Exhibit 10.1


    
      

    

    DRAGON
      ENERGY
      CORPORATION

    650
      POYDRAS
      STREET,
      SUITE
      2828

    NEW
      ORLEANS,
      LOUISIANA
      70130-6155

    


    
      	
              FAX

            	 	
              TELEPHONE

            
	
              (504)
                586-0017

            	 	
              (504)
                586-1717

            


    

    


    


    August
      23, 2004

    


    


    Argyle
      Energy, Inc.

    10777
      Westheimer, Suite 170

    Houston,
      Texas 77042

    


    Attention:
      Mr. Harry J. Peters

    


    


    
      	 	
              Re:

            	
              FARMOUT
                AGREEMENT

            


    

    
      	 	 	
              Barnett
                Crossroads Prospect (Prospect No.
                20)

            


    

    
      
        	 	 	
                Escambia
                  County

              


      
                                                       
      A L A B A M
      A                                                                                                     


    


    


    Gentlemen:

    


    When
      accepted by you in the manner provided hereinafter, this letter shall constitute
      a contract and agreement ("Agreement") between DRAGON ENERGY CORPORATION
      ("Dragon") and ARGYLE ENERGY, INC. ("Argyle"), concerning those certain Oil,
      Gas
      and Mineral Leases (the "Leases") described more particularly in the list of
      leases and lands attached hereto as Exhibit "I." Argyle has expressed a desire
      to acquire an interest in the Leases by drilling a test well in search of oil
      and/or gas on the Leases, and this letter will evidence the agreement between
      Dragon and Argyle with respect thereto.

    


    For
      and
      in consideration of the covenants, obligations, and undertakings set forth
      herein, Dragon and Argyle hereby agree as follows:

    


    


    1.

    


    CASH
      CONSIDERATION

    


    Concurrently,
      with the execution of this Agreement by Dragon and Argyle, Argyle has paid
      to
      Dragon the sum of One Hundred Thousand and 00/100 Dollars ($100,000.00) in
      cash
      (the "Cash Consideration"). Argyle shall not have accepted this Agreement,
      and
      this Agreement shall not be in force and effect as between Dragon and Argyle,
      until Argyle has delivered to Dragon the full amount of the Cash
      Consideration.

    


    


    2.

    


    TITLE
      INFORMATION AND TITLE OPINIONS

    


    Dragon
      makes no representation or warranty, either expressed or implied, concerning
      its
      title to the Leases. Upon the request of Argyle, Dragon shall furnish to Argyle
      copies of the Leases and all title data and title opinions relating to the
      Leases in the possession of Dragon as of the effective date of this Agreement.
      Thereafter, Argyle shall obtain such additional title data and title opinions
      as
      it
      deems
      necessary in connection with the drilling of the Test Well. Argyle shall bear
      and pay one hundred percent (100%) of the total costs and expenses of such
      additional title data and drillsite title opinions.


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

      Argyle
        Energy, Inc.

      Attention:
        Mr. Harry J. Peters

      August
        23, 2004

      Page
        2

    

    
    

     

    3.

    


    TEST
      WELL

    


    3.1.    
On
      or before
      September 30, 2005, and subject to the availability of a drilling rig, tubular
      goods, and other equipment and services required for the drilling and completion
      of the Test Well, Argyle agrees to commence, or to cause to be commenced, the
      actual drilling of a well in search of oil or gas at a mutually acceptable
      legal
      location in Section 19, Township 3 North, Range 8 East, Escambia County, Alabama
      (the "Test Well"). Argyle shall cause such drilling operations to be prosecuted
      with diligence and in a workmanlike manner consistent with the practices of
      a
      prudent operator until the Test Well shall have been drilled to a depth of
      (a)
      14,850 feet TVD below the surface of the earth, or (b) a depth sufficient to
      test adequately and conclusively the stratigraphic equivalent of the Smackover
      Formation as
      seen
      in
      the interval between 13,684 feet and 14,016 feet in the Dragon Energy
      Corporation-ATIC 23-4 #1 well located in Section 23, Township 3 North, Range
      8
      East, Escambia County, Alabama, whichever is the shallower depth (the "Objective
      Depth"), or to such other depth as the parties hereto may agree, as provided
      hereinafter.

