Tekoil executes farm-out agreement with Ptarmigan Resources

Offshore staff

The Woodlands, Texas -- Tekoil & Gas Corp. has executed a farm-out agreement with Newfoundland & Labrador-based Ptarmigan Resources Ltd. in offshore exploration license EL-1069 north of the Port au Port peninsula in western Newfoundland. The license covers 140,000 hectares (346,500 acres) in the shallow waters of the Gulf of St. Lawrence in proximity to the markets of eastern Canada and the northeastern United States.

The agreement requires Tekoil to pay $250,000 to Ptarmigan. The money is a drilling deposit to secure a one-year extension granted by the Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB). The agreement also requires Tekoil to drill an onshore-to-offshore exploration well in 2007 (Phase 1), which will test an offshore structure, and as the validation well, will extend the lease until January 2011. Tekoil will earn 33.3% in the license for completing Phase 1.

The company then will conduct an offshore 3D seismic program (Phase 2) by late 2008 to map in more detail four offshore features Ptarmigan identified using 2D seismic data. Phase 2 will earn Tekoil a further 26.7% of the license, increasing the company's interest to 60%.

Tekoil and Ptarmigan then plan to drill an offshore exploration well (Phase 3), for which the companies will share the drilling costs � 60% Tekoil and 40% Ptarmigan. Should Tekoil assume100% of the drilling expenses, the company will earn an additional 20% interest in the license, for a total of 80% interest, subject to government royalties.

Tekoil estimates the total cost of Phases 1, 2, and 3 at $6 million in 2007, $10 million in 2008, and $25 million in 2009.

If commercial hydrocarbons are discovered during the term of the exploration license, license holder has the exclusive right to apply to the C-NLOPB for a significant discovery license (SDL). Current regulations allow the SDL grantee to hold the license without term at an accelerated rate of annual rentals. The holder of the SDL further has the exclusive right to apply for a production license at any time once the SDL has been granted

1/5/2007