OPERATING AGREEMENT

                                       OF

                              VAQUERO PARTNERS LLC

            OPERATING AGREEMENT dated as of August 22, 2003 by and among the
Members executing this Agreement as Members.

            WHEREAS, the Members have formed a limited liability company
pursuant to the LLC Law;

            WHEREAS, the Members desire to associate together in order to
acquire, develop and/or market certain oil and gas prospects; and

            WHEREAS, the Members desire to set forth their respective rights and
obligations as members of the Company and to provide for the management of the
Company and its affairs and for the conduct of its business;

            NOW, THEREFORE, in consideration of the agreements and obligations
set forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Members hereby agree as
follows.

                                    ARTICLE I
                                   DEFINITIONS

            Section 1.1 Definitions. Capitalized terms used in this Agreement
and not defined elsewhere herein shall have the respective meanings ascribed to
such terms as set forth below.

            "Additional Capital Contribution" shall mean any additional
Contribution to the capital of the Company made by a Member as contemplated in
Section 4.2 hereof.

            "Agreement" shall mean this Operating Agreement as amended from time
to time.

            "Available Cash" shall have the meaning ascribed to such term in
Section 5.3 hereof.

            "Bankruptcy" shall have the meaning ascribed to such term in the LLC
Law (or any successor section thereto).

            "Capital Account" shall mean the account established for each Member
as contemplated in Section 5.1 hereof.

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            "Capital Contribution" shall mean the aggregate amount of the
Initial Capital Contribution plus all Additional Capital Contributions, if any,
contributed to the capital of the Company by a Member as contemplated in
Sections 4.1 and 4.2 hereof.

            "Code" shall mean the Internal Revenue Code of 1986, as amended.

            "Company" shall mean Vaquero Partners LLC, a Texas limited liability
company.

            "Dune" shall mean Dune Energy, Inc., a Delaware corporation.

            "Initial Capital Contribution" shall mean the initial contribution
to the capital of the Company made by a Member as contemplated in Section 4.1
hereof.

            "Interest" shall mean the respective share of a Member in the
profits and losses of the Company and the respective right of a Member to
receive distributions of the Company's assets. Initially, the Interests of the
Members shall be Dune - 85% and Vaquero - 15%. Upon Dune receiving aggregate
distributions from the Company equal to two times (2X) the sum of its Capital
Contributions, the Interests of each Member shall be Dune - 75% and Vaquero -
25%. Upon Dune receiving aggregate distributions from the Company equal to three
times (3X) the sum of its Capital Contributions, the Interests of each Member
shall be Dune - 60% and Vaquero - 40%. A Member's Interest shall be reflected in
the books and records of the Company, and may be further evidenced by a
Certificate of Limited Liability Company Interest in such form as approved by
the required vote of the Members.

            "LLC Law" shall mean the Texas Limited Liability Company Act or any
successor statute as in effect from time to time.

            "Manager" shall mean Mark Harrington and any additions or
replacements selected by the Members in accordance with the provisions of this
Agreement.

            "Members" shall mean Dune and Vaquero.

            "Person" shall mean a natural person, partnership (whether general
or limited), limited liability company, trust, estate, association, corporation,
company, custodian, nominee or other individual, entity or organization in its
own or any representative capacity.

            "Profit" or "Loss" of the Company means an amount equal to the
Company's taxable income or loss, adjusted as follows: (a) there shall be added
any income exempt from federal income tax and (b) there shall be subtracted any
expenditures that are neither deductible nor chargeable to capital accounts for
Federal income tax purposes.

            "Transfer" shall have the meaning ascribed to such term in Section
10.2 hereof.

            "Treasury Regulations" shall mean regulations promulgated by the
United States Department of the Treasury under the Code.


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            "Vaquero" and "VOG" shall mean Vaquero Oil & Gas, Inc.

                                   ARTICLE II

                               FORMATION AND TERM

            Section 2.1 Formation. The Company was formed as a Texas limited
liability company upon the filing of the Company's original Certificate of
Organization (the "Articles of Organization") on August 7, 2003, with the
Secretary of State of the State of Texas in accordance with the LLC Law.

            Section 2.2 Name. The name of the Company shall be Vaquero Partners
LLC or such other name as may be determined by the required vote of the Members.

            Section 2.3 Term. The term of the Company commenced on August 7,
2003, and shall continue in full force and effect until the earliest to occur of
the following:

            (i)   the dissolution of the Company by the required vote of the
                  Members;

            (ii)  the retirement, resignation, withdrawal or expulsion of a
                  Member from the Company, the death, legal incompetence,
                  Bankruptcy or insolvency of a Member, the termination,
                  dissolution or liquidation of a Member (without prompt
                  reconstitution or reformation of such Member), or the
                  occurrence or existence of any other event or condition which
                  shall terminate the continued membership of a Member of the
                  Company as provided in the LLC Law, unless the business of the
                  Company shall be continued by a majority in Interest of the
                  remaining Members within 180 days following the occurrence or
                  existence of any such event or condition (which such remaining
                  Members shall have the right to do); or

            (iii) the entry of a decree of judicial dissolution under the LLC
                  Law.

