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EXHIBIT 10.5

 

 
SECURITY AGREEMENT, dated as of February  27, 2008 (this "Agreement"), made by
BLAST ENERGY SERVICES, INC., a Texas corporation (“Blast”), and EAGLE DOMESTIC
DRILLING OPERATIONS LLC, a Texas limited liability company (“Eagle”; Blast and
Eagle are referred to herein individually as a “Grantor” and collectively as the
“Grantors”) in favor of LAURUS MASTER FUND, LTD (the "Secured Party").
 
Recitals
 
A)           On February 26 2008, the United States Bankruptcy Court for the
Southern District of Texas (the “Bankruptcy Court”) entered its order confirming
the Second Amended Joint Plan of Reorganization of Blast Energy Services, Inc.
Debtor, and Eagle Domestic Drilling Operations LLC Debtor (the “Plan”) filed by
Blast and Eagle.
 
B)           The Plan, among other things, implemented the terms and agreements
between the Grantors and the Secured Party that were embodied in the Settlement
Agreement and the Sale Order.
 
C)           Pursuant to the Plan, the Settlement Agreement and the Sale Order,
the Secured Party has retained against the Grantors a first priority secured
claim in the amount of $2.1 million (the “Laurus Retained Claim”).   The
obligation of the Grantors to pay the Laurus Retained Claim is, pursuant to the
Plan, the Settlement Agreement, the Sale Order and the Confirmation Order,
secured by the Laurus Collateral.
 
D)           The execution and delivery of this Agreement to the Secured Lender
is a condition to the effectiveness of the Plan.
 
ACCORDINGLY, the Grantors and the Secured Party (and each of their respective
successors or assigns) hereby agree as follows:
 
ARTICLE I
 
DEFINITIONS
 
SECTION 1.01. Definition of Terms Used Herein.  Unless the context otherwise
requires, all capitalized terms used but not defined herein shall have the
meanings set forth in the Plan and all references to the Uniform Commercial Code
shall mean the Uniform Commercial Code as in effect in the State of Texas from
time to time; provided, in the event, by reason of mandatory provisions of law,
any or all of the attachment, perfection or priority of, or remedies with
respect to, Laurus' Security Interest in any Collateral is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than the State of
Texas, the term “Uniform Commercial Code” shall mean the Uniform Commercial Code
as in effect in such other jurisdiction for purposes of the provisions of this
Agreement relating to such attachment, perfection, priority or remedies and for
purposes of definitions related to such provisions; provided further, to the
extent that the Uniform Commercial Code is used to define any term herein and
such term is defined differently in different Articles or Divisions of the
Uniform Commercial Code, the definition of such term contained in Article or
Division 9 shall govern.

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SECTION 1.02. Definition of Certain Terms Used Herein.  As used herein, the
following terms shall have the following meanings:
 
"Account Debtor" shall mean any person who is or who may become obligated to the
Grantor under, with respect to or on account of an Account.
 
"Accounts" shall mean any and all right, title and interest of each Grantor
existing as of the Petition Date in and to all "accounts", as such term is
defined in the Uniform Commercial Code, and any other payment intangibles or
rights to payment, and including without limitation, any amounts owed to each
Grantor by Hallwood, Quicksilver and Saddle Creek.
 
"Chattel Paper" shall mean all "chattel paper", as such term is defined in the
Uniform Commercial Code, owned by each Grantor as of the Petition Date.
 
"Collateral" shall mean all (a) Accounts, (b) Documents, (c) Equipment, (d)
General Intangibles, (e) Inventory, (f) Chattel Paper, (g) Goods, (h)
Intellectual Property, (i) Commercial Tort Claims, (j) Investment Property, (k)
Letter of Credit Rights and Supporting Obligations, (l) Instruments, and (m) any
Proceeds.  Collateral shall also mean and shall include, to the extent not
included in the above categories, all rights, title and interest of the Grantors
in and to (i) the contracts with Hallwood, Quicksilver and Saddle Creek executed
on or prior to the Petition Date, (ii) all claims and causes of action against
Hallwood, Quicksilver and Saddle Creek, including the Hallwood Litigation, the
Quicksilver Litigation and the Saddle Creek Litigation, and (iii) all Proceeds
of the foregoing, including any and all payments or recoveries, including from
any settlement, received by the Grantors from the Hallwood Litigation, the
Quicksilver Litigation and the Saddle Creek Litigation.
 
