Exhibit 10.1

 

 

 

Option Agreement

By and Between

TEXCAL ENERGY SOUTH TEXAS, L.P.

(“Optionor”)

and

DENBURY ONSHORE, LLC

(“Optionee”)

dated

November 1, 2006

 

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TABLE OF CONTENTS

 

 

 

 

Page

ARTICLE 1

 

DEFINITIONS

 

1

 

 

 

 

 

ARTICLE 2

 

OPTION TO PURCHASE

 

13

 

 

 

 

 

2.1

 

Option to Purchase

 

13

 

 

 

 

 

2.2

 

Term of Option

 

14

 

 

 

 

 

2.3

 

Initial Term Installments

 

14

 

 

 

 

 

2.4

 

Exercise of Option to Purchase

 

14

 

 

 

 

 

2.5

 

Payment for Assets

 

14

 

 

 

 

 

2.6

 

Closing

 

16

 

 

 

 

 

2.7

 

Development Plan and Capital Expenditure Commitment

 

16

 

 

 

 

 

ARTICLE 3

 

OPERATIONS

 

17

 

 

 

 

 

3.1

 

Operations of Hastings Field Prior to Exercise of Option

 

17

 

 

 

 

 

3.2

 

Operations After Option Exercise

 

18

 

 

 

 

 

3.3

 

Simultaneous Use of Surface

 

18

 

 

 

 

 

ARTICLE 4

 

OPTIONOR’S REPRESENTATIONS AND WARRANTIES

 

19

 

 

 

 

 

ARTICLE 5

 

OPTIONEE’S REPRESENTATIONS AND WARRANTIES

 

21

 

 

 

 

 

ARTICLE 6

 

ACCESS TO INFORMATION AND INSPECTIONS

 

22

 

 

 

 

 

6.1

 

Title Files

 

22

 

 

 

 

 

6.2

 

Other Files

 

22

 

 

 

 

 

6.3

 

Confidentiality Agreement

 

23

 

 

 

 

 

6.4

 

Inspections

 

23

 

 

 

 

 

6.5

 

No Warranty or Representation on Optionor’s Information

 

24

 

 

 

 

 

6.6

 

Amendments to Exhibits

 

24

 

 

 

 

 

ARTICLE 7

 

ENVIRONMENTAL MATTERS AND ADJUSTMENTS

 

24

 

 

 

 

 

7.1

 

Investigation

 

24

 

 

 

 

 

7.2

 

Waiver of Defects

 

25

 

 

 

 

 

7.3

 

Remedy

 

25

 

 

 

 

 

7.4

 

Default Basket

 

25

 

 

 

 

 

7.5

 

Closing

 

26

 

 

 

 

 

ARTICLE 8

 

TITLE DEFECTS AND ADJUSTMENTS

 

26

 

 

 

 

 

8.1

 

Existing Title; Definitions

 

26

 

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8.2

 

Notice of Title Defects

 

29

 

 

 

 

 

8.3

 

Title Defect Adjustment

 

30

 

 

 

 

 

8.4

 

Environmental Defect and Title Defect Values

 

31

 

 

 

 

 

8.5

 

Title Warranty

 

32

 

 

 

 

 

ARTICLE 9

 

PREFERENTIAL PURCHASE RIGHTS AND CONSENTS OF THIRD PARTIES

 

33

 

 

 

 

 

9.1

 

Actions and Consents

 

33

 

 

 

 

 

ARTICLE 10

 

COVENANTS OF OPTIONOR AND OPTIONEE

 

34

 

 

 

 

 

10.1

 

Covenants of Optionor Pending Closing

 

34

 

 

 

 

 

10.2

 

Limitations on Optionor’s Covenants Pending Closing

 

35

 

 

 

 

 

10.3

 

Covenents of Optionee Following Exercise of Option

 

36

 

 

 

 

 

10.4

 

Hastings Field Call on CO2

 

36

 

 

 

 

 

10.5

 

Ownership of CO2

 

36

 

 

 

 

 

10.6

 

Environmental Liabilities Related to Events and Activities Occuring Prior to
October 1, 2004

 

36

 

 

 

 

 

ARTICLE 11

 

CLOSING CONDITIONS

 

37

 

 

 

 

 

11.1

 

Optionor’s Closing Conditions

 

37

 

 

 

 

 

11.2

 

Optionee’s Closing Conditions

 

37

 

 

 

 

 

ARTICLE 12

 

CLOSING

 

38

 

 

 

 

 

12.1

 

Closing

 

38

 

 

 

 

 

12.2

 

Optionor’s Closing Obligations

 

38

 

 

 

 

 

12.3

 

Optionee’s Closing Obligations

 

39

 

 

 

 

 

12.4

 

Joint Closing Obligations

 

39

 

 

 

 

 

12.5

 

Final Settlement/Purchase Price Adjustments

 

41

 

 

 

 

 

ARTICLE 13

 

LIMITATIONS ON WARRANTIES AND REMEDIES

 

41

 

 

 

 

 

ARTICLE 14

 

CASUALTY LOSS AND CONDEMNATION

 

42

 

 

 

 

 

ARTICLE 15

 

DEFAULT AND REMEDIES

 

42

 

 

 

 

 

15.1

 

Optionor’s Remedies

 

42

 

 

 

 

 

15.2

 

Optionee’s Remedies

 

42

 

 

 

 

 

15.3

 

Effect of Termination

 

42

 

 

 

 

 

ARTICLE 16

 

ASSUMPTION AND INDEMNITY

 

42

 

 

 

 

 

16.1

 

Asumed Obligations; Pre-Closing Liabilities

 

42

 

 

 

 

 

16.2

 

Optionee’s Indemnity

 

43

 

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16.3

 

Optionor’s Indemnity

 

43

 

 

 

 

 

16.4

 

Negligence

 

44

 

 

 

 

 

16.5

 

Broker or Finder’s Fee

 

44

 

 

 

 

 

16.6

 

Threshold and Maximum Amounts

 

44

 

 

 

 

 

16.7

 

Claim Procedures

 

44

 

 

 

 

 

ARTICLE 17

 

GAS IMBALANCES

 

45

 

 

 

 

 

ARTICLE 18

 

PREFERENTIAL RIGHT TO PURCHASE AND AREA OF MUTUAL INTEREST PROVISION

 

46

 

 

 

 

 

18.1

 

Preferential Right to Purchase

 

46

 

 

 

 

 

18.2

 

Area of Mutual Interest Provision

 

47

 

 

 

 

 

ARTICLE 19

 

MISCELLANEOUS

 

49

 

 

 

 

 

19.1

 

Receivables and other Excluded Funds

 

49

 

 

 

 

 

19.2

 

Public Announcements

 

49

 

 

 

 

 

19.3

 

Filing and Recording of Assignments, etc

 

50

 

 

 

 

 

19.4

 

Further Assurances and Records

 

50

 

 

 

 

 

19.5

 

Notices

 

51

 

 

 

 

 

19.6

 

Incidental Expenses

 

52

 

 

 

 

 

19.7

 

Waiver

 

52

 

 

 

 

 

19.8

 

Binding Effect; Assignment

 

53

 

 

 

 

 

19.9

 

Taxes

 

53

 

 

 

 

 

19.10

 

Audits

 

54

 

 

 

 

 

19.11

 

Governing Law

 

54

 

 

 

 

 

19.12

 

Mediation and Arbitration

 

54

 

 

 

 

 

19.13

 

Entire Agreement

 

54

 

 

 

 

 

19.14

 

Severability

 

54

 

 

 

 

 

19.15

 

Exhibits

 

55

 

 

 

 

 

19.16

 

Survival

 

55

 

 

 

 

 

19.17

 

Subsequent Adjustments

 

55

 

 

 

 

 

19.18

 

Counterparts

 

55

 

 

 

 

 

19.19

 

Subrogation

 

55

 

 

 

 

 

19.20

 

Suspended Monies

 

56

 

 

 

 

 

19.21

 

Optionee as Operator

 

56

 

 

 

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OPTION AGREEMENT

                This Option Agreement (“Agreement”), dated as of  November 1,
2006, is by and between TexCal Energy South Texas, L.P. whose address is 1021
Main Street, Suite 2500, Houston, Texas 77002 (“Optionor”), and Denbury Onshore,
LLC, whose address is 5100 Tennyson Parkway, Suite 1200, Plano, Texas 75024
(“Optionee”).  Optionor and Optionee are sometimes together referred to herein
as “Parties”.

R E C I T A L S

                WHEREAS, Optionor owns certain oil and gas leasehold interests
and related assets more fully described on the exhibits hereto; and

                WHEREAS, Optionor desires to grant, and Optionee desires to
acquire, the right and option to purchase these interests and related assets on
the terms and conditions hereinafter provided;

                NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, Optionor and Optionee hereby agree as follows:

ARTICLE 1. - DEFINITIONS

1.1.         “Acquiring Party” has the meaning specified in Section 18.2(b).

1.2.         “Agreement” shall mean this Option Agreement between Optionor and
Optionee.

1.3.         “Agreement Effective Time” shall mean 7:00 a.m., Central Standard
Time, on November 1, 2006.

1.4.         “Area of Mutual Interest” has the meaning specified in Section
18.2(a)

1.5.         “Asset Operating Expense” has the meaning specified in Section
2.5(b)(i)(3).

1.6.         “Asset Payout Amount” has the meaning specified in Section
1.26(d)(4).

1.7.         “Assets” shall mean the following described assets and properties
(except to the extent constituting Excluded Assets):

(a)           the Leases;

(b)           the Personal Property and Incidental Rights;

(c)           the Inventory Hydrocarbons;

 

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(d)           the West Hastings Unit; and

(e)           the East Hastings Field.

1.8.         “Assumed Obligations” shall mean with respect to the Assets:

(a)           all Environmental Obligations or Liabilities (i) related to, or
arising from, events first occurring after the Exercise Effective Time, and
(ii) related to, or arising from, events first occurring or in existence prior
to October 1, 2004, to the extent and as set out in Section 10.6;

(b)           all obligations with respect to gas production, sales or, subject
to Article 17, processing imbalances with third parties;

(c)           all liabilities, duties, and obligations that arise out of the
ownership, operation or use of the Assets after the Exercise Effective Time,
other than Environmental Obligations or Liabilities, including, but not limited
to, all liabilities, duties, and obligations, express or implied, imposed upon
Optionor herein under the provisions of the Leases and any and all assignments,
subleases, farmout agreements, assignments of overriding royalty, joint
operating agreements, easements, rights-of-way, and all other contracts,
agreements and instruments affecting the Leases, or the premises covered
thereby, whether recorded or unrecorded, and under all applicable laws, rules,
regulations, orders and ordinances, excluding the claims and suits set forth in
Exhibit “H” and any claims or suits identified in the Option Exercise Notice
which relate to liabilities incurred after the Agreement Effective Time and
prior to Closing.

1.9.         “Capital Costs” has the meaning specified in the definition of
Excluded Assets.

1.10.       “Cash Payment” has the meaning specified in Section 2.5.

1.11.       “Casualty Loss” has the meaning specified in Article 14.

1.12.       “Claims” has the meaning specified in Sections 16.2.

1.13.       “Closing” has the meaning specified in Section 12.1.

1.14.       “Closing Date” has the meaning specified in Section 12.1

1.15.       “Conditions Precedent” has the meaning specified in Section 2.1.

1.16.       “Consents” has the meaning specified in Section 9.1(b)

1.17.       “Cure Period” has the meaning specified in Section  8.3(a)

1.18.       “D&M” has the meaning specified in Section 2.5(b)

1.19.       “D&M Report” has the meaning specified in Section 2.5(b)

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1.20.       “Defensible Title”, subject to and except for the Permitted
Encumbrances has the meaning specified in Section 8.1(a).

1.21.       “Designated Interest” shall mean: (i) as to the West Hastings Unit,
a working interest of 89.33682% and a net revenue interest of 78.94105%; (ii) as
to the East Hastings Field, a working interest of 100% and a net revenue
interest of 87.5%; (iii) as to a Lease in the West Hastings Unit, the working
interest and net revenue interest set forth for such Lease in Exhibit “C”; (iv)
as to a Lease in the East Hastings Field, the working interest and net revenue
interest set forth for such Lease in Exhibit “C”; as to a well in the West
Hastings Unit, the working interest and net revenue interest set forth for such
well in Exhibit “B-1”; as to a well in the East Hastings Field, the working
interest and net revenue interest set forth for such well in Exhibit “B-2”; and,
as to any other Asset, the ownership interest of Optionor in such Asset to be
conveyed to Optionee, less and except the Optionor’s reserved overriding royalty
interest as set forth in Section 1.27(a).  If following the Agreement Effective 
and prior to the Option Exercise Date Optionor acquires additional interests in
the Hastings Field, the Designated Interests shall be adjusted to reflect such
acquisitions(s).  The Designated Interests for all of the above Assets are
referred to collectively as the “Designated Interests.”

1.22.       “Development Plan” has the meaning set forth in Section 2.7.

1.23.       “Environmental Defect Notice Date” has the meaning set forth in
Section 7.1.

1.24.       “Environmental or Title Defect Value” has the meaning set forth in
Section 8.4.

1.25.       “East Hastings Field” shall refer to those lands falling within the
geographic outline depicted on the plat in Exhibit “D-1”.

1.26.       “Environmental Defect” shall mean: (i) a condition or activity with
respect to an Asset that is in material violation, or reasonably likely to
materially violate, any federal, state or local statute, or any rule, order,
ruling or regulation entered, issued or made by any court, administrative
agency, or other governmental body or entity, federal, state, or local, or any
arbitrator (“Environmental Law”), or surface or mineral lease obligation
relating to natural resources, conservation, the environment, or the emission,
release, storage, treatment, disposal, transportation, handling or management of
industrial or solid waste, hazardous waste, hazardous or toxic substances,
chemicals or pollutants, petroleum, including crude oil, natural gas, natural
gas liquids, or liquefied natural gas, and any wastes associated with the
exploration and production of oil and gas (“Regulated Substances”); or (ii) the
presence of Regulated Substances in the soil, groundwater, or surface water in,
on, at or under an Asset in any manner or quantity which is required to be
remediated by Environmental Law or by any applicable action or guidance levels
or other standards published by any governmental agency with jurisdiction over
the Assets, or by a surface or mineral lease obligation.  Optionee and Optionor
agree that for a condition to be in violation of any statute or regulation it

3

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shall not be necessary that Optionor shall be under notice of violation from a
federal or state regulatory agency or lessor.

The Parties agree and acknowledge that Optionee will be provided an opportunity
to examine the Assets for potential naturally occurring radioactive materials
(“NORM”), and any potential obligations with respect to NORM and that the
presence of NORM on any of the Assets, except with respect to inactive wells,
facilities, pipelines and other equipment, may not be raised by Optionee as the
subject of an Environmental Defect.

1.27.       “Environmental Law” shall be as defined in Section 1.26 above.

1.28.       “Environmental Obligations or Liabilities” shall mean all
liabilities, obligations, expenses (including, without limitation, all
attorneys’ fees), fines, penalties, costs, claims, suits or damages (including
natural resource damages) of any nature, associated with the Assets, and
attributable to or resulting from:  (i) pollution or contamination of soil,
groundwater or air, on, in or under the Assets or lands in the vicinity thereof,
and any other contamination of or adverse effect upon the environment, (ii)
underground injection activities and waste disposal, (iii) clean-up responses,
remedial, control or compliance costs, including the required cleanup or
remediation of spills, pits, lakes, ponds, or lagoons, including any subsurface
or surface pollution caused by such spills, pits, lakes, ponds, or lagoons, (iv)
noncompliance with applicable land use, permitting, surface disturbance,
licensing or notification requirements, including those in a surface or mineral
lease, whether an express or implied obligation, (v) all obligations, whether
pursuant to an Environmental Law or a surface or mineral lease obligation,
whether express or implied, for plugging, replugging and abandoning any wells,
the restoration of any well sites, tank battery sites and gas plant sites, and
any other surface locations or sites, the proper removal, disposal and
abandonment of any wastes or fixtures, and the proper capping and burying of all
flow lines, which are included in the Assets; (vi) violation of any federal,
state or local Environmental Law or land use law, or surface or mineral lease
obligation, whether an express or implied obligation, and (vii) any other
violation which could qualify as an Environmental Defect.  Notwithstanding
anything to the contrary set forth in, or implied by, this Section 1.28
“Environmental Obligations or Liabilities” does not include (i) personal injury
or wrongful death occurring prior to the Exercise Effective Time or (ii) offsite
waste disposal occurring prior to the Exercise Effective Time.

1.29.       “Excluded Assets” shall mean the following:

(a)           an overriding royalty interest from the Exercise Effective Time in
production from the Assets equal to an undivided two percent of eight-eighths
(2% of 8/8ths), which overriding royalty interest shall be reserved by
Optionor.  Said reserved overriding royalty interest shall be free of (i) any
and all costs and expenses associated with the exploration, production or
operation of wells producing the Assets, and (ii) post production costs
associated with removing CO2 from the production stream,  and shall be paid in
the same manner as provided for with respect to lessors.  In the event Optionor
exercises its option to receive the Reversionary Interest set forth in Section

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1.29(d) below, then Optionor’s Reversionary Interest will bear its proportionate
share of the reserved overriding royalty interest.

(b)           all interests in the surface estate in Hastings Field Lands,
including but not limited to those described in Exhibits “A-5” and “A-6”;

(c)           all of Optionor’s leasehold, fee mineral and royalty interests in
the Hastings Field, as such interests relate to horizons above the top of, and
below the base of, the Frio Zone.