    


    3.2.    
Argyle
      agrees to pay and bear one hundred percent (100%) of the total cost, risk,
      liability, and expense incurred in connection with the drilling of the Test
      Well
      to its Objective Depth and all logging, coring, and testing of the Test Well
      provided or permitted under this Agreement prior to a decision concerning a
      completion attempt therein. For purposes of this Agreement, the point in time
      when the Test Well has been drilled to its Objective Depth and all such logging,
      coring and testing of the Test Well prior to a decision concerning a completion
      attempt therein has been completed shall be referred to hereinafter as "Casing
      Point."

    


    3.3.    
During
      the
      course of drilling the Test Well to Casing Point, Argyle shall perform, or
      cause
      to be performed, the following services with respect to the Test
      Well:

     

    
      
        	 	
                (a)

              	
                Argyle
                  shall cause a survey of the location of the Test Well to be made,
                  cause
                  such location to be staked, and secure drilling permits for the
                  Test Well.
                  As soon as
                  is
                  practicable after the execution of this Agreement, Argyle shall
                  furnish to
                  Dragon a survey plat showing the staked location of the Test
                  Well.

              


      

    

     

    
      	 	
              (b)

            	
              Argyle
                shall prepare, or cause to be prepared, the Test Well location and
                the
                access thereto, and shall settle or pay surface damages, if any,
                occasioned by these operations.

            


    

    


    
      	 	
              (c)

            	
              Argyle
                shall furnish, or cause to be furnished, an appropriate drilling
                rig,
                equipment, labor, mud and chemicals, surface casing, protection casing
                if
                necessary, cement, water, and fuel; shall move the drilling rig on
                and off
                location; and shall perform such other services as
                may be
                required to drill the Test Well to its Objective
                Depth.

            


    

    


    
      	 	
              (d)

            	
              Argyle
                shall furnish such on-site geological and engineering supervision,
                as
                is
                necessary or appropriate.

            


    

    


    
      	 	
              (e)

            	
              Argyle
                shall, on a daily basis, maintain an estimate of the total expenses
                incurred to date for the drilling of the Test Well and shall include
                such
                information, along with the daily progress of the drilling of the
                Test
                Well, in the daily drilling reports to Dragon provided for in Section
                3.3.
                (g) (i).

            


    

    


    
      	 	
              (f)

            	
              During
                the drilling of the Test Well, Argyle shall conduct such coring and
                testing as would a reasonably prudent operator. Upon reaching the
                Objective Depth, Argyle shall run, from the base of the surface casing
                of
                the Test Well to its Objective Depth, such electrical induction logs,
                neutron density logs, or other logs as may be necessary to properly
                test
                the Objective Depth for the presence of oil and/or gas in commercial
                quantities.

            


    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

      Argyle
        Energy, Inc.

      Attention:
        Mr. Harry J. Peters

      August
        23, 2004

      Page
        3

    

     

    
      
        	 	
                (g)

              	
                Argyle
                  agrees that Dragon and its representatives shall, at all times,
                  have
                  access at their own risk to the derrick floor of the Test Well
                  to witness
                  all operations thereon and to inspect the logs and other records
                  kept with
                  respect to the Test Well. Argyle shall provide Dragon with at least
                  twenty-four (24) hours written notice concerning the anticipated
                  time that
                  any logging, coring, testing, completion, or plugging operations
                  will take
                  place on the Test Well to allow Dragon, or its representatives,
                  sufficient
                  time to be present at the well site to witness the same. Further,
                  Argyle
                  agrees to furnish to Dragon copies of each of the
                  following:

              


      

    

     

    
      	 	
              (i)

            	
              daily
                drilling reports;

            


    

    
      	 	
              (ii)

            	
              core
                analyses;

            


    

    
      	 	
              (iii)

            	
              mud
                logs;

            


    

    
      	 	
              (iv)

            	
              electrical
                induction logs and surveys and neutron density
                logs;

            


    

    
      	 	
              (v)

            	
              velocity
                surveys;

            


    

    
      	 	
              (vi)

            	
              well
                test and completion reports; and

            


    

    
      	 	
              (vii)

            	
              all
                reports made to any state or federal
                agency.

