Oil and Gas Interests

12 Months Ended

Feb. 28, 2012

Note 5 – Oil and Gas Interests

The Company has oil and gas interests in the North Sea and the United States and has not yet determined whether these properties contain reserves that are economically recoverable. In connection with the acquisition of Renfro Energy LLC, the Company acquired oil and gas interests on proven properties. Oil and gas interests consisted of the following at February 28 and February 28, 2012:

	February 28, 2012									February 28, 2012
	United			United						United			United
	States			Kingdom			Total			States			Kingdom			Total

Unproved properties:
acquisition costs	$	3,701,871		$	23,439		$	3,725,310		$	3,701,871		$	23,439		$	3,725,310
exploration costs		2,347,394			4,084,668			6,432,062			2,347,394			4,084,668			6,432,062

		6,049,265			4,108,107			10,157,372			6,049,265			4,108,107			10,157,372

Proved properties:
acquisition costs		248,940			—			248,940			—			—			—

Less: Write-down of oil & gas interests		(5,938,576	)		(4,108,107	)		(10,046,683	)		(5,938,576	)		(4,108,107	)		(10,046,683	)
Less: Incidental revenue		(110,689	)		—			(110,689	)		(110,689	)		—			(110,689	)

	$	248,940		$	—		$	248,940		$	—		$	—		$	—

During the quarter ended August 31, 2010, the Company decided to no longer continue with exploration activities in the unproved interests and is exploring alternatives of disposing of its existing interests in the North Sea and the United States.

North Slope, Alaska, United States

On May 29, 2007, the Company entered into a Lease Purchase and Sale Agreement with a company to acquire a combined 100% working interest in 12 state-issued oil and gas leases in the North Slope of Alaska. These leases are subject to a royalty of 16.66667% to the State of Alaska and a private royalty equal to 5% of net revenue. In consideration for the oil and gas leases, the Company issued 4,000,000 restricted common shares of the Company valued at $1,001,702, the transferor’s historical cost. The valuation is based the SEC Staff Accounting Bulletin, Topic 5, G.

Pursuant to underlying agreements on the property, the Company is obligated to drill one test well to at least 10,000 feet on or before February 14, 2011, four test wells to at least 4,000 feet on or before February 20, 2012, and one test well to at least 4,000 feet on or before January 16, 2012. The Company is currently unable to quantify an estimate of the cost of these wells.

North Slope, Alaska, United States (Continued)

By a purchase agreement dated October 10, 2007 and amended February 2, 2007, the Company acquired 8 additional oil and gas leases in the North Slope of the State of Alaska for $850,000 including cash of $250,000 and $600,000 paid by the issuance of 80,000 common shares of the Company. The fair value of the shares issued was $964,000 (based on the quoted market price of the Company’s common shares on the transaction date) and consequently a further $364,000 has been recorded for this portion of the purchase agreement. These leases are subject to a royalty of 16.66667% to the State of Alaska and a private royalty equal to 5%. Two of the leases acquired pursuant to this agreement are part of the Cook Inlet project described below.

On January 28, 2009, the Company entered into an agreement with the original lease vendors (the “Payers”) regarding twelve of the North Slope oil and gas leases (the “Twelve Leases”). Under the terms of the Agreement, the Payers agreed to use their best efforts to make, on the Company’s behalf, annual rental payments for the Twelve Leases totaling up to $64,980 on or before the February 1, 2009 due date.

The Company agreed to repay to the Payers by March 2, 2009 any portion of the Payments made by the Payers (the “Repayment Amount”). The Repayment Amount is subject to an 18% interest rate per annum. The Company also granted the Payers a security interest in the Company’s right, title, and interest in the Twelve Leases. The Company further agreed to transfer and assign its right, title, and interest in the Twelve Leases to the Payers in the event of the Company’s failure to pay the Repayment Amount in a timely manner.

The Company failed to pay the Repayment Amount and by an agreement dated May 14, 2009, the Payers agreed to extend the repayment date until August 14, 2009 in return for the lease assignment documents for the Twelve Leases being executed and delivered into escrow.

