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                                                                   EXHIBIT 10.42


                          PRODUCTION PAYMENT CONVEYANCE
                               (DRILLING PROGRAM)

         THIS PRODUCTION PAYMENT CONVEYANCE (this "Conveyance"), dated as of
the date set out at the end hereof, is made from and by TransTexas Gas
Corporation, a Delaware corporation (herein called "Grantor") to and in favor of
TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. and TCW DR VI
Investment Partnership, L.P. (herein collectively called "Grantee").

                                    ARTICLE I

         Section 1.1. Defined Terms. When used in this Conveyance or in any
exhibit or schedule hereto (unless otherwise defined in any such exhibit or
schedule), the following terms have the respective meanings assigned to them in
this section or in the sections, subsections, exhibits and schedules referred to
below:

         "Affiliate" means, with respect to any Person: (a) any other Person
directly or indirectly owning, controlling or holding with power to vote 10% or
more of the outstanding voting securities of such Person, (b) any other Person
10% or more of whose outstanding voting securities are directly or indirectly
owned, controlled or held with power to vote by such Person, and (c) any other
Person directly or indirectly controlling, controlled by or under common control
with such Person; provided that, "Affiliate" also means, with respect to
Grantee, (a) any of the Beneficiaries, (b) any trustee, general partner,
investment manager, custodian, custodial agent, or other fiduciary of or for
Fund V LP, Fund VI LP, or any Beneficiary, (c) Trust Company of the West, a
California trust company, and (d) TCW Asset Management Company, a California
corporation, whether acting as Agent or in any other capacity.

         "Agent" means the Person named as Agent in Section 8.7, acting in such
capacity, together with its successors and assigns in such capacity.

         "Agreed Rate" means a rate of interest of fifteen percent (15.0%) per
year, calculated on the basis of actual days elapsed and a year of 360 days.

         "Application Date" means the next-to-last Business Day of each calendar
month, starting with April 29, 1998. As used herein with respect to any
Application Period, the "related Application Date" means the Application Date
that occurs approximately one month after the end of such Application Period.
For example, if an Application Period ends at 7:00 a.m., Texas time, on March 1
and the next-to-last Business Day of such March is March 30, the related
Application Date is such March 30.

         "Application Period" means a period of time beginning at 7:00 a.m.,
Texas time, on the first day of any calendar month and ending at 7:00 a.m.,
Texas time, on the first day of the next succeeding calendar month. The first
Application Period will begin at the Initial Time and will end at 7:00 a.m.,
Texas time, on April 1, 1998. As used herein with respect to any

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Application Date, the "related Application Period" means the Application Period
immediately preceding (but not including) such Application Date. For example, if
an Application Date occurs on February 27, the related Application Period is the
one which ended at 7:00 a.m., Texas time, on the preceding February 1.

         "Assignable 331 Retained Interest" has the meaning given to such term
in Section 6.1.

         "Barrel" means 42 United States standard gallons of 231 cubic inches
per gallon at 60 degrees Fahrenheit.

         "Beneficiary" means any Person that at any time is a general or limited
partner in Fund V LP or in Fund VI LP or for whom any Person included within
Grantee is acting as investment manager, custodian or custodial agent.

         "British Thermal Unit" or "BTU" means the amount of energy required to
raise the temperature of one pound of pure water one degree Fahrenheit from 58.5
degrees Fahrenheit to 59.5 degrees Fahrenheit, as defined in the American Gas
Association Gas Measurement Manual and any subsequent revisions.

         "Business Day" means a day that is not a Saturday, a Sunday, a legal
holiday in Houston, Texas, or a legal holiday in Los Angeles, California.

         "Commercial Well" has the meaning given such term in Section 3.2(c).

         "Dedication Percentage" means (i) fifty-seven percent (57%) with
respect to the NRI Percentage for State Tract 331 and (ii) eighty percent (80%)
with respect to the NRI Percentage for each other portion of Subject Lands;
provided that the Dedication Percentage shall be adjusted upward (automatically,
without any need for an amendment hereto) from time to time as follows:

                  (a) from time to time, within ninety days after the then
         most-recent Regular Evaluation Date, but effective as of such then
         most-recent Regular Evaluation Date, the Dedication Percentage shall be
         adjusted upward in the event that the Reserve Report prepared as of
         such then most-recent Regular Evaluation Date reflects that the PPNPV
         of the proved developed producing reserves attributable to the
         Production Payment is less than 140% of the unliquidated balance of the
         Primary Sum as of such then most-recent Regular Evaluation Date, and
         the new Dedication Percentage (in this definition, the "Adjusted
         Dedication Percentage") shall, in the case of State Tract 331, be that
         percentage between 57% and a maximum of sixty-five percent (65%) and,
         in the case of all other Subject Lands, be that percentage between 80%
         and a maximum of ninety percent (90%), necessary to achieve, to the
         maximum extent possible, the level of 140% of the unliquidated balance
         of the Primary Sum, all as more particularly described in Section 5.2
         of the Purchase Agreement;

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                  (b) on and as of 7:00 a.m., Houston, Texas time, on January 1,
         2002, the Dedication Percentage shall be adjusted upward (assuming the
         Adjusted Dedication Percentage is then less than 65% for State Tract
         331 or less than 90% for all other Subject Lands) to 65% for State
         Tract 331 and 90% for all other Subject Lands, which shall remain the
         Dedication Percentage for the balance of the Production Payment Period;
         and

                  (c) the Dedication Percentage may be adjusted from time to
         time pursuant to Section 3.6 (but no such adjustment shall result in a
         Dedication Percentage in excess of 65% for State Tract 331 or in excess
         of 90% for all other Subject Lands).

         "Delivery Charges" means the actual costs, if any, incurred by Grantee
for separating, gathering, compressing, treating, or Processing PP Hydrocarbons
prior to a Delivery Point or of transporting PP Hydrocarbons to a Delivery Point
in a condition satisfactory to meet pipeline specifications and qualifications
at such Delivery Point (net of any revenues received by Grantee in connection
with any such Processing, to the extent that such revenues are not included in
PP Proceeds).

         "Delivery Point" means (a) as of the Initial Time, for each field
listed on Schedule 2 hereto, the Delivery Point specified for such field on such
Schedule, or (b) such other delivery point or points in the vicinity of such
field hereafter from time to time designated by Grantee at which Gas from the
Subject Interests in such field is (or reasonably could be, without any
additional capital expenditures) sold to a third party or delivered into a
pipeline for transportation to a market point. Unless otherwise agreed by
Grantor, any designation by Grantee of a new Delivery Point shall become
effective one month after the first day of the next succeeding Application
Period.

         "Delivery Services" has the meaning given such term in Section 2.5.

         "Designated Event" has the meaning given such term in the Purchase
Agreement.

         "Direct Taxes" means all ad valorem, property, gathering,
transportation, pipeline regulating, gross receipts, severance, production,
excise, heating content, carbon, value, value added, environmental, occupation,
franchise, sales, use, fuel, and other taxes and governmental charges and
assessments imposed on or as a result of all or any part of the Subject
Interests, the Hydrocarbons produced from Subject Interests or the proceeds
thereof, the Production Payment, or the PP Hydrocarbons or the proceeds thereof,
regardless of the point at which or the manner in which such taxes, charges or
assessments are charged, collected, levied or otherwise imposed. The only taxes
which are not Direct Taxes are federal income taxes, state income taxes, and
franchise taxes levied against Grantee or the Beneficiaries and any other taxes
levied against the overall net income of Grantee or the Beneficiaries (including
interest, penalties and withholding obligations owing to governmental
authorities with respect to such income or franchise taxes). Interest, penalties
and withholding obligations owing to governmental authorities with respect to
any Direct Taxes shall constitute "Direct Taxes".

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         "economically feasible" has the meaning given such term in Section
3.2(c).

         "Environmental Laws" means all applicable local, state or federal laws,
rules, regulations, or orders regulating or otherwise pertaining to (a) the use,
generation, migration, storage, removal, treatment, remedy, discharge, release,
transportation, disposal or cleanup of pollutants, contamination, hazardous
wastes, hazardous substances, hazardous materials, toxic substances or toxic
pollutants, (b) the soil, surface waters, groundwater, land, stream sediments,
surface or subsurface strata, ambient air and any other environmental medium on
or off any Subject Interest, or (c) the environment or health and safety-related
matters; including the following as from time to time amended and all others
whether similar or dissimilar and whether now existing or hereinafter enacted:
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended by the Superfund Amendments and Reauthorization Act of 1986,
the Resource observation and Recovery Act of 1976, as amended by the Used Oil
Recycling Act of 1980, the Solid Waste Disposal Act amendments of 1980, and the
Hazardous and Solid Waste Amendments of 1984, the Hazardous Materials
Transportation Act, as amended, the Toxic Substance Control Act, as amended, the
Clean Air Act, as amended, the Clean Water Act, as amended, and all regulations
promulgated pursuant thereto.

         "Expense Components" shall have the meaning given such term in Section
2.2.

