Exhibit 10.1
OPTION AGREEMENT
THIS AGREEMENT is made on 28 April 2005.
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PARTIES
(1) USIBERIAN ENERGY GROUP INC., a corporation incorporated under the
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laws of the State of Nevada, United States and whose principal place
of business is at 000 Xxxxxxx Xxxxxx, 0xx xxxxx, Xxx Xxxx, XX 00000
("SEG"); and
(2) UBALTIC PETROLEUM LIMITED, a company incorporated in England and Wales
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under company number 05303991 and whose registered office is at 00x
Xxxxxxx Xxxxxx, Xxxxxx X0X 0XX, Xxxxxx Xxxxxxx ("BP").
INTRODUCTION
A) SEG is the sole shareholder of OOO Zauralneftegaz ("ZNG"), a
Russian limited liability company that has various interests and
assets, including oil and gas exploration licences in the Kurgan
region of the Russian Federation.
B) The parties wish to jointly cooperate in a joint venture (the
"JOINT VENTURE") through the establishment of a company ("JV CO")
for the purposes of developing the 4 oil and gas exploration
licences currently owned by ZNG (the "EXISTING LICENCES"), and to
bid for further oil and gas exploration licences in the Kurgan
region of the Russian Federation and oil and gas production
licences in the Khanty-Mansisk and Tyumen regions of the Russian
Federation.
C) To this end, the parties entered into an Option Agreement and
Memorandum of Understanding dated 24 January 2005, as
subsequently amended by a Deed of Variation dated 11 March 2005,
(the "ORIGINAL OPTION") pursuant to which, inter alia, SEG
granted to BP an exclusive option whereby on exercise of said
option (i) SEG agreed to form JV CO; (ii) SEG agreed to transfer
50% of the issued share capital of JV CO to BP on the basis JV CO
would be owned 50% by BP and 50% by SEG; (iii) SEG agreed to
transfer 100% of its ownership interests in ZNG to JV CO; and
(iv) BP agreed to provide certain funding to JV CO, each as
provided for under the terms of the Original Option.
D) In consideration for each party's continued commitment to the
other to finalise the arrangements relating to the Joint Venture,
the parties are entering into this agreement (the "AGREEMENT")
for the purposes of amending and replacing the terms of the
Original Option and to set out the revised terms agreed between
the parties in relation to the Joint Venture.
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ORIGINAL OPTION
1. Except as provided in clause 2, this Agreement supersedes and replaces
the Original Option, which shall cease to have any force and effect
and is hereby terminated and each of the parties confirms to the other
party that it has no claim against the other party under the Original
Option.
OPTION
2. The exclusive option (the "OPTION") granted by SEG to BP under the
Original Option to purchase from SEG 50% of the entire issued share
capital of JV CO (the "OPTION SHARES") shall remain in full force and
effect and the parties acknowledge that the Option has been exercised
by BP and BP has paid to SEG the sum of US$100,000 (receipt of which
is hereby confirmed by SEG) as consideration for the exercise of the
Option.
CONDITIONS
3.1 Completion of the purchase of the Option Shares ("COMPLETION") shall
be conditional on the following:
(a) BP having made the payments under the Initial Loan (as defined
below) referred to in clauses 9.1 to 9.4 in so far as they due at
the relevant time and subject to the terms of the Loan Agreement
(as defined below);
(b) BP being satisfied with the Due Diligence (as defined below) in
accordance with the terms of clause 5 below;
(c) JV CO owning 100% of the ownership interests of ZNG;
(d) each of the parties being satisfied with the terms of the Joint
Venture Documentation and the parties and ZNG having executed
such of the Joint Venture Documentation to which they are party;
and
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(e) the parties having complied in all material respects with their
respective obligations under this Agreement.
3.2 If the conditions set out in clause 3.1 have not been fully satisfied
by 31 July 2005 or if at any time prior to Completion any of such
conditions should become incapable of being satisfied, then (except
where the condition in clause 3.1(e) has not been satisfied and the
party who is not in breach of its obligations under the Agreement
waives such condition) this Agreement shall immediately lapse and
cease to have effect and, subject to clause 3.3, neither party shall
have a claim against the other except in relation to any prior breach
of this Agreement.