            


    

    


    3.4.     When
      the Test
      Well has been drilled to its Objective Depth and the logging, coring, and
      testing provided in Section 3.3.(f) have been completed, Argyle or Dragon shall
      have the right to have additional logs, cores, or other tests made or run in
      the
      Test Well to aid in a decision whether to attempt a completion therein;
      provided, however, that Argyle shall have the right to veto any such proposed
      additional logs, cores, or other tests if Argyle, in its sole judgment,
      determines that such proposed logs, cores, or other tests would unduly
      jeopardize the Test Well or the geological formation into which it has been
      drilled. Any such additional logging, coring and testing shall be proposed
      in
      the manner provided in Article VI.B.1 of the Operating Agreement referred to
      hereinafter. If Argyle approves any such proposal for additional logging, coring
      and testing, Argyle shall be liable for 100% of the cost related thereto. In
      the
      event that Argyle does not elect to conduct such additional testing and Dragon
      elects to conduct such testing, Dragon shall be liable for all costs incurred
      and all damage to the well bore during such testing.

    


    3.5. 
      (a) In the event that Argyle
      is unable to reach the Objective Depth in the Test Well, or having reached
      such
      Objective Depth, is unable to complete the Test Well because of subsurface
      conditions or formations, including without limitation heaving shale, domal
      formations, and excessively high pressure water sands or cavities, that would
      render further drilling operations by a prudent operator impracticable, or
      because of mechanical conditions in the Test Well beyond Argyle's control,
      Argyle shall plug and abandon the Test Well and restore the drillsite premises
      thereof pursuant to the provisions of Section 3.6.

    


     (b)
      Thereafter, Argyle shall determine, it its sole discretion, whether to commence
      or to cause to be commenced, within sixty (60) days after the date that plugging
      operations on the Test Well are completed, the actual drilling of a substitute
      well for oil and/or gas (the "Substitute Test Well") at a mutually acceptable
      location on the Leases. The Substitute Test Well shall be drilled under the
      same
      terms and conditions as the Test Well. If the Substitute Test Well is commenced
      in a timely manner and completed as a producer of oil and/or gas in commercial
      quantities, the Substitute Test Well shall take the place of the Test Well
      for
      purposes of this Agreement, and as used herein, the term "Test Well" shall
      include the Substitute Test Well.


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

      Argyle
        Energy, Inc.

      Attention:
        Mr. Harry J. Peters

      August
        23, 2004

      Page
        4

    

     

    3.6.
      (a)
      In the event that Argyle commences the actual drilling of the Test Well as
      provided in this Article 3, and reaches the Objective Depth of the Test Well
      but
      both Argyle and Dragon elect not to attempt to complete the Test Well, Argyle
      shall plug and abandon the Test Well and shall restore the drillsite premises
      pursuant to the requirements of the Leases and applicable laws and regulations,
      unless operations are conducted pursuant to Section 3.7, and Argyle shall bear
      one hundred percent (100%) of the total costs, risks, liabilities, and expenses
      of such plugging, abandonment, and surface restoration operations.

    


    (b)
      In
      the event that Argyle commences the actual drilling of the Test Well as provided
      in this Article 3, and reaches the Objective Depth of the Test Well and both
      Argyle and Dragon participate in the unsuccessful attempt to complete the Test
      Well, Argyle and Dragon shall plug and abandon the Test Well and shall restore
      the drillsite premises pursuant to the requirements of the Leases and applicable
      laws and regulations, unless operations are conducted pursuant to Section 3.7,
      and the costs, risks, liabilities, and expenses of such plugging, abandonment,
      and surface restoration operations shall be borne by the parties in their
      respective after casing point working interests, (the "ACP Interest"). The
      ACP
      Interests of Argyle and Dragon are seventy-five percent (75%) and twenty five
      percent (25%) respectively.