            Section 2.4 Office. The office of the Company shall be located at 16
River Hollow Lane, Houston, Texas 77027. So long as it remains a Member, the
office of Vaquero shall be located at such location as shall be approved by the
Manager. At any time, the Manager may change the location of the Company's and
Vaquero's office.

                                   ARTICLE III

                               BUSINESS AND POWERS

            Section 3.1 Business. The Company's business and purpose shall be to
engage in the acquisition, development and marketing of oil and gas prospects as
well as to engage in and carry on any lawful business, purpose, act or activity
for which a limited liability company may be organized under the LLC Law.


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            Section 3.2 Powers. The Company shall have the powers, privileges
and authority to take in its name all lawful actions and exercise all powers
granted by this Agreement, the LLC Law and any other law, together with any
powers incidental thereto, which are necessary, useful, appropriate, advisable,
desirable or convenient to the conduct, promotion and attainment of the
business, purposes and activities of the Company.

                                   ARTICLE IV

                CAPITAL CONTRIBUTIONS AND FINANCIAL TRANSACTIONS

            Section 4.1 Initial Capital Contributions. Set forth opposite each
Member's name on Schedule 1 hereto is the amount of such Member's Initial
Capital Contribution. Such amount may be contributed (i) in cash or (ii) upon
the vote of all the Members, in other property having a fair market value (as
agreed among the Members) equal to the amount set forth opposite such Member's
name on Schedule 1 hereto. Such other property may consist of securities or
other interests in corporations, partnerships, limited liability companies or
other Persons.

            Section 4.2 Additional Capital Contributions. From time to time,
upon the request of the Manager, Dune shall be required to contribute Additional
Capital Contributions for costs to develop oil and gas prospects, in an
aggregate amount not to exceed $400,000. Such Additional Capital Contributions
may be in made in cash or, subject to the provisions of the last two sentences
of Section 4.1 hereof, other property. Notwithstanding the foregoing, an
obligation of the Company to pay, contribute or advance monies to any third
party shall not be construed to obligate the Manager to determine that any
Additional Capital Contributions shall be called. The obligation of Dune to make
Additional Capital Contributions to the Company as contemplated herein is not
intended to, and shall not, create any rights in, or give rise to any benefits
to, any third parties.

            Section 4.3 Borrowing and Lending by the Company. Subject to the
provisions of Section 4.4 hereof, the Company shall have the power and right to
borrow money or property from any Member or other Person (including any Person
which shall be affiliated or associated with the Company or any Member) on such
terms as may be determined by the required vote of the Members. In no event and
at no time shall a creditor of or lender to the Company acquire any rights or
interests, directly or indirectly, in the Company or in the capital, property,
income, gain, profit, loss, deduction or credit of the Company by virtue of
being a creditor of or lender to the Company. The Company shall have the power
and right to lend money or property to any Member or other Person (including any
Person which shall be affiliated or associated with the Company or any Member)
on such terms as may be determined by the required vote of the Members.


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<PAGE>

            Section 4.4 Advances by Members. If a Member shall advance money or
property to the Company pursuant to Section 4.3 hereof or otherwise (other than
as provided in Sections 4.1 and 4.2 hereof), the amount of such advance shall
not be an Additional Capital Contribution by such Member and shall not increase
such Member's Interest in the Company or entitle such Member to an increase in
such Member's share of the income, gain or profits of the Company, nor subject
such Member to any greater portion of any loss or liability which the Company
may sustain; instead, the amount of such advance shall be indebtedness due from
the Company to such Member, and, except as provided otherwise in Section 4.3
hereof, such indebtedness shall be subject to such terms and shall bear interest
at such rate as determined by the required vote of the Members. Unless otherwise
determined by the required vote of the Members, any such indebtedness shall be
repaid as soon as practicable to such Member, with interest to be paid prior to
the repayment of principal.

            Section 4.5 Withdrawals. Except as determined by the required vote
of the Members, no Member shall have the right to:

            (i)   withdraw all or any portion of such Member's Capital
                  Contribution;

            (ii)  receive any return or interest on any portion of such Member's
                  Capital Contribution; or

            (iii) retire, resign, withdraw or terminate such Member's membership
                  from the Company.

            Section 4.6 Return of Capital Contributions. No Member shall be
entitled to the return of all or any portion of such Member's Capital
Contribution unless and until:

            (i)   affirmatively approved by the required vote of the Members; or

            (ii)  all liabilities of the Company (except liabilities to Members
                  on account of their Capital Contributions) have been paid, and
                  the Company shall have been dissolved without reformation in
                  accordance with Section 2.3 or Article XI hereof and Articles
                  of Dissolution shall have been filed with the Department of
                  State of the State of Texas in accordance with the LLC Law.