         "Force Majeure" means (a) unavoidable interruption of Delivery Services
caused by catastrophic circumstances (such as freezing of wells or lines of
pipe) or (b) unavoidable or sudden mechanical difficulties relating to
performance of the Delivery Services; provided that Grantor shall not be
authorized as a reason for nonperformance, in part or in full, of the Delivery
Services, to claim an event of Force Majeure to the extent and beginning 24
hours after such time as Grantee has designated a new Delivery Point or Delivery
Points that allow Grantor the ability to perform or cause to be performed the
Delivery Services despite the event of Force Majeure.

         "Fund V LP" means TCW Portfolio No. 1555 DR V Sub-Custody Partnership,
L.P. and, unless the context in which used shall otherwise require, such term
shall also include any successor to it as owner at the time in question of any
or all of the Production Payment.

         "Fund VI LP" means TCW DR VI Investment Partnership, L.P. and, unless
the context in which used shall otherwise require, such term shall also include
any successor to it as owner at the time in question of any or all of the
Production Payment.

         "Gas" means natural gas and all other gaseous hydrocarbons, including
casinghead gas, whether or not such natural gas and other gaseous hydrocarbons
are Processed.

         "Grantee" means the Persons named in the preamble to this Conveyance as
the Grantee, and, unless the context in which used shall otherwise require, such
term shall also include any successor to any such Person as owner at the time in
question of any or all of the Production Payment.

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         "Grantor" means the Person named in the preamble of this Conveyance as
Grantor, and, unless the context in which used shall otherwise require, such
term means any successor-owner at the time in question of any or all of the
Subject Interests (other than the Production Payment or the Assignable 331
Retained Interests).

         "Guaranty" has the meaning given such term in the Purchase Agreement.

         "Hydrocarbons" means Oil and Gas.

         "Imbalance Charges" has the meaning given such term in Section 2.6(c).

         "Initial Time" means 7:00 a.m., Texas time, on the date hereof.

         "Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended from time to time, and any successor statute or statutes.

         "Lease Measuring Point" means, with respect to any particular Subject
Well, the point at which the BTU content of Gas included in PP Hydrocarbons
produced from such Subject Well is initially measured.

         "Mcf" means one thousand cubic feet.

         "MMBTU" means one million BTUs.

         "Non-Affiliate" means, with respect to any Person, any Person who is
not an Affiliate of such Person.

         "NRI Percentage" means, with respect to each portion of Subject Lands
described on Exhibit A, the percentage shown on Exhibit A as the "Net Revenue
Interest" for such portion of Subject Lands.

         "Oil" means crude oil, condensate, and other liquid hydrocarbons,
specifically to include condensate or other liquid hydrocarbons separated at the
surface (e.g., using conventional separators) but not to include the products of
Processing.

         "Percentage Share" means, with respect to each Person making up
Grantee, the fractional undivided interest which it owns in the Production
Payment at the time in question. At the initial grant of the Production Payment,
the Percentage Share of each Person making up Grantee is as follows:

<TABLE>
         <S>                        <C>
         Funds V LP                 66 2/3%
         Funds VI LP                33 1/3%
</TABLE>

         "Permitted Assigns" has the meaning given such term in Section 6.2.

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         "Permitted Encumbrances" has the meaning given such term in the
Purchase Agreement.

         "Person" means an individual, corporation, partnership, limited
liability company, association, joint stock company, trust or trustee thereof,
estate or executor thereof, unincorporated organization or joint venture, court
or governmental unit or any agency or subdivision thereof, or any other legally
recognizable entity.

         "PP Hydrocarbons" means the Dedication Percentage of the NRI Percentage
of all Hydrocarbons in and under and that may be produced from (or, to the
extent pooled or unitized, allocated to) any Subject Lands between the Initial
Time and the Termination Time.

         "PPNPV" has the meaning given such term in the Purchase Agreement.

         "PP Proceeds" means, for any particular Application Period, the total
dollar amount received by Grantee during or (to the extent not previously
applied) prior to such Application Period from sales of PP Hydrocarbons,
determined after deduction of all PP Severance Taxes (whether paid before or
after receipt by Grantee).

         "PP Severance Taxes" means all severance taxes actually attributable to
the PP Hydrocarbons, taking into account any applicable credits, rebates and
other factors.

         "Primary Sum" means the sum of $27,701,170 (as such sum may be
increased from time to time by amendments or supplements hereto), and at any
time the "unliquidated balance of the Primary Sum" shall be the Primary Sum plus
the aggregate amounts which have been added thereto pursuant to Section 2.3(a),
less the aggregate amount of PP Proceeds which have been applied thereto at or
before such time pursuant to Section 2.3(a)(ii), and less any reductions under
Section 2.3(b).

         "Processing" or "Processed" means to manufacture, fractionate or refine
Subject Hydrocarbons or otherwise to engage in any process designed to remove
elements (hydrocarbons or nonhydrocarbons) from Gas, but such terms do not mean
or include natural pressure reduction, the use of normal lease or well equipment
or other normal operations on or near any of the Subject Interests (such as the
use on or near the lease -- or, in the case of any offshore or near-shore wells,
at or near the landfall of the connecting pipeline -- of dehydrators, gas
treating facilities, separators, heater-treaters, lease compression facilities,
injection or recycling equipment, tank batteries, field gathering systems,
pipelines and equipment and so forth). References to Hydrocarbons which are
"Processed" (including the reference thereto contained in the definition of Gas)
refer both to the natural gas liquids and other products of Processing and to
the residue gas and other hydrocarbons remaining after such operations.

         "Production Payment" means the term overriding royalty which is granted
herein to Grantee, and all other rights, titles, interests, estates, remedies,
powers and privileges appurtenant or incident to such term overriding royalty,
whether hereunder, under the Purchase Agreement, by operation of law, or
otherwise.

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         "Production Payment Documents" has the meaning given such term in the
Purchase Agreement.

         "Production Payment Period" means the period from and after the Initial
Time until the Termination Time.

         "Purchase Agreement" means the Purchase Agreement of even date herewith
between Grantor and Grantee, as from time to time amended or supplemented.

         "Regular Evaluation Date" has the meaning given such term in the
Purchase Agreement.

         "Reimbursable Expenses" means all costs and expenses paid or incurred
by or on behalf of Grantee or its Affiliates which are in any way related to:
(a) the negotiation, acquisition, ownership, enforcement, or termination of the
Production Payment, this Conveyance, the other Production Payment Documents, or
any waivers or amendments hereto or thereto, or (b) any litigation, contest,
release or discharge of any adverse claim or demand made or proceeding
instituted by any Person affecting in any manner whatsoever the Production
Payment, any PP Hydrocarbons or PP Proceeds, this Conveyance or the other
Production Payment Document, or the enforcement or defense hereof or thereof, or
the defense of Grantee's and its Affiliates' exercise of their rights hereunder
or thereunder. Included among the Reimbursable Expenses are (i) all recording
and filing fees, (ii) all reasonable fees and expenses of counsel, engineers,
accountants and other consultants, experts and advisors for Grantee and its
Affiliates, (iii) all reasonable travel and other out of pocket expenses of the
consultants, experts and advisors of Grantee and its Affiliates, and (iv) all
amounts which Grantee is entitled to receive under Section 4.1 or 5.1 hereof.
Notwithstanding the foregoing, Reimbursable Expenses shall not include expenses
associated with third party claims (1) relating to title to the Production
Payment, to the extent such claims arise solely due to the actions of Grantee or
its Affiliates, or (2) that arise solely out of the failure by Grantee to
perform its obligations under any contractual arrangement entered into directly
by Grantee pursuant to Section 2.6 (a) hereof.

         "Reserve Report" means each reserve report to be delivered by Grantor
pursuant to Section 5.1 of the Purchase Agreement.

         "Retained Interests" means the interests retained by Grantor in the
Subject Interests after conveyance of the Production Payment hereunder.

         "Separation Point" means the point at which lease level separation of
Oil takes place.

         "State Tract 331" means the State of Texas' Galveston Bay Tract 331
that is subject to the State of Texas Oil and Gas Lease No. M-97211 that is
described in Exhibit A hereto.

         "Subject Hydrocarbons" means that portion of the Hydrocarbons in and
under and that may be produced from (or, to the extent pooled or unitized,
allocated to) Subject Lands which is attributable (after deducting all
royalties, overriding royalties, production payments and

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similar burdens, excluding only the Production Payment, which both burden the
Subject Interests at the Initial Time and are reflected in the Net Revenue
Interest figures set out on Exhibit A) to the Subject Interests.

         "Subject Interests" means:

                  (a) All of the leasehold interests and other property
         interests described in Exhibit A attached hereto; and

                  (b) Without limitation of the foregoing, all other right,
         title and interest (of whatever kind or character, whether legal or
         equitable and whether vested or contingent) of Grantor in and to the
         oil, gas and other minerals in and under or that may be produced from
         Subject Lands (including interests in oil, gas or mineral leases to the
         extent the same cover such lands, overriding royalties, production
         payments and net profits interests in such lands or such leases, and
         fee mineral interests, fee royalty interests and other interests in
         such oil, gas and other minerals) even though Grantor's interest in
         such oil, gas and other minerals may be incorrectly described in, or
         omitted from, Exhibit A; and

                  (c) All rights, titles and interests of Grantor in and to, or
         otherwise derived from, all presently existing and valid oil, gas or
         mineral unitization, pooling, or communitization agreements,
         declarations or orders and in and to the properties covered and the
         units created thereby (including all units formed under orders, rules,
         regulations, or other official acts of any federal, state, or other
         authority having jurisdiction, voluntary unitization agreements,
         designations or declarations, and so-called "working interest units"
         created under operating agreements or otherwise) relating to the
         properties described in subsections (a) or (b) above in this
         definition.