    


    (c)
      In
      the event that Argyle commences the actual drilling of the Test Well as provided
      in this Article 3, and reaches the Objective Depth of the Test Well and either
      Argyle or Dragon elects not to participate in a proposed completion attempt
      in
      the Test Well, the completion attempt will be subject to the provisions of
      Section 4.3, and if unsuccessful, the Consenting Party shall plug and abandon
      the Test Well and shall restore the drillsite premises pursuant to the
      requirements of the Leases and applicable laws and regulations, unless
      subsequent operations are conducted, and the Consenting Party shall bear (100%)
      of the total costs, risks, liabilities, and expenses of such plugging,
      abandonment, and surface restoration operations.

    


    


    3.7.
      (a)
      After the Test Well has been drilled to Casing Point and Argyle and Dragon
      have
      elected not to attempt to complete the Test Well as a well capable of producing
      oil and/or gas in commercial quantities, Argyle or Dragon may propose deepening,
      sidetracking, or any other operations in the Test Well prior to the plugging
      and
      abandonment thereof. Any such additional logging, coring and testing shall
      be
      proposed in the manner provided in
      Article
      VI.B. I of the Operating Agreement referred to hereinafter.

    


    (b)
      If
      Argyle and Dragon elect to participate in the operation proposed under Section
      3.7.(a), the cost, risk, liability, and expense incurred in connection therewith
      shall be borne by the parties in their respective ACP Interest.

    


    (c)
      In
      the event that either Argyle or Dragon elects not to participate in the relevant
      Section 3.7.(a) operation (the "Non-Consenting Party"), and the proposing party
      (the "Consenting Party") thereafter elects not to proceed therewith, Argyle
      shall plug and abandon the Test Well and restore the drillsite premises thereof
      pursuant to the provisions of Section 3.6. In the event that either Argyle
      or
      Dragon elects not to participate in the relevant Section 3.7.(a) operation,
      and
      such operation is pursued by the Consenting Party, the Non-Consenting Party
      shall surrender and relinquish to the Consenting Party, all of the right, title,
      and interest of the Non-,Consenting Party in and to the Test Well and the
      Leases; and the Consenting Party shall bear the full cost, risk, liability,
      and
      expense incurred in connection with the relevant operation. Such surrender
      of
      the interest of the Non-Consenting Party in the Leases shall not create an
      obligation on the part of the Consenting Party to reimburse the Non-Consenting
      Party for sums previously paid by the Non-Consenting Party under the terms
      of
      this Agreement. The Non- Consenting Party shall execute any assignments or
      other
      documents in favor of the Consenting Party necessary to divest the
      Non-Consenting Party of such rights and interests.


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

      Argyle
        Energy, Inc.

      Attention:
        Mr. Harry J. Peters

      August
        23, 2004

      Page
        5

    

    
       

    

    3.8.    
Subject
      to
      the provisions of Section 11.1., Argyle may, at its option, subcontract the
      performance of all or any part of its responsibilities and obligations
      hereunder; provided, however, that no such subcontract shall be regarded as
      an
      assignment of Argyle's responsibilities or obligations hereunder or as having
      the effect of relieving Argyle of its contractual responsibilities and
      obligations hereunder.

    


    3.9.    
Argyle
      shall, during all operations conducted by it pursuant to this Agreement in
      connection with the exploration for, or production of, oil and/or gas on the
      Leases, I comply with any and all applicable laws, rules, and regulations of
      any
      governmental authority having jurisdiction over such operations, and with all
      of
      the terms, covenants, arid conditions either expressed or implied, set forth
      in
      the Leases, this Agreement, and the Operating Agreement referred to
      hereinafter.

    


    


    4.

    


    COMPLETION
      ATTEMPT ON THE TEST WELL

    


    4.1.    
The
      decision
      whether to attempt to complete the Test Well as a well capable of producing
      oil
      and/or gas in commercial quantities shall be governed by the relevant provisions
      of the Operating Agreement referred to hereinafter, and all operations in
      connection with any such completion attempt shall be governed by the terms
      of
      such Operating Agreement, except to the extent that they conflict with the
      terms
      hereof.