(d)           a reversionary working interest of an undivided twenty-five
percent (25%) in and to the Assets assigned hereunder, (the “Reversionary
Interest”), at such time as the Optionee has achieved Payout.  “Payout” shall
mean that point in time when Optionee has received from Net Revenues from the
Assets an amount equal hundred percent (100%) of the sum of Operating Costs plus
the  Payout Amount plus (ii) one hundred thirty percent (130%) of all Capital
Costs expended to conduct enhanced recovery operations on the Assets.  It being
the intent of the Parties that the Optionor shall convey to Optionee at Closing
the Designated Interest (less Optionor’s reserved overriding royalty interest)
as to the Assets, subject to the Optionor’s Reversionary Interests.  Optionor’s
Reversionary Interests as set forth above will be proportionately adjusted 
Optionee’s actual working interest and/or net revenue interest, respectively,
acquired by virtue of this Agreement.  Subject to Optionor’s post Payout
election as provided in Section 1.26(d)(11) below, Optionor’s Reversionary
Interests shall automatically revert to the Optionor once Payout has been
achieved, without any further action on the part of the Optionor.  Optionor’s
Reversionary Interests will be effective on the first day of the month next
succeeding the point in time in which Payout has occurred.  Within thirty (30)
days after Payout has occurred, and subject to Optionor’s right to reject
reversion, Optionee shall provide Optionor with an Assignment of the Optionor’s
Reversionary Interests, which will be free and clear of all liens and
encumbrances of any kind and shall be substantially in the form of the
Assignment and Conveyance attached hereto as Exhibit “I”.

Calculation of Payout and Optionor’s Reversionary Interests shall be subject to
the following additional terms and provisions:

(1)           As used herein, “Net Revenues” shall mean with respect to the
Assets, gross revenues from the Designated Interest share of production from the
Assets  from and after the Exercise Effective Time less any applicable federal,
state and local taxes (including excise, production, severance, sales, and ad
valorem taxes, but excluding any income based taxes) and less payments from
gross revenues attributable to Optionor’s reserved overriding royalty interest,
and any other overriding royalty interests, production payments, net profit
interest and similar interests or burdens of record against the Assets existing
as of the Agreement Effective Time and paid after the Exercise Effective Time.

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(2)           As used herein, “Operating Costs” shall mean with respect to the
Assets from and after the Exercise Effective Time,  the Designated Interest
share of (i) operating costs and expenses (including administrative overhead
charges) for the operation of wells, facilities, equipment and flowlines located
on and/or used in conjunction with the Assets, actually incurred and expended by
Optionee and/or the Operator and charged to the joint account by Optionee and/or
the Operator, as set forth in the Accounting Procedure of the West Hastings Unit
Operating Agreement or the applicable operating agreement for any East Hastings
Field wells (in the event there is no applicable operating agreement, the
Accounting Procedure of the West Hastings Unit Operating Agreement shall be
utilized) and (ii) CO2 Costs.

(3)           As used herein, “Capital Costs” shall mean with respect to the
Assets, the Designated Interest share of all capital costs actually incurred and
expended by the Operator for enhanced oil recovery operations and charged to the
joint account by Optionee and/or the Operator from and after the Exercise
Effective Date, including for the construction of facilities, field development,
conversion of wells for injection purposes, drilling, completion, reworking,
recompletion of wells, construction of flowlines located on and/or used in
conjunction with such Assets, and such other costs as are incurred under the
Development Plan and credited towards the Required Cumulative Capital
Expenditure Amounts provided in Section 2.7(a) below.

(4)           As used herein, “Asset Payout Amount” shall mean the sum of the
predicted “annual future net revenue” (as such terms are currently used by D&M
in the reserve report prepared for Optionor dated July 31, 2006)  for the first
four years following the Exercise Effective Time,  as shown in the D&M Report
used to determine the Purchase Price for the Assets.

(5)           As used herein, “CO2 Costs” shall mean the direct cost of
acquiring (commodity cost) and delivering (transportation cost) CO2 to the
Assets.

(i)            transportation costs (before and after Payout) shall be (x) the
actual costs on a per mcf basis charged by unaffiliated third party
transporters, or (y) in the event Optionee owns the pipeline transporting CO2 to
the Assets, a per mcf fee not to exceed the amount necessary to amortize the
actual cost of constructing and operating that portion of the line on which the
CO2 is transported to  the Assets, based on a capacity throughput of 400 MMcf/d
over a twenty (20) year period, at a discount rate of six hundred fifty basis
points over the one year LIBOR (if the one year LIBOR is five and one-half
percent (5.5%) the discount rate used to amortize the pipeline would be 12%),
but in no event shall  discount rate be less than 12%.

(ii)           commodity costs (before and after Payout) shall be the lower of
(x) the average direct cost of CO2 in Optionee’s or third party’s pipeline from
which CO2 is acquired for the Assets and (y) the lowest price

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charged for CO2 by Optionee in sales to third party users or consumers in
Texas.  In no event shall the average cost per mcf of CO2 delivered to the
Assets exceed one percent (1%) of the average NYMEX oil closing price per barrel
during the month of delivery; provided the foregoing cap on CO2 prices shall
never be less than $.30 per mcf. A “mcf” of CO2 shall be 1000 cubic feet of CO2
at standard conditions.  Optionee shall deliver CO2 to the Assets at a pipeline
pressure of not less than 1100 psi.

(iii)          Any CO2 charged to the and used by Optionee for any purpose other
than with respect to the development of the shall be credited as Net Revenues at
the same cost that the CO2 is charged as provided above.

(6)           Costs associated with building, owning, operating and maintaining
CO2 pipelines used by Optionee to deliver CO2 to the Hastings Field shall not be
considered Capital Costs or Operating Costs for purposes of determining Payout. 
Nor shall such costs be considered in computing Required Cumulative Capital
Expenditure Amounts. Nothwithstanding the foregoing, actual  transportation
costs incurred in transporting CO2 to the Hastings Field, as set forth in
Section 1.29(d)(5)(i) shall be considered for purposes of determining Payout.

(7)           Optionor’s Reversionary Interests in the Assets, after it reverts,
shall be subject to the terms and provisions of the West Hastings Unit Operating
Agreement and/or any other applicable agreements.  After such Reversionary
Interests revert to Optionor, Optionor shall be liable for and shall assume and
pay its proportionate working interest share of all subsequent costs associated
with its working interest attributable to the reverted and reassigned interests,
including capital costs.

(8)           If for any reason Optionor desires not to accept the Reversionary
Interests provided for in this Section  (d), and the obligations and liabilities
associated with such Reversionary Interests, Optionor may decline to accept such
Interests by notifying Optionee in writing on or before   () days after Optionor
is notified, in writing, of the effective date of reversion.  After receipt of
such a notice, Optionor’s right to the Reversionary Interests will terminate
effective as of the date of the reversion.

(9)           Prior to Payout, Optionee shall provide to Optionor (i) on a
monthly basis operating reports covering revenues, operating expenses, capital
expenditures, production and injection volumes and product prices received; and
(ii) a quarterly statement (with all supporting documentation) identifying the
status of Payout; and (iii) Optionee shall further provide Optionor with
quarterly reports including historical and prospective technical information
relating to the Assets including, but not limited to injection and production
data on a field and well basis, well logs, cores, tests and any other data
necessary for Optionor to perform its own technical analysis; and (iv) the right
to request an annual technical presentation to be presented to Optionor by the
appropriate technical

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staff of Optionee.  Optionor shall have the right to conduct an annual audit of
the accounts and records of Optionee (at a mutually convenient time during
Assignor’s normal business hours and in accordance with the Council of Petroleum
Accountants Society guidelines and practices for audits by working interest
owners) to verify the accounting for Payout. Such audits may be performed by
Optionor directly or through an independent accounting firm of its choice, but
in each case at the Optionor’s sole cost and expense.  Notwithstanding the
above, all Payout accounting by Optionee during any calendar year shall
conclusively be presumed true and correct after twenty four (24) months
following the end of any such calendar year, unless within the said twenty four
(24) month period, Optionor takes written exception thereto and makes claim on
Optionee for adjustments.

(e)           (i) all trade credits, accounts receivable, notes receivable and
other receivables attributable to Optionor’s interest in the Assets with respect
to any period of time prior to the Exercise Effective Time; (ii) all deposits,
cash, checks in process of collection, cash equivalents and funds attributable
to Optionor’s interest in the Assets with respect to any period of time prior to
the Exercise Effective Time; and (iii) all proceeds, benefits, income or
revenues accruing with respect to the Subject Acreage prior to the Exercise
Effective Time;

(f)            all corporate, financial, and tax records of Optionor; however,
Optionee shall be entitled to receive copies of any tax records which directly
relate to any Assumed Obligations, or which are necessary for Optionee’s
ownership, administration, or operation of the Assets;

(g)           all claims and causes of action of Optionor arising from acts,
omissions or events, or damage to or destruction of the Assets, occurring prior
to the Exercise Effective Time; provided, however, Optionor shall transfer to
Optionee all claims and causes of action of Optionor against prior owners of the
Assets or third parties for Environmental Obligations or Liabilities that are
not Retained Environmental Obligations or Liabilities;

(h)           except as otherwise provided in Section 14 all rights, titles,
claims and interests of Optionor relating to the Assets prior to the Exercise
Effective Time (i) under any policy or agreement of insurance or indemnity; (ii)
under any bond; or (iii) to any insurance or condemnation proceeds or awards;

(i)            all Hydrocarbons produced from or attributable to the Assets with
respect to all periods prior to the Exercise Effective Time, together with all
proceeds from or of such Hydrocarbons, except the Inventory Hydrocarbons and the
unsold inventory of gas plant products, if any, attributable to the Leases as of
the Exercise Effective Time;

(j)            claims of Optionor for refund of or loss carry forwards with
respect to production, windfall profit, severance, ad valorem or any other taxes
attributable to any period prior to the Exercise Effective Time, or income or
franchise taxes;

8

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(k)           all amounts due or payable to Optionor as adjustments or refunds
under any contracts or agreements (including take-or-pay claims) affecting the
Assets with respect to any period prior to the Exercise Effective Time;

(l)            all amounts due or payable to Optionor as adjustments to
insurance premiums related to the Assets with respect to any period prior to the
Exercise Effective Time;

(m)          all proceeds, benefits, income or revenues accruing (and any
security or other deposits made) with respect to the Assets, and all accounts
receivable attributable to the Assets, prior to the Exercise Effective Time; and

(n)           all of Optionor’s intellectual property, including, but not
limited to, proprietary computer software, patents, trade secrets, copyrights,
names, marks and logos.

(o)           all depths above the top and below the base of the Frio Zone.

1.30.       “Exercise Effective Time” has the meaning specified” shall be
defined in Section 2.4.

1.31.       “Final Settlement” has the meaning specified in Section 12.5

1.32.       “Final Settlement Statement” has the meaning specified in Section
12.5.

1.33.       “Frio Zone” means the stratigraphic interval or its correlative
equivalent between the depths of 5,390 feet and 6,840 feet in the Amoco
Production Company L.F. McKibben A-6 located on the McKibben “A” Lease of the
HT&B Survey 29, Brazoria County, Texas as defined on the Dual
Induction-Electric-Lateralog-Sonic Logs run on November 6, 15, 26, and 28, 1977.

1.34.       “Hastings Field” shall refer, collectively, to the East Hastings
Field and the West Hastings Unit.

1.35.       “Hydrocarbons” shall mean crude oil, natural gas (including CO2),
casinghead gas, condensate, sulphur, natural gas liquids and other liquid or
gaseous hydrocarbons, and shall also refer to all other minerals of every kind
and character which may be covered by or included in the Leases and Assets.

1.36.       “Indemnified Party” has the meaning set forth in Section 16.7.

1.37.       “Indemnifying Party” has the meaning set forth in Section 16.7.

1.38.       “Initial Option Payment” has the meaning specified in Section 2.3
(a)

1.39.       “Inventory Hydrocarbons” shall mean all merchantable oil and
condensate (for oil or liquids in storage tanks, being only that oil or liquids
physically above the top of the inlet connection into such tanks) produced from
or attributable to

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the Leases prior to the Exercise Effective Time which have not been sold by
Optionor and are in storage at the Exercise Effective Time.

1.40.       “Leases” shall mean, except to the extent constituting Excluded
Assets, any and all interests owned by Optionor, including but without
limitation those set forth on Exhibits “A-1”, “A-2”, “A-3” and “A-4”, or which
Optionor is entitled to receive by reason of any participation, joint venture,
farmin, farmout, joint operating agreement, unitization agreement, or other
agreement, in and to the oil, gas and/or mineral leases, permits, licenses,
concessions, leasehold estates, royalty interests, overriding royalty interests,
net revenue interests, executory interests, net profit interests, working
interests, reversionary interests, mineral interests, and any other interests of
Optionor in Hydrocarbons, in the West Hastings Unit, in the West Hastings Unit
Lands, and in East Hastings Field, it being the intent hereof that the leases,
properties and interests and the legal descriptions and depth limitations set
forth on Exhibits “A-1” through “A-4”, inclusive, or in instruments described in
Exhibits “A-1” through “A-4”, inclusive, if any, are for information only and
the term “Leases” includes all of Optionor’s right, title and interest in the
above described Hydrocarbon interests in the West Hastings Unit, in the West
Hastings Unit Lands, and in the East Hastings Field, other than the Excluded
Assets, including but not limited to those described on Exhibits “A-1” through
“A-4”, inclusive, or in instruments described in Exhibits “A-1” through “A-4”,
inclusive, even though such interests may be incorrectly described in Exhibits
“A-1” through “A-4”, inclusive, or omitted from Exhibits “A-1” through “A-4”,
inclusive.

1.41.       “mcf” has the meaning specified in the definition of Excluded
Assets.

1.42.       “Net Proved Reserves” has the meaning specified in Section
2.5(b)(i)(1)

1.43.       “Net Revenues” has the meaning specified in the definition of
Excluded Assets.

1.44.       “NORM” has the meaning set forth in the definition of Environmental
Defects.

1.45.       “Oil and Gas Interest” has the meaning specified in Section 18.2(g).

1.46.       “Oil and Gas Interests” has the meaning specified in Section 18.2(b)
and 18.2(h).

1.47.       “Operating Costs” has the meaning specified in the definition of
Excluded Assets.

1.48.       “Option Exercise Date” has the meaning specified in Section  2.4

1.49.       “Option Exercise Notice” has the meaning given in Section 2.4 .

1.50.       “Option to Purchase” has the meaning specified in Section  2.1.

1.51.       “Option Year” has the meaning specified in Section 2.2.

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1.52.       “Optionee” has the meaning specified in the Preamble.

1.53.       “Optionee’s Credits” has the meaning specified in Section 12.5(b).

1.54.       “Optionor” has the meaning specified in the Preamble.

1.55.       “Optionor’s Credits” has the meaning specified in Section 12.5(a).

1.56.       “Participating Party” has the meaning specified in Section 18.2(f).

1.57.       “Parties” has the meaning specified in the Preamble.

1.58.       “Payout” shall be as defined in the definition of Excluded Assets.

1.59.       “Permitted Encumbrances” shall mean specified in Section 8.1(c).

1.60.       “Personal Property and Incidental Rights” shall mean all right,
title and interest of Optionor in and to or derived from the following insofar
as the same do not constitute Excluded Assets and are attributable to,
appurtenant to, incidental to, or used for the operation of the Leases:

(a)           all easements, rights-of-way, surface leases, permits, licenses,
servitudes or other interests relating to the use of the surface, including but
not limited to those described in Exhibits “A-5,” “A-6,” “A-7,” and “A-8”, or in
instruments described in Exhibits “A-5,” “A-6,” “A-7,” and “A-8”;

(b)           all wells, including but not limited to those listed in Exhibits
“B-1” and “B-2” attached hereto, whether or not such wells are active or
inactive, along with all equipment and other personal property, inventory, spare
parts, tools, fixtures, pipelines, dehydration facilities, platforms, tank
batteries, appurtenances, and improvements situated upon the Leases as of the
Exercise Effective Time and used or held for use in connection with the
development or operation of the Leases or the production, treatment, storage,
compression, processing or transportation of Hydrocarbons from or in the wells
or Leases;

(c)           all unit agreements, orders and decisions of state and federal
regulatory authorities establishing units, joint operating agreements, enhanced
recovery and injection agreements, farmout agreements and farmin agreements,
options, drilling agreements, exploration agreements, assignments of operating
rights, working interests, subleases and rights above or below certain footage
depths or geological formations, to the extent same is attributable to the
Assets, as of the Exercise Effective Time, including but not limited to those
described on Exhibits “F-1” and “F-2”;

(d)           all contracts, agreements, and title instruments to the extent
attributable to and affecting the Assets in existence at Closing, including all
Hydrocarbon sales, purchase, gathering, transportation, treating, marketing,
exchange, processing, disposal and fractionating contracts, joint operating
agreements, including but not limited to those described on Exhibits “F-1” and
“F-2”; and

 

11

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(e)           copies of all lease files, land files, well files, production
records, division order files (including paysheets and supporting files),
abstracts, title opinions, and contract files, insofar as the same are directly
related to the Leases; including, without limitation, all geological,
information and data, to the extent that such data is not subject to any third
party restrictions, but excluding Optionor’s proprietary interpretations of
same, subject to the provisions of Section 6.1.

1.61.       “Proved Reserves” shall mean the reserves attributable to the
interest being evaluated based on the definition of “proved oil and gas
reserves” as set forth in Rule 4-10 of Regulation S-X of the Securities and
Exchange Act of 1934, as amended; provided that Hydrocarbon prices and operating
costs set forth in section 2.5 shall be used in such determination.

1.62.       “Preferential Purchase Rights” has the meaning specified in Section
9.1(b).

1.63.       “Purchase Price” has the meaning specified in Section 2.5.

1.64.       “Receiving Party” has the meaning specified in Section 18.1(a).

1.65.       “Regulated Substances” has the meaning specified in the definition
of Environmental Defects.

1.66.       “Required Cumulative Capital Expenditure Amounts” has the meaning
specified in Section 2.7(b).

1.67.       “Retained Environmental Obligations or Liabilities” shall mean, any
Environmental Obligations or Liabilities of any nature (i) related to the
Excluded Assets, and (ii) related to, or arising from, events first occurring or
in existence prior to October 1, 2004, to the extent and as set out in Section
10.6.

Notwithstanding anything herein to the contrary, Retained Environmental
Obligations or Liabilities shall not include any Environmental Obligations or
Liabilities that (a) relate to NORM, or (b) relate to the plugging and
abandonment of the wells in the Hastings Field existing at the Exercise
Effective Time and any related surface restoration of these well sites, or (c)
resulted from or relate to an activity or a condition on or regarding the Assets
first occurring after the Exercise Effective Time .