         "Subject Lands" means the lands and depths described in Exhibit A
(where no depth limit is specified, Subject Lands shall include all depths).

         "Subject Wells" means all wells now located on the Subject Lands
(whether fully drilled and completed or not) or hereafter drilled on the Subject
Lands, and (unless production therefrom is expressly excluded by the terms of
the descriptions on Exhibit A) any other wells now or hereafter located on lands
or leases pooled, communitized or unitized with the Subject Interests.

         "Termination Time" has the meaning assigned to it in Section 2.9.

         "Total Sum" has the meaning assigned to it in Section 2.2.

         Section 1.2. Rules of Construction. All references in this Conveyance
to articles, sections, subsections and other subdivisions refer to corresponding
articles, sections, subsections and other subdivisions of this Conveyance unless
expressly provided otherwise. Titles appearing at the beginning of any of such
subdivisions are for convenience only and shall not constitute part of such
subdivisions and shall be disregarded in construing the

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language contained in such subdivisions. The words "this Conveyance", "this
instrument", "herein", "hereof", "hereunder"' and words of similar import refer
to this Conveyance as a whole and not to any particular subdivision unless
expressly so limited. Unless the context otherwise requires: "including" and its
grammatical variations mean "including without limitation"; "or" is not
exclusive; words in the singular form shall be construed to include the plural
and vice versa; words in any gender include all other genders; references herein
to any instrument or agreement refer to such instrument or agreement as it may
be from time to time amended or supplemented; and references herein to any
Person include such Person's successors and assigns. All references in this
Conveyance to exhibits and schedules refer to exhibits and schedules to this
Conveyance unless expressly provided otherwise, and all such exhibits and
schedules are hereby incorporated herein by reference and made a part hereof for
all purposes.

                                   ARTICLE II

         Section 2.1. Conveyance. Grantor does hereby GRANT, BARGAIN, SELL,
CONVEY, ASSIGN, TRANSFER, SET OVER AND DELIVER unto Grantee, as a production
payment, to be held in undivided interests in proportion to their Percentage
Shares, a term overriding royalty interest carved out of and burdening the
Subject Interests equal to and measured by all PP Hydrocarbons in and under and
that may be produced from (or, to the extent pooled or unitized, allocated to)
the Subject Lands, with such production payment to terminate as of the
Termination Time.

         TO HAVE AND TO HOLD the Production Payment unto Grantee, its successors
and Permitted Assigns, until the Termination Time.

         Section 2.2. Amount and Term. The Production Payment shall continue and
remain in full force and effect until the receipt and realization by Grantee
from PP Proceeds of the aggregate sum of the amounts specified in the following
subsections of this Section 2.2 (herein collectively called the "Total Sum"):

                  (a)  the full amount of the Primary Sum; plus

                  (b) an amount equal to the interest which would accrue at the
         Agreed Rate on the unliquidated balance of the Primary Sum outstanding
         during the period from the Initial Closing Date (as defined in the
         Purchase Agreement) to but not including the first Application Date,
         and thereafter during each period from and including one Application
         Date to but not including the next occurring Application Date, if the
         unliquidated balance of the Primary Sum were to bear such interest;
         plus

                  (c) an amount equal to all Direct Taxes (other than PP
         Severance Taxes), to the extent such Direct Taxes are paid by Grantee
         or Beneficiaries should Grantor fail to promptly pay the same as
         required by Section 2.4, together with an additional amount equal to
         interest on the amount so paid computed at the Agreed Rate from and
         including the date Grantee or Beneficiaries pay such Direct Taxes to
         but not including the earlier of the date such Direct Taxes are either
         reimbursed by Grantor or paid by

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         the application of PP Proceeds under Section 2.3(a) or added to the
         unliquidated balance of the Primary Sum under Section 2.3(a); plus

                  (d) an amount equal to all Reimbursable Expenses to the extent
         paid by Grantee or Beneficiaries should Grantor fail to promptly pay
         the same as required by Section 2.4, together with an additional amount
         equal to interest on the amount so paid computed at the Agreed Rate
         from and including the date Grantee or Beneficiaries pay such
         Reimbursable Expenses to but not including the earlier of the date such
         Reimbursable Expenses are either reimbursed by Grantor or paid by the
         application of PP Proceeds under Section 2.3(a) or added to the
         unliquidated balance of the Primary Sum pursuant to Section 2.3(a);
         plus

                  (e) an amount equal to all Delivery Charges to the extent paid
         by Grantee or Beneficiaries should Grantor fail to promptly pay same as
         required by Section 2.4, together with an additional amount equal to
         interest on the amount so paid, computed at the Agreed Rate from and
         including the date Grantee or Beneficiaries pay such Delivery Charges
         to but not including the earlier of the date such Delivery Charges are
         either reimbursed by Grantor or paid by the application of PP Proceeds
         under Section 2.3(a) or added to the unliquidated balance of the
         Primary Sum pursuant to Section 2.3(a).

The amounts (including interest) referred to in subsections (c), (d) and (e) of
this section are herein collectively called the "Expense Components".

         Section 2.3.  Application of PP Proceeds.

         (a) On each Application Date, all PP Proceeds that have actually been
received by Grantee (whether from the purchasers of PP Hydrocarbons or from
Grantor as provided in Section 2.10) in immediately available funds prior to
noon, Los Angeles time, on such Application Date, shall, to the extent not
previously applied, be applied as follows to the Total Sum:

                  (i) First, to the amounts described in subsections (b), (c),
         (d) and (e) of Section 2.2; and

                  (ii) Second, to the reduction of the unliquidated balance of
         the Primary Sum.

If PP Proceeds applied on any Application Date are insufficient to cover the
full amounts specified in the foregoing subsection (i) of this subsection (a),
then such unrecovered amounts shall be added to the unliquidated balance of the
Primary Sum.

         (b) Neither the actual or potential application of PP Proceeds to
Expense Components shall release Grantor from its obligations to make any
payments or reimbursements of Expense Components required under Section 2.4, but
if any PP Proceeds are actually applied to Expense Components or added to the
unliquidated balance of the Primary Sum pursuant to the preceding subsection (a)
and if such Expense Components (including interest thereon) are

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thereafter paid or reimbursed by Grantor, then on the next occurring Application
Date the unliquidated balance of the Primary Sum shall be reduced by the amounts
so paid or reimbursed by Grantor.

         Section 2.4. Non-Cost-Bearing Interest. The Production Payment shall be
free and clear of (a) all Direct Taxes, other than PP Severance Taxes, (b) all
costs and expenses associated with acquiring, exploring, developing,
maintaining, producing, operating, reworking, recompleting, and remediating the
Subject Interests, and (c) all Delivery Charges. All Direct Taxes (other than PP
Severance Taxes), all such other costs and expenses, and all Delivery Charges
shall be borne by the Retained Interests and paid by Grantor promptly, on or
before the dates the same become due and owing. In addition, Grantor will
promptly (and in any event within 30 days after receiving any notice or
statement for the same) pay all Reimbursable Expenses which have been incurred
and are unpaid and reimburse Grantee or Beneficiaries for any Reimbursable
Expenses which have been paid by Grantee or Beneficiaries. Each amount which is
to be paid by Grantor pursuant to this Section 2.4 which is instead paid by
Grantee or Beneficiaries shall bear interest at the Agreed Rate on each day from
and including the date of such payment until but not including the date repaid
by Grantor.

         Section 2.5.  Delivery Services.

         (a) Expected Deliveries. To the extent not prevented by Force Majeure,
Grantor shall deliver, or cause to be delivered, all PP Hydrocarbons
constituting Gas to the relevant Delivery Point in a condition satisfactory to
meet or exceed pipeline specifications and qualifications at such Delivery Point
and will deliver all PP Hydrocarbons constituting Oil at the points at which the
Grantor delivers Oil from the same Subject Interests into third party pipelines
or to third party transporters or, if requested by Grantee, at one or more other
points of sale reasonably convenient to both Grantor and Grantee. All tasks
required to make such delivery (whether gathering, treating, separating,
compressing, Processing, transporting, or otherwise) are herein called the
"Delivery Services". All Delivery Services, whether performed by Grantor or by
any other Person, shall be performed without any cost or charge to Grantee,
whether incurred or assessed by Grantor or any other Person, and all costs so
incurred or assessed shall be borne and paid by Grantor as provided in Section
2.4. The Delivery Services shall be provided to Grantee on a first priority
basis, to the extent permitted by law and applicable contracts (meaning, for
example, that (A) pipeline and compressor capacity, if owned or controlled by
Grantor or any Affiliate of Grantor, shall be afforded to Subject Hydrocarbons
prior to affording any such capacity to Grantor, any Affiliates of Grantor or
any other Person with respect to any other Hydrocarbons, and (B) pipeline and
compressor capacity owned or controlled by any Person other than Grantor or any
Affiliate of Grantor shall be afforded to Subject Hydrocarbons prior to
affording any such capacity to Grantor or any Affiliate of Grantor with respect
to any other Hydrocarbons), and Grantor hereby expressly subordinates any
capacity rights it may now or hereafter have to the PP Hydrocarbons. Grantor
shall, to the extent permitted by law and applicable contracts, take whatever
action is appropriate to cause any Affiliate of Grantor or any other Person to
afford Subject Hydrocarbons the priority capacity described in this subsection
(a), including assigning to Grantee, upon Grantee's request following failure by
Grantor to provide Delivery Services


                                       11

<PAGE>   12

as required hereunder, any capacity rights Grantor may have under assignable
contracts or other arrangements with an Affiliate or any other Person as may be
necessary or useful to facilitate delivery of PP Hydrocarbons to each Delivery
Point in a condition satisfactory to meet or exceed pipeline specifications or
qualifications at such Delivery Point.