    


    4.2.    
Subject
      to
      the right to elect not to participate in a completion attempt in the Test Well,
      as
      provided
      in Section 4.3, Argyle and Dragon agree to bear seventy-five percent (75%)
      and
      twenty five percent (25%) respectively, of the cost, risk, liability, and
      expense incurred in connection with any completion attempt on the Test Well,
      including without limitation all expenses incurred in equipping the Test Well
      for production. For purposes of this agreement, Dragon and Argyle agree that
      all
      costs and expenses of labor, services, materials, and equipment used and
      incurred in a completion attempt in the Test Well that are not included in
      the
      cost of drilling the Test Well to Casing Point or conducting any operations
      therein pursuant to Section 3.7 shall be deemed to be costs of completion and
      equipping for production, including, without limitation, (a) costs of casing
      and
      associated equipment, (b) cement and cementing service, (c) tubing, (d) packers,
      (e) Christmas tree, (f) perforation, (g) formation treatment and stimulation,
      (h) rig time, (i) engineering supervision, (j) surface handling facilities,
      and
      (k) administrative overhead as
      provided
      in Exhibit "C" to the Operating Agreement referred to hereinafter.

    


    4.3.    
In
      the event
      that either Argyle or Dragon elects not to participate in a proposed completion
      attempt in the Test Well, and such completion attempt is pursued by the
      Consenting Party, the Non-Consenting Party shall surrender and relinquish to
      the
      Consenting Party, all of the right, title, and interest of the Non-Consenting
      Party in and to the Test Well and the Leases; and the Consenting Party shall
      be
      the operator for such completion attempt and all subsequent operations on the
      Leases and shall bear the full cost, risk, liability, and expense incurred
      in
      connection with such completion attempt. Such surrender of interests of the
      Non-
      Consenting Party in the Leases shall not create an obligation on the part of
      the
      Consenting Party to reimburse the Non-Consenting Party for sums previously
      paid
      by the Non-Consenting Party under the terms of this agreement. The
      Non-Consenting Party shall execute any assignments or other documents in favor
      of the Consenting Party necessary to divest the Non-Consenting Party of such
      rights and interests.


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

      Argyle
        Energy, Inc.

      Attention:
        Mr. Harry J. Peters

      August
        23, 2004

      Page
        6

    

    
    

     

    5.

    


    ASSIGNMENTS
      OF INTEREST

    


    5.1.    
When
      the
      Test Well has been drilled to Casing Point and the logging, coring, and testing
      provided in Section 3.3.(f) have been completed, and Argyle has complied with
      all of the terms and provisions of this Agreement, Dragon shall assign to
      Argyle, by recordable instrument of conveyance in form and substance identical
      to the form of Assignment of Oil and Gas Leases attached hereto as Exhibit
      "II"
      (the "Lease Assignment"), an undivided seventy-five percent (75%) interest
      in
      and to (a) the Leases, (b) the Test Well and all oil, gas and related
      hydrocarbons produced, saved, and marketed there from, (c) all other personal
      property and equipment located on the Leases, and (d) all appurtenances thereto.
      For purposes of this Agreement, the referenced percentage shall sometimes be
      referred to herein as
      Argyle's
      "Lease Ownership Percentage."

    


    5.2.    
The
      specific
      provisions governing the assignment of interest in the Leases from Dragon to
      Argyle described in Section 5.1, are set forth in the Lease Assignment, the
      terms and provisions of which are incorporated into this Agreement for all
      purposes. In the event of a conflict between the provisions of the Lease
      Assignment and the provisions of this Agreement, the provisions of this
      Agreement shall govern and control.

    


    5.3.
          Prior
      to Argyle earning an assignment of its interest in
      the
      Leases as provided in Section 5.1 above, Dragon shall maintain all of the Leases
      through delay rental payments as
      may be
      required. During the time Dragon is maintaining said Leases, Dragon shall,
      as
      necessary, present Argyle with an invoice no more than sixty (60) days prior
      to
      a delay rental payment being due, and Argyle shall have fifteen (15) days from
      the date an invoice is received within which to pay such invoice. Should Argyle
      fail to timely pay an invoice as provided herein, Argyle shall forever forfeit
      all of its rights hereunder, and neither party to this Agreement shall have
      any
      recourse against the other, and this Agreement shall terminate. Should Argyle
      timely pay such invoice, all of Argyle's rights hereunder shall be maintained.
      Subsequent to Argyle earning an assignment of its rights hereunder, and after
      receiving an Assignment of its interest from Dragon, all delay rental and other
      lease maintenance payments shall be made by Argyle pursuant to the terms of
      the
      Joint Operating Agreement attached hereto as
      Exhibit
      IV.