"Commercial Tort Claims" shall mean all "commercial tort claims", as such term
is defined in the Uniform Commercial Code, held or owned by each Grantor as of
the Petition Date, including to the extent applicable all claims and causes of
action held and/or asserted by either Grantor in connection with the Hallwood
Litigation, the Quicksilver Litigation and the Saddle Creek Litigation.
 
“Confirmation Order” shall mean the order of the Bankruptcy Court entered by the
Bankruptcy Court on February 26, 2008 entitled Order Confirming Second Amended
Joint Plan of Reorganization of Blast Energy Services, Inc. Debtor and Eagle
Domestic Drilling Operations LLC Debtor.
 
"Copyright License" shall mean any written agreement executed on or prior to the
Petition Date granting any right to any third party under any Copyright owned by
either Grantor or which either Grantor otherwise has the right to license, or
granting any right to either Grantor under any Copyright owned by any third
party, and all rights of the Grantors under any such agreement.

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"Copyrights" shall mean all of the following owned by either Grantor as of the
Petition Date: (a) all copyright rights in any work subject to the copyright
laws of the United States or any other country, whether as author, assignee or
transferee, and (b) all registrations and applications for registration of any
such copyright in the United States or any other country, including
registrations, recordings, supplemental registrations and pending applications
for registration in the United States Copyright Office.
 
"Documents" shall mean all instruments, files, books, records, ledger sheets,
data processing records, computer software, manuals and documents covering or
relating to any of the Collateral, owned by either Grantor as of the Petition
Date.
 
"Equipment" shall mean all machinery, equipment, cables, furniture and
furnishings, and all tangible present and future personal property similar to
any of the foregoing, including embedded software, motor vehicles, office
equipment, tools, parts and supplies of every kind and description (as well as
all such types of property leased by either Grantor and all of such Grantor's
rights and interests with respect thereto) and all improvements, additions,
accessions or appurtenances thereto, that were owned by the Grantors on the
Petition Date. The term Equipment shall include Fixtures.
 
“Event of Default” shall mean (a) the failure of the Grantors to pay when and as
due the amounts due and to be paid to the Secured Party on account of the Laurus
Retained Claim as required by the terms of the Sale Order, the Plan and the
Confirmation Order, (b) any event shall occur under any agreement, document or
instrument, including under the Note and Security Agreement provided in the Plan
in favor of Berg McAfee (Class 3 under the Plan), which allows any person or
entity to declare an event of default under any such agreement, document,
instrument, Note or Security Agreement and/or to foreclose, or commence to
foreclose, on the Collateral, and/or (c) the failure of either Grantor to
perform or observe, in any material respect, any covenant set forth in this
Agreement.
 
"Fixtures" shall mean all items of Equipment, owned as of the Petition Date, of
either Grantor that become so related to particular real estate that an interest
in them arises under any real estate law applicable thereto.
 
"General Intangibles" shall mean all general intangibles, choses in action and
causes of action and all other intangible personal property of either Grantor of
every kind and nature held or owned as of the Petition Date, including all
payment intangibles, software, rights and interests in partnerships, limited
partnerships, limited liability companies and other unincorporated entities,
corporate or other business records, indemnification claims, contracts and
contract rights (including rights under customer contracts, leases, whether
entered into as lessor or lessee, and other agreements), Intellectual Property,
goodwill, registrations, franchises, permits, tax refund claims, commercial tort
claims, goodwill and any letter of credit, guarantee, claim, security interest
or other security, whether voluntary or involuntary, held by or granted to
either Grantor to secure payment by an Account Debtor of any Account.
 
"Goods" shall mean all "goods", as such term is defined in the Uniform
Commercial Code, owned by either Grantor as of the Petition Date.

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“Hallwood” shall mean Hallwood Petroleum LLC and Hallwood Energy, LP and their
respective affiliates.
 
“Hallwood Litigation” shall mean the court proceedings ongoing as of the date of
this Agreement, Adversary case no. 07-03282, in the Bankruptcy Court, or any
similar proceedings, between Hallwood and Eagle pertaining to an early
termination and resulting breach of two IADC standard form drilling contracts,
and any claims, causes of action and counterclaims asserted or to be asserted by
Eagle against Hallwood in such proceedings.
 