3.3 In the event the Agreement terminates in accordance with clause 3.2
(other than by reason of a breach by BP of its obligations hereunder)
SEG shall pay to BP the following sums:
(a) US$500,000 on 31 October 2005; and
(b) US$500,000 on 28 February 2006.
SEG acknowledges that the above sums are fair and reasonable in all
the circumstances and, in the case where such sums become payable
pursuant to a breach by SEG of its obligations hereunder, consist of
liquidated damages that represent a genuine pre-estimate of the loss
that would be suffered by BP if Completion does not occur (including
its costs, expenses and loss of profit). SEG waives any right which it
may have to challenge the validity at law of any obligation to pay the
liquidated damages.
EXCLUSIVITY
4. In consideration of BP contemplating the Joint Venture and undertaking
the possibility of such transaction and incurring expenses therewith,
until 31 July 2005 SEG shall not (and it shall procure that neither
ZNG, nor any of its or ZNG's respective affiliates, officers,
directors, employees, agents or advisors shall), directly or
indirectly, solicit or entertain offers from, negotiate with, or in
any manner encourage, discuss, accept or consider a proposal from a
third party relating to financing or funding of, investment or
acquisition of any interest in ZNG or SEG which could undermine the
transaction described in this Agreement (a "COMPETING TRANSACTION").
If SEG or any of its affiliates, or any of their respective officers,
directors, employees, agents or advisors receives any communication
regarding an offer or a proposal for a Competing Transaction during
such period, then it will immediately notify BP of its receipt and
promptly provide the other parties with a written summary of its
terms.
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5. BP and its representatives shall have the opportunity to carry out at
BP's cost such legal, financial and other due diligence investigations
as BP may decide relating to SEG, ZNG and JV CO and their respective
undertakings, businesses, interests, assets and liabilities (the "DUE
DILIGENCE"). SEG undertakes to afford (and to procure that ZNG shall
afford) BP all assistance and access to facilitate the performance of
such Due Diligence and to promptly provide such information (together
with supporting documentation where appropriate) as may be requested
by BP. In the event that BP determines in its sole discretion that
there are material discrepancies between any matters revealed by the
Due Diligence and any matters contained in or referred to in the
circular relating to ZNG dated 22 December 2004, the SEC filing for
SEG dated 9 September 2004 (or any updates of such filings made with
the SEC), the consolidated financial statements of SEG for the periods
ending 31 December 2003 and 30 September 2004 and the unaudited
consolidated financial statements of SEG for the period ending 31
December 2004 (together referred to as the "DOCUMENTS") or is unable
to confirm to its satisfaction in the Due Diligence any material fact
or issue contained in or referred to in any of the Documents or it
should discover any material matter which may in its sole discretion
affect its willingness to complete the purchase of the Option Shares,
then upon BP providing written notice of the same to SEG, the
conditions in clause 3 shall be treated as having not been satisfied.
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COMPLETION
6. Completion shall take place at the registered office of BP immediately
following the last of the conditions set out in clause 3 above have
been satisfied or such earlier time or date as the parties may agree
in writing. On Completion:
6.1 SEG shall deliver to BP duly executed share transfers for the Option
Shares in favour of BP together with the relevant share certificates
or other documents of title relating thereto and shall procure that JV
CO shall register BP as the holder of such shares;
6.2 BP shall pay the sum of 50 as consideration for the Option Shares; and
6.3 the parties shall enter into the Joint Venture Documentation (as
defined below) and SEG shall procure that JV CO and ZNG shall enter
into such of the Joint Venture Documentation as they are required to
enter into under the terms thereof.
COVENANTS
7. The parties shall as soon as reasonably practicable following the date
hereof cooperate to establish JV CO as an English private company (or
such entity incorporated in such jurisdiction as BP may agree in
writing). Following the establishment of JV CO, SEG shall procure that
the transfer of 100% of the ownership interests in ZNG to JV CO is
completed promptly (and in any event by the date set out in clause 4
above).