1.68.       “Retained Obligations” shall mean all liabilities, duties, and
obligations that arise out of the ownership, operation or use of the Assets
prior to the Exercise Effective Time,  other than Environmental Obligations or
Liabilities but including, without limitation, all liabilities, duties, and
obligations, express or implied, imposed upon Optionor herein under the
provisions of the Leases and any and all assignments, subleases, farmout
agreements, assignments of overriding royalty, joint operating agreements,
easements, rights-of-way, and all other contracts, agreements and instruments
affecting the Leases, or the premises covered thereby, whether recorded or
unrecorded, and under all applicable laws, rules, regulations, orders and
ordinances, except for those specifically included in the definition of “Assumed
Obligations.”

 

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1.69.                     “Reversionary Interest” has the meaning specified in
the definition of Excluded Assets.

1.69.                     “Residual Asset Reserve Value” has the meaning
specified in Section 2.5(b)(ii)(3).

1.70.                     “Selling Party” has the meaning specified in Section
18.1(a).

1.71.                     “Shortage Payment” has the meaning specified in
Section 2.7(b).

1.72.                     “Third Party Interests” has the meaning specified in
Section 9.1(c).

1.73.                     “Title Defect” has the meaning specified in Section
8.1(b).

1.74.                     “Title Defect Notice Date” has the meaning specified
in Section 8.2.

1.75.                     “Volumetric Production Payment” has the meaning
specified in Section 2.5.

1.76.       “West Hastings Unit” shall be as described in and governed by Unit
Agreement, West Hastings Unit, Brazoria and Galveston Counties, dated July 24,
1984, Pageas amended, and as depicted on the plat in Exhibit “D-1”.  Those lands
located within the aerial boundaries of the West Hastings Unit are referred to
as the “West Hastings Unit Lands.”  Exhibit “D-1” also depicts the unit tracts
within the West Hastings Unit.  The ownership of these unit tracts and the
participation factors for these tracts in the Unit are set forth in Exhibit “C”.

1.77.       “West Hastings Unit Lands” has the meaning specified in the
definition of West Hastings Unit.

1.78.       “West Hastings Unit Operating Agreement” shall mean that certain
unit operating agreement dated December 20, 1984, covering the West Hastings
Unit, as may be amended, and which is attached hereto as Exhibit “E.”

ARTICLE 2. - OPTION TO PURCHASE

2.1.         Option to Purchase.  Subject to the terms and conditions of this
Agreement and the satisfaction of the Conditions Precedent on or before December
1, 2006, Optionor does hereby grant and convey unto Optionee the right and
option to purchase the Assets according to the terms and provisions set forth
below (the “Option to Purchase”). As used herein, the term “Conditions
Precedent” mean (a) with respect to Optionor, the receipt by Optionor of the
written consent and approval of the lenders under Optionor’s revolving credit
facility to the grant of this Option to Purchase and the transactions
contemplated hereby, on terms satisfactory to Optionor and (b) with respect to
Optionee, confirmation by Optionee that there are no material Title Defects

13

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and Environmental Defects associated with the Assets.  If the Conditions
Precedent have not been satisfied or waived by December 1, 2006 this Agreement
shall automatically terminate and neither party shall have any further
obligation hereunder.

 

Each Party shall notify the other in writing on or before November 30, 2006
whether or not the Conditions(s) Precedent for that party have been satisfied.

2.2.         Term of Option.  The initial term of the Option to Purchase shall
commence on the Agreement Effective Time and end October 31, 2009.  The initial
option payment, subject to the Conditions Precedent, shall be paid by Optionee
on or before December 1, 2006. Optionee may extend the term of the Option to
Purchase beyond October 31, 2009 on a year by year basis (i.e., through the
anniversary date, October 31, of the following year), by, on or before each
anniversary date, paying Optionor the sum of thirty million dollars
($30,000,000.00).  The maximum term of the Option to Purchase shall be ten (10)
years (i.e., ending October 31, 2016).  Each year the Option to Purchase is in
effect is hereinafter referred to as an “Option Year”.

2.3.         Initial Term Installments.  The consideration for the initial term
of the Option to Purchase shall be fifty million dollars ($50,000,000) paid by
Optionee to Optionor by wire transfer in the following installments:

(a)           Thirty-seven and one-half million dollars ($37,500,000.00) on or
before December 1, 2006;

(b)           Seven and one-half million dollars ($7,500,000.00) on or before
November 1, 2007; and

(c)           Five million dollars ($5,000,000.00) on or before November 1,
2008.

2.4.         Exercise of Option to Purchase.  During the term of the Option to
Purchase, Optionee may exercise its Option to Purchase by giving notice of its
exercise of said Option to Purchase (“Option Exercise Notice”) as provided
herein.  The Option Exercise Notice shall be made utilizing the form of Option
Exercise Notice attached hereto as Exhibit “G” and shall be given on or before
September 1 of any year during the term of this Option and shall be deemed
exercised as of November 1 of such year (the “Option Exercise Date”).  Without
Optionor’s written consent, no Option Exercise Notice may be given prior to
September 1, 2008.  The effective date for the purchase of the Assets shall be
7:00 a.m., Central Standard Time, on January 1 following such Option Exercise
Date (“Exercise Effective Time”).  Optionee’s right to utilize the Asset shall
be effective as of the Exercise Effective Time.

2.5.         Payment for Assets.  The consideration due Optionor by Optionee for
the purchase of the Assets (the “Purchase Price”) shall be either (i) a cash
payment (“Cash Payment”), or (ii) a volumetric production payment (“Volumetric
Production Payment”), to be determined as set forth below.

(a)           Optionor and Optionee shall have until the end of the month of
November following an Option Exercise Date to negotiate and agree upon, based
upon the

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remaining amount and value of Net Proved Reserves attributable to the Assets,
the Cash Payment amount to be paid by Optionee or the terms of the Volumetric
Production Payment to be conveyed to Optionor, with respect to the Assets.

(b)           In the event Optionor and Optionee are unable to agree as provided
under Section 2.5(a), above, then, on or before December 1 of such year, either
Party may request that DeGolyer and MacNaughton (“D&M”) furnish the Parties with
a report (the “D&M Report”) setting forth the following:

(i)            A Cash Payment amount equal to the present value of Net Proved
Reserves, determined as follows:

(1)           D&M’s estimate of Net Proved Reserves for the Assets as of the end
of the year in which the option is exercised (as utilized herein, “Net Proved
Reserves” shall refer to Proved Reserves, net to the Designated Interest, i.e.,
the applicable net revenue interest, and after further deducting Optionor’s
retained overriding royalty interest);

(2)           Pricing based upon a five (5) year forward strip as determined on
the last trading day  of the oil futures contracts on the NYMEX for the year in
which the option is exercised, with prices for year six (6) and beyond based on
the average NYMEX price for the fifth year of the strip;

(3)           Operating expenses for the calculation of the Cash Payment shall
be based upon a review and average of Optionor’s operating expenses attributable
to the Assets for twelve (12) months prior to the Exercise Effective Time on a
dollar per BOE basis (“Asset Operating Expense”); and

(4)           A net present value discount rate of ten (10%) percent.

(ii)           The following Volumetric Production Payment terms:

(1)           Net Proved Reserve volume schedule for the  Assets for the ten
(10) years following the Exercise Effective Time;

(2)           The Asset Operating Expense; and

(3)           The Residual Asset Reserve Value for the Proved Reserves
attributable to time periods after said ten (10) year period, calculated in the
same manner as provided under Section 2.5(b)(i), above,  and paid in a lump sum.

Both Parties may furnish D&M with any data and information they feel pertinent
to the determination.  D&M shall deliver the D&M Report to both Parties no later
than January 15 of the calendar year following the Option Exercise Date.  D&M’s
determinations on the above shall be final and nonappealable.  In the event D&M
is not in existence at the time the Option Exercise Notice is given, the
successor company to D&M shall be utilized, and should no successor company
exist, then the Parties shall agree on an

15

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independent reserve analysis company to make the above determinations in lieu of
D&M.

(c)           Optionor shall have () days after receipt of the D&M Report to
notify Optionee of its election whether to receive a Cash Payment or a
Volumetric Production Payment.  In the event Optionor fails to elect within said
time period, Optionor shall be deemed to have elected to receive a Cash Payment.

2.6.         Closing.  The closing of the purchase of the Assets shall occur at
‘s offices on January 31 of the calendar year following the Option Exercise Date
(or the next business day, if such January 31 falls on a weekend or legal
holiday) or such other time and place as may be agreed upon by the Parties.  At
such  Closing, (i) Optionor shall execute an Assignment and Conveyance in the
form substantially the same as the form attached as Exhibit “I”, and (ii)
depending upon Optionor’s election, Optionee shall either pay the Cash Payment
or execute an Assignment of Volumetric Production Payment in substantially the
same form as the form attached as Exhibit “J”.

2.7.         Development Plan and Capital Expenditure Commitment.

(a)           In the event Optionee exercises its option to purchase the Assets,
contemporaneous with Optionee’s option exercise, Optionee shall (i) submit to
Optionor a development plan for the CO2 flood of the West Hastings Unit (the
“Development Plan”), which plan shall include various milestones including
completion of a pipeline connecting the Jackson Dome Field in Mississippi to the
Hastings Field via Donaldsonville, or other pipeline or alternative delivery
system that would result in a lower CO2 cost to the Hastings Field, a framework
for spending the Required Cumulative Capital Expenditure Amounts, and the
commencement of CO2 injection in the West Hastings Unit and (ii) commit to spend
one hundred seventy-eight million six hundred seventy four thousand dollars
($178,674,000.00) of cumulative capital expenditures (the “Required Cumulative
Capital Expenditure Amounts”) as outlined in the Development Plan for field
development and facilities for enhanced production operations in the West
Hastings Unit.  Optionee shall spend the Required Cumulative Capital
Expenditures Amounts on or before the Commitment Dates set forth below:

“Commitment Date”
By end of Calendar Year

 

“Required Cumulative Capital
Expenditure Amount”

 

1

 

$

26,801,000

 

2

 

$

71,469,000

 

3

 

$

107,204,000

 

4

 

$

142,939,000

 

5

 

$

178,674,000

 

 

Year 1 shall begin with the Exercise Effective Time.   If the Optionee spends in
excess of one hundred seventy-eight million six hundred seventy four thousand
dollars ($178,674,000.00) prior to the end of Year 5, the development obligation
has been fulfilled.

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(b)           In the event Optionee fails to spend the Required Cumulative
Capital Expenditure Amount by the Commitment Dates set forth in (a) above,
Optionee shall pay Optionor a cash payment equal to ten percent, (10.0%) of the
difference between (i) the Required Cumulative Capital Expenditure Amount for
the applicable Commitment Date and (ii) the cumulative capital expenditures
actually expended by Optionee from the Closing Date through such applicable
Commitment Date (hereinafter referred to as the “Shortage Payment”).   Said
Shortage Payment shall be paid by Optionee to Optionor within thirty (30) days
after each Commitment Date.

(c)           If Optionee is not injecting at least an average of 50 mmcf/day of
CO2 (total of purchased plus recycled) in the West Hastings Unit (“Minimum
Injection Rate”), which gas shall be delivered to the Hastings Field via the
Donaldsonville to Hastings pipeline or other pipeline or alternative delivery
system that would result  in a lower CO2 cost to the Hastings Field, for the 90
day period preceding the third anniversary of the Exercise Effective Time,
Optionee shall, within 30 days of such third anniversary, either (i) relinquish
its rights to initiate (or continue) tertiary operations and reassign to
Optionor all Assets previously assigned to Optionee, for the value of such
Assets at that time based on the methodology outlined in Section 2.5, except the
NPV discount rate described in Section 2.5(b)(i)(4) shall be twenty percent
(20%) rather than ten percent (10%), or (ii) begin making additional Shortage
Payments to Optionor in an amount equal to twenty million dollars
($20,000,000.00) less Shortage Payments paid during that year pursuant to
Section 2.7(b) for the first year, and thirty million dollars ($30,000,000.00)
less Shortage Payments paid during that year pursuant to Section 2.7(b) per year
thereafter until the CO2 injection in the Hasting Field equals or exceeds the
Minimum Injection Rate.  If Optionee elects to relinquish its rights as set
forth herein and Optionor accepts such relinquishment, Optionee shall have no
further rights or obligations with respect to the Assets.  Notwithstanding the
relinquishment option described in this Section 2.7(c),  Optionor shall have the
option to reject such relinquishment, in which case Optionee shall retain the
Assets and the Shortage Payment shall be deemed waived for that year and the
Minimum Injection Rate requirement will be deferred until the next anniversary
of the Exercise Effective Time.

ARTICLE 3. - OPERATIONS

3.1.         Operations of Hastings Field Prior to Option Exercise.  Prior to
the Exercise Effective Time Optionor agrees (i) to act as a reasonable prudent
operator, (ii) during the term the Option to Purchase is in effect, not to
undertake any tertiary operations, including, but not limited to CO2 flooding,
fire flooding, polymer flooding, miscible or non-miscible gas flooding other
than CO2, high pressure air injection, steam flooding or microbial injection,
and (iii) during the term the Option to Purchase is in effect, to notify
Optionee in writing at least sixty (60) days prior to the lapse of any Leases
which Optionor does not intend to maintain.  As to any Leases under “(iii)”
above, Optionee shall have the right and option within ten (10) days after
receipt of said notice to elect to obtain Optionor’s interest in any such Leases
at no cost to Optionor so that Optionee may attempt to maintain any such
Leases.  Any costs expended by

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Optionee to maintain any such Leases shall be included in the costs for purposes
of calculating Payout and not be subject to the provisions of Section 18.2.

3.2.         Operations After Option Exercise

(a)           In the event Optionee exercises its Option to Purchase, Optionor
shall use its reasonable efforts to have Optionee appointed as Operator of West
Hastings Unit, both under the West Hastings Unit Operating Agreement and with
the appropriate regulatory or administrative agencies.  In the event Optionor is
not able to secure the formal appointment of Optionee as Operator for the West
Hastings Unit, then Optionor and Optionee shall cooperate and enter into such
contractual relationship as is necessary or shall otherwise allow Optionee to
conduct its Development Plan and conduct all other operations Optionee could
otherwise conduct as Operator in the Hastings Field.

(b)           In the event the Optionee exercises its Option to Purchase the
Assets, the Parties shall execute a Joint Operating Agreement covering the East
Hastings Field and any lands located outside the West Hasting Unit.  The Joint
Operating Agreement shall be in substantially the same form as set forth in
Exhibit “Q.”

(c)           In no event shall the Optionor in any manner be liable for or
incur any costs or expenses associated with the CO2 operations of the Optionee
until such time as Optionor has accepted its Reversionary Interest.

3.3.             Simultaneous Use of Surface-Option to Purchase.

(a)               In the event Optionee exercises its Option to Purchase,
Optionee shall have (i) the right to use all easements and surface rights of
Optionor in the Hastings Field acquired from third parties or resulting from its
ownership of the Leases, and (ii) the right to use Optionor’s surface and
surface estate rights in lands in which Optionor owns all of the surface fee
estate or an undivided interest in the surface fee estate (“Optionor’s Surface
Estate Lands”), so long as (i) Optionee’s use is reasonably necessary for its
operations and activities with respect to the Assets and (ii) Optionee’s use
does not conflict with Optionor activities existing as of the Exercise Effective
Time.  After Optionee’s exercise of its Option to Purchase, Optionor shall be
entitled to new uses of all surface rights and interests in the Hastings Field,
so long as such new use does not conflict with current or reasonably anticipated
future use by Optionee.   For the purposes of this Section 3.3, surface or
surface estate rights shall also mean and include all rights appurtenant to the
surface estate, including, but not limited to, rights to drill water wells, salt
water disposal wells and injection wells.

(b)               Subject to the provision of subsection (a) above, after
Optionee’s exercise of its Option to Purchase, Optionee shall be entitled to
such easements, rights-of-way, and other uses of the surface of Optionor’s
Surface Estate Lands in conjunction with Optionee’s operations and activities
related to the operation of  the Assets as Optionee, acting as a reasonably
prudent operator, deems necessary and appropriate.  Optionee shall pay Optionor
for the following, and only the following, usages of Optionor’s Surface Estate
Lands (all other usages being without cost to Optionee), and

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in the amounts stated: (i) new roads-$1.25 per linear rod; (ii) drill site
locations, including areas for drill site pad, pits, and other
equipment-$1500.00 per acre.

(c)               Subject to the prior usage restrictions in subsection (a)
above, after Optionee’s exercise of its Option to Purchase and for a period of
five (5) years after the applicable initial Exercise Effective Date, Optionee
shall also have the right to purchase from Optionor up to twenty (20) acres of
surface estate, selected by Optionee, out of Optionor’s Surface Estate Lands, to
be used for a central plant facility, for a purchase price of $1,500.00 per
acre.

(d)               Optionor and Optionee agree to execute any instruments or
other documents as may be reasonably requested in order to vest in Optionee the
rights and interests provided for in this Section 3.3.

ARTICLE 4.- OPTIONOR’S REPRESENTATIONS AND WARRANTIES

                Optionor represents and warrants to Optionee as of the date
hereof, that:

(a)           Optionor is a limited partnership duly organized, validly
existing, and in good standing under the laws of the State of Texas, and is duly
qualified to carry on its business in Texas;

(b)           Optionor has all requisite power and authority to carry on its
business as presently conducted, to enter into this Agreement and the other
documents and agreements contemplated hereby, and to perform its obligations
under this Agreement and the other documents and agreements contemplated hereby.
Effective as of the date hereof the consummation of the transactions
contemplated by this Agreement do not and will not violate, nor be in conflict
with, any provision of its governing documents or any agreement or instrument to
which it is a party or by which it is bound (except as set forth hereinbelow and
in any provision contained in agreements customary in the oil and gas industry
relating to (1) the Preferential Purchase Rights (defined below) as to all or
any portion of the Assets; (2) required consents to transfer and related
provisions; (3) maintenance of uniform interest provisions; and (4) any other
third-party approvals or consents contemplated herein), or any judgment, decree,
order, statute, rule, or regulation applicable to Optionor;

(c)           This Agreement, and all documents and instruments required
hereunder to be executed and delivered by Optionor constitute legal, valid and
binding obligations of Optionor in accordance with its respective terms, subject
to applicable bankruptcy and other similar laws of general application with
respect to creditors;

(d)           There are no bankruptcy, reorganization or receivership
proceedings pending, being contemplated by, or to the actual knowledge of
Optionor threatened against Optionor;

(e)           The execution, delivery and performance of this Agreement, and the
transaction contemplated hereunder have been duly and validly authorized by all
requisite authorizing action, corporate, partnership or otherwise, on the part
of Optionor.