"Intellectual Property" shall mean all intellectual and similar property of
either Grantor of every kind and nature owned or licensed as of the Petition
Date, including inventions, permits, designs, Patents, Copyrights, Licenses,
Trademarks, trade secrets, confidential or proprietary technical and business
information, know-how, show-how or other data or information, software and
databases and all embodiments or fixations thereof and related documentation,
registrations and franchises, and all additions, improvements and accessions to,
and books and records describing or used in connection with, any of the
foregoing, and including, without limitation, all rights, title and interest of
the Grantors in, to and with respect to the Abrasive Fluid Jet technology, any
Patents or patent applications with respect thereto, and that certain Abrasive
Fluid Jet Technology Purchase Agreement, dated August 25, 2005, between the
Grantors and Alberta Energy Partners.
 
"Instruments" shall mean all "instruments", as such term is defined in the
Uniform Commercial Code, owned by either Grantor as of the Petition Date.
 
"Inventory" shall mean all inventory, goods and merchandise of either Grantor,
owned as of the Petition Date, held for sale or lease, or furnished or to be
furnished by either Grantor under contracts of service, or consumed in either
Grantor’s respective business, including raw materials, intermediates, work in
process, packaging materials, finished goods, semi-finished inventory, scrap
inventory, manufacturing supplies and spare parts, all such goods that have been
returned to or repossessed by or on behalf of either Grantor and all documents
of title representing such collateral.
 
"Investment Property" shall mean all "investment property", as such term is
defined in the Uniform Commercial Code, owned by either Grantor as of the
Petition Date, and all interests of Blast in Eagle, including all rights, title
and interest of Blast in and to any membership interests, and any distributions
with respect thereto, in Eagle.
 
"Letter-of-Credit Rights" shall mean all "letter-of-credit rights", as such term
is defined in the Uniform Commercial Code, owned by either Grantor as of the
Petition Date.
 
"License" shall mean any Patent License, Trademark License, Copyright License or
other license or sublicense to which either Grantor is a party executed on or
prior to the Petition Date (other than those license agreements in existence on
the date hereof and those license agreements entered into after the date hereof,
which by their terms prohibit assignment or a grant of a security interest by
the Grantor as licensee thereunder so long as such prohibition remains in effect
and is valid notwithstanding the provisions of the Uniform Commercial Code or
the provisions of any other applicable federal or state law).

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"Obligations" shall mean the payment by the Grantors, when and as due, of the
Laurus Retained Claim.
 
"Patent License" shall mean any written agreement, executed on or prior to the
Petition Date, granting to any third party any right to make, use or sell any
invention on which a Patent, owned by either Grantor or which either Grantor
otherwise has the right to license, is in existence, or granting to either
Grantor any right to make, use or sell any invention on which a Patent is in
existence, and all rights of either Grantor under any such agreement, including
all such agreements and licenses related to a method of an apparatus for
horizontal well drilling, patent registration numbers 5,413,184 and 5,853,056.
 
"Patents" shall mean all of the following owned by either Grantor as of the
Petition Date: (a) all letters patent of the United States or any other country,
all registrations and recordings thereof, and all applications for letters
patent of the United States or any other country, including registrations,
recordings and pending applications in the United States Patent and Trademark
Office or any similar offices in any other country, including patent application
# 60/527,308 relating to a method and apparatus for Jet-Fluid Abrasive Cutting
and any patent issued with respect thereto and (b) all reissues, continuations,
divisions, continuations-in-part, renewals or extensions thereof, and the
inventions disclosed or claimed therein, including the right to make, use and/or
sell the inventions disclosed or claimed therein.
 
“Petition Date”  shall mean January 19, 2007.
 
"Proceeds" shall mean all proceeds and products of any of the Collateral,
including, but not limited to, any consideration received from the sale,
exchange, license, lease or other disposition of any asset or property that
constitutes Collateral, any value received as a consequence of the possession of
any Collateral and any payment received from any insurer or other person or
entity as a result of the destruction, loss, theft, damage or other involuntary
conversion of whatever nature of any asset or property which constitutes
Collateral, and shall include (a) any claim of either Grantor against any third
party for (and the right to sue and recover for and the rights to damages or
profits due or accrued arising out of or in connection with) or with respect to
(i) any Intellectual Property, including for infringement or breach, and (ii) a
commercial tort and (b) any and all other amounts from time to time paid or
payable under or in connection with any of the Collateral.
 
