Exhibit 10.1

 

NOTICE OF CONFIDENTIALITY RIGHTS:  IF YOU ARE A NATURAL PERSON, YOU MAY REMOVE
OR STRIKE ANY OF THE FOLLOWING INFORMATION FROM THIS INSTRUMENT BEFORE IT IS
FILED FOR RECORD IN THE PUBLIC RECORDS:  YOUR SOCIAL SECURITY NUMBER OR YOUR
DRIVER’S LICENSE NUMBER.

 

DEED OF TRUST, SECURITY AGREEMENT, FINANCING STATEMENT, FIXTURE FILING AND
ASSIGNMENT OF PRODUCTION

 

THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY AND FUTURE ADVANCE PROVISIONS. 
THIS INSTRUMENT COVERS THE INTEREST OF GRANTOR IN MINERALS OR THE LIKE
(INCLUDING OIL AND GAS) BEFORE EXTRACTION AND THE SECURITY INTEREST CREATED BY
THIS INSTRUMENT ATTACHES TO SUCH MINERALS AS EXTRACTED AND TO THE ACCOUNTS
RESULTING FROM THE SALE THEREOF AT THE WELLHEAD.  THIS INSTRUMENT COVERS THE
INTEREST OF GRANTOR IN FIXTURES.  THIS FINANCING STATEMENT IS TO BE FILED FOR
RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS.  PRODUCTS OF THE
COLLATERAL ARE ALSO COVERED.

 

A POWER OF SALE HAS BEEN GRANTED IN THIS DEED OF TRUST.  A POWER OF SALE MAY
ALLOW THE TRUSTEE OR BENEFICIARY TO TAKE THE COLLATERAL AND SELL IT WITHOUT
GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY GRANTOR UNDER THIS DEED
OF TRUST

 

FROM

 

ZAZA ENERGY, LLC
(Grantor and Debtor)

 

TO

 

Mauri J. Cowen, Trustee for the benefit of

 

U.S. Bank National Association, as Collateral Agent (Beneficiary)
for the benefit of itself and the Holders, as defined below
(Secured Parties)

 

April 6, 2012

 

For purposes of filing this Deed of Trust as a financing statement, the mailing
address for Debtor is 1301 McKinney, Suite 2850, Houston, Texas 77010, its
jurisdiction of organization is the State of Texas and its organizational number
is 0801094301.  The mailing address of Beneficiary is 5555 San Felipe Street,
11th Floor, Houston, Texas 77056, Attention:  Mauri J. Cowen, Facsimile No.: 
(713) 235-9213.

 

Texas Deed of Trust

 

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***********************************

 

This instrument, prepared by Maria S. Kim, Skadden, Arps, Slate, Meagher & Flom
LLP, 1000 Louisiana, Suite 6800, Houston, Texas 77002, (713) 655-5100, contains
after-acquired property provisions and covers future advances and proceeds to
the fullest extent allowed by applicable law.

 

ATTENTION RECORDING OFFICER: This instrument is a deed of trust and mortgage
covering both real and personal property and is, among other things, a Security
Agreement and Financing Statement under the Uniform Commercial Code in effect in
the State of Texas.  This instrument creates a lien on rights in or relating to
lands of Grantor which are described in Exhibit A hereto or in documents
described in such Exhibit A.

 

RECORDED DOCUMENT SHOULD BE RETURNED TO:

 

Bingham McCutchen LLP

One State Street

Hartford, CT 06103-3178

Attention:  Heather Wenzel

 

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DEED OF TRUST, SECURITY AGREEMENT, FINANCING STATEMENT, FIXTURE FILING AND
ASSIGNMENT OF PRODUCTION

 

WHEREAS, this instrument (the “Deed of Trust”) is made as of April 6, 2012 to be
effective as of February 21, 2012 (the “Effective Date”), and executed and
delivered by ZaZa Energy, LLC ( “Grantor” or “Debtor”), to Mauri J. Cowen as
Trustee, for the benefit of U.S. Bank National Association in its capacity as
the collateral agent on behalf, and for the benefit, of the Holders (as
hereinafter defined) (“Beneficiary,” with Beneficiary and the Holders
collectively called the “Secured Parties”).  The addresses of Grantor,
Beneficiary, and the Trustee appear in Section 7.13 of this Deed of Trust.

 

Recitals

 

A.                                   ZaZa Energy Corporation, a Delaware
corporation (“Grantor Parent”), entered into that certain Securities Purchase
Agreement, dated as of February 21, 2012 (as the same from time to time
hereafter may be amended, restated, supplemented or otherwise modified, the
“Securities Purchase Agreement”), by and among Grantor Parent and the Purchasers
(as defined in the Securities Purchase Agreement) named therein, pursuant to
which, subject to the terms and conditions set forth therein, Grantor Parent
agreed to issue and sell to such Purchasers, and such Purchasers purchased from
Grantor Parent, the Notes (as defined in the Securities Purchase Agreement).

 

B.                                     Grantor is a Subsidiary (as defined in
the Securities Purchase Agreement) and a member of an affiliated group of
companies that includes Grantor Parent and other Subsidiaries of Grantor Parent,
and the proceeds from the issuance and sale of the Notes under the Securities
Purchase Agreement will be used, in part, to enable Grantor Parent, Grantor and
such other Subsidiaries to make transfers among themselves in connection with
their respective operations.  Grantor will receive direct and indirect benefits
from the issuance of the Notes and the other transactions contemplated by the
Securities Purchase Agreement.

 

C.                                     Grantor and certain other Subsidiaries of
Grantor Parent executed and delivered to the Secured Parties (as defined below)
that certain Guaranty Agreement, dated as of February 21, 2012 (as the same from
time to time hereafter may be amended, restated, supplemented or otherwise
modified, the “Guaranty”), pursuant to which they guarantee the full, complete
and final payment and performance of the “Guaranteed Obligations” (as defined in
the Guaranty).

 

D.                                    The Purchasers purchased the Notes as
provided in the Securities Purchase Agreement and otherwise agreed to make,
extend and maintain certain financial accommodations to Grantor Parent as
provided in the Transaction Documents, but only upon the condition, among
others, that Grantor shall have executed and delivered this Deed of Trust to
Trustee and Beneficiary, on behalf and for the benefit of the Secured Parties.

 

NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Grantor (a) wishes to make this Deed of Trust for the benefit of
Beneficiary to secure the Obligations (as defined herein), and (b) hereby agrees
as follows:

 

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ARTICLE I
Definitions

 

1.1                                 Terms Defined Above or in Securities
Purchase Agreement.  Capitalized terms defined above have the meanings so given
to them.  Capitalized terms defined in the Securities Purchase Agreement that
are used in this Deed of Trust but that are not otherwise defined in this Deed
of Trust have the meanings given to those terms in the Securities Purchase
Agreement.

 

1.2                                 Certain Definitions.  In addition to the
terms defined above or in the Securities Purchase Agreement, as used in this
Deed of Trust the following terms have the following meanings:

 

“Claims” has the meaning set forth in Section 3.7.

 

“Collateral” means the Realty Collateral, Personalty Collateral and Fixture
Collateral.

 

“Contracts” means all contracts, agreements, operating agreements, farm-out or
farm-in agreements, sharing agreements, mineral purchase agreements, contracts
for the purchase, exchange, transportation, processing or sale of Hydrocarbons,
rights-of-way, easements, surface leases, equipment leases, permits, franchises,
licenses, pooling or unitization agreements, and unit or pooling designations
and orders now or hereafter affecting any of the Oil and Gas Properties,
Operating Equipment, Fixture Operating Equipment, or Hydrocarbons now or
hereafter produced from any of the Oil and Gas Properties, or which are useful
or appropriate in drilling for, producing, treating, handling, storing,
transporting or marketing oil, gas or other minerals produced from any of the
Oil and Gas Properties, and all as such contracts and agreements as they may be
amended, restated, modified, substituted or supplemented from time-to-time.

 

“Credit Parties” has the meaning given to that term in the Securities Purchase
Agreement.

 

“Event of Default” has the meaning set forth in Section 5.1.

 

“Fixture Collateral” means all of Grantor’s interest now owned or hereafter
acquired in and to all Fixture Operating Equipment and all proceeds, products,
renewals, increases, profits, substitutions, replacements, additions, amendments
and accessions thereof, thereto or therefor.

 

“Fixture Operating Equipment” means any of the items described in the first
sentence of the definition of “Operating Equipment” set forth below and which as
a result of being incorporated into realty or structures or improvements located
therein or thereon, with the intent that they remain there permanently,
constitute fixtures under the laws of the state in which such equipment is
located.

 

“Holders” means the holders from time to time of the Notes in accordance with
the Securities Purchase Agreement.

 

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“Hydrocarbon Interests” means rights, titles, interests and estates now or
hereafter acquired in and to oil and gas leases, oil, gas and mineral leases, or
other liquid or gaseous hydrocarbon leases, mineral fee interests, mineral term
interests, subleases, farm-outs, overriding royalty and royalty interests, net
profit interests, carried interests, back-in interests, reversionary interests,
production payment interests, and other similar mineral interests, including any
reserved or residual interests of whatever nature.