                                    ARTICLE V

                  CAPITAL ACCOUNTS; ALLOCATIONS; DISTRIBUTIONS

            Section 5.1 Capital Accounts. A Capital Account shall be established
in the Company's books and records for each Member in accordance with the rules
of Treasury Regulation Section 1.704-l(b)(2)(iv). Consistent therewith, each
Capital Account shall be:


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            (i)   increased by (a) the Member's Capital Contributions in the
                  form of cash, (b) the fair market value of the Member's
                  Capital Contributions in the form of property (net of
                  liabilities securing such contributed property that the
                  Company is considered to assume or take subject to), and (c)
                  the amounts allocated to the Member for such Member's share of
                  the income, gain and profits of the Company; and

            (ii)  decreased by (a) the amounts allocated to the Member for such
                  Member's share of the losses and deductions of the Company,
                  (b) the amount of money distributed to the Member by the
                  Company, and (c) the fair market value of property distributed
                  to the Member by the Company (net of liabilities securing such
                  contributed property that such Member is considered to assume
                  or take subject to).

            Section 5.2 Allocations. Profit and Loss shall be determined and
allocated periodically as the Manager shall determine, but in all events no less
frequently than on an annual basis coinciding with the Company's fiscal year.

      (a)   Profits shall; be allocated as follows:

            (i)   First, among those Members having negative balances in their
                  capital accounts in proportion to and to the extent of such
                  negative balances, then

            (ii)  Next, among the Members in proportion to the excess of the
                  cumulative amount of Losses previously allocated to them
                  pursuant to 5.2 (b)(i) over the cumulative amount of Profits
                  previously allocated to them pursuant to this clause
                  5.2(a)(ii);then

            (iii) Next, 85% to Dune and 15% to Vaquero until there has been
                  allocated to Dune pursuant to this clause an amount of Profits
                  equal to twice its Capital Contributions; then

            (iv)  Next, 75% to Dune and 25% to Vaquero until there has been
                  allocated to Dune pursuant to this clause and the immediately
                  preceding clause (iii) on a cumulative basis an amount of
                  Profits equal to three times its Capital Contributions; then

            (v)   Next, 60% to Dune and 40% to Vaquero.

      (b)   Losses shall be allocated as follows:

            (i)   First, among the Members in proportion to and to the extent of
                  the positive balances in their Capital Accounts, then

            (ii)  Next 100% to Dune.


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            Section 5.3 Distributions. (a) Commencing March 2005, provided the
      Company has cash on hand in excess of the amount reasonably anticipated
      for the needs of the Company for the immediate future ("Available Cash")
      the Manager shall cause the Company to distribute on a quarterly basis an
      amount of cash sufficient for the Members (or the principals thereof) to
      satisfy their respective income tax obligations arising out of the
      allocations of Profit made pursuant to Section 5.2. Subject to the
      foregoing, distributions shall be made to the Members as the Manager shall
      determine. Except as otherwise provided in Section 11.3 all distributions
      to the Members pursuant to this Section shall be made as follows:

                  (i) First, 85% to Dune and 15% to Vaquero until such time as
                  the cumulative amount of cash and the fair market value of
                  property distributed to Dune equals twice its Capital
                  Contributions; then

                  (ii) Next, 75% to Dune and 25% to Vaquero until such time as
                  the cumulative amount of cash and the fair market value of
                  property distributed to Dune pursuant to this clause and the
                  immediately preceding clause (i) on a cumulative basis equals
                  three times its Capital Contributions; then

                  (iii) Next, 60% to Dune and 40% to Vaquero.

            (b) Upon the request of any Member the Company shall distribute to
      each Member its proportionate interest in any producing properties then
      held by the Company. For purposes of such a distribution the proportionate
      interest of a Member in a producing property shall equal such Member's
      Interest in the Company as of the date of distribution, provided that if
      the proportion distributed to VOG is less than 40%, upon the receipt by
      Dune of distributions sufficient to result in an increase in VOG's
      Interest in the Company, Dune shall transfer to VOG such portion of its
      interest in a previously distributed producing property as is necessary to
      increase VOG's interest in such property to its Interest in the Company as
      increased as a result of such distributions. For purposes of computing the
      amount of distributions received by Dune at any time there shall be
      included any cash or other property derived by Dune from its interests in
      a producing property distributed to the Members in accordance with this
      Section.

            Section 5.4 Return of Capital Contributions. No Member shall have
any right to demand the return of such Member's Capital Contribution and any
profits added thereto except upon the termination and dissolution of the
Company. No Member shall be paid interest on such Member's Capital Contribution
or on such Member's Capital Account.


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<PAGE>

                                   ARTICLE VI

             RIGHTS, LIABILITIES, POWERS AND OBLIGATIONS OF MEMBERS

            Section 6.1 Company Property; No Compensation. A Member shall have
no interest in specific Company property, unless determined by the required vote
of the Members. No Member, in its capacity as such, shall be entitled to any
salary, draw or other compensation from the Company.

            Section 6.2 Powers. The powers of the Members shall include all
powers provided or contemplated in the LLC Law and all powers as generally
pertain thereto or are necessarily incidental thereto. No Member shall have the
authority to bind the Company.

