing, of Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00).

i)

“ Leases ” means, collectively, any and all leases, and other documents of title including, without limitation, all agreements granting, reserving or otherwise conferring rights to explore for, drill for, produce, take, use, market, share in the production of or the proceeds from the sale of Petroleum Substances; and rights to acquire any of the foregoing rights; but only if the foregoing pertain in whole or in part to Petroleum Substances within, upon or under the Option Lands, including, without limitation, those leases set out in Schedule “A” under the heading “Leases”;

j)

“ Miscellaneous Interests ” means all right, title, estate and interest (whether absolute or contingent, legal or beneficial), of Quaneco in and to all property, assets and rights (other than the Petroleum Rights or Tangibles) pertaining to the Petroleum Rights or Tangibles including, without limitation:

(i)

all contracts, agreements, and documents relating to the Petroleum Rights;

(ii)

all surface leases, surface access right-of-way and damage agreements and any subsisting rights to enter upon, use or occupy the surface of any lands which are or may be used to gain access to or otherwise use the Petroleum Rights and/or the Tangibles;

(iii)

all Wells; and

(iv)

all well, pipeline and other permits, licenses and authorizations relating to the Petroleum Rights or the Tangibles;

k)

“ Net Mineral Acre ” means the full mineral interest in one (1) acre of Option Lands as set forth in Schedule “A”. Where consideration is expressed in this Agreement as being on the basis of dollars per Net Mineral Acre, such amount is based upon the number of Net Mineral Acres included in the Assets to be assigned to Fellows Energy pursuant to this Agreement;

l)

“ Operating Agreement ” means the American Association of Petroleum Landmen Model Form Operating Agreement (A.A.P.L. Form 610 - 1989 version), including the rates, elections and modifications contained therein, and incorporating the COPAS 1995 Accounting Procedure, which will be attached as an exhibit to the Operating Agreement, including the rates, elections and modifications contained therein. The Operating Agreement rates, elections and modifications will be negotiated by Quaneco and Fellows Energy and added as an addendum to this Agreement prior to the Closing Date;

m)

“ Option ” means the exclusive and irrevocable option granted by Quaneco to Fellows Energy to acquire the Assets, exercisable in accordance with Paragraph 4.1;

n)

“ Option Lands ” means the lands as described in Schedule “A”, together with the rights to explore for and recover the Petroleum Substances within, upon or under such lands, insofar only as such rights are granted by the Leases;

*

Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

o)

“ Option Period ” means:

(i)

for Phase One of the Option Lands, as described in Schedule “A”, the period in time of six (6) months from the Closing Date, provided that if the Phase One Drilling Program is not completed within six (6) months from the Closing Date, due to delays caused by Force Majeure situations, the Option Period will be extended for a concurrent period of time equal to the period of time the Force Majeure situation existed; and

(ii)

for Phase Two of the Option Lands, as described in Schedule “A”, the period in time of twelve (12) months from the Closing Date provided that if the Phase Two Drilling Program is not completed within twelve (12) months from the Closing Date, due to delays caused by Force Majeure situations, the Option Period will be extended for a concurrent period of time equal to the period of time the Force Majeure situation existed;

p)

“ Party ” and “ Parties ” means the entity or entities, as the case may be, named in the first paragraph of this Agreement and any respective permitted successors or assigns;

q)

“Permitted Encumbrances” means:

(i)

liens for Taxes not at the time due or delinquent or the validity of which is being contested at the time in good faith by or on behalf of Quaneco, but only to the extent Quaneco, at its option, elects to indemnify Fellows Energy against such claims;

(ii)

builder’s, mechanic’s, laborer’s, carrier’s, warehouseman’s, materialman’s and similar liens being contested in good faith or not then delinquent, but only to the extent Quaneco, at its option, elects to indemnify Fellows Energy against such claims;

(iii)

easements, rights of way, servitudes or other similar rights in land which do not materially detract from the value of the land concerned or materially impair the use of the Assets affected thereby;

(iv)

rights of general application reserved to or vested in any governmental authority to levy Taxes on the Petroleum Substances or the income therefrom;

(v)

statutory exceptions to title, and the reservations, limitations, provisos and conditions in any original grants from the governments of the States of Utah or Wyoming or the United States of America of any of the mines and minerals within, upon or under the Option Lands; and

(vi)

lessor royalties, royalty burdens, liens, adverse claims, and other encumbrances (collectively the “Royalties” in this definition) set forth in Schedule “B” attached hereto or if such Royalties are not actually described, that total of such Royalties that result in Quaneco’s net revenue interest in the Leases equal eighty-percent (80%), as such net revenue interest is described under the heading “Lease NRI” in Schedule “A”;

r)

“ Petroleum Rights ” means all of Quaneco’s interest in and to the Leases, to the extent applicable to the Option Lands, as set forth in Schedule “A”;

s)

“ Petroleum Substances ” means any of crude oil, crude bitumen and products derived therefrom, synthetic crude oil, petroleum, natural gas, natural gas liquids, coalbed methane, and hydrocarbons related to any of the foregoing, to the extent granted by or under the Leases, insofar only as they pertain to the Option Lands;

t)

“ Phase One Drilling Program ” means the expenditure by Fellows Energy, after Closing, of approximately One Million Dollars ($1,000,000.00) to drill, test, complete, production test and shut-in or plug and abandon a minimum of five (5) core holes, the location and depth of the core holes to be mutually agreed to by the parties, on the Option Lands in the Prospect Area, as further detailed in Paragraph 3.3;

*

Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

u)

“ Phase Two Drilling Program ” means the expenditures by Fellows Energy after the Phase One Drilling Program of at least One Million Dollars ($1,000,000.00) to complete a pilot well program of Fellows Energy’s design.