         (b) Excess Deliveries. If at any time Grantor delivers to Grantee PP
Hydrocarbons in excess of the amount of PP Hydrocarbons required to be delivered
to Grantee hereunder, the amount of such excess delivery shall not be returned
by Grantee but shall instead be deemed an early delivery by Grantor of future PP
Hydrocarbons and shall be considered as fully and finally delivered to Grantee
for all purposes hereunder on the date received by Grantee; provided that if any
Hydrocarbons are delivered hereunder to Grantee following the termination hereof
the proceeds of such Hydrocarbons shall be paid to Grantor.

         Section 2.6.  Marketing of PP Hydrocarbons by Grantee.

         (a) Marketing by Grantee. Grantee shall take possession of all of the
PP Hydrocarbons at the applicable Delivery Points and shall thereafter market
and sell such PP Hydrocarbons for its own account. Grantor shall take such
actions (including executing all division orders, transfer orders, instructions
in lieu thereof and other additional instruments) as are necessary or
appropriate to achieve such results, and Grantor will cooperate with Grantee in
instructing all purchasers of such PP Hydrocarbons to pay the proceeds thereof
directly to Grantee and shall execute such additional instruments (including
division orders, transfer orders and instructions in lieu thereof) as may be
requested by Grantee in connection therewith. If payment for any PP Hydrocarbons
is nonetheless made to Grantor for any reason, all amounts so paid to Grantor
shall be held in trust by Grantor for Grantee and Grantor shall immediately pay
over such proceeds, in the form received, to Grantee (but without recourse to
Grantor on any proper endorsement by Grantor to Grantee). Grantor shall not
enter into any contracts or other arrangements for the sale, transportation,
gathering, Processing or other marketing of Subject Hydrocarbons which would
interfere with Grantee's rights under this Section 2.6 to take possession of and
market the PP Hydrocarbons, free and clear of such contracts or other
arrangements.

         (b) Cooperation and Assistance. Grantee and Grantor will each be taking
quantities of Hydrocarbons from the Subject Interests, and Grantor and Grantee
recognize that coordination between Grantee and Grantor will be required with
respect thereto. Grantor agrees to cooperate with, and assist, Grantee in
connection with Grantee's receipt and sale of PP Hydrocarbons. Without
limitation of the foregoing:

                  (i) Not less than 10 days prior to the first day of each
         Application Period, Grantor will notify Grantee or its authorized
         representatives or direct purchasers, in writing, of the total amounts
         and average daily amounts of Gas and Oil which Grantor expects to be
         produced from the Subject Interests during such Application Period and
         the portion thereof which Grantor projects will be PP Hydrocarbons.

                  (ii) To the extent reasonably practicable, Grantor shall
         thereafter immediately (but in no event more than once weekly) notify
         Grantee or its authorized


                                       12

<PAGE>   13

         representatives or direct purchasers, in writing, of any change in the
         rate of delivery of PP Hydrocarbons from the Subject Interests that has
         come to the attention of Grantor.

                  (iii) Grantor and Grantee will cooperate to ensure that
         nominations to transporters and purchasers are timely made and that
         such nominations reflect expected deliveries from the various Subject
         Interests, and Grantee and its authorized representatives shall be
         entitled to rely upon Grantor's projections for the purpose of
         scheduling deliveries with transporters and purchasers. In no event
         shall Grantor be responsible for the failure, through no fault of
         Grantor, of such transporters or purchasers to fulfill their
         obligations under the relevant arrangements.

Should Grantee so request, Grantor will furnish the information provided for
above and will make nominations and schedule deliveries in conjunction with
Grantee (and make any revisions to such nominations and reschedule deliveries in
conjunction with Grantee) for PP Hydrocarbons (in the form and at the times
required by such Persons), directly to the Persons purchasing or transporting PP
Hydrocarbons for Grantee. Grantor and Grantee acknowledge to each other that
concurrently herewith Grantee and Grantor are entering into the Gas Sales
Agreement and the Oil Sales Agreement referred to in the Purchase Agreement,
under which Grantor is Grantee's purchaser of PP Hydrocarbons, and that to the
extent Grantor (or any future Purchasing Subsidiary of Grantor) is the purchaser
of PP Hydrocarbons there is no need for Grantor to furnish information and make
or revise nominations to itself (or such Purchasing Subsidiary).

         (c) Responsibility. If, after the foregoing Gas Sales Agreement and Oil
Sales Agreement have terminated, any charges, costs, penalties or expenses are
incurred or payable to any Person solely as a result of Grantee's failure to
adjust nominations or scheduled deliveries in accordance with (i) a notification
from Grantor to Grantee of any increase or decrease in quantities to be
delivered from any Subject Well, or (ii) a notification from Grantee's direct
purchaser of any increase or decrease in quantities to be delivered at Delivery
Points, where it was reasonably possible for Grantee to make such adjustment
without penalty, then, as between the parties hereto, Grantee shall be liable
for and shall hold Grantor harmless from any such charges, costs, penalties or
expenses. If any such charges, costs, penalties or expenses (the "Imbalance
Charges") are incurred or payable to any Person other than in the circumstances
provided for in the preceding sentence (including charges, costs, penalties or
expenses caused by failure to deliver projected quantities or failure to provide
notice of changes in deliveries, or charges, costs, penalties or expenses
incurred when Grantor is making nominations, or revisions to nominations, on
behalf of Grantee, as provided for in the next-to-last sentence of Section
2.6(b)), then, as between the parties hereto, Grantor shall be liable for and
shall indemnify and hold Grantee harmless for such Imbalance Charges. Each of
Grantor and Grantee shall promptly notify the other of any notice received by it
from any third party which indicates that an imbalance in deliveries exists or
is occurring that may give rise to any such Imbalance Charges.

         Section 2.7. Measurement: Hydrocarbons Lost or Used. As used in this
Conveyance, the term "Hydrocarbons" shall not include Oil or Gas produced from
any particular Subject Well which are unavoidably lost in the production thereof
or in the compression or


                                       13

<PAGE>   14

transportation thereof prior to the Lease Measuring Point for such Subject Well,
or which are used by Grantor or the operator of any Subject Well for the
production of Subject Hydrocarbons or for the compression or transportation of
Subject Hydrocarbons prior to the Lease Measuring Point for such Subject Well,
in each case only to the extent the same are lost or used in the course of
operations which are being conducted prudently and in a good and workmanlike
manner. Grantor hereby represents, warrants and covenants to Grantee as follows:
(a) the Lease Measuring Point applicable to each Subject Well is and will
continue to be located at a point prior to any point where Gas from such Subject
Well is commingled with Gas or any other Hydrocarbons from any other well or
wells, (b) Grantor currently meters, and will continue to meter, Gas from each
Subject Well separately (i.e., on a well-by-well basis), (c) the volumes
(measured in Mcfs) of PP Hydrocarbons constituting Gas produced from or out of
any particular Subject Well are measured and determined, and will continue to be
measured and determined at the Lease Measuring Point applicable to such Subject
Well, and (d) the Separation Point for each Subject Well is and will continue to
be upstream of the Lease Measuring Point for such Subject Well. Grantor
covenants and agrees to determine the number of MMBTUs in each Mcf of Gas
included in PP Hydrocarbons at the Lease Measuring Points.

         Section 2.8. No Proportionate Reduction. It is understood and agreed
that, though the Production Payment is conveyed by Grantor to Grantee out of the
Subject Interests, the Production Payment shall be equal to the full Dedication
Percentage in effect from time to time of the NRI Percentage of the Hydrocarbons
produced from (or, to the extent pooled or unitized, allocated to) the various
Subject Lands and shall not be reduced for any reason. Among other things, the
Production Payment and the PP Hydrocarbons shall not be reduced due to (a) the
undivided interest owned by Grantor in a lease constituting any Subject
Interests being less than the entire interest in such lease, or (b) the interest
in Oil, Gas or other minerals underlying any portion of the Subject Lands which
is covered by a particular lease (or group of leases) being less than the entire
interest in the oil, gas and other minerals underlying such portion of the
Subject Lands, or (c) the share of production from (or, to the extent pooled or
unitized, allocated to) any portion of Subject Lands which is attributable to
the Subject Interests being less than the NRI Percentage set forth on Exhibit A
for such portion of the Subject Lands, or (d) Grantor's failure to own, or
otherwise have good title to, all or any part of the Subject Interests as
described on Exhibit A.