            Section 6.3 Limitations on Liability. Subject to Section 4.3 hereof
and the other provisions of this Section 6.3, no Member personally, solely by
reason of being a member of the Company or acting (or omitting to act) in such
capacity or participating in the conduct of the business of the Company, shall
be liable for all or any portion of the debts, obligations or liabilities of the
Company or the other Member (whether arising in tort, contract or otherwise);
and such debts, obligations and liabilities shall be solely those of the Company
or the other Member, as the case may be, and shall be the responsibility of the
Company or the other Member, as the case may be. Except as otherwise provided in
Section 4.3 hereof, a Member shall have no liability to any other Member or the
Company when acting pursuant to such Member's authority granted pursuant to this
Agreement, except to the extent such Member's acts or omissions shall be
determined to constitute willful misconduct or gross negligence.

            Section 6.4 Liability for Capital Contributions and Returns of
Capital Contributions and Distributions. A Member shall be liable to the Company
for:

            (i)   any difference between such Member's Capital Contribution
                  actually made to the Company and the amount agreed to be made
                  to the Company by such Member as stated in this Agreement
                  (including Schedule 1 hereto) or any other instrument signed
                  by such Member;

            (ii)  any Capital Contribution which such Member shall have agreed
                  in this Agreement (including Schedule 1 hereto) or any other
                  instrument signed by such Member to make to the Company in the
                  future at the time and on the conditions stated herein or
                  therein; or

            (iii) any Capital Contribution or distribution returned, paid or
                  distributed to such Member as and to the extent provided in
                  the LLC Law.

            Any liability of a Member to the Company under this Article VI may
be waived or compromised pursuant to the required vote of the Members, unless
such waiver or compromise would adversely affect the rights or claims of any
creditor of the Company who extended credit to the Company in reasonable
reliance on the obligation of a Member or the Members to make a Capital
Contribution or to return a Capital Contribution or property to the Company. A
Member who shall be subject to an obligation to repay any Capital Contribution,
payment or distribution to the Company as required by this Agreement or the LLC
Law shall make such repayment on demand by any Member.


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<PAGE>

            No Member shall be liable to the Company or its creditors or any
other Member with respect to any amounts paid to such Member as profit sharing,
advance or loan repayment, interest, salary, wage, compensation, rental,
royalty, fee or other payment for value given which shall not be paid to such
Member as a return of such Member's Capital Contribution or as a distribution.

            Section 6.5 Transactions with the Company; Compensation. A Member or
any Person affiliated or associated with a Member may act as surety, guarantor,
endorser or provider of collateral for the Company. A Member may not transact
business with the Company unless the terms and conditions of such transaction
are approved by the other Member. Nothing in this Agreement shall be construed
to preclude a Member from serving the Company in any other capacity as an
employee, agent, contractor or otherwise and receiving compensation and expense
reimbursement therefor, provided that such service, the terms and conditions
thereof, and such compensation and expense reimbursement shall be approved by
the other Member. Contributions of capital and distributions in accordance with
the terms hereof shall not be deemed to be the transaction of business with the
Company.

            Section 6.6 Other Business Activities. For so long as Vaquero shall
be a Member, Vaquero, together with its principals Rick Trapp and Paul Williams,
shall devote their full time, effort and resources to the Company's business,
and neither Vaquero, Rick Trapp nor Paul Williams may engage in or possess any
interest in other businesses and ventures of any kind, nature or description,
independently or with others, whether related or unrelated to the business of
the Company, or whether competitive with the Company or its business, or
otherwise. For so long as Vaquero is a Member, Vaquero, Trapp and Williams shall
have the obligation to offer to the Company, an opportunity to participate in
any oil or gas prospect shown to such Vaquero, Trapp or Williams by a third
party, on terms similar to those offered by said third party.

                                   ARTICLE VII

                            MANAGEMENT OF THE COMPANY

            Section 7.1 Management. The ordinary and usual decisions concerning
the business and affairs of the Company shall be made by the Manager. The
Manager shall exercise all powers of the Company and do all lawful acts and
things for, on behalf of, and in the name of, the Company. The initial Manager
of the Company shall be Mark Harrington.


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<PAGE>

            Section 7.2 Term of Office as Manager. The Manager shall not have
any contractual right to such position. The Manager shall be appointed by the
required vote of the Members and shall serve until his removal by the required
vote of the Members.

            Section 7.3 Authority; Designation of Agents. Only the Manager and
agents expressly authorized in writing by the Manager shall have the authority
to bind the Company. The Manager may designate one or more agents of the
Company. Agents shall possess and exercise the powers and authority and perform
the duties as shall be determined by the required vote of the Manager. The
Members may engage and compensate, on behalf of the Company and from Company
funds, such advisers, attorneys, accountants, auditors and other providers of
services (any or all of which may be Persons affiliated or associated with the
Company or any Member) as shall be determined by the required vote of the
Members.

            Section 7.4 Compensation. The salaries or other compensation of the
agents of the Company shall be determined by the Manager, provided that no
compensation shall be paid to Dune or any of its affiliates unless the terms and
conditions on which such compensation is paid are approved by Vaquero.