v)

“ Prospect Area ” means the area containing the Option Lands and the area in which the Parties agree to jointly acquire lands, pursuant to the terms and conditions as set out in Article VII. The Prospect Area is identified in the map attached as Schedule “C”;

w)

“ Purchase Price 1 ” means the consideration payable by Fellows Energy to Quaneco, if Fellows Energy exercises the Option on Phase I of the Option Lands, of $15 per net mineral acre acquired of part or all of the Option Lands (maximum investment of 183,945 net mineral acres x 65% x $15 = $1,793,463.70);

x)

“ Purchase Price 2 ” means the consideration payable by Fellows Energy to Quaneco, if Fellows Energy exercises the Option on Phase II of the Option Lands, of $35 per net mineral acres of part or all of the Option Lands (maximum investment of 183,945 net mineral acres x 65% x $35 = $4,184,748.70);

y)

“ Tangibles ” means all of Quaneco’s interest in and to any and all tangible and depreciable property including, without limitation, all well equipment located on the wellsites of the Wells located on the Option Lands;

z)

“ Taxes ” means all taxes imposed at a federal, state, county or local level affecting or related to the Assets, including but not limited to any windfall profit taxes, excise taxes, ad valorem taxes, production taxes and severance taxes, including interest and penalties, if any, thereon (but exclusive of federal and state income taxes and franchise or other taxes imposed upon Quaneco and Fellows Energy) incurred or accruing after the Closing Date; and

aa)

“ Wells ” means all producing, suspended, shut-in, disposal or injection wells located on the Option Lands including, without limitation, the wells set forth and described in Schedule “A”.

1.2

Schedules

a)

Schedule “A”, containing a description of the Option Lands, Leases, Permitted Encumbrances and the Wells;

b)

Schedule “B” containing a description of the Royalties that burden the Option Lands;

c)

Schedule “C”, containing a map which identifies the Prospect Area; and

d)

Schedule “D”, describing the drilling and geological requirements for Fellows Energy’s operations during the Phase One Drilling Program.

1.3

Applicable Law

*

Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

1.4

Successors and Assigns

1.5

Interpretation

a)

Included Words : Words importing the singular number include the plural and vice versa and words importing gender include the masculine, feminine and neuter genders.

b)

Waiver and Amendment : No failure of any Party in exercising any right or remedy hereunder will operate as a waiver thereof, nor will any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any right or remedy in law or in equity or by statute or otherwise conferred. No waiver or amendment of any provision of this Agreement will be effective unless waived or varied by an instrument in writing dated subsequent to the date hereof, executed by duly authorized representatives of all Parties.

c)

Time : Time will be of the essence of this Agreement.

d)

Entire Agreement : This Agreement constitutes the entire agreement of the Parties relative to the subject matter contained herein, and there are no oral or other representations or warranties connected with the subject matter hereof other than as are contained herein, except as and to the extent that any other agreement, document, or instrument, whether the whole or any terms thereof, may be incorporated herein by reference, or authorized, required or permitted by the terms hereof, or obligations contained therein may be assumed by any of the Parties or stated herein to be of continuing effect. Wherever any term or condition, express or implied of a document delivered in pursuance hereof conflicts or is at variance with any term or condition in this Agreement, such term or condition of this Agreement will prevail. Subject to the foregoing, this Agreement supercedes all prior agreements between the Parties relating to the subject matter contained herein.

2.1

Title Review

*

Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

2.2

Cure

a)

not close this Agreement, if the total of the Title Defects, which are not cured or removed to the satisfaction of Fellows Energy, affect more than fifteen (15%) percent of the Assets;

b)

grant a further period or periods of time, not to exceed fifteen (15) days, within which Quaneco will attempt to cure or remove the Title Defects, in which event the Closing Date will be deferred for a like period;

c)

waive the uncured Title Defects; or

d)

delete the affected Assets from this transaction and reduce the Purchase Price 1 and/or Purchase Price 2, as the case may be, if Fellows Energy exercises the Option) accordingly, which remedy must be mutually agreed to by Quaneco and Fellows Energy.

3.1

Closing

a)

Fellows Energy will deliver one hundred (100%) percent of the Initial Payment to Quaneco, on behalf of Fellows Energy, by wire transfer of funds to a bank and bank account of Quaneco’s choosing;

b)

Quaneco and Fellows Energy will execute, acknowledge and deliver a mutually agreeable memorandum of this Agreement, suitable for recording where appropriate, which will give notice of this Agreement and the rights of the Parties;

c)

Quaneco will execute and deliver to Fellows Energy a designation of operator or other documents that might be reasonably required to afford Fellows Energy access to the Option Lands and Leases in order to conduct the Phase One Drilling Program.

3.2

Closing Conditions

a)

Fellows Energy will have done such due diligence regarding Quaneco’s interest in and title to the Assets including, but not limited to, verification that the Parties comprising Quaneco collectively own a one hundred (100%) percent working interest in the Option Lands and the Leases, the Leases have a net revenue interest of not less than eighty (80%) percent and that Quaneco is capable of assigning the Assets to Fellows Energy;

b)

Fellows Energy will have the opportunity to review, and will be satisfied with, all agreements relating to Quaneco’s interest in the Assets;

c)

At the Closing Date, Fellows Energy shall be designated as operator for the exploration, development and production of all coalbed methane on the Option Lands and within the Prospect Area;

d)

The Assets and the Prospect Area will not be subject to any contracts for the production, sale and transportation of petroleum substances.

*

Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

3.3

Phase One Drilling Program

3.4

Phase Two Drilling Program