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(f)            Optionor has not incurred any obligation or liability, contingent
or otherwise, for brokers’ or finders’ fees in connection with this Agreement or
the transaction provided herein;

(g)           Other than as set forth in Exhibit “H”, to the best of Optionor’s
knowledge, there are no claims, investigations, demands, actions, suits, or
administrative, legal or arbitration proceedings (including condemnation,
expropriation, or forfeiture proceedings) pending, or to the best of Optionor’s
knowledge, threatened, against Optionor or any of its affiliates, or any Asset:
(i) seeking to prevent the consummation of the transactions contemplated hereby,
or (ii) which, individually or in the aggregate, would materially and adversely
affect the Assets.

(h)           Optionor has not intentionally or willfully misrepresented or
omitted any material information requested by Optionee in writing about the
Assets;

(i)            Subject to satisfaction of the Condition Precedent, the granting
of the Option to Purchase and the transfer of the Assets to Optionee
contemplated hereby does not violate any covenants or restrictions imposed on
Optionor by any bank or other financial institution in connection with a
mortgage or other instrument, and will not result in the creation or imposition
of a lien on any portion of the Assets;

(j)            Except as disclosed by Optionor in writing, if Optionor is the
operator of an Asset, to the best of Optionor’s knowledge, it is in material
compliance with all laws, rules, regulations and orders pertaining to such
Assets, including Environmental Laws;

(k)           Except as disclosed by Optionor in writing, if Optionor is the
operator of an Asset, to the best of Optionor’s knowledge, it has all
governmental permits necessary for the operation of the Asset and is not in
material default under any permit, license or agreement relating to the
operation and maintenance of the Assets;

(l)            Except as set forth on Exhibit “K”, there are no waivers,
consents to assign, approvals or similar rights owned by third parties and
required in connection with granting of the Option to Purchase or the conveyance
of the Assets from Optionor to Optionee;

(m)          Except as set forth on Exhibit “K”, , there are no rights of first
refusal, preferential rights, preemptive rights or contracts, or other
commitments or understandings of a similar nature to which Optionor is a party
or to which the Assets are subject;

(n)           No Hydrocarbons produced or to be produced from the Leases are
subject to any oil or gas sales contracts other than those identified on
Exhibits “F-1” and “F-2” and, no third party has any call upon, option to
purchase, dedication rights or similar rights with respect to the Hydrocarbons
produced to be produced from Optionor’s interest in the Leases;

(o)           Other than as set forth in Exhibit “H”, to the best of Optionor’s
knowledge there are no claims, investigations, demands, actions, suits, or
administrative, legal or

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arbitration proceedings (including condemnation, expropriation, or forfeiture
proceedings) pending, or to the best of Optionor’s knowledge threatened, against
Optionor or any of its affiliates seeking to prevent the consummation of the
transactions contemplated hereby; and

(p)           Except as set forth on Exhibit “L”, there are no oil or gas
production imbalances with respect to the Leases;

The above representations and warranties by Optionor shall be continuing in
nature during the term of this Agreement or as otherwise provided, and Optionor
shall notify Optionee of any material change with respect thereto.

ARTICLE 5. - OPTIONEE’S REPRESENTATIONS AND WARRANTIES

                Optionee represents and warrants to Optionor as of the date
hereof that:

(a)           Optionee is a limited liability company duly organized, validly
existing, and in good standing under the laws of the state of Delaware, and is
duly qualified to carry on its business in Texas;

(b)           Optionee has all requisite power and authority to carry on its
business as presently conducted, to enter into this Agreement and the other
documents and agreements contemplated hereby, and to perform its obligations
under this Agreement and the other documents and agreements contemplated
hereby.  This Agreement and the consummation of the transactions contemplated by
this Agreement do not and will not violate, nor be in conflict with, any
provision of Optionee’s articles of incorporation, partnership agreement(s),
by-laws or governing documents or any agreement or instrument to which it is a
party or by which it is bound, or any judgment, decree, order, statute, rule, or
regulation applicable to Optionee;

(c)           the execution, delivery and performance of this Agreement and the
transactions contemplated hereunder have been duly and validly authorized by all
requisite authorizing action, corporate, partnership or otherwise, on the part
of Optionee;

(d)           this Agreement, and all documents and instruments required
hereunder to be executed and delivered by Optionee at Closing, constitute legal,
valid and binding obligations of Optionee in accordance with their respective
terms, subject to applicable bankruptcy and other similar laws of general
application with respect to creditors;

(e)           there are no bankruptcy, reorganization or receivership
proceedings pending, being contemplated by, or to the actual knowledge of
Optionee threatened against Optionee;

(f)            Optionee has not incurred any obligation or liability, contingent
or otherwise, for brokers’ or finders’ fees in connection with this Agreement or
the transaction provided herein;

 

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(g)           Optionee is an experienced and knowledgeable investor and operator
in the oil and gas business.  Prior to entering into this Agreement, Optionee
was advised by and has relied solely on its own expertise and legal, tax,
reservoir engineering, accounting, and other professional counsel concerning
this Agreement, the Assets and the value thereof;

(h)           Other than as set forth in Exhibit “H”, to the best of Optionee’s
knowledge, there are no claims, investigations, demands, actions, suits, or
administrative, legal or arbitration proceedings (including condemnation,
expropriation, or forfeiture proceedings) pending, or to the best of Optionee’s
knowledge, threatened, against Optionee or any of its affiliates, or any Asset:
seeking to prevent the consummation of the transactions contemplated hereby.

(i)            Optionee has the financial resources to close the transaction
contemplated by this Agreement, whether by third party financing or otherwise;
and

(j)            Optionee acknowledges the existence of the claims and suits
described in Exhibit “H” and that these claims and suits are Permitted
Encumbrances as set forth in Section 8.1(c).  Optionee further acknowledges that
Optionee has, or by Closing will have, legal counsel of its choice fully review
those claims and suits identified on Exhibit “H”.

The above representations and warranties by Optionee shall be continuing in
nature during the term of this Agreement or as otherwise provided, and Optionee
shall notify Optionor of any material change with respect thereof.

ARTICLE 6. - ACCESS TO INFORMATION AND INSPECTIONS

6.1.         Title Files.

Promptly after the execution of this Agreement and during the term of this
Agreement, Optionor shall permit Optionee and its representatives at reasonable
times during normal business hours to examine, in Optionor’s offices at their
actual location, all abstracts of title, title opinions, title files, ownership
maps, lease files, assignments, division orders, payout statements, title
curative, other title materials and agreements pertaining to the Assets by
Optionee, within a reasonable period of time, insofar as the same may now or in
the future be in existence and in the possession of Optionor.  No warranty of
any kind is made by Optionor as to the information so supplied, and Optionee
agrees that any conclusions drawn therefrom are the result of its own
independent review and judgment.  Optionee shall be entitled to copies of all
files related to the Assets other than files containing privileged
communications or attorney work product.

6.2.         Other Files.

Promptly after the execution of this Agreement and during the term of this
Agreement, Optionor shall permit Optionee and its representatives at reasonable
times during normal business hours to examine, in Optionor’s offices at their
actual location,

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all production, well, regulatory, engineering and geological information,
accounting information, environmental information, inspections and reports, and
other information, files, books, records, and data pertaining to the Assets as
requested by Optionee, insofar as the same may now or in the future be in
existence and in the possession of Optionor, excepting economic evaluations and
Optionor’s proprietary interpretations of same, reserve reports and any such
information that is subject to confidentiality agreements or to the
attorney/client and work product privileges.  No warranty of any kind is made by
Optionor as to the information so supplied, and Optionee agrees that any
conclusions drawn therefrom are the result of its own independent review and
judgment.  Optionee shall be entitled to copies of all files related to the
Assets other than files containing privileged communications or attorney work
product.

6.3          Confidentiality Agreement.

All information made available to Optionee pursuant to Article 6 shall be
maintained confidential by Optionee until the Closing Date. The information
protected by such confidentiality obligation does not include any information
that (i) at the time of disclosure is generally available to and known by the
public (other than as a result of a disclosure by Optionee), or which after such
disclosure comes into the public domain through no fault of Optionee or its
representatives, or (ii) is or was available to Optionee on a nonconfidential
basis, or (iii) is already known to Optionee on a nonconfidential basis, as
evidenced by Optionee’s written records, at the time of its disclosure by
Optionor to Optionee.  Optionee may disclose the information or portions thereof
to those employees, agents or representatives of Optionee who need to know such
information for the purpose of assisting Optionee in connection with its
performance of this Agreement, including to D&M, or its successor or
replacement, for the purposes of Section 2.5 of this Agreement. Further, in the
event that Optionee is requested or required (by deposition, interrogatory,
request for documents, subpoena, civil investigative demand or similar process)
to disclose any of the information, Optionee shall provide Optionor with prompt
written notice of such request or requirement, so that Optionor may seek such
protective order or other appropriate remedy as it may desire.  Optionee shall
further take reasonable steps to ensure that Optionee’s employees, consultants
and agents comply with the provisions of this Section 6.3.  Notwithstanding the
foregoing, nothing contained within this Section 6.3 shall preclude either the
Optionor or Optionee from disclosing its internal reports, analyses,
compilations, studies or evaluations based upon information that is generally
known or available in the public domain.

6.4.         Inspections.

Promptly after the execution of this Agreement and during the term of this
Agreement, Optionor, subject to any necessary third-party operator approval,
shall permit Optionee and its representatives at reasonable times and at their
sole risk, cost and expense, to conduct reasonable inspections of the Assets for
all purposes, including any Environmental Defects.

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6.5.         No Warranty or Representation on Optionor’s Information.

EXCEPT AS SET FORTH IN THIS AGREEMENT, OPTIONOR MAKES NO WARRANTY OR
REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE ACCURACY, COMPLETENESS,
OR MATERIALITY OF THE INFORMATION, RECORDS, AND DATA NOW, HERETOFORE, OR
HEREAFTER MADE AVAILABLE TO OPTIONEE IN CONNECTION WITH THE ASSETS OR THIS
AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY DESCRIPTION OF THE ASSETS, QUALITY
OR QUANTITY OF HYDROCARBON RESERVES, IF ANY, PRODUCTION RATES, RECOMPLETION
OPPORTUNITIES, DECLINE RATES, GAS BALANCING INFORMATION, ALLOWABLES OR OTHER
REGULATORY MATTERS, POTENTIAL FOR PRODUCTION OF HYDROCARBONS FROM THE ASSETS, OR
ANY OTHER MATTERS CONTAINED IN OR OMITTED FROM ANY OTHER MATERIAL FURNISHED TO
OPTIONEE BY OPTIONOR.  ANY AND ALL SUCH DATA, INFORMATION AND MATERIAL FURNISHED
BY OPTIONOR IS PROVIDED AS A CONVENIENCE ONLY AND ANY RELIANCE ON OR USE OF SAME
IS AT OPTIONEE’S SOLE RISK.

6.6.         Amendments to Exhibits.

Optionor and Optionee acknowledge that Optionee’s inspection of Optionor’s
records and files, or further review by Optionor, prior to Closing may indicate
that some or all of the Exhibits attached to this Agreement were not complete or
entirely correct at the time of execution of this Agreement.  Accordingly,
Optionor and Optionee agree to revise and amend the Exhibits, as needed, so that
they will be complete and accurate for any Closing  and shall be given effect as
if made on the Closing Date.  It is understood, however, that such revisions or
amendments shall not otherwise be taken into account in giving effect to any
representations, rights, options, conditions, covenants and obligations of the
Parties contained in this Agreement as originally executed and shall not be used
to negate any representation or covenant previously made.

ARTICLE 7. - ENVIRONMENTAL MATTERS AND ADJUSTMENTS

7.1.         Investigation.

Prior to December 1, 2006, Optionee shall have the right, at reasonable times
during normal business hours, to conduct its investigation into the status of
the physical and environmental condition of the Assets.  Upon payment of the
initial option payment described in Section 2.3(a), Optionee accepts the
physical and environmental condition of the Assets existing as of the Agreement
Effective Time.  Subsequent to the execution of this Agreement, during the month
of November following the Option Exercise Date, Optionee shall have the right,
at reasonable times during normal business hours, to conduct further
investigation into the status of the physical and environmental condition of the
Assets. If, in the course of conducting such investigation, Optionee discovers
that any Asset is subject to a material Environmental Defect not existing as of
the Agreement Effective Time, Optionee may raise such Environmental Defect in
the

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manner set forth below.  For purposes hereof, the term “material” shall mean
that the Optionee’s good faith estimate, supported by documentation, of the cost
of remediating any single Environmental Defect, or the net reduction in value of
the Asset affected by such Defect, whichever is lesser, exceeds fifty thousand
dollars ($50,000.00), the Parties agreeing that such amount will be a per Asset
deductible rather than a threshold.  No later than 5:00 p.m. Central Standard
Time on December 1st following the Option Exercise Date (the “Environmental
Defect Notice Date”), Optionee shall notify Optionor in writing specifying such
Environmental Defects, if any, the Assets affected thereby, and Optionee’s good
faith estimate of the costs of remediating such Defects, or the net reduction in
value of the Assets affected by such Defects, whichever is lesser, together with
supporting documentation.  Optionor may, but shall be under no obligation to,
correct at its own cost and expense such Defects on or before the Closing Date,
in which case there shall be no reduction to the Cash Payment, nor any payment
by Optionor to Optionee.  Prior to Closing, Optionee shall treat all information
regarding any environmental conditions as confidential, whether material or not,
and shall not make any contact with any governmental authority or third party
regarding same without the prior written consent of Optionor unless required by
law.

7.2.         Waiver of Defects.

If Optionee fails to notify Optionor prior to or on the Environmental Defect
Notice Date, of any Environmental Defects, all defects, whether known or
unknown, will be deemed waived for purposes of adjustments pursuant to this
Article 7, the Parties shall proceed with the Closing, Optionor shall be under
no obligation to correct the defects, and Optionee shall assume the risks,
liability and obligations associated with such defects, unless such defects
constitute Retained Environmental Obligations or Liabilities of Optionor.

7.3.         Remedy.

In the event any Environmental Defect, for which notice has been timely given as
provided hereinabove, remains uncured as of the Closing, Optionor, at its sole
option, shall, (i) agree to cure or remediate any Defect within a reasonable
time after Closing and without any reduction or offset to any Cash Payment in a
manner acceptable to both Parties, or (ii) reduce the Cash Payment by the amount
of the Environmental Defect Value as determined pursuant to Section 8.4, and
subject to application of the fifty thousand dollars ($50,000.00) deductible in
Section 7.1; or (iii) if the Purchase Price does not consist of a Cash Payment
(but rather a Volumetric Production Payment), pay Optionee at the Closing the
amount of the Environmental Defect Value as determined pursuant to Section 8.4,
and subject to application of the fifty thousand dollars ($50,000.00)
deductible.

7.4.         Default Basket.

The Parties agree that adjustments to the Purchase Price under this Article 7
and Article 8 shall only occur to the extent that the aggregate Environmental
Defects and Title Defects, collectively, exceed two hundred fifty thousand
dollars ($250,000.00)

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(the “Aggregate Defect Basket”) after taking the applicable materiality
deductible into account.  For the avoidance of doubt and by way of example only,
if there are a total of two (2) Environmental Defects of two  hundred thousand
dollars ($200,000.00) and one hundred fifty thousand dollars ($150,000.00) and
two (2) Title Defects of seventy five  thousand dollars ($75,000.00) and five
thousand dollars ($5,000.00), the total adjustment would be twenty five 
thousand dollars ($25,000.00) [being one hundred fifty thousand dollars
($150,000.00) for Environmental Defect #1, plus one hundred thousand dollars
($100,000.00) for Environmental Defect #2, plus twenty five thousand dollars
($25,000.00) for Title Defect #1 and zero ($0) for Title Defect #2, minus two
 hundred fifty thousand dollars ($250,000.00) for the Aggregate Defect Basket].

7.5.         Closing.

In the event any adjustment to the Cash Payment or payment by Optionor to
Optionee is made due to an Environmental Defect raised by Optionee, the Parties
shall proceed with the Closing, Optionor shall be under no obligation to correct
the Defect, and the Defect shall become an Assumed Obligation of Optionee.

ARTICLE 8. - TITLE DEFECTS AND ADJUSTMENTS

8.1.         Existing Title; Definitions.

Upon payment of the initial option payment as set forth in Section 2.3(a),
Optionee accepts title to the Assets as it exists as of the Agreement Effective
Time, subject to its right to examine issues related to defects to title arising
or occuring during the time after the Agreement Effective Time until the Closing
Date, as set forth below.

For purposes hereof, the terms set forth below shall have the meanings assigned
thereto.

(a)           “Defensible Title”, subject to and except for the Permitted
Encumbrances means:

(1)           Such title held by Optionor and reflected by appropriate
documentation properly filed in the official records of the jurisdiction in
which the Lease or Leases are located that (a) as to the Leases, entitles
Optionor and will entitle Optionee, after Closing, to own and receive and retain
the Designated Interests (subject to the Excluded Assets) in such Leases,
without suspension, reduction or termination, excluding Permitted Encumbrances;
(b) as to wells, entitles Optionor and will entitle Optionee, after Closing, to
own and receive and retain the Designated Interests (subject to the Excluded
Assets) in such wells, without suspension, reduction or termination, excluding
Permitted Encumbrances; (c) as to the West Hastings Unit and East Hastings
Field, obligates Optionor, and will obligate Optionee after Closing, to bear
89.33682% of the costs and expenses relating to the maintenance, development and
operation of such West Hastings Unit and 100% as to the East Hastings Field; 

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(d) as to the West Hastings Unit, reflects the ownership and unit participation
of the tracts within the unit area as set forth in Exhibit “C”; (e) the Leases
and wells are free and clear of any liens, claims or encumbrances of any kind or
character as of the Closing, except Permitted Encumbrances; and (f) is not
encumbered by any  default by Optionor incurred after the Agreement Effective
Time under a material provision of any Lease, Unit Operating Agreement, or other
contract or agreement affecting the Leases;

(2)           As to personal property included in the Assets, title to such
property is free and clear of any liens, claims or encumbrances of any kind or
character as of Closing, except Permitted Encumbrances; and

(3)           As to all other Assets, (a) such Assets are free and clear of any
liens, claims or encumbrances of any kind or character incurred after the
Agreement Effective Time as of Closing except for Permitted Encumbrances; and
(b) the Optionor is not in default under a material provision of any Lease,
operating agreement, or other contract or agreement affecting such Assets.