     

     

    6.

    


    OPERATING
      AGREEMENT

    


    6.1.    
Concurrently
      with the execution of this Agreement, Dragon and Argyle have executed an
      Operating Agreement identical in form and substance to the form of Operating
      Agreement attached hereto and made a part hereof as
      Exhibit
      "IV" (the "Operating Agreement") that names Argyle as "Operator" and Dragon
      as
      "Non-Operator."

    


    6.2.    
All
      operations in connection with the Test Well shall be governed by the applicable
      provisions of the Operating Agreement, to the extent that such provisions are
      not inconsistent with the provisions of this Agreement. All operations in
      connection with any subsequent well located on the Leases, including the
      decision to drill or not to drill, shall be governed by the applicable
      provisions of the Operating Agreement, to the extent that such provisions are
      not inconsistent with the provisions of this Agreement.


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

      Argyle
        Energy, Inc.

      Attention:
        Mr. Harry J. Peters

      August
        23, 2004

      Page
        7

    

    
    

     

    7.

    


    RELATIONSHIP
      OF PARTIES - TAXATION

    


    7.1.    
It
      is not
      the purpose of this Agreement to create, and this Agreement shall not be
      construed as creating, a joint venture, partnership, or other relation whereby
      any party to this Agreement shall be liable for the acts, either of omission
      or
      commission, of any other party hereto. Furthermore, the respective rights and
      obligations of the parties hereto shall, in all respects, be several and not
      joint, and shall be governed by the express provisions hereof.

    


    7.2.    
Dragon
      and
      Argyle agree that the provisions of the Operating Agreement shall govern their
      relationship, for U.S. federal and state income taxation purposes.

    


    


    8.

    


    AREA
      OF MUTUAL INTEREST

    


    8.1.    
An
      area of
      mutual interest that covers all of lands within the area outlined on the plat
      attached hereto as
      Exhibit
      "III," the "AMI" is hereby established by the parties hereto.

    


    8.2.    
Should
      any
      party hereto acquire, either directly or indirectly, a leasehold, farmout or
      similar interest, within the AMI, while this Agreement or the Operating
      Agreement are in effect, the acquiring party shall give notice of such
      acquisition to the non-acquiring party, advise them of the terms and conditions
      of said acquisition and furnish copies of all pertinent information. Any
      non-acquiring party shall have a
      period
      of
      ten (10) days (or twenty four (24) hours, exclusive of Saturdays, Sundays and
      Holidays), in case a well is being drilled within the AMI, in which to elect
      to
      share in such acquisition to the extent of their ACP Interest. If the non-
      acquiring party elects to participate in such acquisition, it shall pay its
      ACP
      Interest of the acquisition costs for such acquired interest within fifteen
      (15)
      days of its
      election
      to participate. Failure of the non-acquiring party to pay its share of
      acquisition costs within the fifteen (15) day period shall, at the acquiring
      party's election, be deemed an election not to participate.

    


    


    9.

    


    INDEMNITY
      and INSURANCE

    


    9.1.    
Argyle
      agrees to assume responsibility for and indemnify, hold harmless, release and
      defend Dragon, its successors and assigns, from and against any liability to
      the
      extent such liability arose from or is based upon events, actions, conditions,
      circumstances or omissions incurred or created by Argyle in connection with
      the
      drilling of any well (s) as provided for hereunder, and, for all subsequent
      operations by Argyle that relate in any way to or are incurred in connection
      with Argyle's operations conducted hereunder and from and against any
      obligations, losses, damages, claims, demands, suits, costs, expenses,
      penalties, fines, liens and liabilities whatsoever (including reasonable
      attorney's fees and expenses), accruing or relating to the owning, developing,
      exploring, operating and maintaining the Leases insofar arid only insofar
as
      such
      ownership, development, exploration, operations, and maintenance pertain to
      the
      Leases. No claims for consequential, punitive, exemplary or other similar types
      of damages or loss of business opportunity may be asserted by any party hereto.
      For liabilities that arise from operations after Dragon has elected to
      participate in the completion or subsequent operations for the Test Well, this
      indemnity provision shall be superceded by the terms of the Operating
      Agreement.