The Company entered into an agreement dated May 16, 2009 with the Payers in respect of five of the remaining North Slope oil and gas leases (the “Five Leases”). Pursuant to this agreement, the Payers made annual lease payments totaling $25,126 for the Five Leases on behalf of the Company. The amount paid on behalf of the Company is subject to an 18% interest rate per annum. The Company also executed an assignment to the Payers of the Company’s right, title, and interest in the Five Leases to be delivered into escrow in the event the Company fails to repay the payers by August 14, 2009.

The Company could provide no assurance that it would be able to obtain financing arrangements to repay the Payers by August 14, 2009 and consequently, all costs incurred of $2,401,282 were written off on the statement of operations during the year ended February 28, 2009. During the years ended February 28, 2010, the Company failed to repay the Payers by the due date and assignment of the related leases to the Payers was triggered. Consequently, the fees were no longer payable and outstanding lease fees and accrued interest of $98,400 were recorded as a gain on recovery of payables.

Anglesey, North Sea, United Kingdom

Pursuant to a farm-in agreement dated June 8, 2007, the Company agreed to acquire a 33.33% interest in two UK petroleum production licenses (“Licenses”). The Licenses are located in the UK North Sea and have since been merged into one traditional license. As consideration for the Licenses, the Company agreed to fund 100% of the seismic costs and its 33.33% share of the License budget costs as agreed by the parties. The Company also has the option to acquire an additional 26.67% interest in the Licenses by paying an additional 46.67% of the dry-hole costs of an exploration well.

The option is effective from completion of the transfer of the assigned interest to the Company and shall continue to be valid and exercisable until 28 days after receipt by the Company of the processed seismic data and final interpretation.

During the year ended February 28, 2010, the Company returned the Licenses to the UK government and consequently all costs incurred of $2,512,856 were written-off on the statement of operations during the year ended February 28, 2010.

Spears Gas Well, Texas, United States

Pursuant to a subscription agreement dated October 9, 2007, the Company acquired a 22.5% joint venture interest in a gas well called the Spears Gas Unit 2, Well #1 in the Gomez Field, Pecos County, Texas in consideration for US$500,000.

As at February 28 and February 28, 2012, the gas well is shut-in awaiting further financing.

Cook Inlet, Alaska, United States

By a purchase agreement dated October 10, 2007, the Company acquired 6 oil and gas leases located in Cook Inlet of the State of Alaska for $750,000, payable in installments on or before March 7, 2008. At February 28, 2008, the Company had paid $750,000. Included in these leases were 3 unissued leases that the vendors owned the rights thereto. The leases are subject to a royalty of 16.66667% to the State of Alaska and a private royalty equal to 5% of net revenue.

Subsequent to February 28, 2009, the Company entered into an agreement dated May 29, 2009 with the Payers in respect of these three oil and gas leases (the “Three Leases”). Pursuant to this agreement, the Payers made annual lease payments totaling $25,780 for the Three Leases on behalf of the Company. The amount paid on behalf of the Company is subject to an 18% interest rate per annum. The Company also executed an assignment to the Payers of the Company’s right, title, and interest in the Five Leases to be delivered into escrow in the event the Company fails to repay the payers by August 14, 2009.

The Company could provide no assurance that it would be able to obtain financing arrangements to repay the Payers by August 14, 2009 and consequently, all costs incurred of $1,061,727 were written-off on the statement of operations during the year ended February 28, 2009. During the years ended February 28, 2010, the Company failed to repay the Payers by the due date and the assignment of the related leases to the Payers was triggered. Consequently, outstanding lease fees and accrued interest of $26,743 were recorded as a gain on write off of amounts payable.

Bourbon, North Sea, United Kingdom

On February 16, 2007, the Company entered into a farm-out agreement dated February 8, 2007 wherein the Company would be assigned a total of 46% interest in a license block in the UK North Sea. In consideration for the assignment, the Company must pay for 89% of the cost of drilling and exploration well.