 

“Hydrocarbons” means oil, gas, coal seam gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, and all other liquid and gaseous
hydrocarbons produced or to be produced in conjunction therewith from a well
bore and all products, by-products, and other substances derived therefrom or
the processing thereof, and all other minerals and substances produced in
conjunction with such substances, including sulfur, geothermal steam, water,
carbon dioxide, helium, and any and all minerals, ores, or substances of value
and the products and proceeds therefrom.

 

“Indemnified Parties” has the meaning set forth in Section 3.7.

 

“Obligations” means:

 

(a)                                  The Guaranteed Obligations;

 

(b)                                 All other indebtedness, obligations, and
liabilities of the Credit Parties or any of their respective Subsidiaries
arising under the Securities Purchase Agreement, this Deed of Trust, any
Guaranty Agreement, or any of the other Transaction Documents;

 

(c)                                  All other indebtedness, obligations and
liabilities of any kind of Grantor or any of its Subsidiaries owing to any of
the Holders now existing or hereafter arising under or pursuant to any
Transaction Document, whether fixed or contingent, joint or several, direct or
indirect, primary or secondary, and regardless of how created or evidenced;

 

(d)                                 All sums advanced or costs or expenses
incurred by Beneficiary or any of the other Holders (whether by it directly or
on its behalf by the Trustee), which are made or incurred pursuant to, or
allowed by, the terms of this Deed of Trust plus interest thereon from the date
of the advance or incurrence until reimbursement of Beneficiary or such Holder
charged at the Reimbursement Rate;

 

(e)                                  All future advances or other value, of
whatever class or for whatever purpose, at any time hereafter made or given by
Beneficiary or any of the Holders to any Credit Party or any of their respective
Subsidiaries under or pursuant to any Transaction Document, whether or not the
advances or value are given pursuant to a commitment, whether or not the
advances or value are presently contemplated by the parties hereto, and whether
or not Grantor is indebted to any Holder at the time of such events; and

 

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(f)                                    All renewals, extensions, modifications,
amendments, rearrangements and substitutions of all or any part of the above
whether or not Grantor executes any agreement or instrument.

 

“Oil and Gas Property” or “Oil and Gas Properties” means (a) the Hydrocarbon
Interests described in Exhibit A-1 attached hereto and made a part hereof for
all purposes including the net revenue interests warranted in Exhibit A-1 and
any reversionary or carried interests relating to any of the foregoing; (b) the
Properties now or hereafter pooled or unitized with the Hydrocarbon Interests
described in Exhibit A-1; (c) all presently existing or future unitization,
pooling agreements and declarations of pooled units and the units created
thereby that may affect all or any portion of the Hydrocarbon Interests
described in Exhibit A-1, including all production units, drilling and spacing
units (and the Properties covered thereby), those units which may be described
or referred to on Exhibit A-1 and any other units created by agreement or
designation or under orders, regulations, rules or other official acts of any
Governmental Authority; (d) the surface leases described in Exhibit A-1; (e) any
and all non-consent interests owned or held by, or otherwise benefiting, Grantor
and arising out of, or pursuant to, any of the Contracts; (f) all Hydrocarbons
in and under and that may be produced and saved or attributable to the
Hydrocarbon Interests described in Exhibit A-1, including all oil in tanks, and
all rents, issues, profits, proceeds, products, revenues and other incomes from
or attributable to the Hydrocarbon Interests; (g) any other interest in, to or
relating to (i) all or any part of the land described in Exhibit A-1, the land
relating to, or described in, the leases set forth in Exhibit A-1 or in the
documents described in Exhibit A-1, or (ii) any of the estates, property rights
or other interests referred to above, (h) any instrument executed in amendment,
correction, modification, confirmation, renewal or extension of the interests
described in clause (a) above, and (i) all tenements, hereditaments,
appurtenances and Properties, whether now existing or hereafter obtained, but in
any manner appertaining, belonging, affixed or incidental to or in connection
with any of the aforesaid.

 

“Operating Equipment” means, whether now owned or hereafter acquired, the
following owned by Grantor:  all surface or subsurface machinery, equipment,
facilities, supplies or other Property of whatsoever kind or nature now or
hereafter located on any of the Oil and Gas Properties which are useful for the
production, treatment, storage or transportation of Hydrocarbons, including the
wells described on Exhibit A-2 and all other oil wells, gas wells, water wells,
injection wells, casing, tubing, rods, pumping units and engines, trees,
derricks, separators, gun barrels, flow lines, pipelines, tanks, gas systems
(for gathering, treating and compression), water systems (for treating, disposal
and injection), supplies, wells, power plants, poles, cables, wires, meters,
processing plants, compressors, dehydration units, lines, transformers, starters
and controllers, machine shops, tools, storage yards and equipment stored
therein, buildings and camps, telegraph, telephone and other communication
systems, roads, loading racks, shipping facilities and all additions,
substitutes and replacements for, and accessories and attachments to, any of the
foregoing.  Operating Equipment shall not include any items incorporated into
realty or structures or improvements located therein or thereon in such a manner
that they no longer remain personalty under the laws of the state in which such
equipment is located.

 

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“Permitted Liens” means the Liens permitted by paragraph 7B(1) of the Securities
Purchase Agreement.

 

“Person” means any natural person, corporation, business trust, joint venture,
trust, association, company (whether limited in liability or otherwise),
partnership (whether limited in liability or otherwise) or Governmental
Authority, or any other entity, in any case, whether acting in a personal,
fiduciary or other capacity.

 

“Personalty Collateral” means all of Grantor’s right, title and interest now
owned or hereafter acquired in and to (a) all Operating Equipment, (b) all
Hydrocarbons severed and extracted from or attributable to the Oil and Gas
Properties, including oil in tanks and all other “as-extracted” collateral from
or attributable to the Oil and Gas Properties, (c) all accounts (including
accounts resulting from the sale of Hydrocarbons at the wellhead), contract
rights and general intangibles, including all accounts, contract rights and
general intangibles now or hereafter arising from any of the Contracts
regardless of whether any of the foregoing is in connection with the sale or
other disposition of any Hydrocarbons or otherwise, including all Liens securing
the same, (d) all proceeds and products of the Realty Collateral and any other
contracts or agreements relating to the Realty Collateral, (e) all information
concerning the Oil and Gas Properties and all wells located thereon, including
abstracts of title, title opinions, geological and geophysical information and
logs, lease files, well files, and other books and records (including
computerized records and data), (f) any deposit or time accounts with any
Holder, including Grantor’s operating bank account and all funds and investments
therein, (g) any options or rights of first refusal to acquire any Realty
Collateral, and (h) all proceeds, products, renewals, increases, profits,
substitutions, replacements, additions, amendments and accessions of, to or for
any of the foregoing.

 

“Property” means any property of any kind, whether real, personal, or mixed and
whether tangible or intangible.

 

“Realty Collateral” means all of Grantor’s right, title and interest now owned
or hereafter acquired in and to the Oil and Gas Properties, including any access
rights, water and water rights, and all unsevered and unextracted Hydrocarbons
(even though Grantor’s interest therein may be incorrectly described in, or a
description of a part or all of such interest may be omitted from, Exhibit A).

 

“Reimbursement Rate” means the lesser of (i) the Default Rate as that term is
defined in the Securities Purchase Agreement, and (ii) the maximum non-usurious
rate under applicable law.

 

“Security Termination” means the full, complete and indefeasible final payment
and performance of the Obligations.

 

1.3                                 Construction.  All meanings to defined
terms, unless otherwise indicated, are to be equally applicable to both the
singular and plural forms of the terms defined.  Article, Section, Schedule, and
Exhibit references are to Articles and Sections of and Schedules and Exhibits to
this Deed of Trust, unless otherwise specified.  All references to instruments,
documents,

 

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contracts, and agreements are references to such instruments, documents,
contracts, and agreements as the same may be amended, supplemented, and
otherwise modified from time to time, unless otherwise specified.  The words
“hereof”, “herein” and “hereunder” and words of similar import when used in this
Deed of Trust shall refer to this Deed of Trust as a whole and not to any
particular provision of this Deed of Trust.  As used herein, the term
“including” means “including, without limitation”.  Exhibit A when referenced
herein include any subparts thereof (e.g. Exhibit “A-1”, Exhibit “A-2”).

 

ARTICLE II
Creation of Security

 

2.1                                 Conveyance and Grant of Lien.  In
consideration of the advances or extensions by the Holders to the Credit Parties
of the funds or credit constituting the Obligations, and in further
consideration of the mutual covenants contained herein, Grantor, by this Deed of
Trust hereby GRANTS, CONVEYS, SELLS, TRANSFERS and ASSIGNS with a general
warranty of title, for the uses, purposes and conditions hereinafter set forth,
all of its right, title and interest in and to the Realty Collateral, the
Personalty Collateral and the Fixture Collateral unto Trustee, and to his
successor or successors or substitutes IN TRUST, WITH POWER OF SALE, to secure
the payment and performance of the Obligations for the benefit of Beneficiary on
behalf, and for the benefit, of itself and the Holders.

 

TO HAVE AND TO HOLD the Realty Collateral, the Personalty Collateral and Fixture
Collateral unto the Trustee and his successors or substitutes in trust and to
his and their successors and assigns forever for the benefit of Beneficiary on
behalf, and for the benefit, of itself and the Holders, together with all and
singular the rights, hereditaments and appurtenances thereto in anywise
appertaining or belonging, to secure payment of the Obligations and the
performance of the covenants of Grantor contained in this Deed of Trust. 
Grantor does hereby bind itself, its successors and assigns, to warrant and
forever defend all and singular the Realty Collateral, the Personalty Collateral
and the Fixture Collateral unto the Trustee and his successors or substitutes in
trust, and their successors and assigns, against every Person whomsoever
lawfully claiming or to claim the same, or any part thereof.