8. SEG hereby undertakes to BP to procure that without the prior written
consent of BP in the period up to Completion:
8.1 JV CO shall remain a non-trading dormant company and SEG shall not
transfer or otherwise dispose of any interest in, or create any
security in or encumbrance over, the shares in JV CO;
8.2 no further ownership interests in ZNG will be created or issued and,
other than as required by clause 7, SEG shall not transfer or
otherwise dispose of any interest in, or create any security in or
encumbrance over, the ownership interests in ZNG;
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8.3 no alteration or amendment shall be made to the operating,
organisational or constitutional documents of ZNG;
8.4 ZNG shall not make any change in the nature or scope of its business
as carried on at the date of this Agreement;
8.5 ZNG shall not enter into any transaction, contract or arrangement that
is not in the normal and ordinary course of its business nor enter
into any transaction which is not on arm's length terms nor effect any
acquisitions or disposals of any material assets;
8.6 except as provided for or contemplated by this Agreement, ZNG shall
not borrow money or incur any material indebtedness;
8.7 ZNG shall not appoint or terminate any personnel in a managerial
capacity;
8.8 ZNG shall not encumber or grant security over any of its assets; and
8.9 ZNG shall not institute or settle any legal proceedings nor take any
steps to wind itself up or commence any insolvency proceedings in
relation to itself.
FUNDING
9. On execution of this Agreement, BP shall provide a loan facility to
ZNG in respect of an amount of US$1,267,860 (the "INITIAL LOAN") on
the terms of the loan agreement in the form annexed as Annexure 1 (the
"LOAN AGREEMENT"), which shall provide that the Initial Loan shall be
applied by ZNG on the following terms:
9.1 US$375,000 towards the outstanding invoices due by ZNG to
Basneftegeofizika in the total sum of US$588,856;
9.2 up to US$178,524 to discharge all sums outstanding due by ZNG to
Bazhenov Expedition;
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9.3 US$250,000 to be used by ZNG to account to OOO Business Standard, a
Russian limited liability company ("BUSINESS STANDARD") in respect of
its services for coordinating the gathering of data and information on
the various new exploration licences in the Kurgan region being
considered by ZNG (there are initially proposed to be 3 licences in
number in respect of areas which shall be designated by BP). The
parties intend that this data and information be obtained as soon as
possible;
9.4 a payment on account of the salaries for each of the months of April,
May, June and July 2005 for those employees set forth in Schedule 1 in
the sum of US$42,000 per month in aggregate (such sum to include all
applicable tax). These amounts may only be drawn at the end of the
month to which they relate;
9.5 a further amount of US$250,000 shall be advanced to allow the payment
to Business Standard of a further payment of US$250,000, but only upon
production to BP of a copy of a letter addressed to ZNG from the
relevant license authority(ies) of the Ministry of Natural Resources
in the Russian Federation confirming that the licenses detailed in
such clause above have been awarded to ZNG in a form acceptable to BP;
9.6 US$15,148 to pay amounts owing to OOO Geo Data Consulting for
supervisory control over gravimetric and seismic surveys performed by
Bashneftegeofizika and Bazhenov Expedition;
9.7 US$4,313 to discharge all sums outstanding to JSC Central Geophysical
Expedition for preparation of costs estimate and technical plan for
seismic works;
9.8 US$24,680 to be used as a deposit for Russian banking and currency
regulation requirements; and
9.9 US$2,015 to allow for foreign exchange rate fluctuation and to cover
for applicable bank charges in respect of the Initial Loan.
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10. The Initial Loan shall be conditional, inter alia, upon ZNG entering
into the Loan Agreement, SEG providing a guarantee in respect of ZNG's
liability in respect of the Initial Loan in the form of Annexure 2
(the "GUARANTEE"), providing security in the form of the pledge and
security agreement annexed at Annexure 3 (the "SECURITY AGREEMENT")
and ZNG entering into the License Agreement (as defined below). SEG
shall procure that ZNG shall obtain any consents and approvals
required from banks or authorities in relation to the making of the
Initial Loan or any payments to be made thereunder. For the avoidance
of doubt, the Loan Agreement, the Guarantee, the Security Agreement
and the License shall survive the termination or lapse of this
Agreement.