(b)           “Title Defect” shall mean (i) any matter which causes Optionor to
have less than Defensible Title to any of the Assets as of the Closing Date, or
(ii) any matter that causes one or more of the following statements to be untrue
as of the Closing Date, except for Permitted Encumbrances and matters in
existence at, or occurring prior to, the Agreement Effective Time:

(1)           Optionor has not received written notice from any governmental
authority or any other person (including employees) claiming any material
violation of any law, rule, regulation, ordinance, order, decision or decree of
any governmental authority with respect to the such Assets.

(2)           Optionor, or the Operator of an Asset, has complied in all
material respects with the provisions and requirements of all orders,
regulations and rules issued or promulgated by governmental authorities having
jurisdiction with respect to such Assets and has filed for and obtained all
material governmental certificates, permits and other authorizations necessary
for Optionor’s current operation of such Assets other than permits, consents and
authorizations required for the sale and transfer of such Assets to Optionee;

(3)           Optionor has not materially defaulted or materially violated any
agreement to which Optionor is a party or any obligation to which Optionor is
bound affecting or pertaining to such Assets other than as disclosed hereunder
or on any exhibit attached hereto;

(4)           The Leases included within such Assets are in full force and
effect; and

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(5)           All taxes, rentals, royalties, operating costs and expenses, and
other costs and expenses related to such Assets which are due from or are the
responsibility of Optionor have been paid.

(c)           “Permitted Encumbrances” shall mean any of the following matters:

(1)           defects in the early chain of title consisting of failure to
recite marital status or the omission of succession or heirship proceedings;

(2)           defects or irregularities arising out of uncancelled mortgages,
judgments or liens, the inscriptions of which, on their face, have expired as a
matter of law prior to the Effective Time, or prior unreleased oil and gas
leases which, on their face, expired more than ten (10) years prior to the
Agreement Effective Time and have not been maintained in force and effect by
production or operations pursuant to the terms of such leases;

(3)           tax liens and operator’s liens for amounts not yet due and
payable, or those that are being contested in good faith by Optionor in the
ordinary course of business;

(4)           to the extent any of the following do not materially diminish the
value of, or impair the conduct of operations on, any of the Assets and do not
impair Optionor’s right to receive the revenues attributable thereto:  (i)
easements, rights-of-way, servitudes, permits, surface leases and other rights
in respect of surface operations, pipelines, grazing, hunting, fishing, logging,
canals, ditches, lakes, reservoirs or the like, (ii) easements for streets,
alleys, highways, pipelines, telephone lines, power lines, railways and other
similar rights-of-way, on, over or in respect of property owned or leased by
Optionor or over which Optionor owns rights of way, easements, permits or
licenses, and (iii) the terms and conditions of all leases, agreements, orders,
instruments and documents pertaining to the Assets;

(5)           all lessors’ royalties, overriding royalties, net profits
interests, carried interest, production payments, reversionary interests and
other burdens on or deductions from the proceeds of production if the net
cumulative effect of such burdens or deductions does not reduce the net revenue
interest of Optionor in any well affected thereby to the extent that Optionor
will not be able to deliver to Optionee at Closing, the Designated Interests in
production (net revenue interests);

(6)           preferential rights to purchase and required third party consents
to assignments and similar agreements with respect to which waivers or consents
are obtained from the appropriate parties, or the appropriate time period for
asserting the rights has expired without an exercise of the rights prior to the
Closing Date;

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(7)           all rights to consent by, required notices to, filings with, or
other actions by governmental entities and tribal authorities in connection with
the sale or conveyance of oil and gas leases or interests if they are
customarily obtained subsequent to the sale or conveyance;

(8)           defects or irregularities of title arising out of events or
transactions which have been barred by limitations or by acquisitive or
liberative prescription;

(9)           any encumbrance or other matter having an aggregate adverse effect
on the value of the Assets of less than fifty thousand dollars ($50,000), the
Parties agreeing that such amount will be a per Asset deductible rather than a
threshold;

(10)         rights reserved to or vested in any municipality or governmental,
statutory or public authority to control or regulate any of the Assets in any
manner, and all applicable laws, rules and orders of governmental authority; and

(11)         any encumbrance or other matter (whether or not constituting a
Title Defect) expressly waived in writing by Optionee or listed on Exhibit “H”.

(12)    liens related to Optionor’s bank indebtedness which will be released at
Closing.

(13)    any matters which would otherwise constitute Title Defects that existed
as of the Agreement Effective Date.

8.2.         Notice of Title Defects.

No later than 5:00 p.m. Central Standard Time on December 1st following the
Option Exercise Date (a “Title Defect Notice Date”), Optionee may provide
Optionor written notice of any Title Defect along with a description of those
matters which, in Optionee’s reasonable opinion, constitute Title Defects and
setting forth in detail Optionee’s calculation of the value for each Title
Defect determined pursuant to Section 8.4.  Optionor may elect, at its sole cost
and expense, but without obligation, to cure all or any portion of such Title
Defects prior to Closing, in a manner acceptable to both Parties, in which case
no reduction or offset in any Cash Payment, or payment by Optionor to Optionee,
shall be made.  Optionee’s failure to deliver to Optionor such notice on or
before the Title Defect Notice Date shall be deemed a waiver by Optionee of all
Title Defects with respect to the Assets, known or unknown, that Optionor does
not have notice of from Optionee on such date.  Any defect or deficiency
concerning Optionor’s title to the Assets not asserted by Optionee in a Title
Defect Notice on or prior to the Title Defect Notice Date shall be deemed waived
by Optionee for purposes of any adjustment to the Cash Payment or payment by
Optionor to Optionee, the Parties shall proceed with Closing, Optionor shall be
under no obligation to correct the defects, and Optionee shall assume the risks,
liability and obligations associated with

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such defects.  However, such waiver shall not effect or impair the warranties of
Optionor set forth in Section 8.5 or the indemnity obligations of Optionor as
set forth in Article 16.

8.3.         Title Defect Adjustment.

(a)           In the event any Title Defect, for which notice has been timely
given as provided hereinabove, remains uncured as of Closing, Optionor shall
have the opportunity to cure, until sixty (60) days after Closing (“Cure
Period”), such Title Defect.  In the alternative, Optionor may elect to (i)
indemnify Optionee against any damages, claims or expenses that may arise out of
such Title Defect, subject to the provisions of Section 8.3(c) below, with no
reduction in the Cash Payment or payment to Optionee; or (ii) reduce the Cash
Payment by an amount equal to the Title Defect Value as determined pursuant to
Section 8.4, and subject to application of the fifty thousand dollars
($50,000.00) deductible described in Section 8.1(c) (9); or, (iii) if the
Purchase Price does not consist of a Cash Payment (but rather a volumetric
production payment), pay Optionee at Closing the amount of the Title Defect
Value as determined pursuant to Section 8.4, and subject to application of the
fifty thousand dollars ($50,000.00) deductible.  Should Optionor elect
alternative “(i)” (indemnity) or “(ii)” (price reduction) or “(iii)” (payment to
Optionee) in this Section 8.3(a), those Assets affected by the Title Defect
shall be transferred to Optionee at Closing.

(b)           If Optionor elects to attempt to cure a Title Defect after
Closing, the Closing with respect to the portion of the Assets affected by such
Title Defect will proceed along with all other Assets as provided in this
Agreement.  If Optionor fails or refuses to cure any Title Defect prior to the
expiration of the Cure Period, Optionor shall notify Optionee in writing of such
failure or refusal promptly upon the expiration of the Cure Period.  In this
event, Optionee shall within seven (7) days after receipt by Optionee of Notice
from Optionor of such failure or refusal to cure any such Title Defect, pay
Optionee an amount equal to the subject Title Defect Value.  In the event that
any such property is retained by Optionor and such property has been receiving
revenue, without complaint, for a period in excess of two (2) years, then
Optionee agrees (i) not to take any action to interfere with such revenue
stream, and (ii) to the extent that Optionee becomes payor of such revenue, to
pay Optionor such revenue upon receipt of an indemnity agreement from Optionor.

(c)           The following provisions shall apply to an election by Optionor
under Section 8.3(a)(i) to indemnify Optionee with regard to such Title Defect:

(1)           Optionor’s indemnity shall be limited to a period of two (2) years
from the Effective Time.

(2)           In no event shall Optionor’s indemnity exceed the amount of the
Title Defect Value as determined under Section 8.4 hereof.

(3)           Optionor’s indemnity shall be freely transferable by Optionee to
its successors and assigns of the Assets affected by such Title Defect,
including

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without limitation, any lender to Optionee and any purchaser of such Assets,
whether directly from Optionee or through any foreclosure proceeding; and

(4)           If the Title Defect Value, as determined under Section 8.4 hereof,
individually or in the aggregate, for one or more Title Defects to be covered by
the Optionor’s indemnity exceeds two hundred fifty thousand dollars
($250,000.00) (after application of the appropriate deductible(s) provided for
in Section 8.1(c)(9), Optionor shall have no right under the second sentence of
Section 8.3(a)(iii) to indemnify Optionee with regard to such Title Defects
without Optionee’s consent.

(d)           In the event any adjustment to the Cash Payment, or payment by
Optionor to Optionee, is made due to a Title Defect raised by Optionee, the
Parties shall proceed with Closing, Optionor shall be under no obligation to
correct the Title Defect, and such Title Defect shall become an Assumed
Obligation of Optionor.

8.4.         Environmental Defect and Title Defect Values.

Upon timely delivery of notice of an Environmental or Title Defect, Optionee and
Optionor shall use their best efforts to agree on the validity and value of the
claim for the purpose of making any adjustment to the Purchase Price based on
the provisions herein (“Environmental or Title Defect Value”).  In determining
the Value of an Environmental or Title Defect, it is the intent of the Parties
to include, to the extent possible, only that portion of the lands, Leases and
wells, or other Assets, whether an undivided interest, separate interest or
otherwise, materially and adversely affected by the Defect.  The following
guidelines shall be followed by the Parties in establishing the Value of any
Environmental or Title Defect for the purpose of adjusting a Cash Payment or
establishing an amount to be paid by Optionor to Optionee for such a Defect if
(a) the validity of the claim is agreed to by the Parties, (b) proper notice has
been timely given, and (c) subject to (i) application of the appropriate
deductibles as set forth in this Agreement for Environmental Defects and Title
Defects:

(a)           If the Title Defect is based on a difference in net revenue
interest or expense interest from the Designated Interests for the affected
property, then the Title Defect Value shall be the amount of the reduction or
increase as the case may be.

(b)           If the Environmental or Title Defect is liquidated in amount (for
example, but not limited to, a lien, encumbrance, charge or penalty), then the
Defect Value shall be the lesser of (1) the sum necessary to be paid to the
obligee to remove the Defect from the property, or (2) the decrease in the fair
market value of the Asset as a result of the Defect.

(c)           If the Environmental or Title Defect represents an obligation or
burden upon the affected property for which the economic detriment is not
liquidated but can be estimated with reasonable certainty as agreed to by the
Parties, the Defect Value shall be the sum necessary to compensate Optionee at
Closing for the adverse economic effect which the Environmental or Title Defect
will have on the affected property.  This

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sum shall be the lesser of (1) the cost of remediating the Defect, or (2) the
decrease in the fair market value of the Asset as a result of the Defect.  The
fair market value determination shall be made by the Parties in good faith
taking into account all relevant factors, including, but not limited to, the
following:

(1)           the value of the Leases, lands, wells and other Assets affected by
the Environmental or Title Defect;

(2)           the productive status of the affected Asset (i.e., proved
developed producing, etc.) and the present value of the future income expected
to be produced therefrom;

(3)           if the Title Defect represents only a possibility of title
failure, the probability that such failure will occur; and

(4)           the economic effect of the Environmental or Title Defect.

(d)           If the Value of the Environmental or Title Defect cannot be
determined using the above guidelines, and if the Parties cannot otherwise agree
on the amount of an adjustment to the Cash Payment or payment by Optionor to
Optionee, or if the validity of the claim as to an Environmental or Title Defect
cannot be agreed upon, then the Closing shall nevertheless include the Asset(s)
affected thereby.  If the validity of the claim is in dispute, there shall be no
adjustment to the Cash Payment or a payment by Optionor to Optionee at Closing. 
If the value of the claim is in dispute, the Cash Payment or payment by Optionor
to Optionee at Closing shall be adjusted by an amount being the average of
Optionor’s and Optionee’s good faith estimates of the value thereof.  In either
case, Optionor and Optionee shall each have the right, exercisable within ninety
(90) days after the Closing Date, to refer the disputed matter to mediation and
arbitration in accordance with the dispute resolution procedures set forth in
Exhibit “P.” After the expiration of said ninety (90) day period the right to
refer the matter to mediation and arbitration shall terminate.  Subject to the
terms of Exhibit “P”, the decision of the arbitrator regarding any Environmental
or Title Defect Dispute shall be final as between the Parties.

8.5.         Title Warranty.

OPTIONOR SHALL CONVEY OPTIONOR’S INTERESTS IN AND TO THE ASSETS TO OPTIONEE AS
PROVIDED IN THE FORM OF CONVEYANCE, ASSIGNMENT AND BILL OF SALE ATTACHED AS
EXHIBIT “I” HERETO.  THE CONVEYANCE, ASSIGNMENT AND BILL OF SALE SHALL BE MADE
WITHOUT WARRANTY OF TITLE, EITHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AND
WITHOUT RECOURSE, EVEN AS TO THE RETURN OF THE PURCHASE PRICE OR OTHER
CONSIDERATION (EXCEPT AS SPECIFICALLY PROVIDED HEREIN), EXCEPT THAT OPTIONOR
SHALL WARRANT TITLE TO THE ASSETS AGAINST ALL CLAIMS, LIENS, BURDENS AND
ENCUMBRANCES ARISING BY, THROUGH OR UNDER OPTIONOR, BUT NOT OTHERWISE AND NOT
WITH RESPECT TO ANY IMPAIRMENT OR FAILURE OF TITLE RELATED TO ANY

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LACK OF PRODUCTION IN PAYING QUANTITIES.  THE CONVEYANCE, ASSIGNMENT AND BILL OF
SALE SHALL BE MADE WITH FULL SUBSTITUTION AND SUBROGATION TO OPTIONEE IN AND TO
ALL COVENANTS AND WARRANTIES BY OTHERS HERETOFORE GIVEN OR MADE TO OPTIONOR WITH
RESPECT TO THE ASSETS.

IMBALANCES WITH RESPECT TO OIL OR NATURAL GAS ARE GOVERNED BY ARTICLE 17
HEREOF.  THE PARTIES AGREE THAT THE EXISTENCE OF ANY SUCH IMBALANCES SHALL NOT
BE DEEMED A TITLE DEFECT.

ARTICLE 9. - PREFERENTIAL PURCHASE RIGHTS
AND CONSENTS OF THIRD PARTIES

9.1.         Actions and Consents.

(a)           Optionor and Optionee agree that each shall use all reasonable
efforts to take or cause to be taken all such action as may be necessary to
consummate and make effective the transaction provided in this Agreement and to
assure that it will not be under any material corporate, legal, or contractual
restriction that could prohibit or delay the timely consummation of such
transaction.

(b)           Prior to the execution of this Agreement, Optionor and Optionee
will satisfy themselves that the execution of this Agreement will not in and of
itself trigger (i) any preferential rights to purchase, or any rights of first
refusal to purchase, any of the Assets (“Preferential Purchase Rights”), or (ii)
any rights of consent or approval to the Agreement or transactions contemplated
by the Agreement (“Consents”).  In the event that Optionor and Optionee
determine before or after the execution of this Agreement that a Preferential
Purchase Right or Consent is triggered by the execution of this Agreement, they
will endeavor to obtain a waiver of such right, or such consent, as applicable,
and failing which, will negotiate an agreed upon reduction or reimbursement of
the initial installment of the consideration for the initial term of the Option
to Purchase payable upon execution of this Agreement.

(c)           Promptly after the Option Exercise Date, Optionor shall notify all
holders of Preferential Purchase Rights and Consents of such terms and
conditions of this Agreement to which the holders of such rights are entitled. 
Optionor shall promptly notify Optionee if any Preferential Purchase Rights are
exercised, any consents or approvals denied, or if the requisite period has
elapsed without said rights having been exercised or consents or approvals
having been received.  If prior to Closing, any such Preferential Purchase
Rights are timely and properly exercised, or Optionor is unable to obtain a
necessary consent or approval prior to Closing, the interest or part thereof so
affected shall be treated in the same manner as an uncured Title Defect.  If any
additional Preferential Purchase Rights are discovered after Closing, or if a
third party Preferential Purchase Rights holder alleges improper notice, then
Optionee agrees to cooperate with Optionor in giving effect to any such valid
third party Preferential Purchase Rights.  In the event any such valid third
party preferential purchase rights are

 

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validly exercised after Closing, Optionee’s sole remedy against Optionor shall
be payment by Optionor to Optionee of the value of that portion of the Assets on
which such rights are exercised and lost by Optionee to such third party
determined in the same manner as a Title Defect Value.