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

      Argyle
        Energy, Inc.

      Attention:
        Mr. Harry J. Peters

      August
        23, 2004

      Page
        8

    

    
    

     

    9.2.    
Argyle
      shall, before work is commenced hereunder and at all times during the term
      of
      this Agreement, maintain or cause to be maintained insurance at its own expense
      with reliable insurance companies authorized to do business in the state or
      states in which the work is to be performed hereunder. The policies shall
      provide the minimum insurance coverage for the benefit of Dragon as
      required
      in Exhibit "D" to the Operating Agreement. Argyle shall, before work is
      commenced hereunder, submit to Dragon, certificates of insurance evidencing
      that
      satisfactory coverage of the types and limits set forth in Exhibit "D" to the
      Operating Agreement is in effect. Policies providing for such coverage shall
      contain provisions that no cancellation or material changes in the policies
      shall become effective except upon thirty (30) days advance written notice
      thereof to Dragon, that Dragon is named as
      an
additional
      insured, that rights of subrogation against Dragon have been waived, and the
      certificates of insurance furnished to Dragon shall evidence these
      provisions.

    


    


    10.

    


    NOTICES

    


    10.1.    
All
      notices,
      consents, approvals, requests, demands, and other communications required or
      permitted to be given hereunder or in connection with the transactions
      contemplated hereby shall be in writing and delivered in person or by United
      States mail, courier service, telegram, telex, telecopier or any other form
      of
      facsimile, postage or charges prepaid, and addressed to each party at the
      addresses listed below in accordance with the notice provisions of the Operating
      Agreement:


    

      
        	
                If
                  to Dragon:

              
	 	 
	
                Dragon
                  Energy Corporation

              
	
                650
                  Poydras Street, Suite 2828

              
	
                New
                  Orleans, Louisiana 70130-6155

              
	
                Attention:

              	
                Mr.
                  McLain J. Forman

              
	
                Email:

              	
                dragonenergy@belLsouth.net

              
	
                Office
                  Telephone:

              	
                (504)
                  586-1717

              
	
                Office
                  Fax:

              	
                (504)
                  586-0017

              
	 	 
	
                If
                  to Argyle:

              
	 	 
	
                Argyle
                  Energy, Inc.

              
	
                10777
                  Westheimer, Suite 170

              
	
                Houston,
                  Texas 77042

              
	
                Attention:

              	
                Mr.
                  Harry J. Peters

              
	
                Email:

              	
                hjp@br-energy.com

              
	
                Office
                  Telephone:

              	
                (832)
                  358-3900

              
	
                Office
                  Fax:

              	
                (832)
                  358-3903

              


      

    

    


    10.2.    
Dragon
      and
      Argyle may change the address to which such communications are to be directed
      by
      giving written notice to the other party in the manner provided in Section
      8.1.


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

      Argyle
        Energy, Inc.

      Attention:
        Mr. Harry J. Peters

      August
        23, 2004

      Page
        9

    

     

    11.

    


    GENERAL
      PROVISIONS

    


    11.1.    
Any
      assignment of interest by Argyle shall expressly be made subject to all of
      the
      terms, covenants, provisions, and conditions of this Agreement and the Operating
      Agreement and shall provide that the assignee identified therein agrees to
      ratify this Agreement at Dragon's request. No such assignment shall be binding
      upon Dragon until thirty (30) days after Argyle shall have furnished to Dragon
      a
      certified copy of the recorded instrument or instruments evidencing the same.
      An
      assignment by Argyle of all of its interest in the Leases will only relieve
      Argyle of liabilities and obligations arising hereunder from and after the
      date
      that said assignment is fully executed by all parties.