 

Subject, however, to the condition that none of Beneficiary and the Holders
shall be liable in any respect for the performance of any covenant or obligation
of Grantor in respect of the Collateral.  Any reference in Exhibit A to the name
of a well shall not be construed to limit the Collateral to the well bore of
such well or in the proration units.  It is Grantor’s intention that this
instrument cover Grantor’s entire right, title and interest in the lands,
leases, units and other interests set forth in Exhibit A.

 

2.2                                 Security Interest.  For the same
consideration and to further secure the Obligations, Grantor hereby grants to
the to the Beneficiary, on behalf of and for the benefit of itself and the other
Secured Parties a security interest in and to the Collateral.

 

2.3                                 Assignment of Liens and Security Interests. 
For the same consideration and to further secure the Obligations, Grantor hereby
assigns and conveys to Beneficiary for its benefit and the benefit of the other
Secured Parties any security interests held by Grantor arising under

 

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section 9.343(a) of the Texas Business and Commerce Code and the Liens granted
to Grantor pursuant to section 9.343(d) attributable to the interest of Grantor
in the Hydrocarbons.

 

ARTICLE III
Proceeds from Production

 

3.1                                 Assignment of Production.

 

(a)                                  In order to further secure the Obligations,
Grantor has assigned, transferred, conveyed and delivered and does hereby
assign, transfer, convey and deliver unto Beneficiary, effective as of the
Effective Date at 7:00 a.m. Houston, Texas time, all Hydrocarbons produced from,
and which are attributable to, Grantor’s interest, now owned or hereafter
acquired, in and to the Oil and Gas Properties, or are allocated thereto
pursuant to pooling or unitization orders, agreements or designations, and all
proceeds therefrom.

 

(b)                                 Subject to the provisions of Section 3.1(c)
and (f) below, all parties producing, purchasing, taking, possessing, processing
or receiving any production from the Oil and Gas Properties, or having in their
possession any such production, or the proceeds therefrom, for which they or
others are accountable to Beneficiary by virtue of the provisions of this
Section 3.1, are authorized and directed by Grantor to treat and regard
Beneficiary as the assignee and transferee of Grantor and entitled in its place
and stead to receive the Hydrocarbons described in Section 3.1(a) and the
proceeds therefrom.

 

(c)                                  Subject to the provisions of Section 3.1(f)
below, Grantor directs and instructs each of the parties described in Section
3.1(b) to pay to Beneficiary, for its benefit and the ratable benefit of the
other Holders, all of the proceeds of the Hydrocarbons described in Section
3.1(a) until such time as such party has been furnished evidence that all of the
Obligations have been paid and that the Lien evidenced hereby has been
released.  Grantor agrees to perform all such acts, and to execute all such
further assignments, transfers and division orders, and other instruments as may
be reasonably required or desired by Beneficiary or any party in order to have
said revenues and proceeds so paid to Beneficiary.  None of such parties shall
have any responsibility for the application of any such proceeds received by
Beneficiary.  Subject to the provisions of Section 3.1(f) below, Grantor
authorizes Beneficiary to receive and collect all proceeds of such Hydrocarbons.

 

(d)                                 Subject to the provisions of Section 3.1(f)
below, Grantor will execute and deliver to Beneficiary any instruments
Beneficiary may from time to time reasonably request for the purpose of
effectuating this assignment and the payment to Beneficiary of the proceeds
assigned.

 

(e)                                  Neither the foregoing assignment nor the
exercise by Beneficiary of any of its rights herein shall be deemed to make
Beneficiary a “mortgagee-in-possession” or otherwise responsible or liable in
any manner with respect to the Oil and Gas Properties or the use, occupancy,
enjoyment or operation of all or any portion thereof, unless and until
Beneficiary, in person or by agent, assumes actual possession thereof, nor shall
appointment of a receiver for the Oil and Gas Properties by any court at the
request of Beneficiary or by agreement with Grantor or the entering into
possession of the Oil and Gas Properties or any part thereof by such receiver be
deemed to make Beneficiary a “mortgagee-in-possession” or otherwise responsible
or liable

 

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in any manner with respect to the Oil and Gas Properties or the use, occupancy,
enjoyment or operation of all or any portion thereof.

 

(f)                                    Notwithstanding anything to the contrary
contained herein, so long as no Event of Default shall have occurred and is
continuing, Grantor shall (without the joinder, or the specific consent, of
Beneficiary) have the right to collect all revenues and proceeds attributable to
the Hydrocarbons described in Section 3.1(a) or the products obtained or
processed therefrom, as well as any Liens and security interests securing any
sales of said Hydrocarbons and to retain, use and enjoy same.

 

(g)                                 Following an Event of Default, Beneficiary
may endorse and cash any and all checks and drafts payable to the order of
Grantor or Beneficiary for the account of Grantor, received from or in
connection with the proceeds of the Hydrocarbons described in Section 3.1(a),
and the same may be applied as provided herein.  Beneficiary may execute any
transfer or division orders in the name of Grantor or otherwise, with warranties
and indemnities binding on Grantor; provided that Beneficiary shall not be held
liable to Grantor for, nor be required to verify the accuracy of, Grantor’s
interests as represented therein.

 

(h)                                 Following an Event of Default, Beneficiary
shall have the right at Beneficiary’s election and in the name of Grantor, or
otherwise, to prosecute and defend any and all actions or legal proceedings
deemed advisable by Beneficiary in order to collect the proceeds of the
Hydrocarbons described in Section 3.1(a) and to protect the interests of
Beneficiary or Grantor, with all costs, expenses and attorneys fees incurred in
connection therewith being paid by Grantor.  In addition, should any purchaser
taking production from the Oil and Gas Properties fail to pay promptly to
Beneficiary in accordance with this Article III, Beneficiary shall have the
right to demand a change of connection and to designate another purchaser with
whom a new connection may be made without any liability on the part of
Beneficiary in making such election, so long as ordinary care is used in the
making thereof, and upon failure of Grantor to consent to such change of
connection, the entire amount of all the Obligations may, at the option of
Beneficiary, be immediately declared to be due and payable and subject to
foreclosure hereunder.

 

(i)                                     Without in any way limiting the
effectiveness of the foregoing provisions, if Grantor receives any proceeds
which under this Section 3.1 are payable to Beneficiary, Grantor shall hold the
same in trust and remit such proceeds, or cause them to be remitted,
immediately, to Beneficiary.

 

3.2                                 Application of Proceeds.  All payments
received by Beneficiary pursuant to this Article III attributable to the
interest of Grantor in and to the Hydrocarbons shall be applied in the order
provided in Section 7(h) of the Security Agreement (as defined in the Securities
Purchase Agreement).

 

3.3                                 Grantor’s Payment Duties.  Except as
provided in Section 7.18, nothing contained herein will limit Grantor’s absolute
duty to make payment of the Obligations regardless of whether the proceeds
assigned by this Article III are sufficient to pay the same, and the receipt by
Beneficiary of proceeds from Hydrocarbons under this Deed of Trust will be in
addition to all other security now or hereafter existing to secure payment of
the Obligations.

 

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3.4                                 Liability of Secured Parties.  The Secured
Parties are hereby absolved from all liability to Grantor for failure to enforce
collection of any of such proceeds, and from all other responsibility to Grantor
in connection therewith except the responsibility to account to Grantor for
proceeds actually received by Beneficiary.

 

3.5                                 Actions to Effect Assignment.  Subject to
the provisions of Sections 3.1(c) and 3.1(f), Grantor covenants to cause all
operators, pipeline companies, production purchasers and other remitters of said
proceeds to pay promptly to Beneficiary the proceeds from such Hydrocarbons in
accordance with the terms of this Deed of Trust, and to execute, acknowledge and
deliver to said remitters such division orders, transfer orders, certificates
and other documents as may be necessary, reasonably requested or proper to
effect the intent of this assignment; and Beneficiary shall not be required at
any time, as a condition to its right to obtain the proceeds of such
Hydrocarbons, to warrant its title thereto or to make any guaranty whatsoever. 
In addition, Grantor covenants to provide to Beneficiary the name and address of
every such remitter of proceeds from such Hydrocarbons, together with a copy of
the applicable division orders, transfer orders, sales contracts and governing
instruments.  All expenses incurred by the Trustee or Beneficiary in the
collection of said proceeds shall be repaid promptly by Grantor; and prior to
such repayment, such expenses shall be a part of the Obligations secured
hereby.  If under any existing Contracts for the sale of Hydrocarbons, other
than division orders or transfer orders, any proceeds of Hydrocarbons are
required to be paid by the remitter direct to Grantor so that under such
existing Contracts payment cannot be made of such proceeds to Beneficiary in the
absence of foreclosure, Grantor’s interest in all proceeds of Hydrocarbons under
such existing Contracts shall, when received by Grantor, constitute trust funds
in Grantor’s hands for the benefit of Beneficiary, and shall be immediately paid
over to Beneficiary.