         Section 2.9. Termination. The Production Payment shall remain in full
force and effect until the time (herein called the "Termination Time") when the
full aggregate amount of the Total Sum, together with all reimbursements,
indemnities, restitutions, and other payments required hereunder, have been
received by Grantee as provided herein. At the Termination Time, all rights,
titles and interests herein conveyed in and to any Hydrocarbons thereafter
produced shall automatically terminate and vest in Grantor, and, upon request by
Grantor, Grantee shall execute and deliver such instrument or instruments (in
proper recordable form, if applicable) as may be necessary to evidence such
termination of the Production Payment; provided that, notwithstanding the
foregoing or anything herein to the contrary, any and all obligations which any
Person may have to indemnify or reimburse Grantee or its Affiliates for any
reason, or to make payments to Grantee or its Affiliates on account of PP
Hydrocarbons produced before the Termination Time, shall survive any termination
of the Production


                                       14

<PAGE>   15

Payment. No pipeline company or other Person purchasing, taking, or processing
PP Hydrocarbons shall ever be required to take notice of, or keep informed
concerning, the termination of the Production Payment, until actual receipt of
written notice from Grantee confirming that such termination has occurred, which
Grantee agrees to deliver with reasonable promptness upon request of Grantor.

         Section 2.10. Payment Mechanics. All PP Proceeds received by Grantor
(instead of directly by Grantee) in any Application Period shall be paid by
Grantor to Grantee, prior to noon, Los Angeles time, on the related Application
Date. No PP Proceeds (whether paid by Grantor or any other Person) shall be
deemed received by Grantee or applied to the Production Payment until such PP
Proceeds have been so received by Grantee's bank or collection agent in
immediately available funds for the account of Grantee. Grantor will make each
payment which it owes under this Conveyance (except for payments made pursuant
to Section 2.6(a), which shall be made as provided therein) in immediately
available funds received at or before noon, Los Angeles time, on the date
specified for the payment thereof, and all such payments by Grantor will
otherwise be made in accordance with the procedures set out in Section 2.6 of
the Purchase Agreement.

                                   ARTICLE III

         Section 3.1. Operations. As between Grantee and Grantor, Grantor shall
have exclusive charge, management and control of all operations to be conducted
on the Subject Interests. Grantor shall take or cause to be taken any and all
actions that a prudent operator would deem necessary in the operation,
maintenance and management thereof and in the production, handling, treating and
transportation of Hydrocarbons produced therefrom and shall otherwise act in
accordance with its customary practices; in doing the foregoing Grantor shall
not take into account the diminution in Grantor's share of production from the
Subject Interests caused by the granting of the Production Payment and Grantor
shall make its economic decisions as if Grantor owned the full interest in the
Subject Interests undiminished by the Production Payment. Except as expressly
provided in subsection (e) below or as provided in Section 4.3(j) of the
Purchase Agreement, and notwithstanding any other provision hereof to the
contrary, during the Production Payment Period Grantor shall not conduct any
exploratory activities, development drilling of new wells, or redrilling or
deepening of existing wells on the Subject Lands and nothing in this Conveyance
shall impose upon Grantor any express or implied obligation to conduct any
exploration activities, development drilling of new wells or redrilling or
deepening of Existing Wells on the Subject Lands. Without limitation of the
foregoing, Grantor shall:

                  (a) operate and maintain the Subject Interests in material
         conformity with all applicable laws and all rules, regulations and
         orders of all duly constituted authorities having jurisdiction
         (including all Environmental Laws) and in conformity with all leases
         and other contracts and agreements forming a part of or relating to the
         Subject Interests;

                  (b) promptly pay all costs and expenses (including all Direct
         Taxes and all costs, expenses and liabilities for labor, materials and
         equipment incurred in connection


                                       15

<PAGE>   16

         with the Subject Interests and all obligations to the holders of
         lessors' interests, royalty interests and other interests affecting the
         Subject Interests) incurred in exploring, developing, operating and
         maintaining the Subject Interests or in producing, handling, treating
         and transporting Hydrocarbons produced therefrom, (except to the extent
         that (i) Grantor is contesting any such costs and expenses in good
         faith by appropriate proceedings, (ii) Grantor has reserved adequate
         funds for the payment thereof, and (iii) if any such costs and expenses
         are owed to any lessor of any lease under which any of the Subject
         Interests are held, failure to win such contest would not result in
         termination or cancellation of such lease);

                  (c) maintain in full force and effect, free of any right of
         cancellation, forfeiture or termination, the Subject Interests, as well
         as all material permits, licenses, easements, servitudes and other
         rights necessary or useful in connection with the operation or
         management of the Subject Interests or providing the Delivery Services;

                  (d) maintain in good working order and, to the extent
         necessary, repair and replace, each Subject Well and the equipment
         needed for production therefrom, and all separation, metering and
         related facilities that are located on each Lease Measuring Point or
         Separation Point; and

                  (e) except for the Doornbos #1 well and the Barrow Ranch #1
         well or as otherwise agreed in writing by Grantee, complete each
         Subject Well and properly equip it for production (as used herein, the
         term "complete" includes, without limitation, casing, testing,
         perforating, fracturing, shooting, acidizing or otherwise stimulating
         and, if testing indicates that such Subject Well would constitute a
         Commercial Well, physically connecting such Subject Well to a pipeline
         or other outlet).

As to any of the Subject Interests of which Grantor is now, or hereafter
becomes, the operator, Grantor will not resign, or otherwise voluntarily
relinquish, its position as operator, except when an assignee of Grantor under a
transaction authorized under subsection 6.1(c) becomes operator. As to any
matters which Grantor does not control because Grantor is not at that time the
operator of a part of Subject Interests, Grantor shall exercise its full
contractual rights to cause the operator of such part of the Subject Interests
to take any and all actions as are required above.

         Section 3.2. Shut-in or Abandonment of Subject Wells; Abandonment of
Subject Interests.

         (a) Need for Consent. Until the termination of the Production Payment,
Grantor shall not, without first obtaining the consent of Grantee:

                  (i) abandon (or propose or consent to the abandonment of) any
         Subject Well (other than the Doornbos #1 well and the Barrow Ranch #1
         well), or surrender, abandon or release (or propose or consent to the
         surrender, abandonment or release of) any Subject Interest; provided,
         however, that after any Subject Well becomes a Commercial Well, Grantor
         may, without the consent of Grantee, abandon such Subject


                                       16

<PAGE>   17

         Well if and when such Subject Well ceases to be a Commercial Well and
         it would not be economically feasible (without regard to the burden of
         the Production Payment) to restore the productivity of such well by
         reworking, reconditioning, plugging back, or otherwise conducting
         operations with respect to such well (not to include redrilling or
         deepening of the well except as required in Section 4.3(j) of the
         Purchase Agreement).

                  (ii) voluntarily shut-in or restrict the flow from a Subject
         Well (or propose or consent to such a shut-in or restriction); provided
         that (1) a shut-in of, or restriction of flow from, a well shall not be
         deemed to be voluntarily made if it is caused by or results from
         governmental requirements, operation and maintenance requirements
         (which cannot be satisfied by actions taken with respect to other
         wells, which actions do not violate other contractual duties of
         Grantor), or sound reservoir management requirements, or from an act or
         event of Force Majeure which act or event is not reasonably within the
         control of and not caused by the fault or negligence of Grantor and
         which by the exercise of due diligence Grantor is unable to prevent or
         overcome, and (2) a Subject Well which has ceased to be a Commercial
         Well and can be abandoned under subsection (i) above may be shut-in
         pending such abandonment.

         (b) Reworking. Grantor shall comply with its redrilling obligations
under Section 4.1(j) of the Purchase Agreement. In addition, if, prior to the
termination of the Production Payment, a Subject Well that has become a
Commercial Well then ceases to be a Commercial Well and it would be economically
feasible (without regard to the burden of the Production Payment) to restore or
enhance the productivity of such well by reworking, reconditioning, plugging
back, or otherwise conducting operations relative to such well (not to include
redrilling or deepening of the well except as required in Section 4.3(j) of the
Purchase Agreement), Grantor shall take such action to restore or enhance the
productivity of such well.

         (c) Definitions of "Commercial Well" and "economically feasible". For
all purposes of this Conveyance:

                  (i) A well shall be deemed to be a "Commercial Well" unless
         and until there arises a condition, which reasonably appears to be
         permanent, such that the aggregate value of the Hydrocarbons which are
         being produced or which it reasonably appears will be produced from
         such well -- net of Direct Taxes and of royalties, overriding royalties
         and similar burdens reflected in the Net Revenue Interest figures set
         out on Exhibit A, but without regard to the burden of the Production
         Payment -- no longer exceeds the costs and expenses directly related to
         the operation and maintenance of such well.

                  (ii) The restoration of the productivity of a well shall be
         deemed to be "economically feasible" whenever the net present value,
         discounted at ten percent per annum, of the Hydrocarbons which it
         reasonably appears will be produced from such well -- net of Direct
         Taxes, of the costs of operating and maintaining such well (other than
         overhead charges), and of royalties, overriding royalties and similar
         burdens reflected in the Net Revenue Interest figures set out on
         Exhibit A, but without regard to


                                       17

<PAGE>   18



         the burden of the Production Payment -- exceeds the costs and expenses
         directly related to such restoration.