“Quicksilver” shall mean Quicksilver Resources, Inc. and its affiliates.
 
“Quicksilver Litigation” shall mean the court proceedings ongoing as of the date
of this Agreement, Adversary case no. 07-03292, in the Bankruptcy Court, or any
similar proceedings, between Quicksilver and Eagle pertaining to an early
termination and resulting breach of three IADC standard form drilling contracts,
and any claims, causes of action and counterclaims asserted or to be asserted by
Eagle against Quicksilver in such proceedings.
 
“Saddle Creek” shall mean Saddle Creek Energy Development, LP.
 
“Saddle Creek Litigation” shall mean all claims and causes of action against
Saddle Creek, including with respect to the litigation commenced by the Grantors
in the Bankruptcy Court, relating to or involving that certain IADC Day Rate
Drilling Contract dated October 24, 2006, as amended.

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“Sale Order” shall mean the “Order Under 11 U.S.C. Sections 105(A) And 363 and
Fed. R. Bankr. P. 2002 And 6004 Authorizing and Approving (I) Asset Purchase
Agreement; (II) Asset Sale Free And Clear Of Liens, Claims, Interests And
Encumbrances; and (III) Certain Related Relief” entered by the Court on May 11,
2007
 
"Security Interest" shall have the meaning assigned to such term in Section
2.01.
 
“Settlement Agreement” shall mean the global settlement agreement among the
numerous signatory parties, including the Grantors and the Secured Party,
approved by order of the Bankruptcy Court entered on May 11, 2007.
 
"Supporting Obligations" shall mean all "supporting obligations", as such term
is defined in the Uniform Commercial Code, owned by either Grantor as of the
Petition Date.
 
"Trademark License" shall mean any written agreement, executed on or prior to
the Petition Date, granting to any third party any right to use any Trademark
owned by either Grantor or which either Grantor otherwise has the right to
license, or granting to either Grantor any right to use any Trademark owned by
any third party, and all rights of either Grantor under any such agreement.
 
"Trademarks" shall mean all of the following owned by either Grantor as of the
Petition Date: (a) all trademarks, service marks, trade names, corporate names,
company names, business names, fictitious business names, trade styles, trade
dress, logos, other source or business identifiers, designs and general
intangibles of like nature, all registrations and recordings thereof, and all
registration and recording applications filed in connection therewith, including
registrations and registration applications in the United States Patent and
Trademark Office, any State of the United States or any similar offices in any
other country or any political subdivision thereof, and all extensions or
renewals thereof, (b) all goodwill associated therewith or symbolized thereby
and (c) all other assets, rights and interests that uniquely reflect or embody
such goodwill.
 
ARTICLE II
 
SECURITY INTEREST
 
SECTION 2.01. Security Interest. As security for the payment in full of the
Obligations, each Grantor hereby grants to the Secured Party, its successors and
assigns, a continuing security interest in all of each such Grantor's right,
title and interest in, to and under the Collateral (the "Security
Interest").  Without limiting the foregoing, the Secured Party is hereby
authorized to file one or more financing statements (including fixture filings),
amendments thereto, continuation statements, filings with the United States
Patent and Trademark Office or United States Copyright Office (or any successor
office or any similar office in any other country) or other documents, including
a copy of the Sale Order and the Confirmation Order, for the purpose of
perfecting, confirming, continuing, enforcing or protecting the Security
Interest granted by the Grantors, without the signature of the Grantors, and
naming the Grantors as debtor and the Secured Party as secured party.  The
Secured Party is authorized to include any information required by part 5 of
Article 9 of the Uniform Commercial Code, or its equivalent in any other
applicable jurisdiction, for the sufficiency or filing office acceptance of any
financing statement, amendment or continuation statement.

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SECTION 2.02. No Assumption of Liability. The Security Interest is granted as
security only and shall not subject the Secured Party to, or in any way alter or
modify, any obligation or liability of either Grantor with respect to or arising
out of the Collateral.
 