 

3.6                                 Power of Attorney.  Without limitation upon
any of the foregoing, Grantor hereby designates and appoints Beneficiary as true
and lawful agent and attorney-in-fact (with full power of substitution, either
generally or for such periods or purposes as Beneficiary may from time to time
prescribe), with full power and authority, for and on behalf of and in the name
of Grantor, to execute, acknowledge and deliver all such division orders,
transfer orders, certificates and other documents of every nature, with such
provisions as may from time to time, in the opinion of Beneficiary, be necessary
or proper to effect the intent and purpose of the assignment contained in this
Article III; and Grantor shall be bound thereby as fully and effectively as if
Grantor had personally executed, acknowledged and delivered any of the foregoing
orders, certificates or documents.  The powers and authorities herein conferred
on Beneficiary may be exercised by Beneficiary through any Person who, at the
time of exercise, is the president, a vice president or other officer of
Beneficiary.  The power of attorney conferred by this Section 3.6 is granted for
valuable consideration and coupled with an interest and is irrevocable as long
as Security Termination has not occurred.  Any Person dealing with Beneficiary,
or any substitute, shall be fully protected in treating the powers and
authorities conferred by this Section 3.6 as continuing in full force and effect
until advised by Beneficiary that Security Termination has occurred.

 

3.7                                 Indemnification.  GRANTOR AGREES TO
INDEMNIFY BENEFICIARY, THE TRUSTEE AND THE HOLDERS, AND EACH OF THEIR RESPECTIVE
DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS (COLLECTIVELY, THE “INDEMNIFIED
PARTIES”) FROM, AND DISCHARGE, RELEASE AND HOLD EACH OF THEM HARMLESS AGAINST
ALL LOSSES, DAMAGES,

 

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CLAIMS, ACTIONS, LIABILITIES, JUDGMENTS, COSTS, ATTORNEYS FEES OR OTHER CHARGES
OF WHATSOEVER KIND OR NATURE (HEREAFTER REFERRED TO AS “CLAIMS”) MADE AGAINST,
IMPOSED ON, INCURRED BY OR ASSERTED AGAINST ANY OF THEM AS A CONSEQUENCE OF THE
ASSERTION EITHER BEFORE OR AFTER THE PAYMENT IN FULL OF THE OBLIGATIONS THAT ANY
OF THE INDEMNIFIED PARTIES RECEIVED HYDROCARBONS OR PROCEEDS PURSUANT TO THIS
DEED OF TRUST OR PURSUANT TO ANY RIGHT PROVIDED UNDER APPLICABLE LAW TO COLLECT
PROCEEDS DIRECTLY FROM ACCOUNT DEBTORS WHICH ARE CLAIMED BY THIRD PERSONS.  THE
INDEMNIFIED PARTIES WILL HAVE THE RIGHT TO EMPLOY ATTORNEYS AND TO DEFEND
AGAINST ANY SUCH CLAIMS AND UNLESS FURNISHED WITH REASONABLE INDEMNITY, THE
INDEMNIFIED PARTIES WILL HAVE THE RIGHT TO PAY OR COMPROMISE AND ADJUST ALL SUCH
CLAIMS.  GRANTOR WILL INDEMNIFY AND PAY TO THE INDEMNIFIED PARTIES ALL SUCH
AMOUNTS AS MAY BE PAID IN RESPECT THEREOF, OR AS MAY BE SUCCESSFULLY ADJUDICATED
AGAINST ANY OF THE INDEMNIFIED PARTIES.  THE INDEMNITY UNDER THIS SECTION 3.7
SHALL APPLY TO CLAIMS ARISING OR INCURRED BY REASON OF THE PERSON BEING
INDEMNIFIED’S OWN NEGLIGENCE BUT SHALL NOT APPLY TO CLAIMS ARISING OR INCURRED
BY REASON OF THE PERSON BEING INDEMNIFIED’S OWN GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT.  THE LIABILITIES OF GRANTOR AS SET FORTH IN THIS SECTION 3.7 SHALL
SURVIVE THE TERMINATION OF THIS DEED OF TRUST.

 

ARTICLE IV
Grantor’s Warranties and Covenants

 

4.1                                 Payment of Obligations.  Grantor covenants
that Grantor shall timely pay and perform the Obligations secured by this Deed
of Trust.

 

4.2                                 Representations and Warranties.  Grantor
represents and warrants as follows:

 

(a)                                  Incorporation of Representations and
Warranties from Securities Purchase Agreement.  The representations and
warranties applicable to Grantor and to its Properties contained in Section 7 of
the Guaranty are hereby confirmed and restated, each such representation and
warranty, together with all related definitions and ancillary provisions, being
hereby incorporated into this Deed of Trust by reference as though specifically
set forth in this Section.

 

(b)                                 Title to Collateral.  Grantor has good and
defensible title to its Properties constituting Realty Collateral, and good
title to its Properties constituting Personalty and Fixture Collateral, in each
case, free from all Liens other than Permitted Liens.  The descriptions of
quantum and nature of the interests of Grantor set forth in Exhibit A include
the entire interests of Grantor in the Oil and Gas Properties and are complete
and accurate in all material respects.  There are no “back-in” or “reversionary”
interests held by third parties which could reduce the interests of Grantor in
the Oil and Gas Properties as set forth Exhibit A other than such interests
provided for in the Hess Agreements.  No operating or other agreement to which
Grantor is a party or by which Grantor is bound affecting any part of the
Collateral requires Grantor to bear any of the costs relating to the Collateral
greater than the leasehold interest of Grantor in such portion of the
Collateral.  Grantor’s ownership of the Hydrocarbons and the undivided interests
therein as specified in Exhibit A will, after giving full effect to all Liens
permitted hereby, afford Grantor not less than those net interests (expressed as
a fraction, percentage or decimal) in the

 

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production from or which is allocated to such Hydrocarbons specified as net
revenue interest in Exhibit A and will cause Grantor to bear not more than that
portion (expressed as a fraction, percentage or decimal), specified as working
interest in Exhibit A, of the costs of drilling, developing and operating the
wells identified in Exhibit A.

 

(c)                                  Pricing.  The prices being received for the
production of Hydrocarbons do not violate, in any material respect, any Contract
or any law or regulation.  Where applicable, all of the wells located on the Oil
and Gas Properties and production of Hydrocarbons therefrom have been properly
classified, in all material respects, under appropriate governmental
regulations.

 

(d)                                 Gas Regulatory Matters.  Grantor has filed
with the appropriate state and federal agencies all necessary rate and
collection filings and all necessary applications for well determinations under
the Natural Gas Act of 1938, as amended, the Natural Gas Policy Act of 1978, as
amended, and the rules and regulations of the Federal Energy Regulatory
Commission thereunder and comparable state laws and regulations, and each such
application has been approved by or is pending before the appropriate state or
federal agency.

 

(e)                                  Drilling Obligations.  There are no
obligations under any Oil and Gas Property or Contract which require the
drilling of additional wells or operations to earn or to continue to hold any of
the Oil and Gas Properties in force and effect, except for oil and gas leases
and term assignments that are still within their primary term (each of which
will require drilling operations to perpetuate it beyond its primary term), and
the standard provision in certain oil and gas leases and term assignments that
requires either production or operations to perpetuate each respective lease
after the expiration of its primary term.

 

(f)                                    Refund Obligations.  Grantor has not
collected any proceeds from the sale of Hydrocarbons produced from the Oil and
Gas Properties which are subject to any refund obligation.

 

(g)                                 Grantor’s Address.  The address of Grantor’s
place of business, residence, chief executive office and office where Grantor
keeps its records concerning accounts, contract rights and general intangibles
is as set forth in Section 7.13, and there has been no change in the location of
Grantor’s place of business, residence, chief executive office and office where
it keeps such records and no change of Grantor’s name during the four months
immediately preceding the Effective Date.  Grantor hereby represents and
warrants that its organizational number is 0801094301, the state of its
formation is Texas, and the correct spelling of its name is as set forth in its
signature block below.

 

4.3                                 Further Assurances.

 

(a)                                  Grantor covenants that Grantor shall
execute and deliver such other and further instruments, and shall do such other
and further acts as in the opinion of Beneficiary may be necessary or reasonably
desirable to carry out more effectively the purposes of this Deed of Trust,
including without limiting the generality of the foregoing, (i) prompt
correction of any defect in the execution or acknowledgment of this Deed of
Trust, any written instrument comprising part or all of the Obligations, or any
other document used in connection herewith; (ii) prompt correction of any defect
which may hereafter be discovered in the title to the Collateral;

 

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(iii) prompt execution and delivery of all division or transfer orders or other
instruments which in Beneficiary’s opinion are required to transfer to
Beneficiary, for its benefit and the ratable benefit of the other Holders, the
assigned proceeds from the sale of Hydrocarbons from the Oil and Gas Properties;
and (iv) prompt payment when due and owing of all taxes, assessments and
governmental charges imposed on this Deed of Trust, upon the interest of
Beneficiary or the Trustee, or upon the income and profits from any of the
Collateral.

 

(b)                                 Grantor covenants that Grantor shall
maintain and preserve the Lien and security interest herein created so long as
Security Termination has not occurred.