(d)           With respect to any portion of the Assets for which a Preferential
Purchase Right has not been asserted prior to Closing, or a consent or other
approval to assign has not been granted and for which the time for election to
exercise such Preferential Purchase Right or to grant such consent has not
expired, the Closing with respect to the portion of the Assets subject to such
outstanding obligations will nevertheless proceed along with the Closing of
other Assets as provided in this Agreement.  In the event that within ninety
(90) days after Closing any such Preferential Purchase Right is not waived or
consent or approval is not obtained or the time for election to purchase or to
deliver a consent or approval does not pass (such that under the applicable
documents, Optionor may not sell the affected third party interest to Optionee),
then Optionee shall reassign same to Optionor and Optionor will promptly pay to
Optionee the value of such third party interests.

ARTICLE 10. - COVENANTS OF OPTIONOR AND OPTIONEE

10.1.       Covenants of Optionor Pending Closing.

(a)           From and after the date of execution of this Agreement and until
Closing, and subject to Section 10.2 and the constraints of applicable operating
and other agreements, Optionor shall operate, manage, and administer the Assets
as a reasonable and prudent operator and in a good and workmanlike manner
consistent with its past practices, and shall carry on its business with respect
to the Assets in substantially the same manner as before execution of this
Agreement.  Prior to Closing, Optionor shall use all commercially reasonable
efforts to preserve in full force and effect all Leases, operating agreements,
easements, rights-of-way, permits, licenses, and agreements which relate to the
Assets in which Optionor owns an interest, and shall perform all material
obligations of Optionor in or under all such agreements relating to the Assets;
provided, however, Optionee’s sole remedy for Optionor’s breach of its
obligations under this Section 11.1(a) shall be limited to the relative amount
of the Purchase Price the parties agree should be allocated to that portion of
the Assets affected by such breach, and if the parties cannot agree, the matter
shall be submitted to mediation and arbitration procedures set forth in Exhibit
“P” Optionor shall, except for emergency action taken in the face of serious
risk to life, property, or the environment (1) submit to Optionee, for prior
written approval, all proposed contracts, agreements or amendments to contracts
relating to the Assets to the extent same could be binding upon Optionee’s
exercise of its Option to Purchase; (2) submit to Optionee, for Optionee’s
information, all AFE’s relating to the Assets in excess of One Hundred Thousand
Dollars ($100,000.00); (3) consult with, inform, and advise Optionee regarding
all material matters concerning the operation, management, and administration of
the Assets; (4) notify Optionee of any written voting under any

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operating, unit, joint venture, partnership or similar agreement relating to the
Assets; and (5) not approve or elect to go nonconsent as to any proposed well or
plug and abandon or agree to plug and abandon any well without Optionee’s prior
written approval.  On any matter requiring Optionee’s approval under this
Section 11.1(a), Optionee shall respond within five (5) days to Optionor’s
request for approval and failure of Optionee to respond to Optionor’s request
for approval within such time shall release Optionor from the obligation to
obtain Optionee’s approval before proceeding on such matter.  With respect to
emergency actions taken by Optionor in the face of serious risk to life,
property, or the environment, without prior approval of Optionee pursuant to the
provisions above, Optionor will advise Optionee of its actions as promptly as
reasonably possible and consult with Optionee as to any further related actions.

(b)           From and after the date of execution of this Agreement until this
Option terminates, Optionor may not enter into any agreement, or amend,
supplement or change any existing agreement that would have a material adverse
effect on Optionee’s option rights hereunder, without Optionee’s consent, which
consent shall not be unreasonably withheld.

(c)           Optionor shall promptly notify Optionee of any suit, lessor demand
action, or other proceeding before any court, arbitrator, or governmental agency
and any cause of action which pertains to the Assets or which reasonably would
be expected to result in material impairment or loss of Optionor’s interest in
any portion of the Assets or which might hinder or impede the operation of the
Assets in any material respect.

(d)           Except for Permitted Encumbrances, Optionor shall not alienate,
encumber, transfer, abandon or release any of the Assets during the term of this
Agreement without the prior written consent of Optionee.

(e)           Subject to the terms and conditions of this Agreement, Optionor
will use commercially reasonable efforts to cause (a) its respective
representations and warranties set forth in this Agreement to be true and
correct on and as of the Closing Date except to the extent such representations
and warranties expressly relate to an earlier date, and (b) all of the
conditions precedent to the obligations of the other Party (to the extent they
are within the control of Optionor) to be satisfied on or prior to each Closing
Date.

10.2.       Limitations on Optionor’s Covenants Pending Closing.

To the extent Optionor is not the operator of any of the Assets, the obligations
of Optionor in Section 10.1 concerning operations or activities which normally
or pursuant to existing contracts are carried out or performed by the operator,
shall be construed to require only that Optionor use all commercially reasonable
efforts (without being obligated to incur any expense or institute any cause of
action) to cause the operator of such Assets to take such actions or render such
performance as would a reasonable prudent operator and within the constraints of
the applicable operating agreements and

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other applicable agreements.

10.3.                     Covenants of Optionee Following Exercise of Option.

Optionee shall act as a reasonable prudent operator in delivering CO2 to the
Assets in a timely manner and in sufficient quantities to efficiently conduct
operations to enhance oil production, under the terms of this Agreement,
including but not limited to, Sections 1.26(d)(2), 1.26(d)(3) and 1.26(d)(5).

10.4.                     Hastings Field Call on CO2.

The Assets shall have first call on the CO2 in Optionee’s pipeline proposed to
be constructed from a point near Donaldsonville, Louisiana to the Hastings
Field, up to a maximum of 200 MMcf/d for so long as the Hastings Field requires
200 MMcf/d of additional CO2 above then existing recycle volumes.  The call on
CO2 shall be based on 8 MMcf/d times the toal number of CO2 injectors until such
time as the total number of injectors times 8 MMcf/d exceed 200 MMcf/d. 
Optionor agrees that the call on CO2 is based on the assumption that individual
injection wells will inject on average 8 MMcf/d per well.  If the actual average
injection rate is lower than 8 MMcf/d, the 200 MMcf/d call on CO2 shall be
adjusted downward based on the actual average injection rate divided by 8
MMcf/d.  This call is on CO2 from whatever source in Optionee’s pipeline, but is
not a call on any particular source of CO2.

10.5.       Ownership of CO2.

All CO2 injected into the Hastings Field for which the working interest owners
are charged shall be owned by the working interest owners proportionate to their
ownership interest in the West Hastings Unit or the East Hastings Field, as the
case may be.

10.6.       Environmental Liabilities Related to Events and Activities occurring
prior to October 1, 2004.

Notwithstanding anything to the contrary contained herein, Optionor and Optionee
agree that from and after the Exercise Effective Date all Environmental
Obligations and Liabilities related to, or arising from, events or conditions
first occurring prior to October 1, 2004, shall be shared equally between
Optionor and Optionee and their respective successors and assigns.  The
provisions of Section 16.6 and Section 16.7 shall apply to any claim for shared
payment under this Section 10.6, except that Optionor and Optionee shall each
have equal rights to participate in the defense of all Environmental Obligations
and Liabilities subject to this Section 10.6 and no third-party claim in respect
of such Environmental Obligations and Liabilities shall be compromised or
settled without the prior written consent of both Optionor and Optionee, which
consent shall not be unreasonably withheld or delayed.

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ARTICLE 11. - CLOSING CONDITIONS

11.1.       Optionor’s Closing Conditions.

The obligations of Optionor under this Agreement are subject, at the option of
Optionor, to the satisfaction, at or prior to Closing, of the following
conditions:

(a)           all representations and warranties of Optionee contained in this
Agreement shall be true and accurate in all material respects at and as of
Closing as if such representations and warranties were made at and as of
Closing, and Optionee shall have performed, satisfied and complied in all
material respects with all agreements and covenants required by this Agreement
to be performed, satisfied and complied with by Optionee at or prior to Closing;

(b)           the execution, delivery, and performance of this Agreement and the
transactions contemplated thereby have been duly and validly authorized by all
necessary action, corporate, partnership or otherwise, on the part of Optionee,
and an officer’s certificate of Optionee confirming the same;

(c)           all necessary consents of and filings with any state or federal
governmental authority or agency relating to the consummation of the
transactions contemplated by this Agreement shall have been obtained,
accomplished or waived, except to the extent that such consents and filings are
normally obtained, accomplished or waived after Closing; and

(d)           as of the Closing Date, no suit, action or other proceeding
(excluding any such matter initiated by Optionor) shall be pending or threatened
before any court or governmental agency seeking to restrain Optionor or prohibit
the Closing or seeking damages against Optionor as a result of the consummation
of this Agreement.

11.2.       Optionee’s Closing Conditions.

The obligations of Optionee under this Agreement are subject, at the option of
Optionee, to the satisfaction, at or prior to Closing, of the following
conditions:

(a)           all representations and warranties of Optionor contained in this
Agreement shall be true, accurate in all material respects at and as of Closing
as if such representations and warranties were made at and as of Closing, and
Optionor shall have performed, satisfied and complied in all material respects
with all agreements and covenants required by this Agreement to be performed,
satisfied and complied with by Optionor at or prior to Closing;

(b)           the execution, delivery, and performance of this Agreement and the
transactions contemplated thereby have been duly and validly authorized by all
necessary action, corporate, partnership or otherwise, on the part of Optionor,
and an officer’s certificate of Optionor confirming the same;

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(c)           all necessary consents of and filings with any state or federal
governmental authority or agency relating to the consummation of the
transactions contemplated by this Agreement shall have been obtained,
accomplished or waived, except to the extent that such consents and filings are
normally obtained, accomplished or waived after Closing; and

(d)           as of the Closing Date, no suit, action or other proceeding
(excluding any such matter initiated by Optionee) shall be pending or threatened
before any court or governmental agency seeking to restrain Optionee or prohibit
the Closing or seeking damages against Optionee as a result of the consummation
of this Agreement.

ARTICLE 12.- CLOSING

12.1.       Closing.

The closing of the purchase of the Assets following the exercise of the option
granted herein (the “Closing”) shall be held at the offices of Optionee on the
date provided in Section 2.6 above, or at such earlier date or place as the
Parties may agree in writing (herein called “Closing Date”).  Time is of the
essence and the Closing Date shall not be extended unless by written agreement
of the Parties.  On or before five (5) business days prior to Closing, Buyer and
Seller shall use their best efforts to provide each other copies of all closing
documents.

12.2.       Optionor’s Closing Obligations.

At Closing Optionor shall deliver to Optionee the following:

(a)           the Assignment and Conveyance substantially in the form attached
hereto as Exhibit “I” and such other documents as may be reasonably necessary to
convey all of Optionor’s interest in the Assets to Optionee in accordance with
the provisions hereof ;

(b)           a non-foreign affidavit executed by Optionor in the form attached
as Exhibit “M”;

(c)           appropriate regulatory forms appointing Optionee as the operator
for those Assets which Optionor operates;

(d)           copies of all third-party waivers, consents, approvals, permits
and actions obtained;

(e)           subject to existing operating agreements and Optionor’s rights to
continued use and access as set forth in Section 3.3, exclusive possession of
the Assets;

(f)            letters-in-lieu of transfer orders in form acceptable to Optionor
and Optionee;

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(g)           a Reporting and Accounting Memorandum executed by Optionor in the
form attached as Exhibit “N”; and

(h)           releases of all mortgages, liens and similar encumbrances
burdening the Assets in form and substance reasonably satisfactory to Optionee.

12.3.       Optionee’s Closing Obligations.

At Closing, (i) Optionor shall execute an Assignment and Conveyance, the form of
which shall be substantially the same as the form attached hereto as Exhibit
“I”, and (ii) depending upon Optionor’s election, Optionee shall either pay the
Cash Payment or execute an Assignment of Volumetric Production Payment, the form
of which shall be substantially the same as the form attached hereto as Exhibit
“J”.

12.4.       Joint Closing Obligations.

Both Parties at Closing shall execute a Settlement Statement evidencing any
amount actually wire transferred or the Volumetric Production Payment assigned
and all adjustments to the consideration taken into account at Closing.  All
events of the Closing shall each be deemed to have occurred simultaneously with
the other, regardless of when actually occurring, and each shall be a condition
precedent to the other.

12.5.       Final Settlement/Purchase Price Adjustments.

Within one hundred twenty (120) days after Closing, Optionor shall provide to
Optionee, for Optionee’s concurrence, an accounting (the “Final Settlement
Statement”) of the actual amounts of Optionor’s and Optionee’s Credits for the
adjustments set out in this Section 12.5.  Optionee shall have the right for
thirty (30) days after receipt of the Final Settlement Statement to audit and
take exceptions to such adjustments.  The Parties shall attempt to resolve any
disagreements on a best efforts basis.   Those credits agreed upon by Optionee
and Optionor shall be netted and the final settlement shall be paid as directed
in writing by the receiving party, on final adjustment by the party owing it
(the “Final Settlement”).

The Purchase Price shall be adjusted as follows:

(a)           The Purchase Price shall be adjusted upward by the following
(“Optionor’s Credits”):

(1)           the value of (i) all Inventory Hydrocarbons attributable to the
Assets, such value to be based upon the existing contract price for crude oil in
effect as of the Effective Time, less severance taxes, transportation fees and
other fees deducted by the purchaser of such oil, such oil to be measured at the
Exercise Effective Time by the operators of the Assets; and (ii) the value of
all of Optionor’s unsold inventory of gas plant products, if any, attributable
to the Assets at the Effective Time valued in the same manner as if such
products had been sold under the contract then in existence between Optionor and
the

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purchaser of such products or, if there is no such contract, valued in the same
manner as if said products had been sold at the posted price in the field for
said products;

(2)           the amount of all production expenses, operating expenses and all
expenditures attributable to the operation of the Assets after the Exercise
Effective Time and accrued by Optionor prior to Closing Date in accordance with
generally accepted accounting principles and Section 11.1;

(3)           an amount equal to the sum of any upward adjustments provided
elsewhere in this Agreement applicable to the Assets; and

(4)           any other amount agreed upon by Optionor and Optionee in writing
prior to Closing.

(b)           The Purchase Price shall be adjusted downward by the following
(“Optionee’s Credits”):

(1)           the total collected sales value of all Hydrocarbons sold by the
Optionor after the Exercise Effective Time which are attributable to the Assets,
and any other monies collected by the Optionor with respect to the ownership of
the Assets after the Exercise Effective Time, but excepting interest income.

(2)           the amount of all unpaid ad valorem, property, production, excise,
severance and similar taxes and assessments (but not including income taxes),
which taxes and assessments become due and payable or accrue to the Assets prior
to the Exercise Effective Time, which amount shall, where possible, be computed
based upon the tax rate and values applicable to the tax period in question;
otherwise, the amount of the adjustment under this paragraph shall be computed
based upon such taxes assessed against the applicable portion of the Assets for
the immediately preceding tax period just ended;

(3)           an amount equal to the sum of any downward adjustments provided
elsewhere in this Agreement; and

(4)           any other amount agreed upon by Optionor and Optionee in writing
prior to Closing.

(c)           Optionor shall prepare and deliver to Optionee, at least five
business days prior to Closing, Optionor’s estimate of the adjusted Purchase
Price to be paid at Closing, together with a preliminary statement setting forth
Optionor’s estimate of the amount of each adjustment to the Purchase Price to be
made pursuant to this Section 12.5.  The Parties shall negotiate in good faith
and attempt to agree on such estimated adjustments prior to Closing.  In the
event any estimated adjustment amounts are not agreed upon prior to Closing, the
estimate of the adjusted Purchase Price for purposes of Closing shall be
calculated based on Optionor’s and Optionee’s agreed upon estimated adjustments
and Optionor’s good faith estimate of any disputed amounts (and

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any such disputes shall be resolved by the Parties in connection with the
resolution of the Final Settlement Statement).

(d)           In the event the Purchase Price is not a Cash Payment, but is in
the form of a Volumetric Production Payment, any and all adjustments in the
Purchase Price shall be made and payable in cash.

ARTICLE 13. - LIMITATIONS ON WARRANTIES AND REMEDIES

THE EXPRESS REPRESENTATIONS AND WARRANTIES OF OPTIONOR CONTAINED IN THIS
AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND
WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY
REPRESENTATION OR WARRANTY WITH RESPECT TO THE QUALITY, QUANTITY OR VOLUME OF
THE RESERVES, IF ANY, OF OIL, GAS OR OTHER HYDROCARBONS IN OR UNDER THE LEASES,
OR THE ENVIRONMENTAL CONDITION OF THE ASSETS.  THE ITEMS OF PERSONAL PROPERTY,
EQUIPMENT, IMPROVEMENTS, FIXTURES AND APPURTENANCES CONVEYED AS PART OF THE
ASSETS ARE SOLD HEREUNDER “AS IS, WHERE IS, AND WITH ALL FAULTS” AND NO
WARRANTIES OR REPRESENTATIONS OF ANY KIND OR CHARACTER, EXPRESS OR IMPLIED,
INCLUDING ANY WARRANTY OF QUALITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE OR CONDITION, ARE GIVEN BY OR ON BEHALF OF OPTIONOR.  IT IS UNDERSTOOD
AND AGREED THAT PRIOR TO CLOSING OPTIONEE SHALL HAVE INSPECTED THE ASSETS FOR
ALL PURPOSES AND HAS SATISFIED ITSELF AS TO THEIR PHYSICAL AND ENVIRONMENTAL
CONDITION, BOTH SURFACE AND SUBSURFACE, AND THAT OPTIONEE ACCEPTS SAME IN ITS
“AS IS, WHERE IS AND WITH ALL FAULTS” CONDITION.  OPTIONEE HEREBY WAIVES ALL
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED
WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONDITION, OR
CONFORMITY TO SAMPLES.