ARTICLE III
 
COVENANTS
 
SECTION 3.01. Change of Name; Location of Collateral; Records; Place of
Business. (a) Each Grantor agrees promptly to notify the Secured Party in
writing of any change (i) in its corporate name or in any trade name used to
identify it in the conduct of its business or in the ownership of its
properties, (ii) its state of incorporation, (iii) in the location of its chief
executive office, its principal place of business, any office in which it
maintains books or records relating to Collateral owned by it or any office or
facility at which Collateral owned by it is located (including the establishment
of any such new office or facility), (iv) in its identity or corporate
structure, (v) in its organizational number or (vi) in its Federal Taxpayer
Identification Number.  Each Grantor agrees not to effect or permit any change
referred to in the preceding sentence unless it shall have given the Secured
Party ten (10) Business Days prior written notice of such change and shall
promptly execute all documents that are required in order for the Secured Party
to continue at all times following such change to have a valid, legal and
perfected security interest in all the Collateral.  Each Grantor agrees promptly
to notify the Secured Party if any material portion of the Collateral owned or
held by such Grantor is damaged or destroyed.
 
SECTION 3.02. Further Assurances.  Each Grantor agrees, at its own expense, to
execute, acknowledge, deliver and cause to be duly filed all such further
instruments and documents and take all such actions as the Secured Party may
from time to time reasonably request to better assure, preserve, protect and
perfect the Security Interest and the rights and remedies created hereby.
 
SECTION 3.03. First Priority Lien/Other Liens/Disposition of Collateral. As
provided in the Sale Order, Plan and Confirmation Order, the Security Interest
provided for in this Agreement is a continuing first priority fully perfected
security interest in and lien against the Collateral.  Each Grantor shall not
make or permit to be made an assignment, pledge or hypothecation of the
Collateral or shall grant any other lien or security interest in respect of the
Collateral, except for the liens and security interests authorized in the Plan
and the Confirmation Order.  Unless and until the Secured Party shall notify the
Grantors that an Event of Default shall have occurred and be continuing, each
Grantor shall be entitled to sell, convey, lease, assign, transfer or otherwise
dispose of any Collateral, subject to the consent rights of the Secured Party
set forth in the Plan and the Confirmation Order and provided that the proceeds
of any such sale, conveyance, lease, assignment, transfer or disposition are
distributed to the Secured Party in the manner and amount as provided in the
Sale Order, the Plan and the Confirmation Order.

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ARTICLE IV
 
REMEDIES
 
SECTION 4.01. Remedies upon Default. In addition to all other rights and
remedies granted to the Secured Party under this Agreement, upon the occurrence
and continuance of an Event of Default, the Obligations shall become immediately
due and payable and the Secured Party may exercise all rights and remedies of a
secured party under the Uniform Commercial Code or other applicable
law.  Without limiting the generality of the foregoing, upon the occurrence and
during the continuance of an Event of Default, each Grantor agrees to deliver
each item of Collateral to the Secured Party on demand, and it is agreed that
the Secured Party shall have the right to take any of or all the following
actions at the same or different times: (a) with respect to any Collateral
consisting of Intellectual Property, on demand, to cause the Security Interest
to become an assignment, transfer and conveyance of any of or all such
Collateral by the Grantor to the Secured Party (other than Licenses that are not
assignable), and/or to issue any license or sublicense, whether general, special
or otherwise, and whether on an exclusive or non-exclusive basis, to use any
such Collateral throughout the world on such terms and conditions and in such
manner as the Secured Party shall determine (other than in violation of any
then-existing licensing arrangements to the extent that waivers cannot be
obtained), and (b) with or without legal process and with or without prior
notice or demand for performance, to take possession of the Collateral and
without liability for trespass to enter any premises where the Collateral may be
located for the purpose of taking possession of or removing the Collateral and,
generally, to exercise any and all rights afforded to a secured party under the
Uniform Commercial Code or other applicable law.  Without limiting the
generality of the foregoing, each Grantor agrees that the Secured Party shall
have the right, subject to the mandatory requirements of applicable law, to sell
or otherwise dispose of all or any part of the Collateral, at any public or
private sale or at any broker's board or on any securities exchange, for cash,
upon credit or for future delivery as the Secured Party shall deem
appropriate.  The Secured Party shall be authorized at any such sale (if it
deems it advisable to do so) to restrict the prospective bidders or purchasers
to persons who will represent and agree that they are purchasing the Collateral
for their own account for investment and not with a view to the distribution or
sale thereof, and upon consummation of any such sale the Secured Party shall
have the right to assign, transfer and deliver to the purchaser or purchasers
thereof the Collateral so sold.  Each such purchaser at any such sale shall hold
the property sold absolutely, free from any claim or right on the part of either
Grantor, and each Grantor hereby waives (to the extent permitted by law) all
rights of redemption, stay, valuation and appraisal which either Grantor now has
or may at any time in the future have under any rule of law or statute now
existing or hereafter enacted.