11. To the extent ZNG requires further sums prior to Completion in
addition to the Initial Loan for auction fees in respect of
exploration licenses detailed in clause 9.3 in excess of the amounts
referred to in clauses 9.3 and 9.5 above, then the parties will
cooperate with each other to calculate and minimize the amounts
required by ZNG, and, on request by SEG, BP will consider in good
faith such request for further funding, provided that any further
funding will be provided by BP at its discretion and on terms
acceptable to it.
12. It is the intention of the parties that following Completion BP shall
be responsible for funding JV CO and in particular for making or
procuring loans (the "LOANS") to JV CO in the following amounts and
for the following purposes as and when the parties agree they are
required:
Amount (US Dollars) Purpose
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Up to $75,000 To cover SEG's legal, accounting
and regulatory costs associated
with establishing JV CO and
transferring ZNG into it.
Up to $700,000 2D Seismic testing by ZNG's
contractors on a licence block to
be agreed between the parties and
shallow core sampling in the Kurgan
Area and the reprocessing of
volumetric and magnetic reports.
$100,000 to $400,000 each Preparation, due diligence, legal
costs and licensing fees for three
new proven or producing licences
for ZNG in Khanty Mansyisk and
Tyumen Regions.
Approximately $500,000 Working capital for JV CO and ZNG.
$583,000 In respect of outstanding debts and
commitments of SEG and ZNG as at 31
December 2004 not covered in clause
9 above. To be paid on Completion.
This payment shall only be made
after the scope of work on West
Suersky has been agreed by BP and
the work programme contained in the
four exploration licences has been
amended to BP's satisfaction.
To be agreed by the parties The drilling and ancillary work on
West Suersky and Mokrousovsky and
any new fields as agreed by the
parties.
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13. The Loans to be made or procured by BP shall be on proper commercial
terms as are acceptable to BP and SEG and full debentures, charges and
other appropriate security over JV CO's and ZNG's businesses,
undertakings and other assets shall be taken by BP as security
therefor upon the making of the Loans. The parties shall cooperate
with each other in good faith to agree the most appropriate financing
structure for the Loans (if any) as is necessary or desirable on the
grounds of tax and cost efficiency. Unless otherwise agreed by BP, on
Completion BP shall make an additional loan to JV CO equal to the
amount outstanding under the Initial Loan to enable JV CO to make an
inter-company loan to ZNG to enable it to repay the Initial Loan. SEG
shall not be required to provide a guarantee or security in respect of
JV CO's obligations under the Loans (and it is acknowledged that SEG
shall be released from its obligations under the Guarantee and
Security Agreement following Completion).
14. If following Completion BP's ordinary shares are admitted to listing
on the Alternative Investment Market of the London Stock Exchange (or
any other recognised investment exchange or overseas investment
exchange (as such expressions are defined in the Financial Services
and Markets Act 2000)) (an "IPO"), BP shall (to the extent it may
lawfully do so) procure that sufficient sums are provided as loans to
ZNG to allow it to repay amounts owed to the parties below, but only
on condition that such persons will apply such amounts in subscribing
for such number of ordinary shares in BP in connection with the IPO as
would have a value at the price per share of any placing carried out
in connection with the IPO (or if there is no such placing, at the
opening trading price of such shares):
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14.1 US$250,000 to Business Standard; and
14.2 US$500,000 to SEG or its nominee.
LICENCE AGREEMENT
15.
15.1 SEG shall procure that ZNG shall provide to BP a licence in respect of
certain data on the terms of licence agreement annexed at Annexure 4 (the
"LICENCE AGREEMENT").
15.2 BP agrees that it will in the period prior to Completion provide
funding for the fees of Exploration Consultants Limited incurred in processing
the data to be licensed pursuant to the Licence Agreement, provided that:
(a) the parties shall on Completion procure that JV CO shall utilize the
Loans to reimburse BP for such costs; and
(b) if Completion does not occur, SEG shall reimburse such costs (as
notified in writing to SEG) to BP on 31 October 2005.
