EXHIBIT 10.6
[LETTERHEAD OF ENCAL ENERGY LTD. APPEARS HERE]
December 13, 1996
Pinnacle Oil International Inc.
380 - 1090 West Georgia St.
Vancouver, British Columbia
V6E 3V7
Attention: Mr. R. Dirk Stinson
Dear Sir:
Re: JOINT VENTURE PROPOSAL
EAST CENTRAL ALBERTA, CANADA
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Further to our recent meeting on the captioned subject, please accept this
letter of understanding as a term sheet from which Encal Energy Ltd. ("Encal")
and Pinnacle Oil International Inc. ("Pinnacle Oil") may pursue a joint venture
proposal.
The general terms of the joint venture are as follows:
1. OBJECTIVES
. to provide a field test of the Stress Field Detector ("SFD")
technology by Pinnacle for Encal which may be further tested through
the drilling of oil and gas test wells by Encal.
. to utilize Pinnacle Oil's expertise and proprietary SFD technology
within the Acme/Swalwell area, as set forth on the attached Schedule
"A", for the purpose of identifying and further enhancing drilling
opportunities for Encal and the joint venture as, herein described
(such area shall be hereinafter called "the Area").
2. PINNACLE'S WORK COMMITMENT AND TIMING
. Pinnacle will carry out and interpret SFD surveys within the Area and
more specifically over Encal's undeveloped lands in the Area prior to
January 30, 1997. Encal's undeveloped lands to be evaluated by
Pinnacle will be lands in which Encal holds a working interest, or may
be entitled to hold an interest, of not less than 50%. Specified
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Joint Venture Proposal
12/16/96
Page 2
exclusions from the Schedule "A" Acme/Swalwell Lands will be any lands
and rights not owned by Encal and in addition, shall exclude any well
spacing units of Encal's Acme/Swalwell Lands which are shown as
excluded portions through cross hatching on Schedule "A".
. Upon completion of the survey, Pinnacle will present an interpreted
SFD survey to Encal which shall highlight prospects and anomalies that
have been identified by Pinnacle in a ranked order from most
prospective to least prospective. Undeveloped prospects identified by
Pinnacle and presented for acceptance to Encal at this stage will be
the prospects in which Pinnacle shall have the right to participate as
hereafter referenced.
3. ENCAL'S COMMITMENT
Encal will provide seismic geophysical evaluation on a minimum of the three
most prospective anomalies identified by Pinnacle as soon as possible.
Pending incorporation of the seismic data, Encal will proceed to test
through test well drilling, none, some or all of the identified anomalies.
Upon Encal having drilled a test well to test a prospect, Pinnacle will
receive a casing point election to participate in such well as to 5% of
Encal's interest on each of the first three test wells. In the event
Pinnacle elects to participate beyond casing point in a test well, Pinnacle
shall thereafter be entitled to a working interest equal to 5% of Encal's
interest in the test well and the test well spacing unit, with such
interest earned by Pinnacle to be subject to all existing royalties and
other burdens on Encal's interest ("Earned Interest"). Costs incurred after
the casing election point would be paid at election to Encal by Pinnacle
and Pinnacle would participate as to the Earned Interest share in costs
(including casing costs) from that point on. Subject to the further terms
of this agreement, Pinnacle will have the right to participate with Encal
as to 5% of Encal's interest in subsequent option wells and development
wells after the third test well on any prospects identified in Clause 2
hereof, during the term of this agreement as set forth in Clause 5.
4. INFORMATION TO BE KEPT CONFIDENTIAL
. All data, interpretation and future rights from the SFD survey will
remain the sole property of Pinnacle. All data interpretation and
future rights from any seismic geophysical data will remain the sole
property of Encal. It is understood that Pinnacle may use SFD surveys
conducted and subsequently tested through drilling under this
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Joint Venture Proposal
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Page 3
agreement as templates to encourage further applications of SFD
technology. Notwithstanding the foregoing, it is understood by both
parties that any dissemination of SFD survey, drilling or other
confidential information for a period of one year from rig release of
each well must be with mutual consent. Press releases regarding the
status, progress and results of operations involving both Encal and
Pinnacle must also be jointly agreed upon.