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The Secured Party shall give the Grantors 10 days' written notice (which the
Grantors agree is reasonable notice within the meaning of the Uniform Commercial
Code) of the Secured Party's intention to make any sale of Collateral.  Such
notice, in the case of a public sale, shall state the time and place for such
sale and, in the case of a sale at a broker's board or on a securities exchange,
shall state the board or exchange at which such sale is to be made and the day
on which the Collateral, or portion thereof, will first be offered for sale at
such board or exchange.  Any such public sale shall be held at such time or
times within ordinary business hours and at such place or places as the Secured
Party may fix and state in the notice (if any) of such sale.  At any such sale,
the Collateral, or portion thereof, to be sold may be sold in one lot as an
entirety or in separate parcels, as the Secured Party may (in its sole and
absolute discretion) determine.  The Secured Party shall not be obligated to
make any sale of any Collateral if it shall determine not to do so, regardless
of the fact that notice of sale of such Collateral shall have been given.  The
Secured Party may, without notice or publication, adjourn any public or private
sale or cause the same to be adjourned from time to time by announcement at the
time and place fixed for sale, and such sale may, without further notice, be
made at the time and place to which the same was so adjourned.  In case any sale
of all or any part of the Collateral is made on credit or for future delivery,
the Collateral so sold may be retained by the Secured Party until the sale price
is paid by the purchaser or purchasers thereof, but the Secured Party shall not
incur any liability in case any such purchaser or purchasers shall fail to take
up and pay for the Collateral so sold and, in case of any such failure, such
Collateral may be sold again upon like notice.  At any public (or, to the extent
permitted by law, private) sale made pursuant to this Section, the Secured Party
may bid for or purchase, free (to the extent permitted by law) from any right of
redemption, stay, valuation or appraisal on the part of either Grantor (all said
rights being also hereby waived and released to the extent permitted by law),
the Collateral or any part thereof offered for sale and may make payment on
account thereof by using any claim then due and payable to the Secured Party
from the Grantors as a credit against the purchase price, and the Secured Party
may, upon compliance with the terms of sale, hold, retain and dispose of such
property without further accountability to the Grantors therefor.  For purposes
hereof, a written agreement to purchase the Collateral or any portion thereof
shall be treated as a sale thereof; the Secured Party shall be free to carry out
such sale pursuant to such agreement and the Grantors shall not be entitled to
the return of the Collateral or any portion thereof subject thereto,
notwithstanding the fact that after the Secured Party shall have entered into
such an agreement all Events of Default shall have been remedied and the
Obligations paid in full.  As an alternative to exercising the power of sale
herein conferred upon it, the Secured Party may proceed by a suit or suits at
law or in equity to foreclose this Agreement and to sell the Collateral or any
portion thereof pursuant to a judgment or decree of a court or courts having
competent jurisdiction or pursuant to a proceeding by a court-appointed
receiver.
 
SECTION 4.02. Application of Proceeds. The Secured Party shall apply the
proceeds of any collection or sale of the Collateral, as well as any Collateral
consisting of cash, as follows:
 
FIRST, to the payment of all costs and expenses incurred by the Secured Party in
connection with such collection or sale or with the exercise of any right or
remedy hereunder, including all court costs and the reasonable fees and expenses
of its agents and legal counsel;
 
SECOND, to the payment in full of the Obligations; and
 
THIRD, to the Grantors, and its successors or assigns, or as a court of
competent jurisdiction may otherwise direct.