 

4.4                                 Operation of Equipment and Fixtures.  As
long as Security Termination has not occurred, Grantor shall (at Grantor’s own
expense) cause the Operating Equipment and the Fixture Operating Equipment to be
kept in good and effective operating condition, ordinary wear and tear excepted,
and cause to be made all repairs, renewals, replacements, additions and
improvements thereof or thereto, necessary or reasonably appropriate in
connection with the production of Hydrocarbons from the Oil and Gas Properties.

 

4.5                                 Recording.  Grantor hereby authorizes
Beneficiary, at Grantor’s own expense, to record, register, deposit and file
this Deed of Trust and every other instrument in addition or supplement hereto,
including applicable financing statements which have been delivered to Grantor
prior to filing, in such offices and places within the state where the
Collateral is located and in the state where Grantor is registered as a limited
liability company or other entity and at such times and as often as may be
necessary to preserve, protect and renew the Lien and security interest herein
created on real or personal property as the case may be, and otherwise shall do
and perform all matters or things necessary or expedient to be done or observed
for the purpose of effectively creating, perfecting, maintaining and preserving
the Lien and security interest created hereby in and on the Collateral.

 

4.6                                 Insurance.  To the extent that insurance is
carried by a third-party operator on behalf of Grantor, upon request by
Beneficiary, Grantor shall use its reasonable efforts to obtain and provide
Beneficiary with copies of certificates of insurance showing Grantor as a named
insured.  Grantor hereby assigns to Beneficiary for its benefit and the benefit
of the other Holders any and all monies that may become payable under any such
policies of insurance by reason of damage, loss or destruction of any of the
Collateral and Beneficiary may receive such monies and apply all or any part of
the sums so collected, at its election, toward payment of the Obligations,
whether or not such Obligations are then due and payable, in such manner as
Beneficiary may elect.  Subject to the terms of the Securities Purchase
Agreement, any insurance proceeds received by Grantor shall be held in trust for
the benefit of Beneficiary, shall be segregated from other funds of Grantor and
shall be forthwith paid over to Beneficiary.

 

ARTICLE V
Default

 

5.1                                 Events of Default.  An Event of Default as
provided in the Securities Purchase Agreement shall constitute an “Event of
Default” under this Deed of Trust.

 

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5.2                                 Acceleration Upon Default.  Upon the
occurrence and during the continuance of any Event of Default (other than
pursuant to clause (viii), (ix) or (x) of paragraph 8A of the Securities
Purchase Agreement), Beneficiary may, or shall at the request of the Required
Noteholders, declare the entire unpaid principal of, and the interest accrued
on, and the Premium and all other amounts owed in connection with, the
Obligations to be forthwith due and payable, whereupon the same shall become
immediately due and payable without any protest, presentment, demand, notice of
intent to accelerate, notice of acceleration or further notice of any kind, all
of which are hereby expressly waived by Grantor.  If an Event of Default
pursuant to clause (viii), (ix) or (x) of paragraph 8A of the Securities
Purchase Agreement has occurred, the entire unpaid principal of and interest
accrued on, and the Premium and all other amounts owed in connection with, the
Obligations shall immediately and automatically become and be due and payable in
full, without presentment, demand, protest or any notice of any kind (including
any notice of intent to accelerate or notice of acceleration) all of which are
hereby expressly waived by Grantor.  Whether or not Beneficiary or the Required
Noteholders elect to accelerate as herein provided, Beneficiary may
simultaneously, or thereafter, without any further notice to Grantor, exercise
any other right or remedy provided in this Deed of Trust or otherwise existing
under the Securities Purchase Agreement or any other Transaction Document or any
other agreement, document, or instrument evidencing obligations owing from
Grantor to any of the Holders.

 

ARTICLE VI
Beneficiary’s Rights

 

6.1                                 Rights to Realty Collateral Upon Default.

 

(a)                                  Operation of Property by Beneficiary.  Upon
the occurrence and during the continuance of an Event of Default, and in
addition to all other rights of Beneficiary, Beneficiary shall have the
following rights and powers (but no obligation):

 

(i)                                     To enter upon and take possession of any
of the Realty Collateral and exclude Grantor therefrom;

 

(ii)                                  To hold, use, administer, manage and
operate the Realty Collateral to the extent that Grantor could do so, and
without any liability to Grantor in connection with such operations; and

 

(iii)                               To the extent that Grantor could do so, to
collect, receive and receipt for all Hydrocarbons produced and sold from the
Realty Collateral, to make repairs, to purchase machinery and equipment, to
conduct workover operations, to drill additional wells, and to exercise every
power, right and privilege of Grantor with respect to the Realty Collateral.

 

Beneficiary may designate any person, firm, corporation or other entity to act
on its behalf in exercising the foregoing rights and powers.  When and if the
expenses of such operation and development (including costs of unsuccessful
workover operations or additional wells) have been paid, and Security
Termination has occurred, the Realty Collateral shall be returned to Grantor
(provided there has been no foreclosure sale).

 

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(b)                                 Judicial Proceedings.  Upon the occurrence
and during the continuance of an Event of Default, the Trustee and/or
Beneficiary, in lieu of or in addition to exercising the power of sale hereafter
given, may proceed by a suit or suits, in equity or at law (i) for the specific
performance of any covenant or agreement herein contained or in aid of the
execution of any power herein granted, (ii) for the appointment of a receiver
whether there is then pending any foreclosure hereunder or the sale of the
Realty Collateral, or (iii) for the enforcement of any other appropriate legal
or equitable remedy; and further, in lieu of the non-judicial power of sale
granted herein for Collateral located in the State of Texas, the Trustee may
proceed by suit for a sale of the Realty Collateral.

 

(c)                                  Foreclosure by Private Power of Sale of
Collateral.  Upon the occurrence and during the continuance of an Event of
Default, the Trustee shall have the right and power to sell, as the Trustee may
elect, all or a portion of the Collateral at one or more sales as an entirety or
in parcels, in accordance with section 51.002 of the Texas Property Code, as
amended from time to time (or any successor provisions of Texas governing real
property foreclosure sales) or with any applicable state law.  Grantor hereby
designates as Grantor’s address for the purpose of notice the address set out in
Section 7.13; provided that Grantor may by written notice to Beneficiary
designate a different address for notice purposes.  Any purchaser or purchasers
will be provided with a special warranty conveyance binding Grantor and
Grantor’s successors and assigns.  Sale of a part of the Realty Collateral will
not exhaust the power of sale, and sales may be made from time to time until all
of the Realty Collateral is sold or Security Termination has occurred.

 

(d)                                 Certain Aspects of Sale.  Beneficiary will
have the right to become the purchaser at any foreclosure sale and to credit the
then outstanding balance of the Obligations against the amount payable by
Beneficiary as purchaser at such sale.  Statements of fact or other recitals
contained in any conveyance to any purchaser or purchasers at any sale made
hereunder will conclusively establish the occurrence of an Event of Default, any
acceleration of the maturity of the Obligations, the advertisement and conduct
of such sale in the manner provided herein, the appointment of any
successor-Trustee hereunder and the truth and accuracy of all other matters
stated therein.  Grantor does hereby ratify and confirm all legal acts that the
Trustee may do in carrying out the Trustee’s duties and obligations under this
Deed of Trust, and Grantor hereby irrevocably appoints Beneficiary to be the
attorney-in-fact of Grantor and in the name and on behalf of Grantor to execute
and deliver any deeds, transfers, conveyances, assignments, assurances and
notices which Grantor ought to execute and deliver and do and perform any and
all such acts and things which Grantor ought to do and perform under the
covenants herein contained and generally to use the name of Grantor in the
exercise of all or any of the powers hereby conferred on Trustee.  Upon any
sale, whether under the power of sale hereby given or by virtue of judicial
proceedings, it shall not be necessary for Trustee or any public officer acting
under execution or by order of court, to have physically present or
constructively in his possession any of the Collateral, and Grantor hereby
agrees to deliver to the purchaser or purchasers at such sale on the date of
sale the Collateral purchased by such purchasers at such sale and if it should
be impossible or impracticable to make actual delivery of such Collateral, then
the title and right of possession to such Collateral shall pass to the purchaser
or purchasers at such sale as completely as if the same had been actually
present and delivered.

 

(e)                                  Receipt to Holder.  Upon any sale made
under the power of sale herein granted, the receipt of the Trustee will be
sufficient discharge to the purchaser or purchasers at any sale

 

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for its purchase money, and such purchaser or purchasers, will not, after paying
such purchase money and receiving such receipt of the Trustee, be obligated to
see to the application of such purchase money or be responsible for any loss,
misapplication or non-application thereof.

 

(f)                                    Effect of Sale.  Any sale or sales of the
Realty Collateral will operate to divest all right, title, interest, claim and
demand whatsoever, either at law or in equity, of Grantor in and to the premises
and the Realty Collateral sold, and will be a perpetual bar, both at law and in
equity, against Grantor, Grantor’s successors or assigns, and against any and
all Persons claiming or who shall thereafter claim all or any of the Realty
Collateral sold by, through or under Grantor, or Grantor’s successors or
assigns.  Nevertheless, if requested by the Trustee so to do, Grantor shall join
in the execution and delivery of all proper conveyances, assignments and
transfers of the Property so sold.  The purchaser or purchasers at the
foreclosure sale will receive as incident to his, her, its or their own
ownership, immediate possession of the Realty Collateral purchased and Grantor
agrees that if Grantor retains possession of the Realty Collateral or any part
thereof subsequent to such sale, Grantor will be considered a tenant at
sufferance of the purchaser or purchasers and will be subject to eviction and
removal by any lawful means, with or without judicial intervention, and all
damages by reason thereof are hereby expressly waived by Grantor.