5. TERM
. Subject to Clause 6 hereof, Pinnacle's right to participate in the
drilling of either option or development wells on Encal's
Acme/Swalwell Lands as referred to in Clause 3 hereof will terminate
on the later of August 31, 1997, or 120 days after notice by Encal to
Pinnacle that Encal has no further intent of drilling test wells, or
option wells, or development wells under this agreement.
6. PINNACLE RIGHT TO FARMIN
. Until July 8, 1997, the parties shall consult as to the potential to
drill further wells on Encal's Acme/Swalwell Lands. In the event that
Encal proposes not to drill any further wells on any portion of the
Acme/Swalwell Lands prior to the expiration of the term referenced in
Clause 5, Pinnacle shall have the right to commit to drill, on a
farmin basis, any number of additional wells on the remaining unearned
Acme/Swalwell Lands. It is agreed and understood that in the event
that Pinnacle commits to drill any additional wells, the parties will
negotiate in good faith towards the execution of a formal farmout
agreement. Such agreement shall contain the terms and conditions
normally untilized by Canadian oil and gas companies for such
transactions. The basic terms would provide for Pinnacle to drill to a
depth sufficient enough to evaluate the Nisku formation, complete, and
equip or abandon each well at its sole cost, risk, and expense each
well. Upon Pinnacle having fulfilled its obligations pursuant to the
Farmout Agreement, Pinnacle shall have earned from Encal:
a) an undivided 100% of Encal's pre-farmout working interest in each
additional well spacing unit in all zones that Encal holds an
interest down to the base of the Nisku formation. Such interest
earned by Pinnacle would be subject to a convertible sliding
scale gross overriding royalty to Encal of 1/150 (5%-15%) of
monthly oil production and 15% of natural gas and all other
products based
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Joint Venture Proposal
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on Encal's original pre-farmout working interest. This royalty
would be convertible at payout to an undivided 50% interest; and
b) in each additional well spacing unit Pinnacle shall have earned
an undivided 50% of Encal's pre-farmout working interest in all
zones that Encal holds an interest down to the base of the Nisku
formation in the balance of a pre-selected one (1) section block.
7. RIGHT-OF-FIRST REFUSAL
. Pinnacle and Encal hereby acknowledge that the opportunity to
participate in the enhancement of drilling opportunities utilizing SFD
technology will be limited to three joint venture partners.
. Encal, as one of the prospective partners, hereby requests and
Pinnacle agrees to provide Encal with a shared right-of-first refusal
(to be shared equally and independently between Encal and Pinnacle's
other joint venture partners) to participate in further exploration
projects utilizing SFD technology in British Columbia, Alberta and
Saskatchewan. The term of this right-of-first refusal will commence on
the date of this letter and terminate on August 31, 1997, but subject
to extension with the mutual agreement of the parties.
8. MISCELLANEOUS
. This Agreement shall not be construed as a partnership.
. Pinnacle warrants to Encal that Pinnacle has full right and authority
to utilize SFD technology.
. Pinnacle, by entering into this agreement, does not violate or
conflict with any term or provision of or constitute a default under
any agreement of whatever nature.
. Each of Pinnacle and Encal shall indemnify the other against all
actions, suits, demands, claims, losses, expenses and damages which
may be brought against, incurred by or suffered by the other or which
may sustain, pay or incur by reason of or in any way attributable to
the operations contemplated by this agreement carried out by the
other, its agents, servants, employees or contractors.
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Joint Venture Proposal
12/16/96
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If this summarizes your understanding of our discussions and you are prepared to
move forward on this basis, please execute and return one copy to the
undersigned. We are prepared to sit down and layout the most effective traverses
and identify template locations as soon as possible.
Yours very truly
ENCAL ENERGY LTD.
/s/ Peter A. Carwardine
Peter A. Carwardine
V.P Land & Corporate Development
/cdi
Attachment
ACCEPTED AND AGREED TO THIS 14 day of December, 1996
[SIGNATURE ILLEGIBLE]
_______________________________
PINNACLE OIL INTERNATIONAL INC.
This is Schedule "A" attached to and forming part of an Joint Venture Proposal
dated December 13, 1996 between Encal Energy Ltd. and Pinnacle Oil International
Inc.
[GRAPH OF JOINT VENTURE PROPOSAL APPEARS HERE]