EXISTING LICENCES
16. As soon as reasonably practicable after the date hereof, the parties
shall cooperate with each other in good faith to procure appropriate amendment
to the work programme set out in the Existing Licences.
JOINT VENTURE ARRANGEMENTS
17. The parties shall following the date hereof negotiate with each other in
good faith with respect to the arrangements that will apply to the Joint
Venture, in particular, the contents of the documents set out below which the
parties will be required to enter into (or agree in the case of the document
referred to at clause 17.3) at Completion in relation to the Joint Venture
(together, the "JOINT VENTURE DOCUMENTATION"). BP shall arrange for drafts of
the Joint Venture Documentation to be provided to SEG within a reasonable time
prior to 31 July 2005.
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17.1 a shareholders' agreement relating to each of the parties shares in JV
CO and setting out terms governing the management of JV CO and setting
out procedures to be followed by the parties with respect to the
operation of JV CO and its business;
17.2 articles of association of JV CO;
17.3 a business plan for JV CO's business;
17.4 an agreement confirming the sale and purchase of the Option Shares on
Completion which shall contain customary warranties and indemnities to
be given by SEG relating to, inter alia, ZNG, JV CO, SEG and the
Option Shares; and
17.5 such loan agreements and security documentation as may be required to
give effect to the Loans.
18. It is the parties intention that the following provisions shall apply
in relation to the Joint Venture and shall be provided for in the
Joint Venture Documentation. The parties will consider appropriate
alternative structures and jurisdictions if that becomes necessary or
desirable on the grounds of tax and cost efficiency:
18.1 the business of the joint venture will be the exploration for and
production and sale of oil and gas and associated and ancillary
activities;
18.2 the parties shall draw up and approve an initial business plan to be
attached to the shareholders agreement. The business plan will be
reviewed by the board of JV CO at regular intervals and updated
annually;
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18.3 the share capital of JV CO shall be held in equal shares by the two
parties;
18.4 overall management and supervision of the Joint Venture shall be the
responsibility of the board of JV CO. The chairman of the boards of JV
CO and ZNG shall be Xxxxx Xxxxxx. Overall financial control of the
boards of JV CO and ZNG will rest with BP so long as any of the
Initial Loan or the Loans remain outstanding with the precise
mechanism to effect this to be agreed between the SEG and BP. A quorum
of the board of JV CO shall require at least one director appointed by
each party;
18.5 the initial appointments to the board of JV CO shall be:
SEG BP
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Xxxxx Xxxxxx Simon Xxxxx Xxxxxx
Xxxxxxx Xxxxx Xxxxx Xxxxx Xxxxxxx Xxxxxxx
18.6 the Chief Executive of JV CO shall be Simon Xxxxx Xxxxxx;
18.7 BP shall be entitled to appoint at all times the Reservoir Engineer,
Drilling Supervisor, Finance Controller and Logistic & Procurement
Supervisor for JV CO and ZNG (provided BP shall consult with SEG with
regard to suitable candidates for the position of Finance Controller);
18.8 certain key decisions affecting the Joint Venture shall be reserved
for mutual agreement between SEG and BP as shareholders. Final
identification of these matters will be for the Joint Venture
Documentation;
18.9 future management fees to be charged to JV CO by SEG and BP as well as
payment of dividends shall be agreed between SEG and BP provided that
no dividend shall be paid until all of the Initial Loan and the Loans
are repaid;
18.10 BP will procure the appointment of Xxxxx Xxxxxx (or Xxx Xxxxx) as a
director of BP after Completion to the extent requested by SEG; and
18.11 BP and SEG shall be free to pursue other business interests provided
that they do not compete with the business of either the Joint Venture
or ZNG (including but not limited to the Existing Licences, the other
licences referred at Recital B and the licences detailed in clause 9.3
(the area to which such licences relate being referred to as the
"AREA")) and SEG will offer to BP, or procure BP is offered, a right
of first refusal on commercial arms length terms on any oil and gas
business proposed to be done by SEG or ZNG in the Area .