ARTICLE 14. - CASUALTY LOSS AND CONDEMNATION

If, prior to Closing, all or any material portion of the Assets is destroyed by
fire or other casualty or if any material portion of the Assets shall be taken
by condemnation or under the right of eminent domain (all of which are herein
called “Casualty Loss” and limited to property damage or taking only), Optionee
and Optionor must agree prior to Closing either that (i) If the value of the
Casualty Loss is in dispute, the Cash Payment or payment by Optionor to Optionee
at Closing shall be adjusted by an amount equal to the average of Optionor’s and
Optionee’s good faith estimates of the value of the Casualty Loss, or (ii) 
Optionee shall proceed with the purchase of such Assets, notwithstanding any
such destruction or taking (without reduction of the Purchase Price)in which
case Optionor shall pay, at Closing, to Optionee all sums paid to Optionor by
third parties by reason of the destruction or taking of such Assets and

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shall assign, transfer and set over unto Optionee all insurance proceeds
received by Optionor as well as all of the right, title and interest of Optionor
in and to any claims, causes of action, unpaid proceeds or other payments from
third parties arising out of such destruction or taking. In either case,
Optionor and Optionee shall each have the right, exercisable within ninety (90)
days after the Closing Date, to refer the disputed matter to mediation and
arbitration in accordance with the dispute resolution procedures set forth in
Exhibit “P”. After the expiration of said ninety (90) day period the right to
refer the matter to mediation and arbitration shall terminate.  Prior to
Closing, Optionor shall not voluntarily compromise, settle or adjust any amounts
payable by reason of any Casualty Loss without first obtaining the written
consent of Optionee, which consent shall not be unreasonably withheld.

ARTICLE 15. - DEFAULT AND REMEDIES

15.1.       Optionor’s Remedies.

Upon failure of Optionee to timely make the payments described in Section 2.3,
or to materially comply with other material terms contained in the Agreement,
Optionor, at its sole discretion, and in addition to any other remedies it may
have at law or equity, may (i) enforce specific performance, or (ii) terminate
this Agreement and retain any and all previous payments made hereunder.

15.2.       Optionee’s Remedies.

Upon failure of Optionor to materially comply with all material terms contained
in this Agreement, Optionee, at its sole option and in addition to any other
remedies it may have at law or equity, may (i) enforce specific performance, or
(ii) terminate this Agreement.

15.3.       Effect of Termination.

In the event of termination of this Agreement under this Article 15, the
transaction shall not close and neither Optionee nor Optionor shall have any
further obligations, remedies, liabilities, rights or duties to the other
hereunder, except as expressly provided herein.

ARTICLE 16. - ASSUMPTION AND INDEMNITY

16.1.       Assumed Obligations; Pre-Closing Liabilities.

Upon and after Closing, Optionee shall own the Assets, together with all the
rights, duties, obligations, and liabilities accruing with respect thereto,
including the Assumed Obligations and Optionee’s indemnity obligations
hereunder.  Optionee agrees to assume and pay, perform, fulfill and discharge
all Assumed Obligations and Optionee’s indemnity obligations.  Optionor agrees
to retain and pay, perform, fulfill and discharge all Retained Obligations, and
Optionor’s indemnity obligations.

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16.2.       Optionee’s Indemnity.

OPTIONEE AGREES TO INDEMNIFY, DEFEND AND HOLD OPTIONOR AND OPTIONOR’S EMPLOYEES,
OFFICERS AND DIRECTORS HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS,
LOSSES, DAMAGES, PUNITIVE DAMAGES, COSTS, EXPENSES, CAUSES OF ACTION OR
JUDGMENTS OF ANY KIND OR CHARACTER INCLUDING, WITHOUT LIMITATION, ANY INTEREST,
PENALTY, REASONABLE ATTORNEYS’ FEES AND OTHER COSTS AND EXPENSES INCURRED IN
CONNECTION THEREWITH OR THE DEFENSE THEREOF (COLLECTIVELY THE “CLAIMS”), WITH
RESPECT TO ALL LIABILITIES AND OBLIGATIONS OR ALLEGED OR THREATENED LIABILITIES
AND OBLIGATIONS CAUSED BY, RELATED TO, ATTRIBUTABLE TO, OR ARISING OUT OF THE
ASSUMED OBLIGATIONS.

IN ADDITION TO THE FOREGOING, OPTIONEE AGREES TO INDEMNIFY, DEFEND AND HOLD
OPTIONOR AND OPTIONOR’S EMPLOYEES, OFFICERS AND DIRECTORS HARMLESS FROM AND
AGAINST ANY AND ALL CLAIMS, DEMANDS, LOSSES, DAMAGES, PUNITIVE DAMAGES, COSTS,
EXPENSES, CAUSES OF ACTION OR JUDGMENTS OF ANY KIND OR CHARACTER INCLUDING,
WITHOUT LIMITATION, ANY INTEREST, PENALTY, REASONABLE ATTORNEYS’ FEES AND OTHER
COSTS AND EXPENSES INCURRED IN CONNECTION THEREWITH OR THE DEFENSE THEREOF
(COLLECTIVELY THE “CLAIMS”), WITH RESPECT TO ALL LIABILITIES AND OBLIGATIONS OR
ALLEGED OR THREATENED LIABILITIES AND OBLIGATIONS CAUSED BY, RELATED TO,
ATTRIBUTABLE TO, OR ARISING OUT OF OPTIONEE’S OPERATIONS AS TO THE ASSETS AS OF
THE EXERCISE EFFECTIVE TIME.

16.3        Optionor’s Indemnity.

OPTIONOR AGREES TO INDEMNIFY, DEFEND AND HOLD OPTIONEE AND OPTIONEE’S EMPLOYEES,
OFFICERS AND DIRECTORS HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS WITH RESPECT
TO ALL LIABILITIES AND OBLIGATIONS OR ALLEGED OR THREATENED LIABILITIES AND
OBLIGATIONS CAUSED BY, RELATED TO, ATTRIBUTABLE TO, OR ARISING OUT OF (A) THE
RETAINED OBLIGATIONS and (B) TO THE EXTENT NOT ACCOUNTED FOR IN THE CALCULATION
OF THE PURCHASE PRICE PURSUANT TO SECTION 2.5, ENVIRONMENTAL OBLIGATIONS AND
LIABILITIES THAT FIRST AROSE FROM  OR OUT OF EVENTS OR CONDITIONS FIRST
OCCURRING BETWEEN OCTOBER 1, 2004 AND THE EXERCISE EFFECTIVE DATE.

IN ADDITION TO THE FOREGOING, OPTIONOR AGREES TO INDEMNIFY, DEFEND AND HOLD
OPTIONEE AND OPTIONEE’S EMPLOYEES, OFFICERS AND DIRECTORS HARMLESS FROM AND
AGAINST ANY AND ALL CLAIMS, DEMANDS, LOSSES, DAMAGES, PUNITIVE DAMAGES, COSTS,
EXPENSES, CAUSES OF ACTION OR JUDGMENTS OF ANY KIND OR CHARACTER INCLUDING,
WITHOUT LIMITATION, ANY INTEREST, PENALTY, REASONABLE ATTORNEYS’ FEES AND OTHER
COSTS AND EXPENSES INCURRED IN

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CONNECTION THEREWITH OR THE DEFENSE THEREOF (COLLECTIVELY THE “CLAIMS”), WITH
RESPECT TO ALL LIABILITIES AND OBLIGATIONS OR ALLEGED OR THREATENED LIABILITIES
AND OBLIGATIONS (IN EITHER CASE, OTHER THAN ENVIRONMENTAL OBLIGATIONS AND
LIABILITIES ASSUMED BY OPTIONEE PURSUANT TO SECTION 10.6) CAUSED BY, RELATED TO,
ATTRIBUTABLE TO, OR ARISING OUT OF OPTIONOR’S OPERATIONS AS TO THE ASSETS PRIOR
TO THE  EXERCISE EFFECTIVE TIME.

16.4.       Negligence.

THE INDEMNIFICATION, RELEASE AND ASSUMPTION PROVISIONS PROVIDED FOR IN THIS
AGREEMENT SHALL BE APPLICABLE WHETHER OR NOT THE LOSSES, COSTS, EXPENSES AND
DAMAGES IN QUESTION AROSE SOLELY OR IN PART FROM THE ACTIVE, PASSIVE,
COMPARATIVE, OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF THE
PARTIES HERETO.

16.5        Broker or Finder’s Fee.

Each party hereby agrees to indemnify and hold the other harmless from and
against any claim for a brokerage or finder’s fee or commission in connection
with this Agreement or the transactions contemplated by this Agreement to the
extent such claim arises from or is attributable to the actions of such
indemnifying party, including, without limitation, any and all losses, damages,
punitive damages, attorneys’ fees, costs and expenses of any kind or character
arising out of or incurred in connection with any such claim or defending
against the same.

16.6        Threshold and Maximum Amounts.

No claim may be made against an Indemnifying Party pursuant to this Article 16
unless, and only to the extent that, the aggregate amount of all Claims exceeds
$100,000.  The maximum aggregate liability of an Indemnifying Party under this
Article 16 shall be an amount equal to the Purchase Price.

16.7                        Claim Procedures.

Each Person entitled to indemnification under this Article 16 (the “Indemnified
Party”) shall give written notice setting forth in reasonable detail the basis
of any Claim to the Party required to provide indemnification (the “Indemnifying
Party”) promptly, but not later than fifteen (15) days, after such Indemnified
Party becomes aware of a Claim or receives written notice of any Claim asserted
by any person who is not a Party (or a successor to a Party) to this Agreement
(a “Third-Party Claim”) that is or may give rise to an indemnification claim;
provided that the failure of the Indemnified Party to give notice as provided in
this Section 16.7 shall not relieve any Indemnifying Party of its obligations
under Section 16.7, except to the extent that such failure prejudices the rights
of any such Indemnifying Party.  The Indemnifying Party may elect to assume the
defense of any Third-Party Claim or any litigation resulting therefrom; provided
that counsel for the Indemnifying Party, who shall in such case conduct the

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defense of such claim, shall be approved by the Indemnified Party (whose
approval shall not unreasonably be withheld), and the Indemnified Party may
participate in such defense at the Indemnified Party’s expense, and may retain
counsel of its choice at its own expense; provided further that the Indemnified
Party shall have the right to employ, at the Indemnifying Party’s expense, one
firm of counsel of its choice, to represent the Indemnified Party if, in the
Indemnified Party’s reasonable judgment, there exists a conflict of interest
between the Indemnified Party and the Indemnifying Party, or if the Indemnifying
Party (1) elects not to defend, compromise or settle a Third-Party Claim, (2)
fails to notify the Indemnified Party within ten (10) Business Days of its
election to defend after receipt of written notice of such Third-Party Claim, or
(3) having timely elected to defend a Third-Party Claim, fails adequately to
prosecute or pursue such defense, then in each case the Indemnified Party may
defend such Third-Party Claim on behalf of and for the account and risk of the
Indemnifying Party.  The Indemnifying Party, in the defense of any Third-Party
Claim, shall not, except with the prior written approval of the Indemnified
Party, consent to entry of any judgment or entry into any settlement that does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to the Indemnified Party of a release from all liability with respect
thereto.  The Indemnified Party shall not settle or compromise any such claim
without the prior written approval of the Indemnifying Party, which approval
shall not be unreasonably withheld.  The Indemnified Party shall make its
employees available and furnish such information regarding itself or the Claim
in question as the Indemnifying Party may reasonably request in writing and as
shall reasonably be required in connection with the defense of a Third-Party
Claim.

ARTICLE 17. - GAS IMBALANCES

Optionor and Optionee will use their best efforts to update (to the Exercise
Effective Time) the gas imbalance volume amounts listed on Exhibit “L.”  If,
prior to the Final Settlement Date, either party hereto notifies the other party
hereto that the volumes set forth in Exhibit “L” are incorrect, then Optionee or
Optionor will pay the other at the Final Settlement, as appropriate, an amount
equal to the NYMEX price at the end of the month in which the variance occurs,
per net mmbtu variance from the net imbalance shown on Exhibit “L.”  Subject to
such adjustment on the Final Settlement Date, as of the Closing Optionee agrees
to assume any liability and obligation for gas production imbalances (whether
over or under) attributable to the Assets.  Except as set forth in this Article
17, in assuming this liability at Closing, Optionee shall not be obligated to
make any additional payment over the Purchase Price to Optionor, and Optionor
shall not be obligated to refund any of said price to reimburse Optionee for any
over-balances existing at the time of sale.

 

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ARTICLE 18. - PREFERENTIAL RIGHT TO PURCHASE
AND AREA OF MUTUAL INTEREST PROVISION

18.1        Preferential Right to Purchase.

This Agreement is also made expressly subject to a preferential right to
Purchase, the terms and conditions of which are as follows:

(a)               In the event Optionor or Optionee receives a bona fide offer
from a third party to purchase all or a part of the interests of Optionor
(reserved overriding royalty interest, Volumetric Production Payment (if any) or
reversionary working interest, before or after reversion) or Optionee (the
“Selling Party”) in the West Hastings Unit, the West Hastings Unit Lands or the
Hastings Field lands, or other jointly owned lands within the Area of Mutual
Interest (including interests hereafter owned or acquired), and once the Selling
Party and a proposed transferee have fully negotiated the principal terms and
conditions of a transfer (which principal terms shall include all material terms
and conditions necessary for a purchaser to make an informed decision including,
but not necessarily limited to, price, timing, scope, character and description
of the interests to be transferred, agreed indemnities, reservations and
exclusions), Selling Party shall disclose such principal terms and conditions in
detail to the other party to this Agreement (the “Receiving Party”) in a written
notice.  Receiving Party shall have the right to acquire the interest proposed
to be transferred from the Selling Party on the same terms and conditions agreed
to by the proposed transferee if, within ten (10) Days after receipt of Selling
Party’s written notice, the Receiving Party delivers to the Selling Party a
counter-notification that Receiving Party accepts the agreed upon terms and
conditions of the transfer without reservations or conditions.  If the Receiving
Party does not deliver such counter-notification, the transfer to the proposed
transferee may be made, subject to the provisions of this Agreement, under terms
and conditions no more favorable to the transferee than those set forth in the
notice to Receiving Party, provided that the transfer shall be concluded within
one hundred eighty (180) days from the date of Optionee’s receipt of Selling
Party’s written notice.  In the event the proposed sale of the interest to a
third party is timely consummated, the preferential right to purchase shall no
longer attach to the interest transferred to the third party.  In the event the
proposed sale of the interest to the third party is not consummated, then the
preferential right to purchase such interest shall be reinstated as to any
future offers to purchase the interest.

(b)               In the event Selling Party’s proposed transfer of part or all
of its interest in the West Hastings Unit, the West Hastings Unit Lands or the
Hastings Field lands, or other jointly owned lands within the Area of Mutual
Interest, involves consideration other than cash or involves other properties
included in a wider asset sale transaction (package deal), then the interest to
be assigned by Selling Party (or part thereof) shall be allocated a reasonable
and justifiable cash value in the notification to Receiving Party.  Receiving
Party may satisfy the requirements of this Article 18.1 by agreeing to pay such
cash value in lieu of the consideration payable in the third-party offer.

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(c)               The preferential right to purchase shall be applicable to any
transfer of all or a portion of either Parties’ interest in the West Hastings
Unit, the West Hastings Unit Lands or the Hastings Field lands, or other jointly
owned lands within the Area of Mutual Interest, including the transfer of the
reserved overriding royalty interest and/or the Reversionary Interest, whether
directly or indirectly by assignment, merger, consolidation, or sale of stock,
or other conveyance, other than such transfers that are made to (i) an
affiliate, subsidiary, or parent company existing as of the date of this
Agreement or (ii) a new affiliated entity created after the date of this
Agreement for the express purpose of forming a master limited partnership, which
master limited partnership is controlled by the new affiliate, Venoco, Inc. or
Denbury Resources Inc. for a minimum of twelve (12) months following the
transfer.

(d)               A sale or merger involving Optionor’s parent, Venoco, Inc., or
the sale of all or substantially all of Venoco’s assets through merger, business
combination or other transaction, including transactions involving Optionor are
hereby expressly excluded from the terms of this Article 18. Likewise, a sale or
merger involving Optionee’s parent, Denbury Resources Inc., or the sale of all
or substantially all of Denbury Resources Inc.’s assets through merger, business
combination or other transaction, including transactions involving Optionee are
hereby expressly excluded from the terms of this Article 18.

18.2.           Area of Mutual Interest Provision.

(a)   The Parties hereby agree to the establishment of an Area of Mutual
Interest which shall encompass all of those lands within the area outlined in
blue on the plat attached hereto as Exhibit “O”,  and which are more fully
described on Exhibit “O-1” hereto, which area shall hereinafter sometimes be
referred to as an “Area of Mutual Interest”.

If, after the Agreement Effective Time, either party to this Agreement
(“Acquiring Party”) acquires either an oil and gas lease or mineral interest (or
any interest therein), royalty interest, or an option to acquire an oil and gas
lease, or any other oil and/or gas interest covering lands lying within the Area
of Mutual Interest, including oil, gas and mineral leases acquired pursuant to
the exercise of any options (all of the foregoing hereinafter sometimes being
referred to as “Oil and Gas Interests”), or if the Acquiring Party enters into
any type of agreement by which an Oil and Gas Interest may be acquired or
otherwise earned by conducting drilling, seismic, or other operations on the
lands lying within the Area of Mutual Interest, then the Acquiring Party shall
promptly notify the other party of such acquisition or such agreement.  If
either party to this Agreement acquires an Oil and Gas Interest covering lands
within the geographical confines of the Area of Mutual Interest, the other party
shall have the right to participate in any such acquisition of such Oil and Gas
Interest as set forth below.  If, after the Effective Time of this Agreement,
additional parties acquire an interest from the original Parties in the Area of
Mutual Interest, in the event not all parties elect to participate in an
acquisition, then any such non-participating party’s interests shall be offered
in writing to the other participating parties in the proportions that their
ownership interests in the Area of Mutual Interest at the time of the
acquisition bear to the total of the

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ownership interests of all participating parties in the acquisition.  In the
event any acquired Oil and Gas Interest includes lands within and outside the
Area of Mutual Interest, the entire Oil and Gas Interest shall be included
within the AMI.

(b)           The notification provided for in Paragraph (b) above shall contain
all available title information and copies of leases, agreements by which the
Oil and Gas Interest may be acquired, and all other pertinent instruments and
information regarding the proposed acquisition.  It shall also describe in
detail the cost and expense of such acquisition and any other obligation that
may be incurred pursuant thereto.

(c)           If the acquisition requires drilling, seismic, or other operations
on the lands lying within the Area of Mutual Interest, the election of a party
to participate in such operations shall constitute an election to participate in
the agreement governing such operations, to the extent necessary to acquire the
interest.  No party shall be required to make such an election more than sixty
(60) days or less than thirty (30) days prior to the commencement of initial
operations.