The Company is also required to pay for 46% of license costs. On January 24, 2008, the Company agreed to jointly participate with another company to identify a potential farm-in or acquisition opportunity and transferred a 4.6% carried interest in the license block to that company until a full development plan is approved by the U.K. government. Thereafter, that company will be responsible for its 4.6% share of the costs (10% of the Company’s interest). Subsequent to the transfer, this company became related to the Company as two of its beneficial owners became directors of the Company.

During the year ended February 28, 2009, the license holders terminated the Farm-out agreement effective February 27, 2009. Consequently, all costs incurred of $1,419,627 were written off on the statement of operations during the year ended February 28, 2009.

Geneseo-Edwards, Kansas, United States

By a letter agreement dated February 27, 2008, the Company purchased an 80% net revenue interest in three oil leases in Ellsworth County, Kansas, USA by the payment of $80,000. The leases are subject to a landowner royalty of 12.5% and an overriding royalty of 7.5% retained by vendors. The Company was required to drill at least one well on each lease before the leases expire on February 19, 2008, February 19, 2009 and February 28, 2009 or pay the vendor a penalty of $150,000.

During the year ended February 28, 2009 the Company had drilled four wells on these leases and earned incidental revenue of $90,689 from two of these wells, which was credited against oil and gas interests on the consolidated balance sheet as a result of the wells not yet reaching full commercial production. Since January 2009 production has been suspended due to the need for implementation of water disposal facilities for which further funding is not currently available.

Geneseo-Edwards, Kansas, United States (Continued)

During the year ended February 28, 2009, two trade creditors issued mechanical liens against the oil and gas leases and its facilities for non-payment of outstanding invoices totaling $528,079.

During the year ended February 28, 2010, the Company assigned its interest in these oil and gas leases to a creditor in return for a loan rescheduling (Note 5) and entering into an agreement not to sue the Company for defaulting on a loan agreement. The creditor also received 15,000,000 common shares pledged as security from the Company’s treasury against the notes payable.

Pursuant to the above, costs incurred of $1,975,567 were written-off on the statement of operations and deficit for the year ended February 28, 2009 leaving a net book value of $20,000 recovered during the year period ended February 28, 2010 for the sale of certain furniture and equipment held for use on the property.

UK Onshore, United Kingdom

On June 3, 2008, the Company was granted a 90% interest in four UK petroleum production licenses, located in the south of England. In order to maintain the licenses, the Company must undertake seismic exploration estimated to cost $500,000 within the six year term of the license.

Pursuant to a letter agreement dated September 5, 2008, the Company will pay 100% of all costs, expenses, liabilities and obligations arising in respect of operations conducted in respect of each license block until a filed development plan is formally approved by the UK Secretary of State responsible for such matters, for the development of a discovery of petroleum in the blocks. Thereafter, the Company will each be responsible for 90% of all costs, expenses, liabilities and obligations.

25th Round License Blocks 13/17 & 210/20e, United Kingdom

Pursuant to a letter agreement dated September 5, 2008, the Company was granted a 90% interest in an application made for four UK petroleum production licenses. In order to maintain the licenses, the Company must carry out geological and seismic modeling before forming up a drilling location and must begin drilling within the four year term of the license.

Pursuant to the letter agreement, the Company will pay 100% of all costs, expenses, liabilities and obligations arising in respect of operations conducted in respect of each license block until a filed development plan is formally approved by the UK Secretary of State responsible for such matters, for the development of a discovery of petroleum in the blocks. Thereafter, the Company will each be responsible for 90% of all costs, expenses, liabilities and obligations.

On February 12, 2008, the Company was formally notified by the UK Department of Energy and Climate Change (DECC) of its success in the 25th Seaward Licensing Round Awards, the rights to explore and develop the block 13/17 concession in the North Sea by the UK government.

On May 1, 2009, the Company received notification from the UK Department of Energy and Climate Change that this Secretary of State’s offer of this license in the 25th round had been withdrawn due to fact that they consider there to have been a material change in the circumstances relating to the Company having adequate funding arrangements already in place. Consequently, all costs incurred of $87,354 were written-off on the statement of operations and deficit for the year ended February 28, 2009.

FOX PETROLEUM INC. 10-K