 

(g)                                 Application of Proceeds.  The proceeds of
any sale of the Realty Collateral or any part thereof, whether under the power
of sale herein granted and conferred or by virtue of judicial proceedings, shall
either be, at the option of Beneficiary, applied at the time of receipt, or held
by Beneficiary in a cash collateral account as additional Collateral, and in
either case, applied in the order set forth in Section 3.2.

 

(h)                                 Grantor’s Waiver of Appraisement and
Marshalling.  Grantor agrees, to the full extent that Grantor may lawfully so
agree, that Grantor will not at any time insist upon or plead or in any manner
whatever claim the benefit of any appraisement, valuation, stay, extension or
redemption law, now or hereafter in force, in order to prevent or hinder the
enforcement or foreclosure of this Deed of Trust, the absolute sale of the
Collateral, including the Realty Collateral, or the possession thereof by any
purchaser at any sale made pursuant to this Deed of Trust or pursuant to the
decree of any court of competent jurisdiction; and Grantor, for Grantor and all
who may claim through or under Grantor, hereby waives the benefit of all such
laws and, to the extent that Grantor may lawfully do so under any applicable
law, any and all rights to have the Collateral, including the Realty Collateral,
marshaled upon any foreclosure of the Lien hereof or sold in inverse order of
alienation.  Grantor agrees that the Trustee may sell the Collateral, including
the Realty Collateral, in part, in parcels or as an entirety as directed by
Beneficiary.

 

6.2                           Rights to Personalty Collateral Upon Default. 
Upon the occurrence and during the continuance of an Event of Default, or at any
time thereafter, Beneficiary or the Trustee may proceed against the Personalty
Collateral in accordance with the rights and remedies granted herein with
respect to the Realty Collateral, or will have all rights and remedies granted
by the Uniform Commercial Code as in effect in Texas and this Deed of Trust. 
Beneficiary shall have the right to take possession of the Personalty
Collateral, and for this purpose Beneficiary may enter upon any premises on
which any or all of the Personalty Collateral is situated and, to the extent
that Grantor could do so, take possession of and operate the Personalty
Collateral or remove it therefrom.  Beneficiary may require Grantor to assemble
the Personalty Collateral and make it available to Beneficiary at a place to be
designated by Beneficiary which is reasonably

 

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convenient to both parties.  Unless the Personalty Collateral is perishable or
threatens to decline speedily in value or is of a type customarily sold on a
recognized market, Beneficiary will send Grantor reasonable notice of the time
and place of any public sale or of the time after which any private sale or
other disposition of the Personalty Collateral is to be made.  This requirement
of sending reasonable notice will be met if such notice is mailed, postage
prepaid, to Grantor at the address designated in Section 7.13 (or such other
address as has been designated as provided herein) at least ten days before the
time of the sale or disposition.  In addition to the expenses of retaking,
holding, preparing for sale, selling and the like, Beneficiary will be entitled
to recover attorney’s fees and legal expenses as provided for in this Deed of
Trust and in the writings evidencing the Obligations before applying the balance
of the proceeds from the sale or other disposition toward satisfaction of the
Obligations.  Grantor will remain liable for any deficiency remaining after the
sale or other disposition.  Grantor hereby consents and agrees that any
disposition of all or a part of the Collateral may be made without warranty of
any kind whether expressed or implied.

 

6.3                                 Rights to Fixture Collateral Upon Default. 
Upon the occurrence and during the continuance of an Event of Default,
Beneficiary may elect to treat the Fixture Collateral as either Realty
Collateral or as Personalty Collateral (but not both) and proceed to exercise
such rights as apply to the type of Collateral selected.

 

6.4                                 Account Debtors.  Beneficiary may, in its
discretion, after the occurrence and during the continuance of an Event of
Default, (a) notify any account debtor on any accounts constituting Collateral
to make payments directly to Beneficiary, (b) instruct any party described in
Section 3.1(b) to deliver all Hydrocarbons assigned to Beneficiary as described
in Section 3.1(a) and all proceeds therefrom directly to Beneficiary, and (c)
contact such account debtors and other parties directly to verify information
furnished by Grantor with respect to such account debtors and such accounts. 
Beneficiary shall not have any obligation to preserve any rights against prior
parties.

 

6.5                                 Costs and Expenses.  All sums advanced or
costs or expenses incurred by Beneficiary (either by it directly or on its
behalf by the Trustee or any receiver appointed hereunder) in protecting and
enforcing its rights hereunder shall constitute a demand obligation owing by
Grantor to Beneficiary as part of the Obligations.  Grantor hereby agrees to
repay such sums on demand plus interest thereon from the date of the advance or
incurrence until reimbursement of Beneficiary at the Reimbursement Rate.

 

6.6                                 Set-Off.  Upon the occurrence and during the
continuance of any Event of Default, Beneficiary shall have the right to set-off
any funds of Grantor in the possession of Beneficiary against any amounts then
due by Grantor to Beneficiary pursuant to this Deed of Trust.

 

ARTICLE VII
Miscellaneous

 

7.1                                 Successor Trustees.  The Trustee may resign
in writing addressed to Beneficiary or be removed at any time with or without
cause by an instrument in writing duly executed by Beneficiary.  In case of the
death, resignation or removal of the Trustee, a successor Trustee may

 

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be appointed by Beneficiary by instrument of substitution complying with any
applicable requirements of law, and in the absence of any requirement, without
other formality other than an appointment and designation in writing.  The
appointment and designation will vest in the named successor Trustee all the
estate and title of the Trustee in all of the Collateral and all of the rights,
powers, privileges, immunities and duties hereby conferred upon the Trustee. 
All references herein to the Trustee will be deemed to refer to any successor
Trustee from time to time acting hereunder.

 

7.2                                 Advances by Beneficiary or The Trustee. 
Each and every covenant of Grantor herein contained shall be performed and kept
by Grantor solely at Grantor’s expense.  If Grantor fails to perform or keep any
of the covenants of whatsoever kind or nature contained in this Deed of Trust,
Beneficiary or any Holder (either by it directly or on its behalf by the Trustee
or any receiver appointed hereunder) may, but will not be obligated to, make
advances to perform the same on Grantor’s behalf, and Grantor hereby agrees to
repay such sums and any attorneys’ fees incurred in connection therewith on
demand plus interest thereon from the date of the advance until reimbursement of
Beneficiary at the Reimbursement Rate.  In addition, Grantor hereby agrees to
repay on demand any costs, expenses and attorney’s fees incurred by Beneficiary,
the Holders or the Trustee which are to be obligations of Grantor pursuant to,
or allowed by, the terms of this Deed of Trust, including such costs, expenses
and attorney’s fees incurred pursuant to Section 3.1(h), Section 6.5 or Section
7.3, plus interest thereon from the date of the advance by Beneficiary or the
Trustee until reimbursement of Beneficiary or the Trustee, respectively, at the
Reimbursement Rate.  Such amounts will be in addition to any sum of money which
may, pursuant to the terms and conditions of the written instruments comprising
part of the Obligations, be due and owing.  No such advance will be deemed to
relieve Grantor from any default hereunder.

 

7.3                                 Defense of Claims.  Grantor shall promptly
notify Beneficiary in writing of the commencement of any legal proceedings
affecting Grantor’s title to the Collateral or Beneficiary’s Lien or security
interest in the Collateral, or any part thereof, and shall take such action,
employing attorneys agreeable to Beneficiary, as may be necessary to preserve
Grantor’s, the Trustee’s and Beneficiary’s rights affected thereby.  If Grantor
fails or refuses to adequately or vigorously, in the sole judgment of
Beneficiary, defend Grantor’s, the Trustee’s or Beneficiary’s rights to the
Collateral, the Trustee or Beneficiary may take such action on behalf of and in
the name of Grantor and at Grantor’s expense.  Moreover, Beneficiary or the
Trustee, on behalf of Beneficiary, may take such independent action in
connection therewith as they may in their discretion deem proper, including the
right to employ independent counsel and to intervene in any suit affecting the
Collateral.  All costs, expenses and attorneys’ fees incurred by Beneficiary or
the Trustee pursuant to this Section 7.3 or in connection with the defense by
Beneficiary of any claims, demands or litigation relating to Grantor, the
Collateral or the transactions contemplated in this Deed of Trust shall be paid
by Grantor on demand plus interest thereon from the date of such demand by
Beneficiary or Trustee until reimbursement of Beneficiary or Trustee at the
Reimbursement Rate.

 

7.4                                 Termination.  If Security Termination has
occurred and the covenants herein contained are well and fully performed, then
all of the Collateral will revert to Grantor to the extent not otherwise
transferred or sold as permitted under law or under this Deed of Trust and the
entire estate, right, title and interest of the Trustee and Beneficiary will
thereupon cease; and

 

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Beneficiary in such case shall, upon the request of Grantor and the payment by
Grantor of all attorneys’ fees and other expenses, deliver to Grantor proper
recordable instruments acknowledging the termination and release of this Deed of
Trust.