                                  ARTICLE VIII

                                 MEMBER MATTERS

            Section 8.1 Meetings of Members; Notice. Meetings of the Members for
any purpose may be called at any time by the Manager. Any Member may request a
meeting of the Members by delivering written notice to the Manager. Not later
than ten (10) days following receipt of such request, the Manager shall call a
meeting of the Members at the place specified in the Member's request. If the
Manager shall not call a meeting within said time period, then a Member may call
a meeting of the Members by delivering written notice to the other Member at
least ten (10) days prior to the date of the requested meeting. Meetings of the
Members need not take place within the state of Texas.

            Section 8.2 Proxies. At all meetings of the Members, a Member may
vote in person, by an authorized agent or attorney-in-fact or by a proxy
executed in writing by such Member or by such Member's authorized agent or
attorney-in-fact.

            Section 8.3 Quorum and Required Vote at Meetings of Members. Members
holding not less than 51% of the Interests in the Company, present in person or
represented by an authorized agent or attorney-in-fact or by a proxy, shall
constitute a quorum for the transaction of all business by the Members at a
meeting of the Members. The affirmative vote of Members holding not less than
51% of the Interests in the Company, present in person or represented by an
authorized agent or attorney-in-fact or by a proxy, at a meeting of the Members
at which a quorum is present, shall be the act of the Members with respect to
any and all matters voted or agreed upon, consented to or approved. Whenever any
reference shall be made in this Agreement to action, consent, agreement or
approval by the required vote of the Members, such reference shall mean the
affirmative vote of Members holding not less than 51% of the Interests in the
Company as required by this Section 8.3.


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            Section 8.4 Action by Members Without a Meeting. Any action required
or permitted to be taken at a meeting of the Members may be taken by the Members
without a meeting if the action shall be evidenced by one or more written
consents describing the action taken and signed by Members having the required
vote to approve the action so taken. Written consent of the Members pursuant to
this Section 8.4 shall have the same force and effect as a vote of the Members,
and may be stated as such in any document. Prompt notice of the taking of any
action without a meeting by less than unanimous consent of the Members shall be
given to the Members who did not so consent in writing to such action.

            Section 8.5 Telephone Meetings of Members. Members may participate
in a meeting of the Members by means of conference telephone or similar
communications equipment by means of which all Members participating in the
meeting can hear each other. Participation by Members by such means shall
constitute presence in person of such Members at such meeting.

                                   ARTICLE IX

                         BOOKS AND RECORDS; FISCAL YEAR

            Section 9.1 Books of Account and Records. At all times during the
term of the Company, the Company shall keep or cause to be kept, at the office
of the Company indicated in Section 2.4 hereof, all books, records, documents
and instruments of the Company, including without limitation such as are
required pursuant to the LLC Law or other applicable law.

            Section 9.2 Inspection. All books, records, documents and
instruments required to be maintained under Section 9.1 hereof and pursuant to
the LLC Law or otherwise shall be made available to a Member or such Member's
authorized agent or attorney-in-fact, upon reasonable demand, during ordinary
business hours for inspection and copying at the reasonable expense of such
Member.

            Section 9.3 Fiscal Year. The fiscal year of the Company shall begin
on January 1st and end on the next following December 31st of each calendar
year, except that the first fiscal year of the Company shall be the period (even
if less than 12 calendar months) beginning as of the date of this Agreement and
ending on the next following December 31st, and the final fiscal year of the
Company shall be the period beginning January 1st of the year of dissolution of
the Company and ending on the date of the filing of the Company's Articles of
Dissolution.

            Section 9.4 Accountings. The auditors, if any, of the Company shall
be determined by the required vote of the Members. The fees of the auditors
shall be an ordinary Company business expense. Notwithstanding the foregoing,
any Member from time to time may request that, at such Member's expense, an
audit of the books and records of the Company be performed by a firm of
independent public accountants of such Member's choice.


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                                    ARTICLE X
                           RESTRICTION ON RESIGNATIONS
                           AND TRANSFERS OF INTERESTS

            Section 10.1 Restriction on Resignation. At no time and in no event
may a Member resign, retire, withdraw or otherwise terminate such Member's
membership in the Company without the prior written consent of all other
Members, and any action purporting to effect such resignation, retirement,
withdrawal or termination shall constitute a breach of this Agreement by such
Member.

            Section 10.2 Transfer Restrictions. (a) So long as Vaquero is
performing services for the Company pursuant to the Agreement dated as of the
date hereof (and any amendment, modification, renewal or extension of such
agreement, the "Drilling Agreement") no Member may sell, assign, transfer,
convey, pledge, hypothecate, grant any interest in, encumber or otherwise
dispose of, in whole or in part (each a "Transfer"), such Member's Interest in
the Company without the prior written consent of all other Members, unless such
Transfer shall occur through operation of law and shall be to an heir, executor,
administrator, guardian, conservator, receiver or trustee of such Member, or
other legal or personal representative or successor in interest of such Member,
and any action or document purporting to effect or evidence a Transfer other
than in accordance herewith shall be null, void and ineffective and shall
constitute a breach of this Agreement by such Member.