         Section 3.3. Renewals and Extensions and New Leases. This Conveyance
and the Production Payment shall apply to all renewals, extensions and other
similar arrangements of the leases (or other determinable interests) which are
included in the Subject Interests, whether such renewals, extensions or
arrangements have heretofore been obtained by Grantor or are hereafter obtained
by or for Grantor or any Affiliate thereof and whether or not the same are
described in Exhibit A. For the purposes of the preceding sentence, a new lease
that covers the same interest (or any part thereof) covered by a prior lease,
and which is acquired within one year after the expiration, termination, or
release of such prior lease, shall be treated as a renewal or extension of such
prior lease.

         Section 3.4. Adverse Claims. Grantor will, immediately after discovery
of such claim or demand, cause written notice to be given to Grantee of every
adverse claim or demand overtly threatened by any Person affecting the Subject
Interests or the Hydrocarbons produced therefrom in any manner whatsoever, or of
any proceedings instituted or threatened with respect thereto; and Grantor will
cause all necessary and proper steps to be diligently taken to protect and
defend the Subject Interests and such Hydrocarbons against any such adverse
claim or demand.

         Section 3.5. Insurance and Replacement. Grantor shall maintain or cause
to be maintained, at its sole cost and expense and with financially sound and
reputable insurers reasonably satisfactory to Grantee, insurance covering the
Subject Interests and all wells, equipment and facilities located thereon,
against such liabilities, casualties, risks and contingencies and in such types,
as is customary in the case of companies engaged in similar operations and
having similar property. Such insurance shall in any event include the types and
coverages described in Schedule 1, with limits of coverage no less than those
set out in such Schedule. All liability insurance shall name Grantee (and, if
Grantee so requests, each Beneficiary) as an additional insured. Grantor shall
furnish annual certificates of such insurance to Grantee not less than 30 days
prior to the expiration or termination of such policy of insurance. In the event
of any damage to or loss of any well, equipment or facility on the Subject
Interests, Grantor (at no cost to Grantee, and without regard to whether
insurance proceeds are available to Grantor) shall promptly redrill, rebuild,
reconstruct, repair, restore or replace such damaged or lost property, if such
action is economically feasible, as defined in Section 3.2(c).

         Section 3.6. Government Regulation. The obligations of Grantor
hereunder shall be subject to all applicable federal, state and local laws,
rules, regulations and orders (including those of any applicable agency, board,
official or commission having jurisdiction). Grantor shall timely make all
material filings with all applicable agencies, boards, officials and commissions
having jurisdiction with respect to the Subject Interests or the operation
thereof prior to or at the time any such filing becomes due. Should any statute,
or any rules or regulations of any governmental body, or any provisions in
private contracts (including those limiting the size of overriding royalties and
similar interests but excluding any contracts directly entered into by Grantee)
become applicable to the Subject Interests so as to limit the


                                       18

<PAGE>   19

portion of the Hydrocarbons produced from the lands covered by a particular
Subject Interest which may be attributable to the Production Payment, the
Production Payment shall, as to such Subject Interest and for the period of time
during which such statute, rule, regulation or contractual provision is
applicable, be limited to the maximum amount of production from such lands which
can be attributed to the Production Payment under such statute, rule, regulation
or contractual provision; provided, however, should such limitation come into
effect as to one or more Subject Interests, then (without prejudice to other
rights Grantee may have) the Dedication Percentage applicable to that portion of
production from (or, to the extent pooled or unitized, allocated to) Subject
Lands covered by other Subject Interests which would be attributable to the
Production Payment in the absence of the provisions of this subsection shall be
increased, up to a maximum of 65% in the case of State Tract 331 and up to a
maximum of 90% in each other case, so as to cause, to the maximum extent
possible, Grantee to receive, by virtue of ownership of the Production Payment,
the same amount of Hydrocarbons which Grantee would have received had the
aforementioned statute, rule, regulation or contractual provision not reduced
the share of production from the aforementioned Subject Interest with respect to
which the Production Payment could be paid. Unless and until the Dedication
Percentages are otherwise increased as provided herein and in the Purchase
Agreement, the foregoing increase in the Dedication Percentages shall remain in
effect only for so long as such limitation applies, and thereafter until Grantee
has received PP Hydrocarbons sufficient to reduce the unliquidated balance of
the Primary Sum to what it would have been had such limitation never existed.

         Section 3.7. Pooling and Unitization. Certain of the Subject Interests
may have been pooled or unitized for the production of Hydrocarbons prior to the
date hereof, and may, after the date hereof, be pooled or unitized (a) pursuant
to any law, rule, regulation or order of any governmental body or official, or
(b) voluntarily by Grantor with the consent of Grantee. To the extent certain
Subject Interests are so pooled or unitized, such Subject Interests are and
shall be subject to the terms and provisions of such pooling and unitization
agreements or orders.

         Section 3.8. Non-Consent Operations. Without the prior consent of
Grantee, Grantor shall not elect to be a non-participating party with respect to
any plugging back, reworking, sidetracking, completion, or other operation on
any Subject Interest (or lands pooled therewith), or (except in instances where
abandonment of such well would be permitted without Grantee's consent hereunder)
elect to be an abandoning party with respect to a well located on any Subject
Interest (or lands pooled therewith), if the consequence of such election is
that Grantor's interest in such Subject Interest or any part thereof is
temporarily (e.g., during a recoupment period) or permanently forfeited to the
parties participating in such operations or electing not to abandon such well.
Upon any such election by Grantor that is consented to by Grantee, such election
shall also be binding on the Production Payment as to the interest so
temporarily or permanently forfeited. Any additional interests acquired by
Grantor by virtue of electing to pay for or acquire the interest of a
non-consenting or abandoning party in a situation of the type described in the
preceding sentence shall not become a part of the Subject Interests or be
subject to the Production Payment.


                                       19

<PAGE>   20

         Section 3.9.  Future Gas Imbalances.

         (a) No Undertakes Without Consent. Without the prior consent of
Grantee, Grantor will not deliberately take (for itself and for Grantee) a
lesser share of Gas produced from a Subject Well than the share of Gas which
Grantor and Grantee are collectively entitled to take by virtue of ownership of
the Subject Interests (without regard to any rights to take a lesser share under
any production balancing agreement or other arrangement or any rights under
common law with respect to production balancing), except as a result of Grantor
and Grantee, or any predecessor in title to such Subject Interest, having
previously taken from such Subject Well or other wells located on Subject
Interests more Gas than such parties would be entitled to receive by virtue of
their ownership ("previous overproduction"), but only to the extent that the
amount of such previous overproduction occurred after the Initial Time or
occurred prior to the Initial Time and is disclosed in the Purchase Agreement.
If any such deliberate undertakes by Grantor occur in violation of this Section
3.9, the PP Hydrocarbons shall be determined (to the maximum extent allowed
under applicable law and any applicable Permitted Encumbrances) without regard
thereto. It is recognized, however, that due to differences between the
nominations by Grantor and its (and Grantee's) share of actual production and
differences between nominations by other owners of production and their shares
of actual production, minor instances of overproduction or underproduction will
frequently occur, and any such instances will not be deemed violations of this
Section 3.9.

         (b) Proportional Sharing in Overtakes. If, as permitted by applicable
contracts and laws, Grantor takes a greater share of the Gas produced from a
Subject Well than the share of Gas which Grantor is entitled to take by virtue
of ownership of the Subject Interests (such shares determined without regard to
the existence of the Production Payment), then Grantee shall be entitled to
share in such overproduction with Grantor in the same percentages that they
share in the normal production from such well (i.e., the production to which
they are entitled without regard to such overproduction).

         (c) No Balancing From Other Properties. Except to the extent, if any,
that a Subject Interest is subject to such a balancing arrangement before it
becomes subject to this Conveyance and such fact is disclosed to (and accepted
by) Grantee as an express exception to Section 4.1(k) of the Purchase Agreement,
Grantor will not allow any Subject Interest to be subject to any production
balancing arrangement under which one or more third Persons may take a portion
of the production attributable to such Subject Interest without payment (or
without full payment) therefor as a result of production having been taken from,
or as a result of other actions or inactions with respect to, properties other
than such Subject Interest.

