October 1, 1998



Fan Energy Inc.
1801 Broadway, Suite720
Denver, Colorado 80202

                                       Re:      Participation Agreement
                                                HORSETHIEF CANYON PROSPECT
                                                T21N,   R102-103W, 6th P.M.
                                                Sweetwater County, Wyoming

Gentlemen:

     This Agreement will constitute our understanding regarding Fan Energy Inc.,
hereinafter referred to as "FEI",  purchase of an interest in Fancher Resources,
LLC,  hereinafter   referred  to  as  "Fancher",   Horsethief  Canyon  Prospect,
Sweetwater County, Wyoming.

     1.   Fancher will assign 20% of its right, title and interest in and to all
          of its leasehold,  being  approximately  3525 net acres as depicted on
          Exhibit "A" attached hereto.  In addition,  Fancher will assign 20% of
          its right,  title and interest in and to all leasehold and/or minerals
          which  are  acquired  within  the  prospect  outline  as shown on said
          Exhibit "A" (map).  Further,  Fancher agrees to assign 20% interest in
          and to all acreage trades,  farmins,  seismic options,  etc. which are
          secured for the  Horsethief  Prospect.  All  leasehold,  minerals  and
          acreage trades are hereinafter referred to as the "interests".

     2.   FEI agrees to pay $28,000 to Fancher for acreage and  geological  cost
          associated with  Horsethief  Canyon  Prospect,  upon execution of this
          letter agreement.

     3.   In delivering the interests, Fancher will deliver to FEI an 80% NRI on
          acreage which is currently  owned, on this date, by Fancher as well as
          any open UPRC acreage where a lease is earned  pursuant to shooting 3D
          seismic.  Fancher  will  deliver  an 80%  NRI on all  other  interests
          assigned to FEI within the prospect.  In the event an earned  interest
          is less than 80% NRI Fancher will deliver said  interest as is without
          reserving additional overriding royalty interests.


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Fan Energy Inc.
October 1, 1998
Page Two

     4.   Fancher  has  acquired  3D  seismic  data over the  Horsethief  Canyon
          Prospect  as shown on  Exhibit  B. FEI  agrees to pay 24% of all costs
          involved in acquiring,  processing,  and  interpreting  the 3D seismic
          data  over  the  Horsethief  Canyon  Prospect.   Notwithstanding  said
          payment,  the  ownership of such data will be FEI 20% and Fancher 80%.
          The  estimated  gross cost to acquire,  process and  interpret  the 3D
          seismic  data in the  Horsethief  Canyon  prospect is  estimated to be
          $500,000.  FEI's cost to date for seismic is shown on Exhibit E and is
          due upon execution of this Agreement.

     5.   An area of  mutual  interest  is  hereby  established,  effective  for
          acquisitions  after this date,  consisting  of the  Horsethief  Canyon
          Prospect  lands as shown on Exhibit "A". The AMI will remain in effect
          for the term of any oil and gas leases  which  become  subject to this
          agreement,  whether by  acquisition,  extension  or renewal  and shall
          thereafter  terminate unless  production is established on any portion
          of said land through this  agreement,  and shall then continue so long
          as there is production.  Any acquisition to the AMI, shall be reported
          within ten (10) days in writing  describing the acquired  interest and
          cost of same,  FEI will have  twenty  (20) days from  receipt  of such
          notice in which to elect to  participate in the interest by payment of
          its  proportionate  share of the actual cost of the interest plus 10%.
          Failure to  participate in an acquisition to the AMI shall remove that
          interest from the terms of this agreement.

     6.   FEI agrees to pay 24% of all costs to casing point on the initial well
          drilled on the  Horsethief  Canyon  Prospect,  as reflected in the AFE
          attached  hereto and made a part of this  Agreement.  The initial well
          will be spudded on or before November 1, 1998.

     7.   A Federal  Exploratory Unit has been formed as shown on Exhibit F. FEI
          agrees to ratify and adopt the  Horsethief  Canyon Unit  Agreement and
          Unit  Operating  Agreement.   The  Horsethief  Canyon  Unit  Operating
          Agreement  will control all  operations  of the parties while it is in
          effect.  In  the  event  any  lands  subject  to  this  agreement  are
          contracted  out of the  Horsethief  Canyon Unit, or if the  Horsethief
          Canyon  Unit is  terminated,  then such  lands  will be  automatically
          subject to the AAPL 610-1989 JOA attached hereto as Exhibit D.




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Fan Energy Inc.
October 1, !998
Page Three


     8.   FEI will have a continuing  right of first refusal to participate,  on
          similar terms to Horsethief  Canyon Prospect,  in Fancher's four other
          prospects in this area as shown on Exhibit "C" attached hereto and any
          other  prospects or re-entries that Fancher may develop in the subject
          area. These prospects are identified as Northeast Marianne,  Southwest
          Marianne,  Deadman Wash and Shiprock.  FEI will have fifteen (15) days
          from the presentation and review of each prospect in which to elect to
          participate in the aforementioned prospects.

     9.   Simultaneous with the execution of this agreement Fancher and FEI will
          enter into the AAPL Model Form 610-1989  Operating  Agreement attached
          hereto as Exhibit "D" which  designates  Fancher Oil LLC as  Operator.
          Said  Operating  Agreement  will  contain  a  provision  which  allows
          Fancher,  as operator,  to charge a reasonable  fee for G&A related to
          the time required to administer this project on a mutually  acceptable
          basis.

     If the terms as  outlined  above are  satisfactory,  please so  indicate by
signing below in the space  provided and return one copy of this agreement to my
attention.  Thank you for your time and consideration of this matter. Should you
have any questions, please advise.

                                         Sincerely,

                                         FANCHER RESOURCES, LLC

                                         /s/ George H. Fancher Jr.
                                         George H. Fancher Jr.
GHF:jh
enclosures

                                         AGREED TO AND ACCEPTED THIS
                                         1ST  DAY OF OCTOBER, 1998.

                                         FAN ENERGY INC.

                                         By /s/ Jeff Scott
                                            ----------------------------------
                                            Jeff Scott, Director