(d)           To receive an assignment of its proportionate share of the Oil and
Gas Interest acquired as a result of conducting drilling, seismic, or other
operations on the Area of Mutual Interest, a Participating Party must have:

(1)           Participated in all operations necessary for the acquisition of
the Oil and Gas Interest, and also must have paid all costs and expenses
incurred in connection therewith;

(2)           Participated in any previous drilling, seismic, or other
operations that were necessary or were a condition precedent to the operations
resulting in the acquisition of the Oil and Gas Interest; and

(3)           Participated in accordance with the terms, provisions, covenants,
and conditions of the agreements governing the acquisition of an Oil and Gas
Interest.

(e)               If drilling, seismic, or other operations are not required to
acquire the Oil and Gas Interest, the party entitled to receive notice set forth
in Section 18.2(b) shall have thirty (30) days from receipt of written notice
thereof in which to elect to participate in such acquisition as set forth
hereinbelow and in Section 18.2(h).  Failure to give written notice to the
Acquiring Party of its election, as specified herein, shall constitute an
election not to participate.  If a party elects to participate in such
acquisition as set forth herein, such party (“Participating Party”) shall
reimburse the Acquiring Party for its proportionate share of the costs thereof
within fifteen (15) days of receipt of an invoice from the Acquiring Party
setting forth in detail the cost and expense of such acquisition.  The Acquiring
Party shall, within thirty (30) days after receipt of payment from a
Participating Party, assign to the Participating Party the Participating Party’s
proportionate interest in the acquisition, subject to any applicable burdens on
such Participating Party’s interest in the acquisition.

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(f)                All Participating Parties shall be entitled to participate in
any acquisition within the Area of Mutual Interest on a ground floor basis and
subject to no additional burdens placed on an acquisition by the Acquiring
Party. For purposes of this Agreement the Optionor’s interest in the Area of
Mutual Interest shall be twenty-five percent (25%) and Optionee’s interest
seventy-five percent (75%).

(g)           In the event the Parties acquire any Oil and Gas Interest within
the Area of Mutual Interest prior to the Exercise Effective Time, then any Oil
and Gas Interest acquired by the Optionor shall be included in the Designated
Interests to be acquired by the Optionee and shall be valued and conveyed in
accordance with the terms of this Agreement.  Additionally, should the Optionee
acquire any Oil and Gas Interest in the Area of Mutual Interest and elect not to
exercise its Option to Purchase the Assets, Optionee shall give Optionor the
right to acquire any such acquired Oil and Gas Interest at its offered cost as
set forth hereinabove.

(h)               For purposes of this Section 18.2, the term “Oil and Gas
Interest” shall also include surface rights or interests (including easements,
rights-of-way, and surface ownership) in lands lying within the Area of Mutual
Interest, and options to acquire such surface rights or interests, and any
surface rights or interests acquired pursuant to the exercise of any options.
Notwithstanding the foregoing, Optionor and Optionee specifically exclude from
this Area of Mutual Interest any surface rights or interests (including
easements, rights-of-way, and surface ownership) acquired by Optionee for the
sole purpose of constructing and operating a CO2 pipeline to deliver CO2 to the
Hastings Field.

(i)                The terms of this Section 18.2. shall remain in full force
and effect covering the lands lying within the Area of Mutual Interest for a
period of ten (10) years commencing from the Agreement Effective Time, unless
extended for an additional period or terminated earlier by written agreement of
the Parties.

ARTICLE 19. - MISCELLANEOUS

19.1.       Receivables and other Excluded Funds.

Optionee shall be under no obligation to collect on behalf of Optionor any
receivables or other funds included in the Excluded Assets and described in
Section 1.29(e) above.  With respect to receivables, Optionee shall be free to
treat the interests of any party with a delinquent receivable in any manner
deemed appropriate by Optionee.

19.2.       Public Announcements.

Each Party hereto may publicly disclose information with respect to the
transaction contemplated by this Agreement (i) to any state or federal
governmental authority or agency to the extent required by applicable law or by
any applicable rules, regulations or orders of any governmental authority or
agency having jurisdiction; or (ii) as may be necessary to comply with
disclosure requirements of the Securities and

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Exchange Commission and the New York Stock Exchange or other recognized exchange
and any other applicable securities laws.

19.3.       Filing and Recording of Assignments, etc.

Optionee shall be solely responsible for all filings and the prompt recording of
assignments and other documents related to the Assets and for all fees connected
therewith, including the fees charged by any regulatory authority in connection
with the change of operator, and Optionee shall furnish certified copies of all
such filed and/or recorded documents to Optionor within ten (10) days of
Optionee’s receipt of the recorded instruments.  Optionor shall not be
responsible for any loss to Optionee because of Optionee’s failure to file or
record documents correctly or promptly.  Optionee shall not be responsible for
any loss to Optionor because of Optionor’s failure to record this document
correctly or promptly.  Optionee shall promptly file all appropriate forms,
declarations or bonds with federal and state agencies relative to its assumption
of operations and Optionor shall cooperate with Optionee in connection with such
filings.

19.4.       Further Assurances and Records.

(a)           Each of the Parties will execute, acknowledge and deliver to the
other such further instruments, and take such other action, as may be reasonably
requested in order to more effectively assure to said party all of the
respective properties, rights, titles, interests, estates, and privileges
intended to be assigned, delivered or inuring to the benefit of such party in
consummation of the transactions contemplated hereby.  Without limiting the
foregoing, in the event Exhibits “A-1” through “A-4”, inclusive, incorrectly or
insufficiently describes or references or omits the description of a property or
interest intended to be conveyed hereby as described in Sections 1.34 (Leases)
or 1.54 (Personal Property) above, Optionor agrees to, within twenty (20) days
of Optionor’s receipt of Optionee’s written request, together with supporting
documentation satisfactory to Optionor, correct such Exhibit and/or execute an
amended assignment or other appropriate instruments necessary to transfer the
property or interest intended to be conveyed hereby to Optionee.

(b)           Optionee agrees to maintain the files and records of Optionor that
are acquired pursuant to this Agreement for seven (7) years after the Closing. 
Optionee shall provide Optionor and its representatives reasonable access to and
the right to copy such files and records for the purposes of (i) preparing and
delivering any accounting provided for under this Agreement and adjusting,
prorating and settling the charges and credits provided for in this Agreement;
(ii) complying with any law, rule or regulation affecting Optionor’s interest in
the Assets prior to the Closing Date; (iii) preparing any audit of the books and
records of any third party relating to Optionor’s interest in the Assets prior
to the Closing Date, or responding to any audit prepared by such third parties;
(iv) preparing tax returns; (v) responding to or disputing any tax audit; or
(vi) asserting, defending or otherwise dealing with any claim or dispute under
this Agreement or as to the Assets.

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(c)           Optionor agrees that within thirty (30) days after Closing or
within thirty (30) days after operations are actually transferred of record with
the Texas Railroad Commission, whichever is later, it will remove or cause to be
removed its signs and the names and marks used by Optionor and all variations
and derivatives thereof and logos relating thereto from the Assets and will not
thereafter make any use whatsoever of such names, marks and logos.

(d)           Optionor agrees to continue to use all reasonable efforts, but
without any obligation to incur any cost or expense in connection therewith, and
to cooperate with Optionee’s efforts to obtain for Optionee (i) access to files,
records and data relating to the Assets in the possession of third parties; and
(ii) access to wells constituting a part of the Assets operated by third parties
for purposes of inspecting same.

(e)           Optionee shall comply with all current and subsequently amended
applicable laws, ordinances, rules, and regulations applicable to the Assets and
shall promptly obtain and maintain all permits required by governmental
authorities in connection with the Assets.

19.5.       Notices.

Except as otherwise expressly provided herein, all communications required or
permitted under this Agreement shall be in writing and may be given by personal
delivery, facsimile, US mail (postage prepaid), or commercial delivery service,
and any communication hereunder shall be deemed to have been duly given and
received when actually delivered to the address of the Parties to be notified as
set forth below and addressed as follows:

If to Optionor, as follows:

TexCal Energy South Texas L.P.

 

 

c/o Venoco, Inc.

 

 

370 17th Street

 

 

Suite 2950

 

 

Denver, Colorado 80202

 

 

Attention:

William Schneider

 

 

President

 

Telephone:

(303) 626-831

 

Facsimile:

(303) 626-8315

 

with copies to:

 

TexCal Energy South Texas L.P.

 

 

1020 Main Street, Suite 2500

 

 

Houston, Texas 77002

 

 

Attention:

Jeffrey T. Janik

 

 

Senior Vice President

 

Telephone:

(713) 533-4000

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Facsimile:

(713) 533-4060

 

and

 

Venoco, Inc.

 

 

6267 Carpinteria Ave.

 

 

Carpinteria, CA 93013

 

 

Attention:

General Counsel

 

Telephone:

(805) 745-2253

 

Facsimile:

(805) 745-1816

 

If to Optionee, as follows:

 

Denbury Onshore, LLC

 

 

5100 Tennyson Parkway

 

 

Suite 1200

 

 

Plano, Texas 75024

 

 

Attention:

Ray Dubuisson

 

 

Vice President-Land

 

Telephone:

(972)-673-2044

 

Facsimile:

(972)-673-2299

 

Provided, however, that any notice required or permitted under this Agreement
will be effective if given verbally within the time provided, so long as such
verbal notice is followed by written notice thereof in the manner provided
herein within twenty-four (24) hours following the end of such time period.  Any
party may, by written notice so delivered to the other, change the address to
which delivery shall thereafter be made.

19.6.       Incidental Expenses.

Optionee shall bear and pay (i) all state or local government sales, transfer,
gross proceeds, or similar taxes incident to or caused by the transfer of any of
the Assets to Optionee, (ii) all documentary, transfer and other state and local
government taxes incident to the transfer of any of the Assets to Optionee; and
(iii) all filing, recording or registration fees for any assignment or
conveyance delivered hereunder.  Each party shall bear its own respective
expenses incurred in connection with the negotiation and closing of this
transaction, including it own consultants’ fees, attorneys’ fees, accountants’
fees, and other similar costs and expenses.

19.7.       Waiver.

Any of the terms, provisions, covenants, representations, warranties or
conditions hereof may be waived only by a written instrument executed by the
party waiving compliance.  Except as otherwise expressly provided in this
Agreement, the failure of any party at any time or times to require performance
of any provision hereof shall in no manner affect such party’s right to enforce
the same.  No waiver by any party of any condition, or of the breach of any
term, provision, covenant, representation or warranty contained in this
Agreement, whether by conduct or otherwise, in any one or

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more instances, shall be deemed to be or construed as a further or continuing
waiver of any such condition or breach or a waiver of any other condition or of
the breach of any other term, provision, covenant, representation or warranty.

19.8.       Binding Effect; Assignment.

All the terms, provisions, covenants, obligations, indemnities, representations,
warranties and conditions of this Agreement shall be covenants running with the
land and shall inure to the benefit of, and be binding upon, and shall be
enforceable by, the parties hereto and their respective successors and assigns. 
The rights of Optionee under this Agreement to acquire the Assets are personal
and this Agreement may not be assigned or transferred by Optionee to any other
party, firm, corporation or other entity, without the prior, express and written
consent of Optionor, and such consent may be withheld for any reason, including
convenience.  Any attempt to assign this Agreement by Optionee over the
objection or without the express written consent of the Optionor shall be
absolutely void.  Optionor may condition its consent to assign this Agreement on
Optionee providing Optionor with an appropriate guarantee of its assignee’s
performance.  Any subsequent transfer of this Agreement or of all or any part of
the Assets shall be made expressly subject to the terms and provisions of this
Agreement.

19.9.       Taxes.

(a)           Optionor and Optionee agree that this transaction may be subject
to the reporting requirement of Section 1060 of the Internal Revenue Code of
1986, as amended, and that, therefore, IRS Form 8594, Asset Acquisition
Statement, will be filed for this transaction.  The Parties will confer and
cooperate in the preparation and filing of their respective forms to reflect a
consistent reporting of the agreed upon allocation.

(b)           Optionor shall be responsible for all state, local and federal
property, ad valorem, excise, and severance taxes attributable to or arising
from the ownership or operation of the Assets prior to the Exercise Effective
Time.  Optionee shall be responsible for all property and severance taxes
attributable to or arising from the ownership or operation of the Assets after
the Exercise Effective Time.  Any party which pays such taxes for the other
party shall be entitled to prompt reimbursement upon evidence of such payment. 
Each party shall be responsible for its own federal and state income taxes, if
any, as may result from this transaction.

(c)           If this transaction is determined to result in state sales or
transfer taxes, Optionee shall be solely responsible for any and all such taxes
due on the Assets acquired by Optionee by virtue of this transaction.  If
Optionee is assessed such taxes, Optionee shall promptly remit same to the
taxing authority.  If Optionor is assessed such taxes, Optionee shall reimburse
Optionor for any such taxes paid by Optionor to the taxing authority.

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19.10.     Audits.

It is expressly understood and agreed that Optionor retains its right to receive
its proportionate share of the proceeds from any audits relating to activities
prior to the Exercise Effective Time, and Optionor shall likewise pay its share
of any costs attributable to the period prior to the Effective Time resulting
from any such audits.

19.11.     Governing Law.

THIS AGREEMENT SHALL BE GOVERNED, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS
OTHERWISE APPLICABLE TO SUCH DETERMINATIONS.

19.12.     Mediation and Arbitration.

The Parties stipulate and agree that any and all claims and/or controversies
arising between Optionor and Optionee which relate to and arise out of this
Agreement shall be resolved in accordance with the mediation and arbitration
procedures set forth in Exhibit “P.”  The prevailing party in any legal
proceeding or arbitration may be entitled to recover all arbitration costs and
reasonable attorneys’ fees from the non-prevailing party, as determined by the
arbitrators in accordance with the procedures set forth in Exhibit “P.”

19.13.     Entire Agreement.

This Agreement, including the Exhibits attached hereto, embodies the entire
agreement between the Parties and replaces and supersedes all prior agreements,
arrangements and understandings related to the subject matter hereof, whether
written or oral.  No other agreement, statement, or promise made by any party,
or to any employee, officer or agent of any party, which is not contained in
this Agreement shall be binding or valid.  This Agreement may be supplemented,
altered, amended, modified or revoked by a writing only, signed by the Parties
hereto.  The headings herein are for convenience only and shall have no
significance in the interpretation hereof.  The Parties stipulate and agree that
this Agreement shall be deemed and considered for all purposes, as prepared
through the joint efforts of the Parties, and shall not be construed against one
party or the other as a result of the preparation, submittal or other event of
negotiation, drafting or execution thereof.  It is understood and agreed that
there shall be no third-party beneficiary of this Agreement, and that the
provisions hereof do not impart enforceable rights in anyone who is not a
direct, initial party hereto.

19.14.     Severability.

If any provision of this Agreement is found by a court of competent jurisdiction
to be invalid or unenforceable, that provision will be deemed modified to the
extent necessary to make it valid and enforceable, and if it cannot be so
modified, it

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shall be deemed deleted and the remainder of the Agreement shall continue and
remain in full force and effect.

19.15.     Exhibits.

All Exhibits attached to this Agreement, and the terms of those Exhibits which
are referred to in this Agreement, are made a part hereof and incorporated
herein by reference.

19.16.     Survival.

Unless otherwise specifically provided in this Agreement, all of the
representations, warranties, indemnities, covenants and agreements of or by the
Parties hereto shall survive the execution and delivery of the each Conveyance,
Assignment and Bill of Sale.  Additionally, those provisions set forth in
Section 6.3 shall survive the execution and delivery of the Conveyance,
Assignment and Bill of Sale, and shall be deemed as between the Parties, there
successors and assigns to be covenants running with the land.

19.17.     Subsequent Adjustments.

Regardless of the date set for the Final Settlement, Optionee and Optionor agree
that their intent is to allow for the earliest practical forwarding of revenue
and reimbursement of expenses between them, and Optionor and Optionee recognize
that either may receive funds or pay expenses after the Final Settlement Date
which are properly the property or obligation of the other.  Therefore, upon
receipt of net proceeds or payment of net expenses due to or payable by the
other party hereto, whichever occurs first, Optionor or Optionee, as the case
may be, shall submit a statement to the other party hereto showing the relevant
items of income and expense with supporting documentation. Payment of any net
amount due by Optionor or Optionee, as the case may be, on the basis thereof
shall be made within ten (10) days of receipt of the statement.

19.18.     Counterparts.

This Agreement may be executed in any number of counterparts, and each and every
counterpart shall be deemed for all purposes one (1) agreement.

19.19.     Subrogation.

To the fullest extent allowed by law and the applicable agreements with third
parties, Optionor grants Optionee a right of subrogation in all claims or rights
Optionor may have against third parties to the extent they relate to the Assumed
Obligations.

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19.20.     Suspended Monies.

At Closing, Optionor shall deliver to Optionee the monies held in suspense by
Optionor for the account of third parties, or relate to a title dispute or
question as to ownership, along with any documentation in Optionor’s possession
or available to Optionor in support of such suspended funds.  Any additional
monies of this nature received by Optionor after Closing shall be remitted to
Optionee within one hundred twenty (120) days after the Closing hereof.  At
Closing, Optionee shall assume the obligation for the payment of these monies.

19.21.     Optionee as Operator.

After the Closing Date, Optionee shall operate, manage, and administer the
Assets as a reasonable prudent operator and in a good and workmanlike manner in
accordance with the West Hastings Unit Operating Agreement.  The Parties
acknowledge that changes and amendments to the West Hastings Unit Operating
Agreement may become necessary and required by both Parties and will be
negotiated as needed.  These changes and amendments may be in the form of
changes and amendments to the existing West Hastings Unit Operating Agreement, a
new unit operating agreement, or a side letter agreement.

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first above written.

 

TEXCAL ENERGY SOUTH TEXS, L.P.

 

 

By: TEXCAL ENERGY (GP) LLC.

 

 

 

 

 

 

 

By:

/s/ William Schneider

 

 

William Schneider

 

 

President

 

 

 

 

 

DENBURY ONSHORE, LLC

 

 

 

 

 

By:

/s/ H. Raymond Dubuisson

 

 

H. Raymond Dubuisson

 

 

Vice President-Land

 

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