 

7.5                                 Renewals, Amendments and Other Security. 
Without notice or consent of Grantor, renewals and extensions of the written
instruments constituting part or all of the Obligations may be given at any time
and amendments may be made to agreements relating to any part of such written
instruments or the Collateral.  Beneficiary may take or hold other security for
the Obligations without notice to or consent of Grantor.  The acceptance of this
Deed of Trust by Beneficiary shall not waive or impair any other security
Beneficiary may have or hereafter acquire to secure the payment of the
Obligations nor shall the taking of any such additional security waive or impair
the Lien and security interests herein granted.  The Trustee or Beneficiary may
resort first to such other security or any part thereof, or first to the
security herein given or any part thereof, or from time to time to either or
both, even to the partial or complete abandonment of either security, and such
action will not be a waiver of any rights conferred by this Deed of Trust.  This
Deed of Trust may not be amended, waived or modified except in a written
instrument executed by both Grantor and Beneficiary.

 

7.6                                 Security Agreement, Financing Statement and
Fixture Filing.  This Deed of Trust will be deemed to be and may be enforced
from time to time as an assignment, chattel mortgage, contract, deed of trust,
financing statement, real estate mortgage, or security agreement, and from time
to time as any one or more thereof if appropriate under applicable state law. 
AS A FINANCING STATEMENT, THIS DEED OF TRUST IS INTENDED TO COVER ALL PERSONALTY
COLLATERAL INCLUDING GRANTOR’S INTEREST IN ALL HYDROCARBONS AS AND AFTER THEY
ARE EXTRACTED AND ALL ACCOUNTS ARISING FROM THE SALE THEREOF AT THE WELLHEAD. 
THIS DEED OF TRUST SHALL BE EFFECTIVE AS A FINANCING STATEMENT FILED AS A
FIXTURE FILING WITH RESPECT TO FIXTURE COLLATERAL INCLUDED WITHIN THE
COLLATERAL.  This Deed of Trust shall be filed in the real estate records or
other appropriate records of the county or counties in the state in which any
part of the Realty Collateral and Fixture Collateral is located as well as the
Uniform Commercial Code records of the Secretary of State or other appropriate
office of the state in which any Collateral is located.  At Beneficiary’s
request, Grantor shall deliver financing statements covering the Personalty
Collateral, including all Hydrocarbons sold at the wellhead, and Fixture
Collateral, which financing statements may be filed in the Uniform Commercial
Code records or other appropriate office of the county or state in which any of
the Collateral is located or in any other location permitted or required to
perfect Beneficiary’s security interest under the Uniform Commercial Code.  In
addition, Grantor hereby irrevocably authorizes Beneficiary and any affiliate,
employee or agent thereof, at any time and from time to time, to file in any
Uniform Commercial Code jurisdiction any financing statement or document and
amendments thereto, without the signature of Grantor where permitted by law, in
order to perfect or maintain the perfection of any security interest granted
under this Deed of Trust.  A photographic or other reproduction of this Deed of
Trust shall be sufficient as a financing statement.

 

7.7                                 Unenforceable or Inapplicable Provisions. 
If any term, covenant, condition or provision hereof is invalid, illegal or
unenforceable in any respect, the other provisions hereof

 

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will remain in full force and effect and will be liberally construed in favor of
the Trustee and Beneficiary in order to carry out the provisions hereof.

 

7.8           Rights Cumulative.  Each and every right, power and remedy herein
given to the Trustee or Beneficiary will be cumulative and not exclusive, and
each and every right, power and remedy whether specifically herein given or
otherwise existing may be exercised from time to time and as often and in such
order as may be deemed expedient by the Trustee, or Beneficiary, as the case may
be, and the exercise, or the beginning of the exercise, of any such right, power
or remedy will not be deemed a waiver of the right to exercise, at the same time
or thereafter, any other right, power or remedy.  No delay or omission by the
Trustee or by Beneficiary in the exercise of any right, power or remedy will
impair any such right, power or remedy or operate as a waiver thereof or of any
other right, power or remedy then or thereafter existing.

 

7.9           Waiver by Beneficiary.  Any and all covenants in this Deed of
Trust may from time to time by instrument in writing by Beneficiary (acting upon
the direction of the Required Noteholders), be waived to such extent and in such
manner as the Trustee or Beneficiary may desire, but no such waiver will ever
affect or impair either the Trustee’s or Beneficiary’s rights hereunder, except
to the extent specifically stated in such written instrument.

 

7.10         Terms.  The term “Grantor” as used in this Deed of Trust will be
construed as singular or plural to correspond with the number of Persons
executing this Deed of Trust as Grantor.  If more than one Person executes this
Deed of Trust as Grantor, his, her, its, or their duties and liabilities under
this Deed of Trust will be joint and several.  The terms “Beneficiary”,
“Grantor”, and “Trustee” as used in this Deed of Trust include the heirs,
executors or administrators, successors, representatives, receiver, trustees and
assigns of those parties.  Unless otherwise defined herein or the context
otherwise requires, terms used in this Deed of Trust which are defined in the
Uniform Commercial Code of Texas are used with the meanings therein defined.

 

7.11         Counterparts.  This Deed of Trust may be executed in any number of
counterparts, each of which will for all purposes be deemed to be an original,
and all of which are identical except that, to facilitate recordation, in any
particular counties counterpart portions of Exhibit A that describe Properties
situated in counties other than the counties in which such counterpart is to be
recorded may have been omitted.

 

7.12         Governing Law.  This Deed of Trust shall be governed by and
construed in accordance with the laws of the State of Texas.

 

7.13         Notice.  All notices required or permitted to be given by Grantor,
Beneficiary or the Trustee shall be made in the manner set forth in the
Securities Purchase Agreement and shall be addressed as follows:

 

Grantor:

ZaZa Energy, LLC

 

1301 McKinney, Suite 2850

 

Houston, Texas 77002

 

Attention: Charles Campesi

 

Facsimile No.: (713) 595-1919

 

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Beneficiary:

U.S. Bank National Association

 

5555 San Felipe Street, 11th Floor

 

Attention: Mauri J. Cowen

 

Facsimile No.: (713) 235-9213

 

 

 

with a copy to:

 

 

 

Bingham McCutchen LLP

 

One State Street

 

Hartford, Connecticut 06103-3178

 

Attention: Daniel I. Papermaster

 

Facsimile No.: (860) 240-2521

 

 

Trustee:

Any notices to be given to the Trustee shall be delivered to Beneficiary

 

7.14         Duties of Trustee.  It shall be no part of the duty of the Trustee
to see to any recording, filing or registration of this Deed of Trust or any
other instrument in addition or supplemental hereto, or to see to the payment of
or be under any duty with respect to any tax or assessment or other governmental
charge which may be levied or assessed on the Collateral, any part thereof, or
against Grantor, or to see to the performance or observance by Grantor of any of
the covenants and agreements contained herein.  The Trustee shall not be
responsible for the execution, acknowledgment or validity of this Deed of Trust
or of any instrument in addition or supplemental hereto or for the sufficiency
of the security purported to be created hereby, and makes no representation in
respect thereof or in respect of the rights of Beneficiary.  The Trustee shall
have the right to seek the advice of counsel upon any matters arising hereunder
and shall be fully protected in relying as to legal matters on the advice of
counsel.  The Trustee shall not incur any personal liability hereunder except
for his own willful misconduct; and the Trustee shall have the right to rely on
any instrument, document or signature authorizing or supporting any action taken
or proposed to be taken by him hereunder, believed by him in good faith to be
genuine.

 

7.15         Condemnation.  All awards and payments heretofore and hereafter
made for the taking of or injury to the Collateral or any portion thereof,
whether such taking or injury be done under the power of eminent domain or
otherwise, are hereby assigned, and shall be paid to Beneficiary.  Beneficiary
is hereby authorized to collect and receive the proceeds of such awards and
payments and to give proper receipts and acquittances therefor.  Grantor hereby
agrees to make, execute and deliver, upon request, any and all assignments and
other instruments sufficient for the purpose of confirming this assignment of
the awards and payments to Beneficiary free and clear of any encumbrances of any
kind or nature whatsoever.  Any such award or payment may, at the option of
Beneficiary, be retained and applied by Beneficiary, after payment of attorneys’
fees, costs and expenses incurred in connection with the collection of such
award or payment toward payment of all or a portion of the Obligations, whether
or not the Obligations are then due and payable, or be paid over wholly or in
part to Grantor for the purpose of altering, restoring or rebuilding any part of
the Collateral which may have been altered, damaged or destroyed as a result of
any such taking, or other injury to the Collateral.

 

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7.16         Successors and Assigns.

 

(a)           This Deed of Trust is binding upon Grantor, Grantor’s successors
and assigns, and shall inure to the benefit of each Holder (other than as set
forth below) and each of its successors and assigns, and the provisions hereof
shall likewise be covenants running with the land.

 

(b)           This Deed of Trust shall be transferable and negotiable, with the
same force and effect and to the same extent as the Obligations may be
transferable, it being understood that, upon the legal transfer or assignment by
the Holders (or any of them) of any of the Obligations, the legal holder of such
Obligations shall have all of the rights granted to Beneficiary for the benefit
of the Holders under this Deed of Trust.  Grantor specifically agrees that upon
any transfer of all or any portion of the Obligations, this Deed of Trust shall
secure with retroactive rank the existing Obligations of Grantor to the
transferee and any and all Obligations to such transferee thereafter arising.