            From and after the date on which Vaquero is no longer performing
services for the Company pursuant to the Drilling Agreement, Vaquero may sell
all but not less than all of its interest in the Company to a third party
subject to a 45 day right of first refusal in favor of the Company as provided
in the following subsections.

      (b) If at any time Vaquero proposes to transfer its Interest in the
Company, it (the "Selling Member") shall give the Company written notice of its
intention to make the transfer (the "Transfer Notice"), which Transfer Notice
shall include (i) a description of the Interest to be transferred ("Offered
Interest"), (ii) the identity of the prospective transferee(s), and (iii) the
consideration and the material terms and conditions upon which the proposed
transfer is to be made. The Transfer Notice shall certify that the Selling
Member has received a bona fide offer from the prospective transferee(s) and in
good faith believes a binding agreement for the transfer is obtainable on the
terms set forth in the Transfer Notice. The Transfer Notice shall also include a
copy of any written proposal, term sheet or letter of intent or other agreement
relating to the proposed transfer.

      (c) The Company shall have an option for a period of 30 days from receipt
of the Transfer Notice to elect to purchase the Offered Interest at the same
price and subject to the same material terms and conditions as described in the
Transfer Notice. The Company may exercise such purchase option and, thereby,
purchase all of the Offered Interest by notifying the Selling Member in writing


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before expiration of such 30-day period. If the Company gives the Selling
Shareholder notice that it desires to purchase all but not less than all of such
Interest, then payment for the Offered Interest shall be by check or wire
transfer, against delivery of the Offered Interest to be purchased at a place
agreed upon between the parties and at the time of the scheduled closing
therefor, which shall be no later than 45 days after the Company's receipt of
the Transfer Notice, unless the Transfer Notice contemplated a later closing
with the prospective third party transferee(s). If the Company fails to purchase
all of the Offered Interest by exercising the option granted in this Section 5.2
within the period provided, the Selling Member shall have a period of 30
business days from the expiration of the 30-days referred to above in which to
sell the Offered Interest, upon terms and conditions (including the purchase
price) no more favorable to the transferee(s) than those specified in the
Transfer Notice. In the event Selling Member does not consummate the sale or
disposition of the Offered Interest within the 30-day period from the expiration
of these rights, the Company's first refusal rights shall continue to be
applicable to any subsequent disposition of the Offered Interest by Selling
Member until such right lapses in accordance with the terms of this Agreement.

            Section 10.3 Mandatory Redemption of Interests. Upon the occurrence
of any of the following:

            (i)   the death or disability of Trapp or Williams; or

            (ii)  the termination of the Drilling Agreement between the Company,
                  VOG, Trapp and Williams.

            then the Company may, upon the required vote of the Members, redeem
      the full Interest of VOG hereunder in exchange for the Company's
      assignment to VOG of a percent interest in and to the Company's existing
      producing properties and undeveloped leases on the Welder Lands and
      related areas of mutual interest, equal to VOG's Interest at the time
      immediately preceding the redemption and increasing as the Member's
      receive the appropriate return on Capital Contributions set forth in the
      definition of Interest.. Notwithstanding the foregoing, in the event the
      Drilling Agreement is terminated as a result of an act of gross negligence
      by VOG, Trapp or Williams that is related to the business of the Company
      and that has the potential to materially adversely affect the business of
      the Company, then the Company may, upon the required vote of the Members,
      redeem the full interest of VOG hereunder in exchange for the Company's
      assignment to VOG of a percentage interest in and to the Company's
      existing producing properties and undeveloped leases without giving effect
      to any increase in VOG's Interest which would have resulted from future
      distributions by the Company.

            The parties hereto expressly agree that in the event of a redemption
by the Company of VOG's Interest in the Company, then all rights to operatorship
shall vest exclusively in the Company and the Company shall remain the sole
owner of any license acquired from Seitel with respect to the Welder Lands.


                                       13
<PAGE>

                                   ARTICLE XI

                     DISSOLUTION AND WINDING UP; REFORMATION

            Section 11.1 Dissolution and Winding Up. Upon the occurrence or
existence of an event or condition specified in Section 2.3 hereof, the Company
shall dissolve and its affairs shall be promptly wound up.

            Section 11.2 Authority to Wind Up. Except as otherwise provided in
the LLC Law, in the event that the winding up of the affairs of the Company
shall be required under this Agreement or the LLC Law, the winding up activities
and functions shall be managed and conducted by all Members or a committee
thereof determined by the required vote of the Members for such purpose.

            Section 11.3 Distribution of Assets upon Winding Up. Upon the
winding up of the affairs of the Company, the assets of the Company shall be
distributed as follows:

            (i)   first, to creditors, including Members who are creditors, to
                  the extent permitted by law, in satisfaction of liabilities of
                  the Company, whether by payment or by establishment of
                  adequate reserves, other than liabilities for distributions to
                  Members under the LLC Law, then;

            (ii)  next, to Members and former Members in satisfaction of
                  liabilities for distributions under the LLC Law;

            (iii) next, to the Members in the same proportion as such amounts
                  would be distributed in accordance with Section 5.3 until
                  there shall remain to be distributed an amount equal to the
                  aggregate Capital Contributions of the Members, then;

            (iv)  next, to the Members in proportion to and to the extent of
                  their Capital Contributions.