                                   ARTICLE IV

         SECTION 4.1. NO LIABILITY OF GRANTEE; INDEMNITY. EXCEPT AS OTHERWISE
SPECIFICALLY PROVIDED IN THIS CONVEYANCE WITH RESPECT TO PP SEVERANCE TAXES,
GRANTEE SHALL NEVER BE RESPONSIBLE FOR ANY PART OF THE COSTS, EXPENSES OR
LIABILITIES INCURRED IN CONNECTION WITH THE EXPLORING, DEVELOPING, OPERATING,
OWNING, MAINTAINING, REWORKING OR RECOMPLETING OF THE SUBJECT INTERESTS OR
SUBJECT LANDS, THE PHYSICAL CONDITION


                                       20

<PAGE>   21

OF THE SUBJECT INTERESTS OR THE SUBJECT LANDS, OR THE HANDLING, TREATING OR
TRANSPORTING OF HYDROCARBONS PRODUCED FROM THE SUBJECT LANDS (INCLUDING ANY
COSTS, EXPENSES, LOSSES OR LIABILITIES RELATED TO VIOLATION OF AN ENVIRONMENTAL
LAW OR OTHERWISE RELATED TO DAMAGE TO OR REMEDIATION OF THE ENVIRONMENT, WHETHER
THE SAME ARISE OUT OF GRANTEE'S OWNERSHIP OF AN INTEREST IN PROPERTY OR OUT OF
THE ACTIONS OF GRANTOR OR GRANTEE OR OF THIRD PARTIES OR ARISE OTHERWISE), OR
THE FAILURE BY GRANTOR TO HAVE GOOD AND DEFENSIBLE TITLE TO THE SUBJECT
INTERESTS FREE AND CLEAR OF ALL BURDENS, ENCUMBRANCES, LIENS AND TITLE DEFECTS
OTHER THAN PERMITTED ENCUMBRANCES (INCLUDING ANY COSTS, EXPENSES, LOSSES OR
LIABILITIES SUFFERED BY GRANTEE AS A RESULT OF ANY CLAIM THAT GRANTEE MUST PAY
OVER TO ANY PERSON ANY PART OF THE PP PROCEEDS AT ANY TIME PREVIOUSLY RECEIVED
OR THEREAFTER TO BE RECEIVED BY GRANTEE), AND GRANTOR AGREES TO INDEMNIFY AND
HOLD GRANTEE HARMLESS FROM AND AGAINST ALL COSTS, EXPENSES, LOSSES AND
LIABILITIES INCURRED BY GRANTEE IN CONNECTION WITH ANY OF THE FOREGOING OR IN
CONNECTION WITH THE PRODUCTION PAYMENT, THE PURCHASE AGREEMENT, THIS CONVEYANCE,
ANY OTHER PRODUCTION PAYMENT DOCUMENT, OR THE TRANSACTIONS AND EVENTS (INCLUDING
THE ENFORCEMENT OR DEFENSE THEREOF OR HEREOF) AT ANY TIME ASSOCIATED WITH OR
CONTEMPLATED IN ANY OF THE FOREGOING. SUCH INDEMNITY SHALL ALSO COVER ALL COSTS
AND EXPENSES OF GRANTEE, INCLUDING REASONABLE LEGAL FEES AND EXPENSES, WHICH ARE
INCURRED INCIDENT TO THE MATTERS INDEMNIFIED AGAINST. AS USED IN THIS SECTION,
"GRANTEE" REFERS BOTH TO THE PERSONS NAMED AS GRANTEE AT THE BEGINNING OF THIS
CONVEYANCE AND TO AGENT AND THE BENEFICIARIES, AND THE FOREGOING INDEMNIFICATION
SHALL EXTEND TO AND BENEFIT GRANTEE AND GRANTEE'S SUCCESSORS AND ASSIGNS, ALL
THEIR RESPECTIVE AFFILIATES, AND ALL THE RESPECTIVE OFFICERS, DIRECTORS, AGENTS,
BENEFICIARIES, TRUSTEES, ATTORNEYS AND EMPLOYEES OF THEMSELVES AND THEIR
AFFILIATES.

THE FOREGOING INDEMNITY SHALL APPLY WHETHER OR NOT ARISING OUT OF THE SOLE,
JOINT OR CONCURRENT NEGLIGENCE, FAULT OR STRICT LIABILITY OF GRANTEE OR ANY
OTHER PERSON INDEMNIFIED


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<PAGE>   22

HEREUNDER AND SHALL APPLY, WITHOUT LIMITATION, TO ANY LIABILITY IMPOSED UPON ANY
PERSON INDEMNIFIED HEREUNDER AS A RESULT OF ANY STATUTE, RULE, REGULATION,
THEORY OF STRICT LIABILITY OR OTHERWISE.

The foregoing indemnity shall not, however, apply to any costs, expenses, losses
or liabilities which are proximately caused solely by the gross negligence or
willful misconduct of Grantee. The foregoing indemnity shall survive the
termination of the Production Payment and of this Conveyance.

                                    ARTICLE V

         Section 5.1. Remedies. If a Designated Event occurs then Grantee may,
either on its own behalf or through any agent or representative and in addition
to all other rights and remedies available to Grantee at law and in equity
(including the right to sue for damages, which right of Grantee is specifically
acknowledged), exercise any one or more of the following remedies (it being
agreed that the exercising of any one remedy shall not preclude the exercising
of any other remedy):

         (a) If Grantor has failed to perform any act or to take any action
which Grantor is required hereunder to perform or take or to pay any money which
Grantor is required hereunder to pay, then, upon written notice to Grantor,
Grantee may, but shall not be obligated to, perform or cause to be performed
such act or take such action or pay such money, all in Grantor's name or in
Grantee's own name. Any expenses so incurred by Grantee and any money so paid by
Grantee shall be a demand obligation owing by Grantor to Grantee (which
obligation Grantor hereby expressly promises to pay) and Grantee, upon making
such payment, shall be subrogated to all of the rights of the Person receiving
such payment. Each amount due and owing by Grantor to Grantee pursuant to this
subsection shall bear interest each day, from the date of such expenditure or
payment until paid, at the Agreed Rate, which interest shall be payable on the
first day of each month and shall itself bear interest at the same rate if not
timely paid.

         (b) Grantee shall be entitled to apply to a court of competent
jurisdiction for the specific performance or observance of any covenant or
agreement or in aid of the execution of any power herein granted and for the
appointment of a receiver for the Subject Interests but no such appointment
shall prejudice or affect the rights of Grantee to receive all PP Hydrocarbons,
all PP Proceeds, and any amounts due hereunder.

         Section 5.2. Termination of Remedies. The specific remedies to which
Grantee may become entitled under Sections 5.1(a) and (b) shall cease to be
exercisable when all Designated Events have been fully cured or otherwise ceased
to exist (provided that the effecting of performance or observation of any
unperformed covenant or agreement, or other resolution of a Designated Event, by
Grantee or Grantee's agent or representative shall not be deemed to cure such
Designated Event), without prejudice, however, to the exercise of any such
remedies upon any subsequent occurrence of a Designated Event. Nothing in this
section shall impose


                                       22

<PAGE>   23

limitations or otherwise inhibit the exercise of any other rights or remedies
which Grantee may have.

                                   ARTICLE VI

         Section 6.1. Assignments by Grantor. Without the prior consent of
Grantee (which consent may be granted or withheld in the sole and absolute
discretion of Grantee), Grantor shall not assign, sell, transfer, convey,
exchange, mortgage or pledge all or any part of the Subject Interests or create
any lien thereon or security interest therein, except that, without the prior
consent of Grantee, Grantor may:

         (a) permit Permitted Encumbrances to exist against all or any part of
the Subject Interests;

         (b) transfer or mortgage the Assignable 331 Retained Interest to any
Person; and

         (c) transfer and convey all, but not less than all, of Grantor's
interests in the Retained Interests to any corporate entity, the stock in which
is directly and wholly owned by Grantor, provided that, in the case of any
transfer, mortgage or conveyance described in subsections (b) or (c) above, (i)
such Person or entity must expressly acknowledge the Production Payment as
carved out of and burdening the Subject Interests, including the Subject
Interests transferred to it, (ii) such entity (in the case of subsection (c)
only) must assume in writing for the benefit of Grantee all of the liabilities
and obligations of Grantor hereunder and under the Purchase Agreement, (iii)
such entity (in the case of subsection (c) only) must succeed Grantor as the
operator of the Subject Interests, or Grantor (in the case of subsection (b)
only) must remain the operator of the Subject Interests, (iv) John R. Stanley
must ratify and confirm the Guaranty, and shall expressly recognize that such
Guaranty shall continue in force and effect, the same as if no transfer or
conveyance had taken place, and (v) the transfer, mortgage, or conveyance shall
not constitute or precipitate a breach or event of default under any trust
indenture or other material agreement of Grantor or otherwise directly relating
to the Subject Interests. Notwithstanding the foregoing, TransTexas Gas
Corporation shall, from and after any such transfer, mortgage, or conveyance,
continue to remain jointly and severally liable for all of the liabilities and
obligations of Grantor under this Conveyance or the Purchase Agreement or the
other Production Payment Documents. As used herein, "Assignable 331 Retained
Interest" means any portion of Grantor's Retained Interest in the Subject
Interests in State Tract 331 (but not in any other Subject Interests) that, if
such portion were assigned by Grantor to a third Person, would leave Grantor as
the owner of a Retained Interest in such Subject Interests (calculated after
giving effect to such assignment and to the Production Payment and all other
royalties and burdens, and free and clear of all claims of such third Person
and all Liens other than Permitted Liens), with a net revenue interest of at
least 5.3625%, calculated on an 8/8ths basis.