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CONFIDENTIALITY AND ANNOUNCEMENTS
19. Each of the parties shall keep confidential and shall not disclose to
any other person, nor use for any purpose except the purposes of the
Joint Venture, the existence of this Agreement and any matter
contemplated by it and any information obtained from the other party
as a result of negotiating, entering into or implementing the Joint
Venture, provided that this restriction shall not apply to information
which:
(a) is required to be disclosed by operation of law, any stock
exchange regulations (including, for the avoidance of doubt, as
may be required in connection with the marketing of an IPO of
BP), any binding judgment or order or any requirement of a
competent authority;
(b) is reasonably required to be disclosed in confidence to a party's
professional advisers for use in connection with the Joint
Venture and/or matters contemplated herein; or
(c) is or becomes within the public domain (otherwise than through
the default of the recipient party).
20. No public announcement or press release in connection with the subject
matter of this Agreement shall be made or issued by or on behalf of
either party without the prior written approval of the other, except
such as may be required by law or by any stock exchange or by any
governmental authority.
GOVERNING LAW
21. This Agreement shall be governed by English law. Each party
irrevocably agrees to submit to the exclusive jurisdiction of the
courts of England and Wales over any claim or matter arising under or
in connection with this Agreement.
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NOTICE
22. Any notice to be given pursuant to the terms of this Agreement shall
be given in writing to the party due to receive such notice at the
address set out below or such other address as may have been notified
to the other parties in accordance with this clause. Notice shall be
delivered personally or sent by first class pre-paid recorded delivery
or registered post (air mail if overseas) or by facsimile transmission
to the numbers and parties detailed below and shall be deemed to be
given in the case of delivery personally on delivery and in the case
of posting (in the absence of evidence of earlier receipt) 48 hours
after posting (six days if sent by air mail) and in the case of
facsimile transmission on completion of the transmission provided that
the sender shall have received printed confirmation of transmission.
SEG Xxxxx Xxxxxx Fax:
000 Xxxxxxx Xxxxxx x0 (000) 000-0000
6th floor
Xxx Xxxx, XX 00000
XXX
BP Attn: Xxxxx Xxxxxx Fax:
00x Xxxxxxx Xxxxxx x00 00 0000 0000
Xxxxxx X0X 0XX
XX
COUNTERPARTS
23. This Agreement may be executed in any number of counterparts each of
which when executed by one or more of the parties hereto shall
constitute an original but all of which shall constitute one and the
same document.
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STATUS
24. This Agreement is intended to be legally binding. The parties confirm
that they have each received independent legal advice on the subject
matter of this Agreement.
FURTHER ASSURANCE
25. The parties shall do or procure to be done all such further acts and
things and execute or procure the execution of all such other
documents as may be required for the purpose of giving effect to the
provisions of this Agreement.
TIME OF THE ESSENCE
26. Time shall be of the essence of this Agreement, both as regards times,
dates and periods specified in the Agreement and as to any times,
dates or periods that may by Agreement between the parties be
substituted for any of them.
THIRD PARTIES
27. No term of this agreement shall be enforceable under the Contracts
(Rights of Third Parties) Xxx 0000 by a third party.
ENTIRE AGREEMENT
28. This Agreement, and the other documents referred to in it, contain the
entire agreement of the parties with respect to the subject matter
hereof, and all prior or contemporaneous understandings or agreements,
whether written or oral, between the parties with respect to such
subject matter are hereby superseded in their entireties.
ASSIGNMENT
29. Neither party shall without the prior written consent of the other
party assign, transfer, charge or deal in any other manner with this
agreement or any of its rights under it, or purport to do any of the
same, nor sub-contract any or all of its obligations under this
agreement.
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VARIATION
30. No variation of this Agreement or of any of the documents referred to
in it shall be valid unless it is in writing and signed by or on
behalf of each of the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
Signed for SIBERIAN ENERGY GROUP INC
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by /s/ Xxxxx Xxxxxx (duly authorised signatory)
Xxxxx Xxxxxx
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Signed for BALTIC PETROLEUM LIMITED
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by /s/ Xxxxx X. Xxxxxx (duly authorised signatory)
Xxxxx X. Xxxxxx
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