      For purposes of determining the amounts distributed to the Members in
accordance with this Section and the amount of any property to be distributed to
the Members pursuant to clause 11.3(iv), the Company shall engage an engineering
consultant acceptable to both Members to determine the fair market value of any
properties and interests in properties distributed or to be distributed to the
Members.

            Section 11.4 Termination. Upon completion of the distribution of the
Company's assets as provided in this Article XI and the completion of the
winding up of the affairs of the Company, the Company shall be terminated, and
the Members shall cause the filing of the Articles of Dissolution pursuant to
the LLC Law and shall take all other actions as may be necessary to terminate
the Company.

            Section 11.5 Claims of Members. The Members shall look solely to the
Company's assets for the return of their Capital Contributions, and if the
assets of the Company remaining after the payment or discharge of the debts,
claims, obligations, liabilities, losses, damages, costs or expenses of the
Company shall be insufficient to return such Capital Contributions, the Members
shall have no recourse against the Company or any other Member.


                                       14
<PAGE>

            Section 11.6 Reformation. Nothing contained in this Agreement shall
impair, restrict or limit the rights and powers of the Members, under the LLC
Law or the law of any other jurisdiction, to reform and reconstitute themselves
as a limited liability company or other entity either under provisions identical
to those set forth herein or any others which they shall deem appropriate
following the dissolution of the Company.

                                   ARTICLE XII

                                   AMENDMENTS

            Section 12.1 Amendments. The Articles of Organization and this
Agreement may only be amended upon the affirmative required vote of the Members,
and any such amendment shall be evidenced by a written instrument signed by all
Members, provided that if any such amendment would disproportionately affect any
Member, such amendment shall be deemed effective only upon the affirmative vote
of such Member and no amendment of Articles III-VII, X, XI or XII shall take
place without the consent of all Members.. An amendment to admit a new member
shall not be deemed to disproportionately effect the interests of any Member so
long as all Members are diluted pro-rata.

                                  ARTICLE XIII

                                     NOTICES

            Section 13.1 Effective Notice. Notices to Members shall be in
writing and may be delivered personally, by certified or registered mail
(postage prepaid, return receipt requested), by courier, or by telecopy (with
prompt telephonic confirmation by the transmitting party of appropriate receipt
by the addressee). Notice shall be deemed to be given when actually delivered to
the address of a Member appearing on Schedule 1 hereto or otherwise on the books
and records of the Company.

            Section 13.2 Waiver of Notice. Whenever notice shall be required to
be given by the LLC Law or this Agreement, a written waiver of notice, signed by
the Member entitled thereto, whether before or after the time stated in the
notice, shall be deemed equivalent to notice. Attendance of a Person at a
meeting shall constitute a waiver of notice of such meeting, except when such
Person shall attend such meeting for the express purpose of objecting, at the
beginning of such meeting, to the transaction of any business because such
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the Members need be specified
in any written waiver of notice.


                                       15
<PAGE>

                                   ARTICLE XIV

                   REPRESENTATIONS, WARRANTIES AND AGREEMENTS

            Section 14.1 Representations, Warranties and Agreements. Each Member
hereby represents and warrants to, and agrees with, the other Members as
follows:

            (1) The Member has full power, authority and legal capacity and is
permitted by applicable laws, rules and regulations to execute, deliver and
perform the Member's obligations under this Agreement.

            (2) This Agreement has been duly executed and delivered by the
Member, constitutes a legal, valid and binding agreement of the Member, and is
enforceable against the Member in accordance with the terms hereof, subject as
to enforceability to applicable bankruptcy, insolvency, reorganization,
moratorium, receivership, conservatorship or other similar laws relating to or
affecting generally the enforcement of creditors' rights and to general
principles of equity (regardless of whether enforceability is considered in a
proceeding at law or in equity).

            (3) The execution, delivery and performance of this Agreement by the
Member do not violate any law, rule, regulation, judgment, order, writ,
injunction or decree binding on or applicable to the Member, and do not conflict
with, result in a breach of or default under, or require any consent under, any
contract, agreement or instrument to which the Member is a party or by which the
Member or the Member's properties are subject.

            (4) No governmental or regulatory consents, authorizations,
licenses, registrations or qualifications are required to be obtained by the
Member with respect to this Agreement.

            (5) The Member is not subject to any law, rule, regulation,
judgment, order, writ, injunction, decree, contractual obligation or duty that
in any way restricts, could violate or could otherwise prevent the Member's
executing, delivering and performing the Member's obligations under this
Agreement, the Member's making the investment contemplated in this Agreement, or
the Member's becoming a member of the Company or carrying out the Member's
obligations and conducting the business operations of the Company.

            (6) The Member acknowledges the significant transfer restrictions on
the Member's Interest in this Agreement, understands the illiquidity of the
investment contemplated in this Agreement, and understands that there is no
market and there may never be a market for the purchase and sale of the Member's
Interest in the Company.