         Section 6.2. Assignments by Grantee. Grantee's interest in the
Production Payment may not be transferred except in compliance with this
section. Grantee and each Permitted Assign (as hereinafter defined) shall have
the right to assign or convey its interest in the


                                       23

<PAGE>   24

Production Payment, in whole or in part (and either absolutely or by mortgage or
other security instrument), at any time; provided that:

                  (a) no change of ownership or right to receive payment of the
         Production Payment or of any part thereof, however accomplished, shall
         be effective or binding upon Grantor until notice thereof shall have
         been registered with Grantor by the transferor and by the transferee
         (which transferee must make to Grantor the representations and
         warranties in Section 4.2 of the Purchase Agreement), and then only
         with respect to payments made after receipt of such notice, and

                  (b) neither Grantee nor any Permitted Assign shall assign or
         convey any rights under or any interest in the Production Payment
         Documents or the Production Payment to (i) any Person which at the time
         of such assignment or conveyance is conducting material exploration or
         production operations in Railroad Commission Districts 2, 4 or 5, (ii)
         Enron Oil & Gas Company, Coastal Oil & Gas Corporation, Tennessee Gas
         Pipeline, or Terry Oilfield Supply Co., (iii) any party adverse to
         Grantor in any proceeding set forth on Schedule 1 to the Purchase
         Agreement or in any litigation or proceeding subsequently filed, or any
         successor to the rights or interests of any of the foregoing in such
         proceedings or litigation, any party named as a defendant in the case
         styled "TransAmerican Natural Gas Corporation v. El Paso Natural Gas
         Company, et al.", No. 94-63464, 206th Judicial District Court, Hidalgo
         County, Texas or (iv) any Affiliate of any of the foregoing that is not
         an Affiliate of Grantee.

Any Person to whom all or any interest in the Production Payment is assigned or
conveyed in accordance with the foregoing requirements is herein called a
"Permitted Assign". Grantor shall keep records of all Permitted Assigns, their
Percentage Shares, and their addresses, and shall give notice thereof to the
other Persons, if any, from time to time holding the interests of Grantee
hereunder. If the interests of Grantee under this Conveyance are ever owned by
more than one Person, all Persons owning interests hereunder shall designate one
Person as their agent to deliver and receive all communications (including
consents) and exercise the discretion of Grantee hereunder on their behalf.

         Section 6.3. Binding Effect. All the covenants and agreements of the
respective parties herein contained shall be deemed to be covenants running with
the Subject Interests and the lands covered thereby or included therein. All of
the provisions hereof shall be binding upon and shall inure to the benefit of
the parties hereto, and their respective successors and assigns.

                                   ARTICLE VII

         Section 7.1. Warranty. Grantor hereby binds itself to warrant and
forever defend all and singular title to the Production Payment unto Grantee,
its successors and Permitted Assigns, against every person lawfully claiming or
to claim the same or any part thereof, subject, however, to the Permitted
Encumbrances. Without limitation of the generality of the foregoing, Grantor
represents and warrants to Grantee that the ownership of Grantor of the


                                       24

<PAGE>   25

Subject Interests does and will, with respect to each tract of land identified
in Exhibit A hereto, subject only to the Permitted Encumbrances:

         (a) entitle Grantor to receive (subject to and before giving effect to
the Production Payment), free and clear of liens and encumbrances (except the
Permitted Encumbrances), a decimal or percentage net revenue interest share of
the Hydrocarbons produced from, or allocated to, such well or unit equal to not
less than the decimal or percentage interest set forth in Exhibit A in
connection with such tract of land in the column headed "Net Revenue Interest",
and

         (b) cause Grantor to be obligated to bear a decimal or percentage share
of the costs associated with wells or operation on such tract of land not
greater than the decimal or percentage share set forth in Exhibit A in
connection with such tract of land in the column headed "Working Interest",
without a corresponding increase in net revenue interest.

Grantor further represents and warrants to Grantee that such shares of
production which Grantor is entitled to receive, and shares of expenses which
Grantor is obligated to bear, are not and will not be subject to change except,
and only to the extent that, such changes are reflected on Exhibit A. This
Conveyance is made with full substitution and subrogation of Grantee in and to
all covenants, representations and warranties by others heretofore given or made
with respect to the Subject Interests.

                                  ARTICLE VIII

         Section 8.1. Choice of Law. This Conveyance shall be construed and
enforced in accordance with and governed by the laws of the State of Texas
(without regard to conflicts of law principles thereof that would cause another
state's law to apply) and the laws of the United States of America.

         Section 8.2. Intentions of the Parties. Nothing herein contained shall
be construed to constitute either party hereto (under state law or for tax
purposes) in partnership with the other party. In addition, the parties hereto
intend that the Production Payment shall at all times be treated (and all
provisions of this Conveyance shall be construed and treated accordingly): (a)
as a production payment (i.e., a term overriding royalty) and an interest in
real property under the laws of each state in which Subject Interests are
located; and (b) for federal income tax purposes only, as a mortgage loan in
registered form (and not a "royalty" or other "economic interest" in
Hydrocarbons) within the meaning of the Internal Revenue Code and the
regulations and judicial authority relating thereto.

         Section 8.3. Ownership of Equipment. The Production Payment does not
include any right, title or interest in and to any of the personal property,
fixtures, structures or equipment now or hereafter placed on, or used in
connection with, the Subject Interests, and the interest herein conveyed to
Grantee is exclusively a production payment (i.e., a term overriding royalty).


                                       25

<PAGE>   26

         Section 8.4. Further Assurances. Grantor agrees to execute and deliver
to Grantee all such other and additional instruments, notices, division orders,
transfer orders and other documents and to do all such other and further acts
and things as may be necessary to more fully and effectively grant, convey and
assign to Grantee the rights, titles, interest and estates conveyed to Grantee
hereby or intended to be so conveyed.

         Section 8.5. Partition. Grantor and Grantee acknowledge that neither
has any right or interest that would permit it to partition any portion of the
Subject Interests as against the other, and each waives any such right.

         Section 8.6. Notices and Addresses. All notices and other
communications required or permitted under this Conveyance shall be in writing
and, unless otherwise specifically provided, shall be delivered personally or by
telecopier or by registered or certified mail, postage prepaid, or by delivery
service with proof of delivery, at the respective addresses shown below, and
shall be deemed delivered on the date of receipt. Either party may specify as
its proper address any other street address within the continental limits of the
United States by giving notice to the other party, in the manner provided in
this Section, at least fifteen (15) days prior to the effective date of such
change of address.

Grantor's address:

         1300 North Sam Houston Parkway East
         Suite 310
         Houston, Texas 77032-2949
         Attention:  Ed Donahue
         Telephone:  281/987-8600
         Telecopy:  281/986-8865

Grantee's address:

         TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. and
         TCW DR VI Investment Partnership, L.P.
         c/o Trust Company of the West
         865 South Figueroa
         Los Angeles, California 90017
         Telephone:  213/244-0702
         Telecopy:  213/244-0604
         Attention: Thomas F. Mehlberg


                                       26

<PAGE>   27

         with a copy to the Agent at its address:

         TCW Asset Management Company
         1000 Louisiana
         Suite 2175
         Houston, Texas  77002
         Attention: Kurt Talbot
         Telephone:  713/615-7413
         Telecopy:  713/615-7460

         Section 8.7. Grantee's Agent; Consents, Waivers, Supplements and
Amendments.

         (a) Grantee has, pursuant to the Purchase Agreement, appointed TCW
Asset Management Company as its agent (herein called the "Agent") to administer
the Production Payment and to act on Grantee's behalf in giving any consents or
waivers under this Conveyance, in making any amendments or supplements hereto,
and in arranging for the marketing of the PP Hydrocarbons. Unless and until this
Conveyance is supplemented to reflect the termination of such agency or the
appointment of a replacement or successor Agent (which supplement may be
executed by Grantee without the joinder of Grantor), all Persons dealing with
Grantor or Grantee in connection with the Production Payment shall be entitled
to rely upon the authority of TCW Asset Management Company to act as Agent for
Grantee in connection herewith.

         (b) No consent, waiver, supplement or amendment given by Grantee or by
Agent in connection with this Conveyance or the Production Payment shall be
valid or effective unless given be in writing and signed by Grantee or Agent.

         Section 8.8. Counterparts. This Conveyance is being executed in
multiple counterparts, all of which are identical, except that, (i) to
facilitate recordation, in certain counterparts hereof only those portions of
Exhibit A which contain descriptions of properties located in the recording
jurisdiction in which the particular counterpart is to be recorded are included,
and (ii) Schedule l may be omitted from counterparts hereof which are being
recorded. All of such counterparts shall constitute one and the same instrument.
Complete copies of this Conveyance containing the entirety of Exhibit A, and all
schedules hereto, have been retained by Grantor and Grantee.


                                       27

<PAGE>   28



         This Conveyance is executed on the 23rd day of February, 1998, and is
made effective as to runs of Oil and deliveries of Gas as of the Initial Time.


                                                  TRANSTEXAS GAS CORPORATION


                                                  By:    /s/ ED DONAHUE
                                                     ---------------------------
                                                     Name:   Ed Donahue
                                                     Title:  Vice President


STATE OF TEXAS                      )
                                    )
COUNTY OF HARRIS                    )

         The foregoing instrument was acknowledged before me on this 23rd day of
February, 1998, by Ed Donahue as Vice President of TransTexas Gas Corporation, a
Delaware corporation, on behalf of such corporation.




                                             -----------------------------------
                                             Notary Public, State of Texas


                                       28