    


    11.2.    
After
      the
      effective date of this Agreement and prior to Argyle's being entitled to receive
      the Assignment of Leases provided for in Section 5.1., Argyle shall be liable
      for one hundred percent (100%) of all costs in connection with extensions or
      renewals of the Leases, delay rentals, shut-in well payments, minimum royalties,
      and other similar payments. After Argyle has become entitled to receive the
      assignment provided for in Section 5.1., Argyle and Dragon shall be liable
      for
      their Lease Ownership Percentage of such extensions or renewals of the Leases,
      delay rentals, shut-in well payments, minimum royalties, and other similar
      payments.

    


    11.3.    
If
      the Test
      Well is not commenced by the commencement date specified in Article 3, or if
      the
      Test Well (or Substitute Test Well) is not drilled to Casing Point, this
      Agreement shall terminate and all parties shall thereupon be relieved of any
      further obligation hereunder, and no interest in the Leases or other rights
      will
      have been earned by Argyle, and Dragon shall have no recourse of any kind
      whatsoever against Argyle. If a Test Well is not commenced, but all other
      obligations are fulfilled, this agreement shall terminate and Argyle shall
      be
      relieved of all other obligations and no refund of the Cash Consideration shall
      be due to Argyle.

    


    11.4.    
The
      parties
      hereto agree to execute such additional instruments, agreements, or documents
      as
      may be necessary to effectuate the intentions of this Agreement.

    


    11.5.    
Article
      and
      section numbers used in this Agreement refer to articles and sections of this
      Agreement unless otherwise specifically described, '1'he section headings
      contained herein are inserted for convenience only and shall not control or
      affect the meaning or construction of any provision hereof.

    


    11.6.    
This
      Agreement shall be governed by and construed and enforced in accordance with
      the
      laws of the State of Louisiana and, subject to the provisions of Section 11.1.,
      shall be binding upon and inure to the benefit of the parties hereto and their
      respective successors and assigns.

    


    11.7.    
This
      Agreement constitutes the entire agreement between the parties and supersedes
      any and all other written or oral agreements or understandings between the
      parties concerning the subject matter hereof. No modification or amendment
      of
      the terms and provisions of this Agreement shall be effective unless in writing
      and signed by the party against whom enforcement is sought.

    


    11.8.    
This
      Agreement may be executed in multiple counterparts, each of which shall
      constitute an original hereof for all purposes, and all of which, when taken
      together, shall constitute one and the same instrument.


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

      Argyle
        Energy, Inc.

      Attention:
        Mr. Harry J. Peters

      August
        23, 2004

      Page
        10

    

    
       

      11.9.    
This
        Agreement shall be effective as
        of
        August
        1, 2004, notwithstanding the date set out on the first page hereof and shall
        remain in effect so long as
        any of
        the
        Leases subject to this agreement remain or are continued in force, whether
        by
        production, extension, renewal, or otherwise, unless this Agreement is sooner
        terminated by the terms hereof.

    

    


    If
      the
      foregoing reflects your understanding of our agreement in connection with the
      subject matter hereof, please execute two (2) counterparts of this Agreement
      in
      the space provided below and return one such executed counterpart to Dragon
      at
      the address indicated in Section 8.1., the remaining counterpart should be
      retained for your files.

     

    
      	 	 	
              Very
                truly yours,

            
	 	 	 
	 	 	
              DRAGON
                ENERGY CORPORATION

            
	 	 	 
	 	 	 
	 	
              By: 
                

            	
              /s/
                McLain J. Forman

            
	 	 	
              McLAIN
                J. FORMAN

            
	 	 	
              PRESIDENT

            


    

    


    
      	
              MJF:rs

            	 
	
              Attachment

            	 
	 	 
	
              AGREED
                TO AND ACCEPTED

            	 
	
              this
                30th day of November, 2004.

            	 


    

    


    
      	 	
              ARGYLE
                ENERGY, INC.

            	 
	 	 	 
	 	 	 
	
              BY: 
                

            	
              /s/
                Harry J. Peters

            	 
	 	
              HARRY
                J. PETERS

            	 
	 	
              SENIOR
                VICE-PRESIDENT