 

(c)           Grantor hereby recognizes and agrees that the Holders (or any of
them) may, from time to time and one or more times, transfer all or any portion
of the Obligations to one or more third parties.  Such transfers may include,
but are not limited to, sales of participation interests in such Obligations in
favor of one or more third parties.  Upon any transfer of all or any portion of
the Obligations, the Collateral shall secure any and all of the Obligations in
favor of such a transferee then existing and thereafter arising.

 

7.17         Article and Section Headings.  The article and section headings in
this Deed of Trust are inserted for convenience of reference and shall not be
considered a part of this Deed of Trust or used in its interpretation.

 

7.18         Usury Not Intended.  It is the intent of Grantor and Beneficiary in
the execution and performance of this Deed of Trust, the Securities Purchase
Agreement and the other Transaction Documents to contract in strict compliance
with applicable usury laws applicable to the Obligations as are from time to
time in effect.  In furtherance thereof, Beneficiary and Grantor stipulate and
agree that none of the terms and provisions contained in this Deed of Trust, the
Securities Purchase Agreement or the other Transaction Documents shall ever be
construed to create a contract to pay, as consideration for the use, forbearance
or detention of money, interest at a rate in excess of the maximum non-usurious
rate permitted by applicable law and that for purposes hereof “interest” shall
include the aggregate of all charges which constitute interest under such laws
that are contracted for, charged or received under this Deed of Trust, the
Securities Purchase Agreement and the other Transaction Documents; and in the
event that, notwithstanding the foregoing, under any circumstances the aggregate
amounts taken, reserved, charged, received or paid on the Obligations, include
amounts which by applicable law are deemed interest which would exceed the
maximum non-usurious rate permitted by applicable law, then such excess shall be
deemed to be a mistake and Beneficiary shall credit the same on the principal of
the Obligations (or if the Obligations shall have been paid in full, refund said
excess to Grantor).  In the event that the maturity of the Obligations is
accelerated following an Event of Default, or in the event of any required or
permitted prepayment, then such consideration that constitutes interest may
never include more than the maximum non-usurious rate permitted by applicable
law and excess interest, if any, provided for in this Deed of Trust, the
Securities Purchase Agreement or other Transaction Documents shall be canceled

 

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automatically as of the date of such acceleration and prepayment and, if
theretofore paid, shall be credited on the Obligations or, if the Obligations
shall have been paid in full, refunded to Grantor.  In determining whether the
interest paid or payable under any specific contingencies exceeds the maximum
non-usurious rate permitted by applicable law, Grantor and Beneficiary shall to
the maximum extent permitted under applicable law amortize, prorate, allocate
and spread in equal part during the period of the full stated term of the
Obligations, all amounts considered to be interest under applicable law of any
kind contracted for, charged, received or reserved in connection with the
Obligation.

 

7.19         Securities Purchase Agreement.  To the fullest extent possible, the
terms and provisions of the Securities Purchase Agreement shall be read together
with the terms and provisions of this Deed of Trust so that the terms and
provisions of this Deed of Trust do not conflict with the terms and provisions
of the Securities Purchase Agreement; provided, however, notwithstanding the
foregoing, in the event that any of the terms or provisions of this Deed of
Trust conflict with any terms or provisions of the Securities Purchase
Agreement, the terms or provisions of the Securities Purchase Agreement shall
govern and control for all purposes; provided that the inclusion in this Deed of
Trust of terms and provisions, supplemental rights or remedies in favor of
Beneficiary not addressed in the Securities Purchase Agreement shall not be
deemed to be a conflict with the Securities Purchase Agreement and all such
additional terms, provisions, supplemental rights or remedies contained herein
shall be given full force and effect.

 

7.20         Due Authorization.  Grantor hereby represents, warrants and
covenants to Beneficiary and the Trustee that the obligations of Grantor under
this Deed of Trust are the valid, binding and legally enforceable obligations of
Grantor, that the execution and delivery of this Deed of Trust by Grantor has
been duly and validly authorized in all respects by Grantor, and that the
persons who are executing and delivering this Deed of Trust on behalf of Grantor
have full power, authority and legal right to so do, and to observe and perform
all of the terms and conditions of this Deed of Trust on Grantor’s part to be
observed or performed.

 

7.21         No Offsets, Etc.  Grantor hereby represents, warrants, and
covenants to Beneficiary and the Trustee that there are no offsets,
counterclaims or defenses at law or in equity against this Deed of Trust or the
indebtedness secured hereby.

 

7.22         Bankruptcy Limitation.  Notwithstanding anything contained herein
to the contrary, it is the intention of Grantor, Beneficiary and the other
Holders that the amount of the Obligation secured by Grantor’s interests in any
of its Property shall be in, but not in excess of, the maximum amount permitted
by fraudulent conveyance, fraudulent transfer and other similar law, rule or
regulation of any Governmental Authority applicable to Grantor.  Accordingly,
notwithstanding anything to the contrary contained in this Deed of Trust in any
other agreement or instrument executed in connection with the payment of any of
the Obligations, the amount of the Obligations secured by Grantor’s interests in
any of its Property pursuant to this Deed of Trust shall be limited to an
aggregate amount equal to the largest amount that would not render Grantor’s
obligations hereunder or the Liens and security interest granted to Beneficiary
hereunder subject to avoidance under Section 548 of the United States Bankruptcy
Code or any comparable provision of any other applicable law.

 

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7.23         DEFICIENCY JUDGMENT. BENEFICIARY HAS THE RIGHT TO PROCEED TO OBTAIN
AND COLLECT DEFICIENCY JUDGMENT, TOGETHER WITH FORECLOSURE OF THE COLLATERAL
UNDER APPLICABLE TEXAS LAW.

 

THIS WRITTEN AGREEMENT AND THE TRANSACTION DOCUMENTS REPRESENT THE FINAL
AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

 

[Remainder of this page intentionally left blank.]

 

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EXECUTED AND DELIVERED effective as of the Effective Date.

 

 

GRANTOR:

 

 

 

ZAZA ENERGY, LLC

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

 

THE STATE OF TEXAS

§

 

§

COUNTY OF HARRIS

§

 

This instrument was acknowledged before me on this        day of April, 2012, by
                                              , as
                                               of Zaza Energy, LLC, a Texas
limited liability company, on behalf of said limited liability company.

 

 

 

 

Notary Public in and for

 

the State of Texas

 

 

[SEAL]

 

 

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Exhibit “A”

 

The designation “Working Interest” or “WI” or “GWI” when used in this Exhibit A
means an interest owned in an oil, gas, and mineral lease that determines the
cost-bearing percentage of the owner of such interest.  The designation “Net
Revenue Interest” or “NRI” or “NRIO” or “NRIG” means that portion of the
production attributable to the owner of a working interest after deduction for
all royalty burdens, overriding royalty burdens or other burdens on production,
except severance, production, and other similar taxes.  The designation
“Overriding Royalty Interest” or “ORRI” means an interest in production which is
free of any obligation for the expense of exploration, development, and
production, bearing only its pro rata share of severance, production, and other
similar taxes and, in instances where the document creating the overriding
royalty interest so provides, costs associated with compression, dehydration,
other treating or processing, or transportation of production of oil, gas, or
other minerals relating to the marketing of such production.  The designation
“Royalty Interest” or “RI” means an interest in production which results from an
ownership in the mineral fee estate or royalty estate in the relevant land and
which is free of any obligation for the expense of exploration, development, and
production, bearing only its pro rata share of severance,  production, and other
similar taxes and, in instances where the document creating the royalty interest
so provides, costs associated with compression, dehydration, other treating or
processing or transportation of production of oil, gas, or other minerals
relating to the marketing of such production.  Each amount set forth as “Working
Interest” or “WI” or “GWI” or “Net Revenue Interest” or “NRI” or “NRIO” or
“NRIG” is Grantor’s interest after giving full effect to, among other things,
all Liens permitted by the Securities Purchase Agreement and after giving full
effect to the agreements or instruments set forth in this Exhibit A and any
other instruments or agreements affecting Grantor’s ownership of the
Hydrocarbons.

 

Some of the land descriptions in this Exhibit A may refer only to a portion of
the land covered by a particular oil and gas lease.  This Deed of Trust is not
limited to the land described in this Exhibit A but is intended to cover the
entire interest of Grantor in any lease described in this Exhibit A even if such
interest relates to land not described in this Exhibit A.  Reference is made to
the land descriptions contained in the documents of title recorded as described
in this Exhibit A.  To the extent that the land descriptions in this Exhibit A
are incomplete, incorrect or not legally sufficient, the land descriptions
contained in the documents so recorded are incorporated herein by this
reference.

 

Any reference in this Exhibit A to wells or units is for warranty of interest,
administrative convenience, and identification and shall not limit or restrict
the right, title, interest, or Properties covered by this Deed of Trust.  All
right, title, and interest of Grantor in the Properties described herein and in
this Exhibit A are and shall be subject to this Deed of Trust, regardless of the
presence of any units or wells not described herein.

 

References in this Exhibit A to instruments on file in the public records are
made for all purposes.  Unless provided otherwise, all recording references in
this Exhibit A are to the official real property records of the county or
counties in which the mortgaged property is located and in which records such
documents are or in the past have been customarily recorded, whether Deed
Records, Oil and Gas Records, Oil and Gas Lease Records or other records.

 

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