            Section 14.2 Continuing Effect. The representations, warranties and
agreements set forth in Section 14.1 hereof shall be continuing at all times
during the term of this Agreement, and if at any time any event or condition
shall occur or exist which could make any of the foregoing incomplete,
inaccurate or non-complying in any respect, the Member shall immediately give
written notice thereof to the other Members.


                                       16
<PAGE>

                                   ARTICLE XV

                  GOVERNING LAW, ARBITRATION AND INTERPRETATION

            Section 15.1 Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the substantive law of the State of
Texas without reference to its choice of law doctrine.

            Section 15.2 Arbitration. If any claim, controversy or dispute
between or among any Members shall arise with respect to, under or out of, or in
connection with, this Agreement, any matter covered hereby, any breach hereof or
the enforceability hereof, or the business, affairs, operation or management of
the Company, such claim, controversy or dispute shall be settled by binding
arbitration conducted in the State of Texas in accordance with and pursuant to
the Commercial Rules of Arbitration of the American Arbitration Association then
in effect.

            Section 15.3 Severability. If any provision of this Agreement or the
application thereof to any Person or circumstance shall be held to be invalid,
illegal, unenforceable or inconsistent with any present or future law, ruling,
rule or regulation of any court or governmental or regulatory authority having
jurisdiction over the subject matter of this Agreement, such provision shall be
rescinded or modified in accordance with such law, ruling, rule or regulation,
and the remainder of this Agreement, or the application of such provision to the
Persons or circumstances other than those as to which it shall be held
inconsistent, shall not be affected thereby and shall be enforced to the
greatest extent permitted by law.

            Section 15.4 Captions. All captions contained in this Agreement are
for convenience of reference only, and shall not affect the interpretation or
construction of any of the terms hereof.

                                   ARTICLE XVI

                          NO THIRD PARTY BENEFICIARIES

            Section 16.1 No Third Party Beneficiaries. Except as otherwise
provided in this Agreement, a Person not a party to this Agreement shall have no
rights, interests or obligations hereunder. Any agreement to pay any amount
(including any agreement between the Members to make Capital Contributions or to
advance money or property to the Company) and any assumption of liability
contained herein, express or implied, shall only be for the benefit of the
Members; and such agreement or assumption shall not inure to the benefit of the
obligees of any indebtedness or any other Person whomsoever, it being the
intention of the Members that no Person shall be deemed to be a third party
beneficiary of this Agreement.


                                       17
<PAGE>

                                  ARTICLE XVII

                               REMEDIES; NO WAIVER

            Section 17.1 Remedies; No Waiver. No waiver of any breach of this
Agreement or of any objection to any act or omission in connection herewith
shall be implied or claimed by any party hereto or be deemed to constitute a
consent to any continuation of such breach, act or omission, unless in each such
case pursuant to a written instrument signed by all Members, and then only to
the extent set forth therein. A failure or delay by a Member in exercising any
right, power, privilege or remedy in respect of this Agreement shall not be
presumed to operate as a waiver thereof, and a single or partial exercise of any
right, power, privilege or remedy shall not be presumed to preclude any
subsequent or further exercise of that right, power, privilege or remedy or the
exercise of any other right, power, privilege or remedy.

                                  ARTICLE XVIII

                                ENTIRE AGREEMENT

            Section 18.1 Entire Agreement. The Articles of Organization and this
Agreement contain the entire understanding and agreement among the Members with
respect to the subject matter hereof and thereof, and supersede any prior
understandings and agreements (whether written or oral) among the Members with
respect to the subject matter hereof and thereof. If any of the matters covered
by this Agreement were performed or commenced by the Members prior to their
execution and delivery of this Agreement, this Agreement shall be deemed to
govern such prior actions as if it had been executed and delivered by the
Members prior to such action being undertaken.


                                       18
<PAGE>

                                   ARTICLE XIX

                              COUNTERPART EXECUTION

            Section 19.1 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original instrument and all of
which taken together shall constitute one and the same agreement. Each Member
shall become bound by this Agreement immediately upon such Member's execution
and delivery hereof and independently of the execution and delivery hereof by
the other Members.

            IN WITNESS WHEREOF, this Operating Agreement of Vaquero Partners LLC
has been duly executed and delivered by or on behalf of the Members as of the
date first set forth above.

DUNE ENERGY, INC.                                VAQUERO OIL & GAS, INC.


By: /s/ Mark G. Harrington                       By: /s/ Rick Trapp
    ---------------------------                      ---------------------------
    Name: Mark G. Harrington                         Name: Rick Trapp
    Title: President                                 Title: President


                                       19
<PAGE>

                                   SCHEDULE I
                             to Operating Agreement
                             of Vaquero Partners LLC

<TABLE>
<CAPTION>
Name of Member                      Address                          Initial Capital Contribution
--------------                      -------                          ----------------------------
<S>                                 <C>                                         <C>
Dune Energy, Inc.                   16 River Hollow Lane                        $360,000
                                    Houston, Texas  77027

Vaquero Oil & Gas, Inc.             _____________________                        $ 0.00

                                    _____________________
</TABLE>


                                       20