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ARTICLE V
 
MISCELLANEOUS
 
SECTION 5.01. Notices. All communications and notices hereunder shall (except as
otherwise expressly permitted herein) be in writing, first class mail postage
prepaid,  and shall be mailed or electronically transmitted to:
 
The Grantors:

Blast Energy Services, Inc.
Attn:  John O’Keefe
14550 Torrey Chase Boulevard
Suite 330
Houston, TX  77014
Email:  john@blast-es.com

with a copy to:

H. Rey Stroube, III
18510 Kingsland Boulevard
Houston, Texas 77094
(281) 599-3011 (phone & fax)
rstroube3@earthlink.net
 
If to the Secured Party to:

Laurus Master Fund Ltd.
Attn: Brendan Phalen
335 Madison Avenue, 10th Floor
New York, NY 10017
Telephone: 212-541-5800
Facsimile: 212-541-4434
Email: bphalen@laurusfunds.com

with a copy to:

Stuart Komrower, Esq.
Cole, Schotz, Meisel, Forman & Leonard, P.A.
25 Main Street
Hackensack, NJ  07601
201.525.6331 direct dial
201.678-6331 direct fax
Email: skomrower@coleschotz.com

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SECTION 5.02. Security Interest Absolute. All rights of the Secured Party
hereunder, the Security Interest and all obligations of each Grantor hereunder
shall be absolute and unconditional irrespective of (a) any lack of validity or
enforceability of any agreement with respect to any of the Obligations or any
other agreement or instrument relating to any of the foregoing, (b) any change
in the time, manner or place of payment of, or in any other term of, all or any
of the Obligations, or any other amendment or waiver of or any consent to any
departure from any other agreement or instrument, (c) any exchange, release or
non-perfection of any security interest or lien on other collateral, or any
release or amendment or waiver of or consent under or departure from any
guarantee, securing or guaranteeing all or any of the Obligations, or (d) any
other circumstance that might otherwise constitute a defense available to, or a
discharge of, either Grantor in respect of the Obligations.
 
SECTION 5.03. Survival of Agreement. All covenants, agreements, representations
and warranties made by each Grantor herein shall be considered to have been
relied upon by the Secured Party and shall survive the execution and delivery to
the Secured Party of this Agreement, regardless of any investigation made by the
Secured Party or on its behalf, and shall continue in full force and effect
until this Agreement shall terminate.
 
SECTION 5.04. Binding Effect; Several Agreement. This Agreement shall become
effective as to each Grantor upon entry of the Confirmation Order and when a
counterpart hereof executed on behalf of each Grantor shall have been delivered
to the Secured Party and a counterpart hereof shall have been executed on behalf
of the Secured Party, and thereafter shall be binding upon each Grantor and the
Secured Party and their respective successors and assigns, and shall inure to
the benefit of the Grantors, the Secured Party and their respective successors
and assigns, except that the Grantors shall not have the right to assign or
transfer its rights or obligations hereunder or any interest herein or in the
Collateral (and any such assignment or transfer shall be void) except as
expressly contemplated by this Agreement.
 
SECTION 5.05. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
 
SECTION 5.06. VENUE.  The Grantors and the Secured Creditor consent and agree
that the Bankruptcy Court shall have exclusive jurisdiction to hear and
determine, while the bankruptcy cases of the Grantors are still pending, any
claims and disputes between the Grantors and the Secured Creditor pertaining to
this Agreement or any matter arising out of or related to this Agreement.  To
the extent the Bankruptcy Court declines to exercise such jurisdiction or no
longer has such jurisdiction,  the Grantors and the Secured Creditor consent and
agree that any federal court located in the County of Harris, State of Texas
shall have exclusive jurisdiction to hear and determine any claims and disputes
between the Grantors and the Secured Creditor pertaining to this Agreement or
any matter arising out of or related to this Agreement, provided, that nothing
in this Agreement shall be deemed or operate to preclude the Secured Creditor
from bringing suit or taking other legal action in any other jurisdiction to
collect, the Obligations, to realize on the Collateral or any other security for
the Obligations, or to enforce a judgment or other court order in favor of the
Secured Creditor.  Each Grantor expressly submits and consents in advance to
such jurisdiction in any action or suit commenced in any such court, and each
Grantor hereby waives any objection which it may have based upon lack of
personal jurisdiction, improper venue or forum non conveniens.  Each Grantor
hereby waives personal service of the summons, complaint and other process
issues in any such action or suit and agrees that service of such summons,
complaint and other process may be made by registered or certified mail
addressed to such Grantor at the address set forth in Section 5.01 and that
service so made shall be deemed completed upon the earlier of such Grantor’s
actual receipt thereof or three (3) days after deposit in the U.S. mails, proper
postage prepaid.

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SECTION 5.07. Waivers; Amendment. (a) No failure or delay of the Secured Party
in exercising any power or right hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power.  The rights and remedies of the Secured Party hereunder are
cumulative and are not exclusive of any rights or remedies that they would
otherwise have.  No waiver of any provisions of this Agreement or consent to any
departure by the Grantors therefrom shall in any event be effective unless the
same shall be permitted by paragraph (b) below, and then such waiver or consent
shall be effective only in the specific instance and for the purpose for which
given.  No notice to or demand on either Grantor in any case shall entitle each
such Grantor to any other or further notice or demand in similar or other
circumstances.
 
(b) Neither this Agreement nor any provision hereof may be waived, amended or
modified except pursuant to an agreement or agreements in writing entered into
by the Secured Party and the Grantors with respect to which such waiver,
amendment or modification is to apply.
 
SECTION 5.08. WAIVER OF JURY TRIAL. EACH PARTY HERETO. HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER
OR IN CONNECTION WITH THIS AGREEMENT.  EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTY
HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AMONG OTHER THINGS, THE
MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 5.08.
 
SECTION 5.09. Severability. In the event any one or more of the provisions
contained in this Agreement should be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired thereby
(it being understood that the invalidity of a particular provision in a
particular jurisdiction shall not in and of itself affect the validity of such
provision in any other jurisdiction).  The parties shall endeavor in good-faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions the economic effect of which comes as close as possible to that
of the invalid, illegal or unenforceable provisions.
 

 
 

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SECTION 5.10. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original but all of which when
taken together shall constitute but one contract (subject to Section 5.04), and
shall become effective as provided in Section 5.04.  Delivery of an executed
signature page to this Agreement by facsimile transmission shall be effective as
delivery of a manually executed counterpart hereof.
 
SECTION 5.11. Headings. Article and Section headings used herein are for the
purpose of reference only, are not part of this Agreement and are not to affect
the construction of, or to be taken into consideration in interpreting, this
Agreement.
 
SECTION 5.12. Termination. (a) This Agreement and the Security Interest shall
terminate when all the Obligations have been indefeasibly paid in full, at which
time the Secured Party shall either deliver to the Grantors in proper form for
filing, at the Grantors’ expense, all Uniform Commercial Code termination
statements and similar documents which the Grantors shall reasonably request to
evidence such termination or an authenticated record authorizing the Grantors to
prepare and file the same.  Any execution and delivery of termination statements
or documents pursuant to this Section 5.12 shall be without recourse to or
warranty by the Secured Party.
 
(b) This Security Agreement shall remain in full force and effect and continue
to be effective should any petition be filed by or against either Grantor for
liquidation or reorganization, should either Grantor become insolvent or make an
assignment for the benefit of any creditor or creditors or should a receiver or
trustee be appointed for all or any significant part of either Grantor’s assets,
and shall continue to be effective or be reinstated, as the case may be, if at
any time payment and performance of the Obligations, or any part thereof, is,
pursuant to applicable law, rescinded or reduced in amount, or must otherwise be
restored or returned, whether as a “voidable preference,” “fraudulent
conveyance,” or otherwise, all as though such payment or performance had not
been made.  In the event that any payment, or any part thereof, is rescinded,
reduced, restored or returned, the Obligations shall be reinstated and deemed
reduced only by such amount paid and not so rescinded, reduced, restored or
returned.
 
SECTION 5.13. Conflict. In the event of any conflict between the terms of this
Agreement and the terms of the Sale Order, the Plan or the Confirmation Order,
the terms of the Sale Order, the Plan or the Confirmation Order shall control.
 
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the day and year first above written.
 
BLAST ENERGY SERVICES, INC.,
 
as Grantor,
 
By: /s/ John O’Keefe
Name: John O’Keefe
Title: CEO

 
 

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EAGLE DOMESTIC DRILLING OPERATIONS LLC,
 
as Grantor,
 
By: /s/John MacDonald
Name: John MacDonald
 
Title: CFO
 

 
LAURUS MASTER FUND, LTD.
as Secured Party,
 
By:    /s/Scott Bluestein           
Name:  Scott Bluestein
 
Title: