AGREEMENT MADE BETWEEN PANARCTIC OILS LTD.

                       AND CANADA SOUTHERN PETROLEUM LTD.

                                TABLE OF CONTENTS

CLAUSE NO.                                                              PAGE NO.

        1         INTERPRETATION..................................          1

        2         OPERATIONS......................................          3

        3         ASSIGNMENT TO FARMEE............................          4

        4         FARMEE'S UNDERTAKING TO MAINTAIN                      
                  PERMITS.........................................          4

        5         ASSUMPTION OF SEISMIC COMMITMENTS                     
                  BY FARMEE FOR FARMOR............................          5

        6         FARMEE'S DRILLING PROGRAM.......................          6

        7         SUPPLYING INFORMATION TO FARMOR.................          7
        8         RIGHT OF CONVERSION BY FARMOR TO                      
                  NET CARRIED INTEREST............................          8

        9         WELL PROPOSALS..................................          9

       10         HEMBDT OVERRIDE.................................          9

       11         FORCE MAJEURE...................................         10

       12         FURTHER ASSURANCES..............................         10

       13         WAIVER..........................................         10

       14         ENTIRE AGREEMENT................................         10

       15         MISCELLANEOUS...................................         11

       16         CONFORMANCE WITH LAWS...........................         11

       17         TITLE...........................................         11
                                                                       

<PAGE>


                           TABLE OF CONTENTS (Cont'd)

CLAUSE NO.                                                              PAGE NO.

       18         NOTICES.........................................         12

       19         INDEMNIFICATION BY FARMEE.......................         12

       20         SURFACE RIGHTS..................................         12

       21         PERFORMANCE OF PERMITS BY FARMEE................         13

       22         DEFAULT.........................................         13

       23         PERPETUITIES....................................         14

       24         PAYMENT OF ACCOUNTS.............................         14

       25         ASSIGNMENT BY THE FARMEE........................         14

       26         AREA OF COMMON INTEREST.........................         16
                                                                       


<PAGE>


         THIS AGREEMENT dated this 28th day of January, A.D. 1972 BETWEEN:

                   CANADA SOUTHERN PETROLEUM LTD., a
                   body corporate, having an office in the City of
                   Calgary, in the Province of Alberta, (hereinafter
                   called the "Farmor")

                                                   OF THE FIRST PART

AND:

                   PANARCTIC OILS LTD., a body corporate
                   incorporated under the laws of Canada and having
                   its principal place of business in the City of
                   Calgary, in the Province of Alberta, (hereinafter
                   called the "Farmee")

                                                   OF THE SECOND PART


         WHEREAS  the  Farmor is the  holder  of the  Permits  (as  hereinafter
defined)  subject  to the  "Hembdt override" (as hereinafter defined); and

         WHEREAS the Farmee  desires to acquire an interest in the Permits  from
the Farmor subject to the terms and provisions of this Agreement;

         NOW THEREFORE THIS AGREEMENT  WITNESSETH that in  consideration  of the
premises  and of the  covenants  and  agreements  of the parties  hereto in this
Agreement set forth, the parties hereto do hereby covenant and agree as follows:

1.       INTERPRETATION

         (a) In this Agreement,  including the recitals and this clause,  unless
the context otherwise requires:

                  (i)      "the lands"  means the lands set forth and  described
                           and  from  time to time  remaining  in  Schedule  "A"
                           attached  to and  made  part  of this  Agreement  and
                           includes  the right to recover  petroleum  substances
                           within such lands;


<PAGE>

                  (ii)     "the Permits"  means  the  Oil  and  Gas  Exploratory
                           Permits more particularly described in said  Schedule
                           "A"  hereto   (and   includes  any   Leases  selected
                           therefrom) but insofar only as such Permits  comprise
                           the  lands;  Permits  include  all  leases  or  other
                           instruments  conferring  petroleum substances  rights
                           granted  or to  be  granted  pursuant  to the laws of
                           Canada,   directly  or  indirectly,   out  of  or  in
                           relationship to said Permits as set forth in Schedule
                           "A",  or any extension,  variation or renewal thereof
                           or in substitution therefore,  or in substitution for
                           any part thereof as a result of the holding of said
                           Permits;

                  (iii)    "Block I",  "Block  II",  "Block  III",  "Block  IV",
                           "Block V", "Block VI", and "Block VII", respectively,
                           means  those  portions  of the  Permits  and lands so
                           designated  under each of such  respective  Blocks in
                           said Schedule "A";

                  (iv)     "Petroleum  Substances"  means the  substances  which
                           Farmor has the right to explore  for or recover  from
                           the  lands by virtue  of the  Permits,  and where the
                           context so requires, may mean any one or more of such
                           substances.

                  (v)      "Spacing  Unit"  means  the  area  prescribed  for or
                           allocated to a well by or under the  Regulations  for
                           the purpose of drilling  for or  producing  petroleum
                           substances  or,  if  no  area  is  so  prescribed  or
                           allocated, means one section as defined in the Canada
                           Oil and Gas Land Regulations;


<PAGE>

                  (vi)     "Operating  Agreement" means that Operating Procedure
                           attached  to and  made  part  of  this  Agreement  as
                           Schedule  "B",  which  Operating   Agreement  becomes
                           effective in the manner and on the terms provided for
                           in this  Agreement and requires no further  execution
                           to be effective;

                  (vii)    "Hembdt  Override"  means the 1.5625% gross  override
                           royalty  interest  and rights held by Misses  Mildred
                           and Ethel Hembdt, as trustees in the Permits;

                  (viii)   "Regulations" means the statutes,  ordinances,  laws,
                           governmental   orders,    regulations,    rules   and
                           directions  from  time  to time  purporting  to be in
                           force and  applicable  to the Lands,  the Permits and
                           the   petroleum    substances   or   the   operations
                           contemplated by this Agreement.

         (b) The  headings of the clauses of this  Agreement  are  inserted  for
convenience of reference  only and shall not affect the meaning or  construction
thereof.

         (c)  Whenever  the  plural  or  masculine  or  neuter  is  used in this
Agreement,  the same shall be construed as meaning  singular or feminine or body
politic or corporate and vice versa where the context so requires.

         (d) If any term or condition of this Agreement  conflicts with the term
or condition  of the Permits  then such term or  condition in the Permits  shall
prevail and this Agreement shall be deemed to be modified accordingly.

2.       OPERATIONS

         (a) All  operations by Farmee  pursuant to this  Agreement  shall be at
Farmee's sole risk and expense unless the contrary is specifically stated.

         (b) All  operations  by  Farmee  pursuant  to this  Agreement  shall be
conducted in a lawful manner and in accordance with good oilfield practice.

3.       ASSIGNMENT TO FARMEE

         (a)  Forthwith  upon the  execution  of this  Agreement,  Farmor  shall
execute and deliver to Farmee,  registrable assignment Agreements respecting the
Permits  sufficient  to register  the Permits in the name of the Farmee and will
also deliver the original Permits to Farmee (said registration to be at Farmee's
sole cost and expense);


<PAGE>

         (b) Upon receipt of the said  assignments,  Farmee agrees that it shall
hold the Permits  subject to the Hembdt override in trust for the parties hereto
subject to the terms of this  Agreement  and of the  Operating  Agreement on the
following percentage interests, namely:

                               Farmor             50%
                               Farmee             50%

Farmee  shall not  encumber or dispose of all or any part of the Permits so held
in trust without the written  consent of the Farmor or without being entitled or
required to do so under the other provisions of this Agreement.

4.       FARMEE'S UNDERTAKING TO MAINTAIN PERMITS

         (a) Farmee  undertakes to apply  sufficient  allowable  expenditures or
cash to the  Permits  from time to time as  required  in order to  maintain  the
Permits in good standing up to the anniversary  date of each  respective  Permit
falling due in the year 1977 at no cost to Farmor;


<PAGE>

         (b) In the event  Farmee  desires to  surrender  any  Permit,  lease or
portion  of either  constituting  a part of the  properties  in 1977 or any time
thereafter,  Farmee shall  notify  Farmor at least sixty (60) days in advance of
the next  ensuing  anniversary  date of such Permit  and/or  lease.  Farmor will
thereupon notify Farmee within thirty (30) days following receipt of such notice
whether or not Farmee elects to join in the release of such lease or Permit.  In
the event  Farmor  does not  within  said  period  of time  elect to join in the
release of said properties  Farmee shall reassign said  properties  described in
its notice to Farmor.  Farmee will  likewise  insure  that there are  sufficient
allowable  expenditures or cash on any Permit or lease which is to be reassigned
to maintain  the  property in good  standing for a period not less than one year
from the date of  reassignment.  Said assignment of such Permits or leases shall
be a form  satisfactory  for  registration,  free and clear of encumbrances  and
exceptions  other than those set forth in paragraph  10 and the  responsibility,
cost and expense of registering  such  assignment of Permits and leases shall be
borne solely and exclusively by Farmor.

5.       ASSUMPTION OF SEISMIC COMMITMENTS BY FARMEE FOR FARMOR

         (a) Farmee agrees to assume the seismic commitments  arranged by Farmor
prior to entering into this Agreement, as follows:

                  (i)      150 miles of marine reflection  seismic on Block V to
                           be shot by  Kenting  Limited  at an  agreed  price of
                           $550.00 per mile, with a total expenditure commitment
                           of $82,500.00;

                  (ii)     250 miles of  reflective  seismic and  gravity  meter
                           surveys in the area of Cameron and Vanier  Islands to
                           be shot by Polar  Quest,  survey  727 A, with a total
                           commitment not exceeding $68,750.00;


<PAGE>

                  (iii)    letter from Department of Energy, Mines and Resources
                           dated  November 2, 1971 and Farmee's  response  dated
                           November 15, 1971. PROVIDED THAT the total commitment
                           assumed by Farmee under the three contracts shall not
                           exceed the sum of $201,250.00.

         (b) Farmee shall have the right to make any changes or  alterations  in
the seismic program referred to in subclause (a) hereof, PROVIDED THAT Farmor is
relieved of its obligations  respecting  participation  in these  programs.  All
allowable  expenditures  and the benefits  accruing  from  participation  in the
aforesaid survey programs shall accrue to Farmee.

6.       FARMEE'S DRILLING PROGRAM

         Farmee  has  agreed  with  Farmor  to cause a  drilling  program  to be
conducted in the vicinity of the Permits, consisting of the following:

         (a) If seismic work conducted  during the Spring of 1972  establishes a
drill site on Permit No.  484,  200 or more feet  structurally  higher  than the
Hecla  J-60 then a well will be  commenced  not later  than the Fall of 1973 and
drilled to a depth of 5,000 feet, to Paleozoic formation or production whichever
occurs first.

         (b) A well in the Drake  Point  area west of Block V at a  location  of
Farmee's choice to be commenced on or before the first day of April, 1974.

         (c) A well on a location of Farmee's choice on the Isachsen  Penninsula
on Ellef  Ringnes  Island east of Block I to be commenced on or before the first
day of October, 1973.


<PAGE>

         (d) Additional  seismic will be conducted on Permit No. 688 during 1972
on the  Louise  Anticline  and if 300  feet  or more of  structural  closure  is
established  at 8,000 feet or a  shallower  depth  then a well at a location  of
Panarctic's  choice will be  commenced by the Spring of 1974 and drilled to test
the stratigraphic  equivalent of the gas productive sand found in the Kristoffer
Bay G-06 and King Christian D-18A wells.

7.       SUPPLYING INFORMATION TO FARMOR

         (a)  Farmee  shall  supply  immediately  Farmor  with   all information
acquired  by it from work  performed  on the  Permits or off permit work that is
part of a program  conducted  on the  Permits.  Farmor shall not be obligated to
participate in the costs of any  exploratory  work  (excluding  drilling) on the
Permits  up  to  the  anniversary  date  of  the  respective  Permits  in  1977.
Notwithstanding  that  Farmor  may  not be  participating  in the  cost  of such
exploratory work other than drilling, as aforesaid, Farmor shall nevertheless be
entitled  to  receive  from  Farmee  copies  of all  basic  data  (exclusive  of
interpretation) derived therefrom,  provided that the provisions of clause 33 of
the Operating Agreement shall be deemed to be applicable thereto.

         (b)  The  parties  acknowledge  that by  virtue  of the  provisions  of
agreements  with other  companies in which Farmee is a party,  the Farmee may be
unauthorized  to provide  exploratory  information  on any lands  adjoining  the
Permits.

         (c)  Farmor  has the  right  to  request  and  Farmee  shall  have  the
obligation  subject  to  clause  7(b) to give  information  on off  permit  work
conducted  by  Panarctic  or on its  behalf  that  affects  the  value of Canada
Southern's interest in any of the Permits hereunder or in the Permits covered by
the previous agreement dated June 30, 1966, as amended,  wherein Canada Southern
and  Panarctic  are the parties;  the  information  to be given on the following
basis:


<PAGE>

                  (i)      Not more  frequently  than sixty (60) day periods and
                           on a three (3) day notice.

                  (ii)     Panarctic can withhold information  that is less than
                           two (2) weeks old.

                  (iii)    Information to be given on a verbal basis and between
                           appropriate technical staff members of each company.

         (d) Farmee shall use its best effort to immediately  supply Farmor with
the technical information received under 5(a).

8.       RIGHT OF CONVERSION BY FARMOR TO NET CARRIED INTEREST

         (a) The right of conversion reserved to the Farmor under the provisions
of this clause may be exercised as to any one or more of the Blocks described in
Schedule "A" hereto.

         (b) Subject to clause 9 hereof,  the Farmor shall be entitled by notice
in writing to Farmee given at any time prior to the earliest anniversary date in
1977 of any permit in said Block to convert  its 50%  working  interest to a 30%
net carried  interest in any Block or Blocks.  The  provisions  of Schedule  "C"
hereto  (Carried  Interest  Procedure)  shall  apply to such  Block or Blocks so
converted.

         (c) The  effective  date for  conversion  of the rights of the Farmor's
interest  from a working  interest  to a carried  interest  shall be the date on
which notice is given by the Farmor as aforesaid.

         (d) Upon the effective date of any such conversion, then the provisions
of Schedule  "C" shall  apply to the Block or Blocks with  respect to which such
conversion  is effected  whereupon  the  provisions  of Schedule "B"  (Operating
Agreement) shall have no application to such Block or Blocks, except as provided
in Schedule "C".


<PAGE>

9.       WELL PROPOSALS

         If Farmee  proposes a well on any Block on which Farmor has not elected
to convert its interest to a carried interest,  pursuant to Clause 8 hereof, and
prior to the final date for election to so convert Farmor shall, notwithstanding
the  provisions  of Clause 8 hereof,  exercise its right to elect to convert its
interest  in the Block on which the well is  proposed  to be drilled to a thirty
(30%) percent carried interest within thirty (30) days of the date of receipt of
notice  proposing  the well.  If Farmor fails to elect to so convert  within the
said  thirty  (30) day  period,  it will have no further  right to elect on such
Block and such Block shall continue to be subject to the Operating Agreement.

10.      HEMBDT OVERRIDE

         (a) The parties  acknowledge that the Permits are subject to the Hembdt
override,   and  the  Farmor  and  Farmee  shall  proportionately  assume  their
respective share of the Hembdt override on all Permits  remaining subject to the
Operating  Agreement  which is hereby  charged  to the joint  account  under the
Operating  Agreement.  If Farmor  elects to convert  its  working  interest to a
carried  interest  pursuant  to the  provisions  of clause 8  hereof,  then with
respect to those  Permits in which the  interest has been so  converted,  Farmee
shall pay the Hembdt  royalty and all sums so paid shall be expenses  chargeable
to the carried interest account.

         (b) Farmor shall supply  Farmee  forthwith  upon the  execution of this
Agreement with the agreement or other documents setting forth the particulars of
the Hembdt override.


<PAGE>

11.      FORCE MAJEURE

         No party sha1l be deemed to be in default in respect of  nonperformance
of its obligations under this Agreement if and so long as its  nonperformance is
due to strikes,  lockouts, fire, tempest, or acts of God of the Queen's enemies,
or any other cause (whether  similar or dissimilar to those  enumerated)  beyond
its  control,  but lack of  finances  shall in no event be  deemed to be a cause
beyond a  party's  control;  and in the case of any  obligation  contained  in a
Permit, the rights of the parties hereto with respect to force majeure shall not
exceed those granted to the Permitee named therein.

12.      FURTHER ASSURANCES

         Each of the parties  hereto shall from time to time and at all times do
all such  further  acts and  execute  and  deliver  all such  further  deeds and
documents  as shall be  reasonably  required in order fully to perform and carry
out the terms of this Agreement.

13.      WAIVER

         No waiver on behalf of either  party hereto of any breach of any of the
covenants  and  provisions  in this  Agreement  contained,  whether  negative or
positive in form,  shall take effect or be binding  upon such party,  unless the
same be  expressed in writing,  and any waiver so  expressed  shall not limit or
affect such party's rights with respect to any other of future breach.

14.      ENTIRE AGREEMENT

         The terms of this Agreement express and constitute the entire agreement
between  the  parties,  and no  implied  covenant  or  liability  of any kind on
Farmor's or Farmee's part is created or shall arise by reason of these  presents
or anything in this Agreement contained.


<PAGE>

 15.     MISCELLANEOUS

         (a) All terms and  provisions of this  Agreement  shall run with and be
binding upon the lands during the term of this Agreement.

         (b) Time is of the essence of this Agreement.

         (c) Subject to the terms of this Agreement,  this Agreement shall enure
to the benefit of and be binding upon the parties hereto,  their  successors and
assigns.

16.      CONFORMANCE WITH LAWS

         This Agreement and the respective rights and obligations of the parties
hereunder shall be subject to all applicable laws, rules, regulations and orders
of governmental  authorities,  Federal,  Territorial  and Municipal,  and in the
event this  Agreement or any provision  hereof,  or the operations or any matter
contemplated  hereby,  is found to be inconsistent  with or contrary to any such
law, rule,  regulation or order, the latter shall be deemed to control, and this
Agreement  shall be regarded as modified  accordingly,  and as so modified shall
continue to full force and effect.

17.      TITLE

         Farmor represents and warrants that it is the holder of the Permits and
that such  Permits  are  presently  in good  standing  and as of the date hereof
Farmor has not assigned, conveyed, mortgaged or hypothecated its interest in the
Permits  and  warrants  that  it  holds  the  Permits  free  and  clear  of  all
encumbrances, except the Hembdt override.

         Except as above provided,  the Farmor does not warrant title,  nor does
it convey, purport,  promise or agree to convey, to Farmee any better or greater
right,  title or interest in and to any of the Lands than those which it now has
by virtue of the Permits.


<PAGE>

18.      NOTICES

         The addresses for service of the parties hereto shall be as follows:

PANARCTIC OILS LTD.,                             CANADA SOUTHERN PETROLEUM LTD.,
P.O. Box 190,                                    Fifth Floor,
703 - 6th Avenue S.W.,                           505 - 8th Avenue S.W.,
CALGARY 2, Alberta                               CALGARY 2, Alberta
                                         
Any party from time to time may change its address for service by giving written
notice to the other. Any notice may be served by mailing the same, by registered
post,  postage prepaid,  in a properly addressed envelope addressed to the party
to whom the notice is to be given at such party's stated address for service and
if mailed in the Province of Alberta,  any such notice so served shall be deemed
to be given to and received by the  addressee  on the second  business day after
the mailing thereof.

19.      INDEMNIFICATION BY FARMEE

         Farmee shall indemnify the Farmor against all actions,  suits,  claims,
costs and  demands  which may be brought  against or  suffered  by the Farmor by
reason of any matter or thing arising out of or in any way  attributable  to any
operations carried on by Farmee, its servants, agents or employees, on the Lands
prior to right of conversion (paragraph 8) by Farmor.

20.      SURFACE RIGHTS

         Farmee  shall  acquire  all  necessary  licenses,  surface  rights  and
rights-of-way,  including without  limitation the exploratory  licenses required
under the  provisions  of the  Regulations  for the  purpose of work at its sole
cost, risk and expense.


<PAGE>

21.      PERFORMANCE OF PERMITS BY FARMEE

         Except as otherwise provided in this Agreement, Farmee shall, as of the
date  of  this  Agreement,  assume,  carry  out,  observe  and  perform  all the
obligations  of the  Permittee  contained  in the  Permits  and, in the event of
Farmee's  failure so to do, Farmee shall at all times  indemnify  Farmor against
all actions, proceedings,  claims and demands, costs, damages and expenses which
may be  brought  or made  against  it or which it may  sustain,  pay or incur by
reason of such  failure,  including in such  indemnity  any and all sums paid by
Farmor  pursuant to a bona fide settlement made with any claimant having a claim
arising out of or consequent upon any such failure.

22.      DEFAULT

         Should  Farmee make any default in any term,  covenant or  condition of
this  Agreement  or of any Permit and Farmee  does not  commence  to remedy such
default  within thirty (30) days after notice  thereof in writing has been given
to it by Farmor and does not thereafter continue with reasonable diligence, then
Farmor may, by notice in writing to Farmee,  cancel and determine the conveyance
and the entire interest of Farmee under this  Agreement,  and it shall be lawful
for  Farmor,  into and upon the  lands (or any part  thereof  in the name of the
whole), to re-enter and the same to have again,  repossess and enjoy. The rights
hereby granted to Farmor shall be in addition to and not in substitution for any
other  right  or  remedy  which  Farmor  may  have  under  this  Agreement,  and
specifically  the  exercise  of such  rights  shall not serve to deprive  Farmor
either  wholly or partially of any other right or remedy  including  damages and
indemnity.


<PAGE>

23.      PERPETUITIES

         Notwithstanding  anything  in this  Agreement  elsewhere  contained  or
implied,  any right or any party to acquire  any  interest  from any other party
shall  cease,  terminate  and be at an end not later than the  expiration  of 21
years after the death of the last surviving lawful  descendant now living of His
Late Majesty, King George VI.

24.      PAYMENT OF ACCOUNTS

         Farmee shall

         (a) pay,  when they  become  due and  payable,  all claims for wages or
salaries for service rendered or performed and for materials  supplied on, to or
in respect of the Lands;

         (b) permit no mechanic's  or other lien of any nature  whatsoever to be
registered or filed against the Lands, the Permits, or any well thereon,  unless
there be a bona fide dispute respecting such claim or account;

         (c) permit  no claims  of,  or dues to,  or on behalf of the  Workmen's
Compensation Board to become in arrears.

25.      ASSIGNMENT BY THE FARMEE

         (a) This Agreement may be assigned or transferred by Farmee as a whole,
but no such  assignment or transfer  shall be valid until written notice thereof
has been delivered to Farmor, together with a written and enforceable assumption
by Farmee's  assignee or  transferee  of the  obligations  of Farmee  under this
Agreement.


<PAGE>

         (b) No assignment or transfer of any interest,  other than the interest
contemplated by subclause (a) of this clause, or grant of any equitable interest
in this Agreement,  the Permits,  the lands, or any portion  thereof,  by Farmee
shall be valid unless Farmee delivers to Farmor a written notice thereof and any
such transaction  shall be subject to this Agreement and, in particular,  to the
following conditions:

                  (i)      Farmee shall continue to remain solely liable for the
performance of the obligations and liabilities set forth in this Agreement;

                  (ii)     Farmor shall continue to deal exclusively with Farmee
         under this Agreement  and,  without  restricting  the generality of the
         foregoing,  all notices to or from Farmee required under this Agreement
         shall only be forwarded  to and  accepted  from Farmee and Farmor shall
         neither  honor  notices  from nor give notice to  Farmee's  assignee or
         grantee;

                  (iii)    Farmor shall never be obliged  to deal with more than
         one party under this Agreement and should Farmee at some  future  date,
         assign or otherwise alienate its entire interest in this Agreement, the
         Permits and the lands, or any portions  thereof,  Farmor shall have the
         option of choosing the interest holder with which they wish to deal;

                  (iv)     any  person  acquiring   an  interest  by  way  of  a
         mortgage, pledge or hypothecation, including the granting  of  security
         to a chartered bank pursuant to  Section 82  of the Bank Act of Canada,
         shall, on any reali1zation of the security afforded thereby, deliver to
         Farmor a written and  enforceable  assumption  of  the  obligations  of
         Farmee under this Agreement as they relate to the interest so acquired.

         (c) Any notice from  Farmee under this  clause shall be  accompanied by
original or  photostatic copies  of all  instruments evidencing  the transaction
concerned.


<PAGE>

26.       AREA OF COMMON INTEREST

         The  provisions  of Clause 38 of the Operating  Procedure  (Schedule B)
shall  apply  from the date of this  Agreement  until  the  Operating  Procedure
becomes effective.

         IN WITNESS WHEREOF the parties hereto have duly executed this Agreement
as of the day and year first above written.


                                         PANARCTIC OILS LTD.


                                         ---------------------------------------
                                         Vice-President Land and Administration

                                         ---------------------------------------
                                                        Treasurer


                                         CANADA SOUTHERN PETROLEUM LTD.


                                         ---------------------------------------
                                                        President

                                         ---------------------------------------
                                                        Director



<PAGE>


THIS IS SCHEDULE "A" to  Agreement  made  as  of the 28th day of January,  1972,
between PANARCTIC OILS LTD. and CANADA SOUTHERN PETROLEUM LTD.

<TABLE>
<CAPTION>
Block          Permit Number               Date of Issuance                         Location                              Acreage

<S>               <C>                     <C>                           <C>  <C>                                          <C>   
    I             A-3784                  November 27, 1968                  78(degree)50',105(degree)30'                 50,099
                  A-3785                  November 27, 1968                  78(degree)50',106(degree)00'                 50,099
                  A-3786                  November 27, 1968                  78(degree)50',106(degree)30'                 50,099
                  A-3787                  November 27, 1968                  78(degree)50',107(degree)00'                 50,099
                  A-3788                  November 27, 1968                  78(degree)50',107(degree)30'                 50,099
                  A-3789                  November 27, 1968                  78(degree)50',108(degree)00'                 50,099
                  A-3790                  November 27, 1968                  78(degree)50',108(degree)30'                 50,099
                  A-3791                  November 27, 1968                  78(degree)50',109(degree)00'                 50,099
                  A-3796                  November 27, 1968             W1/2 79(degree)10',105(degree)30'                 24,316
                  A-3797                  November 27, 1968                  79(degree)10',106(degree)00'                 48,633
                  A-3798                  November 27, 1968                  79(degree)10',106(degree)30'                 48,633
                  A-3799                  November 27, 1968                  79(degree)00',105(degree)30'                 49,366
                  A-3800                  November 27, 1968                  79(degree)00',106(degree)00'                 49,366
                  A-3801                  November 27, 1968                  79(degree)00',106(degree)30'                 49,366
                  A-3802                  November 27, 1968                  79(degree)00',107(degree)00'                 49,366
                  A-3803                  November 27; 1968                  79(degree)00',107(degree)30'                 49,366
                  A-3804                  November 27, 1968                  79(degree)00',108(degree)00'                 49,366
                  A-3806                  November 27, 1968                  79(degree)00',108(degree)30'                 49,366
                  A-3817                  November 27, 1968             W1/2 79(degree)20',105(degree)30'                 23,950
   II             A-3780                  November 27, 1968             N1/2 78(degree)10',112(degree)00'                 26,420
                  A-3781                  November 27, 1968             N1/2 78(degree)10',112(degree)30'                 26,420
                  A-3782                  November 27, 1968             N1/2 78(degree)10',113(degree)00'                 26,420
                  A-3783                  November 27, 1968             N1/2 78(degree)10',113(degree)30'                 26,420
   III            A-3248                  October 8, 1968                    77(degree)30',114(degree)00'                 55,938
                  A-3249                  October 8, 1968                    77(degree)30',113(degree)30'                 55,938
                  A-3250                  October 8, 1968                    77(degree)30',113(degree)00'                 55,938
                  A-3251                  October 8, 1968                    77(degree)20',113(degree)30'                 56,666
                  A-3252                  October 8, 1968               N1/2 77(degree)20',113(degree)00'                 28,242
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Block          Permit Number               Date of Issuance                         Location                              Acreage

<S>               <C>                     <C>                           <C>  <C>                                          <C>   
   III            A-3253                  October 8, 1968                    77(degree)20',112(degree)30'                 56,666
                  A-3254                  October 8, 1968               S1/2 77(degree)20',112(degree)00'                 28,424
                  A-3255                  October 8, 1968               S1/2 77(degree)20',111(degree)30'                 28,424
                  A-3256                  October 8, 1968                    77(degree)10',112(degree)00'                 57,392
                  A-3257                  October 8, 1968                    77(degree)10',111(degree)30'                 57,392
                  A-3258                  October 8, 1968               S1/2 77(degree)20',111(degree)00'                 28,424
                  A-3259                  October 8, 1968                    77(degree)20',110(degree)30'                 56,666
   IV             A-2715                  August 7, 1968                W1/2 76(degree)20',110(degree)30'                 30,510
                  A-2716                  August 7, 1968                     76(degree)20',111(degree)00'                 61,021
                  A-2717                  August 7, 1968                     76(degree)20',111(degree)30'                 61,021
                  A-2718                  August 7, 1968                W1/2 76(degree)30',110(degree)30'                 30,148
                  A-2719                  August 7, 1968                     76(degree)30',111(degree)00'                 60,296
                  A-2720                  August 7, 1968                     76(degree)30',111(degree)30'                 60,296
                  A-2721                  August 7, 1968                     76(degree)30',112(degree)00'                 60,296
                  A-2722                  August 7, 1968                N1/2 76(degree)30',112(degree)30'                 30,057
                  A-2723                  August 7, 1968                     76(degree)40',112(degree)00'                 59,571
                  A-2724                  August 7, 1968                     76(degree)40',112(degree)30'                 59,571
                  A-2725                  August 7, 1968                     76(degree)40',113(degree)00'                 59,571
                  A-2726                  August 7, 1968                E1/2 76(degree)40',113(degree)30'                 29,785
                  A-3130                  September 19, 1968                 76(degree)40',111(degree)30'                 59,571
                  A-3131                  September 19, 1968                 76(degree)40',111(degree)00'                 59,571
                  A-3132                  September 19, 1968            W1/2 76(degree)40',110(degree)30'                 29,785
                  A-3124                  September 19, 1968                 77(degree)10',106(degree)30'                 57,392
                  A-3125                  September 19, 1968                 77(degree)10',106(degree)00'                 57,392
                  A-3126                  September 19, 1968                 76(degree)40',107(degree)00'                 59,571
                  A-3127                  September 19, 1968                 76(degree)40',106(degree)30'                 59,571
                  A-3128                  September 19, 1968                 76(degree)40',106(degree)00'                 59,571
                  A-3129                  September 19, 1968                 76(degree)40',105(degree)30'                 59,571
                  A-3133                  September 19, 1968                 76(degree)30',106(degree)30'                 60,296
                  A-3134                  September 19, 1968                 76(degree)30',106(degree)00'                 60,296
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Block          Permit Number               Date of Issuance                         Location                              Acreage

<S>               <C>                     <C>                           <C>  <C>                                          <C>   
   IV             A-3135                  September 19, 1968                 76(degree)30',105(degree)30'                 60,296
                  A-3136                  September 19, 1968            W1/2 76(degree)30',105(degree)00'                 30,148
                  A-3137                  September 19, 1968                 76(degree)50',106(degree)30'                 58,846
    V             A-3138                  September 19, 1968                 76(degree)50',107(degree)00'                 58,846
                  A-3139                  September 19, 1968            E1/2 76(degree)50',107(degree)30'                 29,423
                  A-3260                  October 8, 1968                    77(degree)00',107(degree)00'                 58,120
                  A-3261                  October 8, 1968               E1/2 77(degree)00',107(degree)30'                 29,060
   VI             A-3807                  November 27, 1968                  79(degree)30',96(degree)00'                  47,167
                  A-3808                  November 27, 1968                  79(degree)40',96(degree)00'                  46,434
                  A-3809                  November 27, 1968                  79(degree)40',96(degree)30'                  46,434
                  A-3810                  November 27, 1968                  79(degree)40',97(degree)00'                  46,434
                  A-3811                  November 27, 1968                  79(degree)40',97(degree)30'                  46,434
                  A-3812                  November 27, 1968                  79(degree)50',96(degree)30'                  45,699
                  A-3813                  November 27, 1968                  79(degree)50',97(degree)00'                  45,699
                  A-3814                  November 27, 1968                  79(degree)50',97(degree)30'                  45,699
                  A-3815                  November 27, 1968             W1/2 80(degree)00',100(degree)00'                 22,482
                  A-3816                  November 27, 1968             W1/2 80(degree)10',100(degree)00'                 22,114
   VII            A-3792                  November 27, 1968             W1/2 78(degree)50',101(degree)30'                 25,049
                  A-3793                  November 27, 1968             N1/2 78(degree)50',102(degree)00'                 24,958
                  A-3794                  November 27, 1968             N1/2 78(degree)50',102(degree)30'                 24,958
                  A-3795                  November 27, 1968                  79(degree)20',102(degree)30'                 47,901
</TABLE>


<PAGE>


                                 THIS IS SCHEDULE "B" to Agreement made as of
                                 the 28th day of January A.D. 1972 between
                                 PANARCTIC OILS LTD. (herein called "Panarctic")
                                 and CANADA SOUTHERN PETROLEUM LTD.
                                 (herein called "Canada Southern")

                                      INDEX
                                      -----

    CLAUSE        TITLE                                                     PAGE
    ------        -----                                                     ----

       1          INTERPRETATION                                              1

       2          PARTICIPATING INTERESTS                                     4

       3          OPERATOR                                                    5

       4          FORECAST OF OPERATIONS                                      5

       5          AUTHORIZATION FOR EXPENDITURES                              5

       6          INDEPENDENT DRILLING AND DEEPENING:

                  I.       Voluntary Operations                               6

                  II.      Obligation Wells                                  11

       7          MAINTENANCE OF THE PERMITS                                 13

       8          GENERAL ACCOUNTING                                         14

       9          ADVANCES                                                   14

      10          OPERATION'S LIEN                                           15

      11          OWNERSHIP OF PRODUCTION                                    15

      12          PRE-COMMENCEMENT INFORMATION TO NON-OPERATOR               17

      13          DRILLING INFORMATION TO NON-OPERATOR                       17

      14          TESTING INFORMATION TO NON-OPERATOR                        18

      15          LOGGING INFORMATION TO NON-OPERATOR                        18

      16          VELOCITY SURVEYS                                           18

      17          COMPLETION INFORMATION TO NON-OPERATOR                     19


<PAGE>

    CLAUSE        TITLE                                                     PAGE
    ------        -----                                                     ----

      18          ADDITIONAL TESTS                                           20

      19          ACCOUNTS                                                   20

      20          TESTING AND GAUGING                                        21

      21          OPERATIONAL PRACTICES                                      21

      22          INDEMNITY                                                  22

      23          INSURANCE                                                  23

      24          ABANDONMENT OF WELLS                                       24

      25          SURRENDER                                                  26

      26          CHANGE OF OPERATOR                                         27

      27          LEASE SELECTION                                            29

      28          RESTRICTIONS ON INDEPENDENT DRILLING                       30

      29          TERM OF AGREEMENT                                          30

      30          FORCE MAJEURE                                              31

      31          RELATIONSHIP OF PARTIES                                    31

      32          CONFORMANCE WITH LAWS                                      32

      33          CONFIDENTIAL INFORMATION                                   32

      34          FURTHER ASSURANCES                                         33

      35          OVERRIDING ROYALTIES                                       34

      36          ENCUMBRANCES                                               34

      37          UNITED STATES TAX PROVISION                                35

      38          AREA OF COMMON INTEREST                                    36

      39          ALIENATION                                                 37

      40          PARTITION                                                  37

      41          NOTICES AND ADDRESSES FOR SERVICE                          38


<PAGE>



                               OPERATING PROCEDURE


         This Operating Procedure is entered into between and agreed upon by the
parties  to the  Agreement  to which  this  Operating  Procedure  is  annexed as
Schedule  "B" and each of the said  parties  shall be a party to this  Operating
Procedure and be bound by all of the terms,  covenants and conditions  hereof as
fully and effectively as if named herein as a party and if executed by it.

1.       INTERPRETATION:

         (a) In this Operating Procedure,  this clause and the schedules hereto,
unless the context otherwise requires:

                  (i)      "Accounting  Procedure"  means the rules,  provisions
                           and conditions set forth and contained in Exhibit "A"
                           attached hereto and made a part hereof;

                  (ii)     "affiliate    corporation"    means   a   corporation
                           fulfilling one of the following  requirements:

                           (1)      a corporation  the  majority of whose voting
                                    stock is owned by a party hereto;

                           (2)      a corporation  owning  the  majority  of the
                                    voting stock of a party hereto;

                           (3)      a  corporation  the majority of whose voting
                                    stock  is owned  by any  other  corporation,
                                    which  other   corporation   also  owns  the
                                    majority  of the  voting  stock  of a  party
                                    hereto;


<PAGE>

                  (iii)    "completion  costs" with  respect to a well means all
                           monies actually expended for acquiring and installing
                           casing  left in the hole,  (exclusive  of surface and
                           intermediate  casing),  and the cost of acquiring and
                           installing  tubing,  wellhead and pumping  equipment,
                           flowlines,   tanks  and  other   related   equipment,
                           material and services  necessary for  preparing  such
                           well  for  the  taking  of  production  of  petroleum
                           substances therefrom  including,  but not to restrict
                           the  generality  of  the  foregoing,  the  applicable
                           charges more particularly set forth in the Accounting
                           Procedure;

                  (iv)     "drilling costs" means all monies expended, exclusive
                           of  completion  costs,  for drilling and  equipping a
                           well for the  recovery  and taking of  production  of
                           petroleum substances  including,  but not to restrict
                           the  generality  of  the  foregoing,  the  applicable
                           charges more particularly set forth in the Accounting
                           Procedure;

                  (v)      "Farmout Agreement" means the agreement to which this
                           Operating Procedure is annexed as Schedule "B";

                  (vi)     "joint  account"  or "joint  account of the  parties"
                           means the record of expenditures,  receipts and other
                           financial  transactions  which  is kept  by  Operator
                           regarding any operations  conducted  pursuant to this
                           Operating  Procedure at the joint risk and expense of
                           the parties;

                  (vii)    "the Lands"  means the lands,  and lands under water,
                           including the geological  formations  thereunder from
                           time to time made subject to this Operating Procedure
                           pursuant to the  provisions of the Farmout  Agreement
                           and also  includes the  petroleum  substances  within
                           such lands or formations;


<PAGE>

                  (viii)   "Non-Operator"  means  any  party  to  this Operating
                           Procedure which is not Operator;

                  (ix)     "Operator"  means   the   party   to  this  Operating
                           Procedure designated  as  Operator  pursuant  to  the
                           provisions hereof;

                  (x)      "operating   costs"  means  all  monies   necessarily
                           expended, exclusive of drilling and completion costs,
                           to  operate  a well  for the  recovery  of  petroleum
                           substances  as more  particularly  set  forth  in the
                           Accounting    Procedure    under   the   heading   of
                           Exploration, Development and Operating Charges;

                  (xi)     "the  Permits"  means the  petroleum  and natural gas
                           permits and leases,  together  with any leases issued
                           out of such permits,  made subject to this  Operating
                           Procedure  pursuant to the  provisions of the Farmout
                           Agreement,  but only insofar as such documents demise
                           the Lands;

                  (xii)    "petroleum  substances"  means the  substances  to be
                           granted to the holder of the Permits pursuant thereto
                           and  only  insofar  and to the  extent  the  same are
                           granted by Permits;

                  (xiii)   "spacing  unit"  means  the  area  prescribed  for or
                           allocated  to a well for the purposes of drilling for
                           or  producing  the  petroleum  substances,  or any of
                           them,  by  or  under  any  laws,  rules,   orders  or
                           regulations now or hereafter in effect  governing the
                           spacing of petroleum and natural gas wells, or either
                           of them.


<PAGE>

                  (xiv)    "prevailing  market price" means the price prevailing
                           in a competitive market in the area of production or,
                           in the  absence  of such a  competitive  market,  the
                           price prevailing at Montreal,  Quebec less reasonable
                           costs of transportation  computed back to the area of
                           production.

         The headings of the clauses of this  Operating  Procedures are inserted
for  convenience  of  reference  only  and  shall  not  affect  the  meaning  or
construction thereof.

         (c)  Whenever  the  plural  or  masculine  or  neuter  is  used in this
Operating  Procedure the same shall be construed as meaning singular or feminine
or body politic or corporate and vice versa where the context so requires.

         (d) If any term or condition of this Operating Procedure conflicts with
a term or condition  of the Permits,  then such term or condition in the Permits
shall  prevail  and this  Operating  Procedure  shall be deemed  to be  modified
accordingly.  Wherever  any term or  condition,  expressed  or  implied,  of any
Exhibit  conflicts  with or is at variance  with any term or  condition  of this
Operating Procedure, the latter shall prevail.

2.       PARTICIPATING INTERESTS:

         Except as  otherwise  provided  herein,  the parties to this  Operating
Procedure  shall  bear all  costs  and  expenses  paid or  incurred  under  this
Operating  Procedure and shall own the Permits and the Lands,  all wells thereon
and information  obtained  therefrom,  the equipment  pertaining thereto and the
petroleum  substances  produced  therefrom  in  accordance  with  the  following
respective undivided shares or interests:

                     Panarctic Oils Ltd.               -    50%

                     Canada Southern Petroleum Ltd.    -    50%

(hereinafter called "participating interests");


<PAGE>

3.       OPERATOR:

         Panarctic is hereby designated as Operator of the Lands and, subject to
the  provisions of this Operating  Procedure,  shall have the sole and exclusive
control and management of all operations hereunder.

4.       FORECAST OF OPERATIONS:

         Operator  shall,  from  time to time at the  request  of  Non-Operator,
furnish  Non-Operator with a written forecast  outlining all operations which it
proposes to carry out on the Lands during the forecast period (which shall be no
less than Three (3) months and no more than Twelve (12)  months),  together with
the estimated costs thereof.  It is specifically  understood that such forecasts
are for informational  purposes only and shall not bind either of the parties to
this Operating Procedure.

5.       AUTHORIZATION FOR EXPENDITURES:

         Operator shall not undertake any single project reasonably estimated to
require an expenditure  in excess of Fifteen  Thousand  ($15,000.00)  Dollars on
behalf of the parties hereto,  and provided further that the aggregate amount of
those expenditures not in excess of Fifteen Thousand  ($l5,000.00) Dollars shall
not exceed  Thirty  Thousand  ($30,000.00)  Dollars in any sixty (60) day period
unless the same:

                  (i)      is authorized by agreement of the parties, or

                  (ii)     is  required  to keep the  Permits  in full force and
                           effect  but  not   including   the   drilling  of  an
                           obligation well, or

                  (iii)    is required by any law or regulation, or

                  (iv)     is  necessary  because of an  unforeseen  contingency
                           endangering the property of the parties,


<PAGE>

and in the event of any expenditure  made under items (ii), (iii) or (iv) above,
Operator shall forthwith advise Non-Operator in writing thereof;

         PROVIDED THAT the approval of the parties of a detailed estimate of the
cost of the  drilling,  reworking,  deepening or plugging back of any well shall
include  approval  of all  necessary  expenditures  required  therefor  and  for
completing,  testing and  equipping  the same,  including  necessary  flowlines,
separators and lease tankage.

6.       INDEPENDENT DRILLING AND DEEPENING:

         I.       Voluntary Operations:

(a)      Any party  (hereinafter  called "proposing party") at any time may give
         written notice  (hereinafter called "the proposal notice") to the other
         party of a  proposal  to drill a well on the  Lands,  and the  proposal
         notice shall  include the proposed  location of the well,  the proposed
         depth of same and a detailed estimate of the cost thereof. If, prior to
         the expiration of sixty (60) days from receipt of the proposal  notice,
         the other party notifies proposing party in writing of agreement to the
         drilling of the well in accordance with the proposal  notice,  Operator
         shall  drill same on the terms set out in the  proposal  notice and the
         well shall be deemed to be a well drilled for the joint  account of the
         parties.

(b)      If, upon the expiration of sixty (60) days from receipt of the proposal
         notice,  the other  party does not agree in writing to the  drilling of
         such  well  (and  failure  to advise  proposing  party  shall be deemed
         non-agreement),  proposing  party may,  prior to the  expiration of one
         hundred  and twenty  (120) days from  receipt of the  proposal  notice,
         commence  the  drilling of such well and  thereafter  drill same to the
         proposed depth. If such well is not commenced  within the aforesaid one
         hundred and twenty  (120) day period,  the well  proposed  shall not be
         drilled without a new proposal notice.


<PAGE>

(c)      Operations  pursuant to  subclause  (b) hereof  shall be  performed  by
         proposing  party and such well shall be drilled,  completed,  capped or
         abandoned  at the sole risk and  expense of  proposing  party  and,  if
         abandoned,  the  provisions  of Clause 24 hereof shall not apply to the
         other party.

Agreement of 1-1-75:        Exploratory  well defined as  a well 2 or more miles
                            from producing  well.  Penalty for not participating
                            in exploratory well is 6 N.W.T. sections.

(d)      If production of petroleum substances is  encountered  in such well and
         the same is capable of such production and is not abandoned,  then such
         well shall be operated by proposing party for its sole account, and all
         proceeds of production therefrom shall accrue to proposing  party until
         proposing party receives from the proceeds of production from such well
         Three Hundred  (300%) percent of all drilling and  completion  costs of
         such well,  together  with One Hundred (100%) percent of all  operating
         and any other costs incurred with respect to such  well  subsequent  to
         the "on production" date (as set by the applicable governmental agency)
         to the  date  of  recoupment  by  proposing  party  of  such  drilling,
         completion,  and operating and other  costs (the total of the foregoing
         costs is  hereinafter  referred to  as "penalty  expenses").  All  such
         costs are to be computed and charged in accordance with the  Accounting
         Procedure.


<PAGE>

(e)      During  the period in which  proposing  party is  recouping the penalty
         expenses,  it shall  supply  to  the  other  party  a monthly statement
         setting forth all costs  incurred  in  the operation of such well,  the
         revenues  received from the sale of  production therefrom and a current
         statement each month  setting forth a  comparison  of the total of such
         revenues  to the total of  the penalty expenses  incurred to such date.
         If proposing party  receives  out  of  the  proceeds  of production the
         penalty  expenses,  it shall,  within twenty (20) days of such receipt,
         give written  notice to the other party of its receipt of same,  and on
         or before  the  expiration  of thirty  (30) days from  receipt  of such
         written notice,  the  other  party  shall  have  the  right  to  advise
         proposing  party in writing of its  election  to  participate  in  such
         well.  If the other  party so elects to participate  it shall be deemed
         to have participated as of the date the penalty expenses were recovered
         by proposing  party.  Failure of the  other  party  to advise proposing
         party in writing within the time hereinbefore specified of its election
         to participate shall be deemed an election not to participate.

(f)      If the other party elects  to participate in such well  as in subclause
         (e) hereof provided,  Operator shall assume operation  thereof  and the
         well shall  be construed as a well being operated for the joint account
         of the parties from and after  the  effective  participation  date.  In
         such event each  party shall participate  in the well  to the extent of
         its participating  interest.


<PAGE>

(g)      Until such  time  as  any  well  drilled  pursuant  to this  clause  is
         abandoned  or is operated  as a well for the  account  of  both  of the
         parties,  as hereinbefore provided, proposing party shall own the well,
         the equipment  pertaining  thereto  and  all  production  of  petroleum
         substances  therefrom  excepting  production  from  such  well  of  any
         petroleum and/or natural gas that is being produced, or that is capable
         of being  produced,  from any other well or wells the  production  from
         which is attributable  to any  horizons or  formations  of that spacing
         unit on which the well drilled by proposing  party is  located.  At the
         request of proposing  party,  the other party shall execute and deliver
         to proposing  party all documents  as  proposing  party  may reasonably
         request to further evidence the foregoing.

(h)      Proposing party  shall initially  pay and  bear for its own account all
         royalties and taxes applicable to the production obtained from a well
         drilled by it pursuant  to this  clause,  and the other  party shall be
         under no  liability whatsoever for same, provided that all royalties so
         paid shall be first deducted before deducting the penalty expenses.

(i)      All wells drilled on the Lands shall be drilled at a rate substantially
         the same as that prevailing in the area in which the  proposed  well is
         to be located.

(j)      If proposing party is unable to recover from the proceeds of production
         the penalty expenses, it shall own all material, equipment and supplies
         placed or  installed by  it at its sole  expense in the  well or on the
         Lands in connection therewith,  but  if  such  material,  equipment and
         supplies have a salvage value,  less the  estimated  cost  of salvaging
         (such  value  to  be  determined  in  accordance  with  the  Accounting
         Procedure),  in  excess  of  the  unrecovered  amount  of  the  penalty
         expenses,  such excess shall be owned by both parties in  proportion to
         their participating interests.


<PAGE>

(k)      Proposing  party shall indemnify and save harmless the other party from
         and against all actions,  suits,  claims  and demands whatsoever by any
         person or persons  whomsoever in respect of any loss,  injury or damage
         or  obligation to compensate  arising  out  of or  connected  with  the
         operations  carried  on by proposing  party pursuant to this clause and
         prior to the operation of  such well by Operator for the joint  account
         of the parties.

(l)      Proposing  party shall supply to the other  party,  on  or  before  the
         expiration  of ninety (90) days from the rig  release  date  or  the on
         production date of any well  drilled  by it,  whichever  is the  later,
         all factual  data  obtained  from  such  well  covering  the  drilling,
         testing and completion,  capping  or  abandonment,  operations  and the
         other party  shall  be  entitled  to  have  access,  after  the  period
         hereinbefore  specified,  to  all  samples  and  cores  taken from such
         well.

(m)      The foregoing  provisions of this clause shall, mutatis mutandis, apply
         to any deepening,  reworking  and  plugging-back  operations,  with the
         under-noted explicit restrictions:

         (i)      Unless  otherwise  mutually  agreed,  no  well  producing,  or
                  capable  of  producing,   petroleum   substances   in   paving
                  quantities shall be deepened, reworked or plugged-back;

         (ii)     The period for  accepting the proposal  notice shall be forty-
                  eight (48) hours when a rig is present on the  location;

         (iii)    The period for commencing deepening,  reworking  or  plugging-
                  back operations shall be ninety-six (96) hours from receipt of
                  the proposal notice when a rig is present on the location.


<PAGE>

         II. Obligation Wells:

         For the purposes of this clause,  an obligation well is a well which is
required to be commenced and drilled on the Lands under the terms of the Permits
or under the terms of any  regulations or statutes  applicable  thereto and that
failure to  commence  and drill the same will result in  forfeiture  of all or a
portion of the Lands.

(a)      If a notice of the  obligation is given,  the party who receives notice
         of the obligation shall notify the other party hereto of the accrual of
         an  obligation  to   commence  the  drilling   of  an  obligation  well
         immediately upon receipt by it of notice or information that such  well
         is required to be commenced.  If the parties hereto, within thirty (30)
         days of both parties having such notice,  do  not  elect  to drill such
         obligation well as a joint account  well or either of them do not elect
         to drill such obligation well pursuant to the provisions of subclause I
         hereof, the Operator shall forthwith:

         (i)      Attempt to secure release ofthe obligation bythe party to whom
                  the obligation is owed; or

         (ii)     Attempt by  settlement or compromise  to make other reasonable
                  arrangements in lieu of drilling  the obligation well with the
                  party to whom the obligation is owed; or

         (iii)    Attempt to have the obligation  performed by an outside  party
                  without  privity  to  this   Operating  Procedure  upon  terms
                  agreeable to the parties hereto.


<PAGE>

(b)      If none of the foregoing  alternatives  can be agreed upon and put into
         effect  within thirty (30) days of  the  expiration  of  the  aforesaid
         thirty (30) day period, and one of the parties hereto desires to drill,
         the party desiring to drill  the  said  well  (hereinafter  called  the
         "drilling party")  may proceed  to do  so at  its sole cost,  risk  and
         expense  provided  it  commences  the  drilling  of  such well at least
         thirty-one  (31)  days  prior  to  the date upon which the well must be
         drilled to satisfy the obligation,  and continues with due diligence to
         complete the drilling thereof.  Any such well shall conform to the then
         existing well spacing program. On completion or abandonment of any such
         well,  the party  which did  not participate  in the  drilling thereof,
         shall assign or transfer to the drilling party all of its  interest  in
         and to that  portion of the Lands which,  under the terms of the Permit
         in question or the applicable regulations or statutes,  as the case may
         be,  would have been  surrendered  or forfeited if such obligation well
         had not been drilled.

         In the event the period of time between the date that both parties have
         notice of the  requirement  to drill the  obligation  well and the date
         within which such well must be drilled is less than the period of  time
         allowed above to comply with the foregoing procedures, then each of the
         thirty (30) day periods referred to above shall be reduced  accordingly
         with a view  to maintaining  such  procedures  but  decreasing the time
         limits within which they must be effected.

(c)      If neither of the parties hereto is desirous of drilling the obligation
         well,  the parties  hereto shall join in taking the steps  necessary to
         surrender  those  portions  of  the  Lands  which  are  required  to be
         surrendered by the terms of the Permit in question or by the applicable
         regulations or statutes.


<PAGE>

(d)      If the obligation may not be avoided by surrender of the Lands in whole
         or in part and failure to perform the same would  support an action for
         specific  performance  or  damages,  then  if  none  of  the  foregoing
         provisions apply and if the parties hereto cannot  mutually  agree upon
         the nature, location, extent and cost of a program necessary to satisfy
         such  obligation,  then  notwithstanding  anything  elsewhere  in  this
         Operating  Procedure contained,  Operator  shall have the sole right to
         determine such program  and  shall  notify  the other  party  hereto in
         writing  of  the  nature,  location,  extent  and  anticipated  cost of
         conducting such program.  In such event,  and  notwithstanding anything
         elsewhere in this Operating Procedure contained,  both  parties  hereto
         shall  participate  in and shall bear their proportionate  share of the
         cost thereof to  the same extent  as if and to  the intent and  purpose
         that such program were in fact  conducted  by mutual  agreement of both
         parties in accordance with the provisions of this Operating Procedure.

7.       MAINTENANCE OF THE PERMITS:

         Except as otherwise provided in this Operating Procedure,  Operator, on
behalf  of both  parties,  shall  comply  with  all the  expressed  and  implied
covenants  and  conditions  contained  in the  Permits  and shall do all  things
necessary to maintain  the Permits in full force and effect but,  subject to the
provisions  of Clause 6 hereof,  Operator  shall not drill any well on the Lands
unless and until the parties have agreed to such drilling.


<PAGE>

8.       GENERAL ACCOUNTING:

         (a) Subject to subclause (b) hereof,  Operator shall  initially pay and
charge to the account of the parties all costs and expenses of whatsoever nature
made or incurred with respect to any operations  whatsoever on,  maintenance of,
and production from the Lands, and all such costs and expenses shall be borne by
the parties in accordance with their respective participating interests, and the
method of handling the  accounting  with respect  thereto shall be in accordance
with the provisions of the Accounting Procedure.

         (b) Any costs or expenses made or incurred  pursuant to the  provisions
of Clause 6 hereof  shall be borne  solely by the party  which made or  incurred
same  pursuant  to said  provision,  and all  taxes  based on or  calculated  on
production of petroleum  substances  from the Lands shall be borne by that party
which was entitled to said  petroleum  substances in the  proportion in which it
was entitled to same.

9.       ADVANCES:

         Operator may, at its option and from time to time, require both parties
to advance their  respective  shares of the estimated  costs and expenses of all
operations  of  whatsoever  nature  carried  out by  Operator  on  behalf of the
parties. If Operator elects to so require any advance it shall, during the first
fifteen (15) days of any month, request in writing that Non-Operator advance its
estimated share for the month of any costs and expenses  authorized by agreement
of the parties or otherwise permitted under Clause 5 herein, and if so requested
Non-Operator  shall pay its share of such  estimated  monthly costs and expenses
within fifteen (15) days of receipt of the request from Operator.

         The accounts  between the parties  shall be adjusted to actual costs by
Operator in the month's statement  following the month in which the actual costs
are ascertained.


<PAGE>

10.      OPERATOR'S LIEN:

         Operator  shall  have a first  and  prior  lien on all  rights  and the
interest of Non-Operator in and to the Lands,  the Permits and in any production
obtained  therefrom  and the material and  equipment  thereon,  and shall have a
right of set-off against monies  otherwise  payable to Non-Operator  pursuant to
this Operating  Procedure,  to secure the payment by Non-Operator of any amounts
owing by it to Operator  pursuant to the terms of this Operating  Procedure.  If
Non-Operator  does not pay to Operator  its share of such monies  within  thirty
(30)  days  after  demand,  Operator  shall  have the right to  enforce  payment
thereof,  together with interest  thereon at Six (6%) percent per annum,  in any
manner in which it is entitled either pursuant to this Operating  Procedure,  or
at law, or both.  The lien and other rights herein  granted to Operator shall be
in addition to and not in substitution for any other rights or remedies Operator
may have with respect to the  non-payment of any amount owing by Non-Operator to
Operator.

11.      OWNERSHIP OF PRODUCTION:

         (a) Each party shall own and, at its own expense,  may take in kind and
separately  dispose  of for its  own  account  its  proportionate  share  of all
petroleum  substances produced and saved from all wells operated on the Lands on
behalf of the parties, subject, however, to deduction from each party's share of
production its proportionate  share (where applicable) of all lessors' and other
royalties  paid in kind and to the terms and  provisions  of the Permits and the
Accounting  Procedure  and to the right of Operator to use such of the petroleum
substances as may be required for the  development and operation of the Lands on
behalf of the parties and in preparing  and treating such  petroleum  substances
for marketing purposes, and exclusive of production unavoidably lost.


<PAGE>

         (b) If  Non-Operator  at any time and from time to time fails to notify
Operator of the  arrangements it has made to take in kind or separately  dispose
of  its   proportionate   share  of   production,   Operator  may  purchase  the
Non-Operator's share of production at prices not less than the prevailing market
price  for  products  of like  kind and  quality,  or sell the same to others at
prices  not  less  than  those  which  Operator  receives  for its own  share of
production  in an arm's length  transaction  for a monetary  consideration  to a
purchaser  other  than an  affiliate  of the  Operator.  If  Operator  is itself
purchasing Non-Operator's share of production, the right is revocable at will by
written notice to Operator. If Operator is selling Non-Operator's  proportionate
share of production to others,  the right is revocable by Non-Operator by giving
written notice to be effective  within a time not less than the period of notice
which  Operator  must give in order to terminate  its sale  arrangements.  In no
event  shall   Operator   enter  into  any  sales   contract   with  respect  to
Non-Operator's  share of  production  which is for a period  greater  than  that
usually  entered into in the area or for a period of one (1) year,  whichever is
the lesser.

         (c) If Operator purchases and/or sells the share of production to which
Non-Operator is entitled as aforesaid,  Operator shall deliver to  Non-Operator,
on or before the last day of each and every calendar month, a complete statement
or statements properly verified,  including Statutory  Declarations if requested
by  Non-Operator,  with  respect to the quantity and kind of that portion of the
petroleum  substances  produced  and saved from the Lands  during  the  previous
calendar month  attributable  to the interest of  Non-Operator.  Operator shall,
with each such  statement,  pay to  Non-Operator  the proceeds  from the sale of
Non-Operator's portion of such production subject to all deductions of royalties
applicable thereto.


<PAGE>

         (d) Any  market  available  to  Operator  shall  be  shared  by it with
Non-Operator to the intent and purpose that Non-Operator  shall not be obligated
to store its participating interest in petroleum substances produced,  except to
the proportionate  extent that petroleum  substances  produced are so stored for
lack of market.

12.      PRE-COMMENCEMENT INFORMATION TO NON-OPERATOR:

         Prior to commencing any well  on behalf of the parties,  Operator shall
furnish to Non-Operator:

         (a)      the  proposed  program  of  drilling,   coring,   logging  and
                  drillstem testing;

         (b)      particulars of the well location;

         (c)      well co-ordinates and surface elevations.

13.      DRILLING INFORMATION TO NON-OPERATOR:

         During  the  drilling  of any well on behalf of the  parties,  Operator
shall furnish to  Non-Operator:

         (a)      immediate  written  notice  of  commencement  including  Kelly
                  Bushing elevations;

         (b)      daily drilling and geological reports;

         (c)      if requested in writing,  a complete set  of washed samples of
                  the cuttings of the formations penetrated;

         (d)      access to all cores taken;

         (e)      immediate advice  of  any  porous  zones  or  showings  of the
                  petroleum substances encountered, and Non-Operator  may have a
                  representative  present to witness and observe the test of any
                  such porous zones or showings;

and complete access of  Non-Operator's  employees or agents,  at  Non-Operator's
sole cost, risk and expense, to the well including derrick floor privileges.


<PAGE>

14.      TESTING INFORMATION TO NON-OPERATOR:

         During the drilling  of any  well on  behalf of  the parties,  Operator
shall:

         (a)      test it in accordance with the proposed program;

         (b)      make such further  tests  in  accordance  with  good  oilfield
                  practice of  any  porous  zones or  showings of  the petroleum
                  substances encountered or indicated by any survey;

         (c)      take  representative  mud  samples  and  drillstem  test fluid
                  samples in order to obtain  accurate  resistivity mud filtrate
                  and formation water readings and supply Non-Operator with all
                  information relative thereto;

         (d)      supply  Non-Operator  with  copies of the  drillstem  test and
                  service report on each drillstem test run, including copies of
                  pressure charts.

15.      LOGGING INFORMATION TO NON-OPERATOR:

         During the  drilling of any well on behalf of the parties and upon such
well reaching the proposed depth, Operator shall run all log surveys agreed upon
among the  parties  hereto,  prior to the  drilling  of such well to provide the
optimum  evaluation  possible  of the  horizons  penetrated.  In addition to the
foregoing,  Operator  shall run such other logs as may be agreed  upon among the
parties subsequent to the drilling of any such well.  Operator shall supply Non-
Operator with copies as requested of each log so run.

16.      VELOCITY SURVEYS:

         (a) Operator,  on its own behalf and at its own expense,  in accordance
with good oilfield and established  modern and scientific  practices,  may run a
velocity survey in any well drilled on behalf of the parties.


<PAGE>

         (b) If  Operator  does not elect to run a velocity  survey  pursuant to
subclause  (a) hereof,  Non-Operator,  on its own behalf and at its own expense,
including rig time and any other costs relating to such survey which would be in
excess of normal  drilling  or  operating  costs,  may run such  survey with the
written  consent of  Operator,  and in so doing  Non-Operator  shall  proceed in
accordance with good oilfield and established modern and scientific practices.

         (c) If a velocity  survey is run by Operator  pursuant to subclause (a)
or by Non-Operator  pursuant to subclause (b) hereof,  the party not bearing the
costs  of  same  may   obtain  a  copy   thereof,   together   with  all   basic
non-interpretative  geological  and  geophysical  data  (including  check shots)
obtained  from the well in which such  velocity  survey is run, by paying to the
other party  one-eighth (1/8) of the costs thereof (which costs include rig time
costs). The party running the velocity survey shall,  notwithstanding  Clause 33
hereof,  have the  exclusive  right to trade  and sell the  results  of the said
velocity  survey to any third party or parties.  Any party which runs a velocity
survey shall  indemnify  the other party to this  Operating  Procedure  from and
against all actions,  causes of action,  claims and demands for all loss, injury
or damages such other party may incur or suffer by reason of the exercise of the
rights herein granted.

17.      COMPLETION INFORMATION TO NON-OPERATOR:

         Upon the completion of any well drilled on behalf of the parties,
Operator shall supply to Non-Operator:

         (a)      copies as requested of any directional,  temperature,  caliper
                  or other well surveys or oil, gas, water or other analyses
                  made;

         (b)      samples as requested of at least one (1) quart of water and/or
                  petroleum  substances  other than natural gas  recovered  from
                  each test if  Operator  does not make  analyses  of such water
                  and/or petroleum substances other than natural gas;

         (c)      a complete summary of the drilling and completion;


<PAGE>

         (d)      written notice of the commencement of production of any of the
                  petroleum substances;

         (e)      all production  information  and  other  data  relating to the
                  completion of the well.

18.      ADDITIONAL TESTS:

         In  addition  to  its  rights  in  connection  with  velocity  surveys,
Non-Operator shall have the right at its sole cost, risk and expense to make any
other test or survey in any well drilled by the Operator for the joint  account,
provided that Non-Operator shall not make any test or survey in any such well in
the event that the hole is in  unsatisfactory  condition  for such  purposes  as
determined  by  the  Operator  and  provided  further  that  Non-Operator  shall
indemnify  and save  harmless  the other party hereto from and against all loss,
damage,  or cost  which  such  other  party  may  incur or  suffer  by reason of
Non-Operator exercising the rights herein granted.

19.      ACCOUNTS AND INFORMATION:

         Operator shall:

         (a)      at all times keep true and correct books, records and accounts
                  showing  all  operations  carried  on  and  the  quantity  and
                  disposition of the petroleum substances taken from each well;

         (b)      permit  Non-Operator the right of access and to make copies at
                  all  reasonable  times  to  any  and  all   non-interpretative
                  information, and any interpretative information charged to the
                  joint  account,   pertaining  to  wells  drilled,   production
                  secured,    petroleum    substances   marketed    [exploratory
                  operations,  seismic  operations,  development  work]  and any
                  other operations conducted  hereunder,  and the books, records
                  and vouchers relating to the operation of the Lands;


<PAGE>

         (c)      pay when they  become due and  payable all claims for wages or
                  salaries for services  rendered or performed and for materials
                  supplied on, to or in respect of the Lands, or any work, works
                  or operations thereon;

         (d)      permit no liens of any nature  whatsoever to remain registered
                  or field against the Lands, the Permits,  or any well thereon,
                  unless there be a bona fide dispute  respecting  such claim or
                  account;

         (e)      permit no claims of, or dues to, or on behalf of the Workmen's
                  Compensation Board to become in arrears.

20.      TESTING AND GAUGING:

         All sampling, testing, gauging, measuring and taking of gravities which
may be required to be done in order to determine  the  gasoline  content of gas,
the  gravity  of oil,  the amount of water  content  and the amount of any other
foreign substances  contained in any petroleum  substances,  or the qualities of
any other  substances  shall be taken,  done and  performed  by  Operator by any
method or process  generally  recognized in the industry where the work is to be
done  and is  considered  as  reliable  and in  accordance  with  good  oilfield
practice.

21.      OPERATIONAL PRACTICES:

         Operator shall carry on all operations in a proper manner in accordance
with good oilfield and  established  modern and scientific  practices,  with due
skill and vigour,  with good and  sufficient  equipment in  accordance  with the
terms  and  provisions  of the  Permits  and this  Operating  Procedure,  and in
compliance  with all applicable  laws,  rules,  orders and  regulations but with
reasonable  allowances  having  regard to the  adverse  and  unusual  conditions
encountered in operations in Arctic areas.


<PAGE>

22.      INDEMNITY:

         (a)  Each  party  who  carries  on any  operations  at its own risk and
expense pursuant to this Operating Procedure shall and does hereby indemnify and
save  harmless the other party from and against oil  actions,  causes of action,
suits,  claims and demands by any person or persons whomsoever in respect of any
loss,  injury,  damage or obligation  to compensate  arising out of or connected
with such operations.

         (b) Operator shall be solely  responsible for and shall and does hereby
indemnify and save harmless Non-Operator from and against all actions, causes of
action, suits, claims and demands by any person or persons whomsoever in respect
of any loss,  injury,  damage or  obligation  to compensate to the extent of the
risks  against  which  Operator is required to cause to be carried  insurance as
provided in Clause 23 hereof,  and within the limits of such  insurance,  except
that if an insurer is  financially  unable to pay all or any  portion of a valid
claim, Operator shall be released from the indemnity and responsibility  assumed
by it under this subclause.

         (c) In addition to the  provisions  of subclause  (b) hereof,  Operator
shall be solely  liable for any loss or damage of  whatsoever  nature  when such
loss or damage is caused by Operator's gross  negligence or willful  misconduct,
and in such event Operator shall indemnify and save harmless  Non-Operator  from
and  against all  actions,  causes of action,  suits,  claims and demands by any
person  or  persons  whomsoever  in  respect  of any  loss,  injury,  damage  or
obligation to compensate.

         (d) Except as provided in the foregoing  provisions of this clause, all
liabilities  incurred by Operator in the carrying out of any operations pursuant
to this Operating Procedure,  whether contractual or tortious,  shall be charged
to the account of the  parties  and shall be borne by the parties in  accordance
with their respective participating interests.


<PAGE>

23.      INSURANCE:

         (a) As to all  operations  hereunder,  Operator  shall,  for the  joint
account of the  parties,  carry  Workmen's  Compensation  Insurance  meeting the
requirements of law.

         (b) In conducting all operations hereunder,  Operator shall comply with
all laws respecting labour and all other applicable federal and territorial laws
and applicable  rules and  regulations of federal and  territorial  governmental
agencies having jurisdiction.

         (c) Operator shall, for the joint account of the parties,  at all times
during  the term of this  Operating  Procedure  maintain,  and make a good faith
attempt to have its contractors maintain,  with a reputable insurance company or
companies  insurance of at least the kinds specified in subclause (d) hereto and
within limits not less than those therein set forth.

         (d) The insurance referred to in this clause is as follows:

                  (i)      Employer's liability insurance covering each employee
                           engaged in the operations  hereunder to the extent of
                           $100,000.00  where such  employee  is not  covered by
                           Workmen's Compensation;

                  (ii)     Public  liability  insurance  covering all operations
                           hereunder  within limits of  $300,000.00  for any one
                           person injured or killed and  $500,000.00  for two or
                           more persons injured or killed in any one accident;

                  (iii)    Property  damage  liability  insurance  covering  all
                           operations hereunder to the extent of $300,000.00 for
                           damages  to  third  parties  resulting  from  any one
                           accident,   including   damages   to  third   parties
                           resulting   from  fire  or  blowouts  but   excluding
                           subsurface damage;

                  (iv)     Automobile  public liability  insurance  covering all
                           automotive units engaged in the operations  hereunder
                           within  limits  of  $300,000.00  for any  one  person
                           killed or  injured  and  $500,000.00  for two or more
                           persons killed or injured in any one accident;

                  (v)      Automobile   property  damage   liability   insurance
                           covering  all   automotive   units   engaged  in  the
                           operations  hereunder up to the extent of $100,000.00
                           for damages resulting from any one accident.


<PAGE>

         (e) Operator shall furnish  Non-Operator with appropriate  certificates
of insurance,  if requested,  evidencing full  compliance with the  requirements
outlined above.  The policy and  certificates  shall include the Non-Operator as
additional named insured.  Non-Operator  shall be provided with thirty (30) days
advance written notice of cancellation or of any amendment or material change in
the policies.

         (f)  Each  party  which  carries  on any  operations  pursuant  to this
Operating  Procedure shall maintain  insurance to the limits not less than those
set forth in subclause (d) hereof and shall include the other parties  hereto as
additional named insureds.

24.      ABANDONMENT OF WELLS:

         (a) If  either  party  desires  to  abandon  any  well  being  drilled,
deepened,  reworked or operated  pursuant to this  Operating  Procedure,  or one
which is  suspended,  it shall give to the other  party  written  notice of same
(hereinafter called "the abandonment notice").  The party not wishing to abandon
shall, within forty-eight (48) hours of the receipt of the abandonment notice in
the case of a well on which a drilling  rig is located,  and within  thirty (30)
days of the receipt of the  abandonment  notice in all other  cases,  notify the
party wishing the abandon of its intention not to abandon, and shall, as soon as
reasonably  possible,  tender to the party  desiring  to  abandon a sum of money
equal to the interest of the party desiring to abandon in the fair salvage value
of all salvable  materials  and  equipment  attributable  to the well,  less the
estimated cost of salvaging the same,  such value  determined in accordance with
the  provisions  of  the  Accounting  Procedure.   Failure  to  respond  to  the
abandonment  notice shall be deemed an election to  participate  in the proposed
abandonment.


<PAGE>

         (b) Upon  receipt of notice from the party not wishing to abandon,  the
abandoning party shall execute and deliver all necessary  documents to convey to
the party  tendering such notice its entire interest in and to the said well and
the casing and equipment therein,  together with all of its rights in all future
production  therefrom  which may be produced  from the interval  from which such
well last produced,  provided  however it is specifically  understood and agreed
that such  conveyance  shall  exclude  production  from  such well of  petroleum
substances or any of them that are being produced,  or that are capable of being
produced,   from  any  other  well  or  wells,  the  production  from  which  is
attributable  to any  horizons or  formations  of that spacing unit on which the
well subject to the abandonment notice is located.

         (c) Upon the execution and delivery of the conveyance by the abandoning
party,  the well and spacing unit covered  thereby  shall cease to be subject to
this  Operating  Procedure  and the  abandoning  party  shall  be  released  and
discharged from all obligations  thereafter  accruing with respect to such well,
but  such   conveyance   shall  not  release  the  abandoning   party  from  its
proportionate  share of any  obligation  or  liability  which ought to have been
performed or may have accrued prior to such conveyance.

         (d) In the event both  parties  desire to abandon the well which is the
subject of the  abandonment  notice,  then  Operator  shall  abandon  such well,
provided  however that,  where such well was drilled by one of the parties only,
pursuant to  provisions  of Clause 6 hereof,  then that party shall abandon such
well.


<PAGE>

25.      SURRENDER:

         (a) Either  party may at any time and from time to time  surrender  its
entire  interest  with respect to any portion or portions of the Lands by giving
to the other  party,  at least  sixty (60) days  before the date for  payment of
rentals  attributable  to those portions of the Lands proposed to be surrendered
or the  accrual  of any  obligation  thereon  other than the  obligation  to pay
royalties,  a written notice (hereinafter called the "surrender notice"),  which
shall be duly  executed  and  which  shall  specify  the  portions  of the Lands
proposed  to  be  surrendered   (which  portions  are  hereinafter   called  the
"surrendered rights"). It is specifically understood that the surrendered rights
shall be of a size and  dimension  which  the  other  party  hereto  can in turn
surrender should it wish to do so.

         (b) If the party to whom the surrender  notice is given fails to advise
the party giving the notice,  in writing,  within twenty (20) days after receipt
of the  surrender  notice,  that  it  elects  to join  in the  surrender  of the
surrendered  rights,  the party giving the surrender  notice shall convey to the
other party its entire interest in and to the surrendered rights, and the wells,
equipment and material located thereon and attributable  thereto,  and thereupon
the parties  hereto shall do all things and  complete and deliver all  documents
necessary to register the entire interest in the surrendered  rights in the name
of the  party  who  did  not  elect  to join in the  surrender,  and  upon  such
conveyance "the Lands" shall be deemed to be amended so as to exclude  therefrom
the surrendered  rights. If Panarctic is the surrendering party as to any Permit
or lease or portion thereof, Panarctic will in addition to its obligations above
insure at its expense that there are sufficient  allowable  expenditures,  cash,
rent or otherwise to maintain the  properties  in good standing for a period not
less  than  one year  from the date of  conveyance.  The  party  receiving  such
conveyance  shall  forthwith  pay to  Operator  for credit to the account of the
parties a sum equal to the fair salvage  value of all  recoverable  material and


<PAGE>

equipment  located  upon and  attributable  to the  surrendered  rights less the
estimated cost of salvaging,  such value to be determined in accordance with the
Accounting  Procedure.  Upon the execution and delivery of the conveyance by the
surrendering party, the surrendering party shall be released and discharged from
all obligations  thereafter accruing with respect to the surrendered rights, but
such conveyance shall not release the surrendering  party from its proportionate
share of any  obligation or liability  which ought to have been performed or may
have accrued prior to the conveyance of the  surrendered  rights.

26.      CHANGE OF OPERATOR:

         (a) An Operator  shall be discharged  forthwith and its powers,  rights
and duties as Operator shall be terminated if, subject to clause 42 hereof:

                  (i)      it  dissolves,  becomes  bankrupt,   liquidates  or
                           terminates its corporate existence, or

                  (ii)     it sells or  otherwise  disposes of a majority of its
                           interest  in the  Lands  other  than to an  affiliate
                           corporation, or

                  (iii)    having  defaulted in the  performance  of any term or
                           condition of this  Operating  Procedure,  it fails to
                           commence to remedy such default  within  fifteen (15)
                           days  after   receipt  of  written   notice   from  a
                           Non-Operator and thereafter to diligently  proceed to
                           remedy such default.

         (b) Subject to subclause (a) hereof,  an Operator may resign its duties
as such after  giving to  Non-Operator  six (6)  months'  written  notice of its
intention to resign.

         (c) At any time after an Operator  has acted in that  capacity  for two
(2) years,  Non-Operator  may, if dissatisfied with the manner in which Operator
is performing its  obligations  hereunder,  serve notice in writing on Operator,
advising Operator of such dissatisfaction and set forth the terms and conditions
under  which it is  prepared  to  operate  the  Lands,  and  which  will be more
efficient  and  beneficial  to the  parties  hereto;  or if the  dissatisfaction
results from uneconomical  operations,  then advising of the specific  economies
that it will effect as Operator.  Unless within sixty (60) days after receipt of


<PAGE>

such notice  Operator agrees in writing to operate the Lands subject to the same
terms and conditions and to effect the same specific  economies and in fact does
so, then  Operator  shall be  discharged  and the party serving the notice shall
become Operator.  If the party serving the notice becomes  Operator  pursuant to
this  subclause then it shall operate the Lands on the same terms and conditions
mentioned in the notice and with the specific economies  described therein;  and
it shall not charge nor be entitled to any costs or  reimbursement in respect of
amounts  spent by it on the  subject of the  specified  economies  except as set
forth in the said notice.  It is  understood  and agreed that the  provisions of
this  subclause  shall not be utilized by any party at intervals  more  frequent
than at least two (2) years from any previous utilization of same.

         (d)  If an  Operator  is  discharged,  the  other  party  shall  become
Operator.  If an Operator submits its resignation,  the other party shall become
Operator.

         (e) If at any time  neither of the parties is able or willing to act as
Operator  pursuant to the  foregoing,  then the parties,  on notice by either of
them,  shall meet together for the purpose of appointing  an  independent  third
party to operate the Lands.  In the event the parties cannot reach  agreement on
an independent third party, then the party holding a majority in interest in the
Permits shall appoint a third party to operate the Lands. Such third party shall
operate  the Lands on the terms and  subject to the  conditions  as set forth in
this Operating Procedure and on such further terms and conditions as may, in the
opinion of the parties or the party holding a majority interest, as the case may
be, be necessary for such operation.


<PAGE>

         (f) Should any Operator for any cause cease to be Operator,  its rights
and  interests  in the Lands shall be  unaffected  thereby  and it shall  become
Non-Operator  herein and shall be thenceforth  bound by the terms and provisions
hereof as Non-Operator.  Either party hereto becoming a successor Operator shall
thereupon succeed to all the duties, powers, obligations, rights and authorities
given to Operator herein with respect to all operations of every kind thereafter
conducted  on the  Lands.  In every  case of a change of  Operator,  the  proper
adjustments  in the  accounts  of  parties  shall be made as of the date of such
change in order that no party  shall  suffer any  penalty or loss as a result of
such change. The outgoing Operator shall surrender  possession of and deliver to
a party hereto  becoming new Operator the exclusive  possession of the operating
rights hereunder and all undistributed cash on hand, together with copies of all
pertinent  books of account and records of the operations and true copies of all
documents, agreements or other papers relating thereto.

27.      LEASE SELECTION:

         (a) The  parties  shall  consult at least  sixty (60) days prior to the
date upon which  Petroleum and Natural Gas Leases may be selected from the lands
and the parties agree that such lands shall remain in the Non-Lease stage for as
long a period as possible.  If the parties can agree on a Lease  selection  then
such Lease selection  shall be the Lease selection of the parties.  If, however,
the parties  cannot  agree as to the Leases to be selected to the full extent of
the fifty (50%) percent of the initial area allowed under the Canada Oil and Gas
Land  Regulations,  then  those  upon which  agreement  can be reached  shall be
selected  and the  balance up to the fifty  (50%)  percent  limitation  shall be
selected, with each party designating Sections in an order determined by lot for
the account of the parties.


<PAGE>

         (b) In the event of  disagreement  as to a Lease  selection,  then if a
party  does not wish to select  Leases to the full  fifty  (50%)  percent  areal
extent referred to under subclause (a) above,  those Leases upon which agreement
can be reached will be selected  and the party  wishing to select the balance up
to the fifty (50%) percent  limitation  may do so and such balance shall be held
by such  selecting  party for its sole  account and any lands  comprised in such
solely  selected  Leases  shall  be held by such  party  free  and  clear of any
obligations under this Agreement.

         (c)  Subclause  (a) and  (b)  shall  apply,  mutatis  mutandis,  to the
selection of the remaining fifty (50%) percent of Leases  permissible,  pursuant
to Section 58 of the Canada Oil and Gas Land  Regulations  in  conjunction  with
Canada Oil and Gas Land Order No. 1, as amended, or similar provisions from time
to time in force.

         (d) It is understood  that any lease  acquired  under this Clause 37 by
either or both of the parties shall be subject to the Hembdt overriding royalty.

28.      RESTRICTIONS ON INDEPENDENT DRILLING:

         Notwithstanding  anything to the contrary in this Operating  Procedure,
and in particular Clause 6 hereof, no party shall be entitled to drill a well on
the Lands pursuant to the provisions of Clause 6 if at that time a well is being
drilled on the Lands  either as a joint  operation of the parties or pursuant to
the independent drilling provisions of Clause 6 hereof.

29.      TERM OF AGREEMENT:

         Except as otherwise  herein  provided,  this Operating  Procedure shall
continue in full force and effect as long as any portion of the Lands is jointly
owned by the parties hereto or at that later date (joint  ownership  continuing)
all  documents of title (and all renewals and  extensions  thereof) to the Lands
have  terminated  and all wells on  jointly  owned  Lands  have been  plugged or
abandoned,  all equipment thereon and therein salvaged,  and final settlement of
accounts had between the parties hereto.


<PAGE>

30.      FORCE MAJEURE:

         The  obligations  of a  party  to this  Operating  Procedure  shall  be
suspended  and it shall not be liable  for  damages  during  the time and to the
extent  that  such  party is  prevented  from  complying  with  its  obligations
hereunder in whole or in part by strikes,  lockouts,  acts of God or the Queen's
enemies,  war, laws,  orders or regulations of governmental  bodies or agencies,
unavoidable  accidents,  delays in transportation,  inclement  weather,  adverse
terrain,  failure of communications,  inability to obtain necessary materials in
the open market, or any other cause, except lack of finances, whether similar or
dissimilar to those  specifically  enumerated,  beyond the reasonable control of
the party affected.

31.      RELATIONSHIP OF PARTIES:

         Except as otherwise in this  Operating  Procedure  provided,  where the
parties hereto incur a liability to any other person,  such liability  shall not
be joint or  several  but each  party  shall be  separately  liable to the other
person for a portion of the total  liability  calculated in accordance  with its
participating  interest.  It is not the purpose of this  Operating  Procedure to
create any partnership,  mining partnership or joint venture  relationship,  and
neither this Operating Procedure nor the operations hereunder shall be construed
or  considered  as  creating  any such  relationship.  Any  trust  or  fiduciary
relationship  which may be created by this Operating  Procedure shall be limited
only to matters  directly  related to those  operations upon the Lands which are
expressly provided for herein.


<PAGE>

32.      CONFORMANCE WITH LAWS:

         This Operating  Procedure and the respective  rights and obligations of
the  parties   hereunder  shall  be  subject  to  all  applicable  laws,  rules,
regulations  and  orders,  and in the  event  this  Operating  Procedure  or any
provision  hereof is, or the  operations  contemplated  hereby are,  found to be
inconsistent  with or contrary to any such law, rule,  regulation or order,  the
latter shall be deemed to control and this Operating Procedure shall be regarded
as modified  accordingly,  and as so modified  shall  continue in full force and
effect.

33.      CONFIDENTIAL INFORMATION:

         All data and  information of whatsoever  nature acquired by the parties
from any  operations  pursuant to this  Operating  Procedure  or supplied by one
party to the other  pursuant  hereto shall be for the sole and exclusive use and
benefit of the parties unless the parties agree in writing to the  dissemination
of such  information  or unless a party is required to give such  information to
any  recognized  association  within the  petroleum  industry,  of which it is a
member, that engages in the exchange of factual information relating to the type
of operations contemplated by this Operating Procedure.

         Notwithstanding the foregoing,  any party shall be at liberty,  without
the written consent of the other party, to release such data and information to

         (a)      an affiliate  corporation provided such affiliate  corporation
                  undertakes  in writing  with the other  party  hereto that the
                  affiliate corporation shall treat such data and information in
                  the strictest of confidence and shall not further disclose, or
                  permit to be disclosed, such data and information to any other
                  person, firm or corporation, or


<PAGE>

         (b)      to  any   nationally   recognized   lending   institution   or
                  underwriting  organization  for the  bona  fide  purpose  of a
                  proposed borrowing or sale of securities  PROVIDED ALWAYS that
                  any  subsequent  release  of data and  information  or studies
                  resulting  therefrom  shall be solely for the  purpose of such
                  lending or sale and shall be limited to the  minimum  required
                  for that purpose, or

         (c)      to any  governmental  authority  when  required  by law. In no
                  event  shall  information  relating  to  wells  drilled  on  a
                  confidential  basis to the  parties,  or  either  of them,  be
                  disclosed, or

         (d)      to  any  of the  parties  (and  their  assigns)  to a  certain
                  agreement  between  Panarctic  Oils Ltd.  and Tenneco Oils and
                  Minerals Ltd., Columbia Gas System, Inc., Northern Natural Gas
                  Company and Texas Eastern  Transmission  Corporation dated the
                  first  day  of  May,  1971  (hereinafter  referred  to as  the
                  "Tenneco Agreement"), or

         (e)      to J.  C.  Sproule  and  Eric  Connelly  (and  their  assigns)
                  pursuant to an Agreement  between Panarctic and the said J. C.
                  Sproule and Eric  Connelly,  respectively,  both dated October
                  1st, 1967, or

         (f)      to a prospective purchaser of the interest of either party.

34.      FURTHER ASSURANCES:

         Each of the parties hereto  shall at all times do all such further acts
and  execute  and  deliver  all such  further  deeds and  documents  as shall be
reasonably  required  in order  fully to perform and carry out the terms of this
Operating Procedure.


<PAGE>

35.      OVERRIDING ROYALTIES:

         In the event  the  working  interest  of a party  hereto  is  presently
subject to other than the Hembdt royalty or may hereafter  become subject to any
overriding  royalty,  production  payment  or other  burden  and the same is not
charged to the joint  account of the parties,  such  royalty,  payment or burden
shall be borne  by the  party  creating  the  same or  against  whom the same is
enforced.  Provided  that if a party hereto shall  conduct any operation or make
any  election  as a result of which it becomes  entitled  to receive the working
interest  production  otherwise  belonging to the other party hereto,  the party
entitled to receive the working  interest  production  of the  non-participating
party shall receive such  production  free and clear of all royalties,  payments
and burdens (other than those charged to the joint account as aforesaid) against
such  production  which may have been  created  prior to or  subsequent  to this
Operating  Procedure and the party creating such royalties,  payments or burdens
shall  save the party  acquiring  such  interest  harmless  with  respect to the
receipt of such working interest production. The Hembdt royalty is to be charged
to the joint account.

36.      ENCUMBRANCES:

         Subject to the terms of this Operating  Procedure,  each of the parties
hereto  covenants  that it will not encumber or permit or cause to be encumbered
in any way the Lands or the Permits  without  the  written  consent of the other
party  hereto  being  first had and  obtained,  except  by means of  instruments
evidencing the bona fide loan of money to the encumbering  party,  and then only
if such instrument is restricted to the interest of the encumbering  party,  and
subject to the  provisions  of this  Operating  Procedure and all the rights and
interests of the other party hereto.


<PAGE>

37.      UNITED STATES TAX PROVISION:

         Notwithstanding  any provisions  herein that the rights and liabilities
of the parties  hereto are  separate  and not joint or  collective  or that this
Operating  Procedure  and  the  operations  hereunder  shall  not  constitute  a
partnership,  if for United States  Federal  Income Tax purposes this  Operating
Procedure and the operations hereunder are regarded as a partnership,  then each
of the parties hereto which is now or at any time shall become subject to United
States  Income Tax  provisions  hereby elects that it shall be excluded from the
application  of all of the  provisions of Subchapter K of Chapter 1, Subtitle A,
of the Internal Revenue Code of 1954, as permitted and authorized by Section 761
of the said Code and the Regulations promulgated thereunder.  Operator is hereby
authorized  and  directed to execute  such  evidence of this  election as may be
required by the Secretary of the Treasury of the United  States,  or the Federal
Internal Revenue Service, including specifically,  but not by way of limitation,
all of the  returns,  statements  and data  required by the Code and  applicable
Regulations. Should there be any requirement that a party hereto provide further
evidence of this  election,  each party  hereto  hereby  agrees to execute  such
documents  and  furnish  such other  evidence  as may be required by the Federal
Internal  Revenue  Service or as may be  necessary  to evidence  this  election,
PROVIDED ALWAYS that under no circumstances  shall a party not subject to United
States Income Tax be required to make its books and accounts available to United
States  authorities.  Each party hereto further agrees not to give any notice or
take any other action inconsistent with the election made hereby. In making this
election,  each of the parties hereto hereby states that the income derived from
the  operations  under this  Operating  Procedure can be  adequately  determined
without  the  computation  of  partnership   taxable  income.   Any  notices  or
information  which a party  hereto,  not  subject  to United  States  Income Tax
provisions,  is required to provide pursuant to this Clause 37 shall be provided
at the sole cost and expense of the party hereto who is subject to United States
Income Tax  provisions  and on behalf of which the notices and  information  are
provided.


<PAGE>

38.      AREA OF COMMON INTEREST:

         Except as hereinafter in this Clause 38 expressly  provided,  if at any
time prior to  December  31st,  l984,  either  party shall  acquire  directly or
indirectly any interest of any nature or kind,  beneficial or otherwise,  in any
permits or leases of or pertaining to oil and/or gas, including mineral or other
substances produced in association with oil and/or gas, covering lands, any part
of which is  located in the area  outlined  in blue on the map  attached  hereto
marked Schedule "D" to the Farmout Agreement  (hereinafter called the "Acquiring
Party"),  it shall forthwith give notice in writing to the other party hereto of
such  acquisition to the extent only that such  acquisition  relates to the area
located  within  the blue  outline  on  Schedule  "D"  (hereinafter  called  the
"Acquired  Interest"),  specifying the description of the lands and documents of
title,  extent of interest and the  consideration  paid or payable and the terms
and conditions,  if any,  attached  thereto (if the  consideration is other than
cash  then  a cash  equivalent  shall  be  specified)  as  well  as any  factual
information  which is then being withheld under Clause 6(1). The party receiving
such  notice  shall have the right and  option for a period of twenty  (20) days
thereafter  within  which to elect  to  acquire  that  portion  of the  Acquired
Interest  which is  equivalent  to its  participating  interest  at such time by
paying to the Acquiring  Party a like proportion of the  consideration  (or cash
equivalent) paid for the Acquired  Interest and assumption of a similar share of
all  obligations  attached  thereto.  In the event that the party receiving such
notice  shall elect to acquire an interest in the  Acquired  Interest,  then the
lands covered by the Acquired  Interest shall thereafter be included in and form
part of the  Lands  and be  subject  to this  Operating  Procedure  and shall be
thereafter  owned and  operated by the  parties  hereto in  accordance  with and
subject to all applicable  terms and  conditions of this Operating  Procedure in
the  proportions  of their  respective  interests  therein.  Each of the parties
covenants  and agrees to execute and deliver all such  assignments,  conveyances
and other  documents as may be necessary to vest title to the Acquired  Interest
in the  parties to this  Operating  Procedure  but if the party  receiving  such
notice fails to exercise the  aforesaid  rights within the time  stipulated,  it
shall thereafter have no right or interest  whatsoever in the Acquired  Interest
or the lands covered thereby.

         The provisions of this Clause shall not apply to

         (a)      any acreage located in the half grid corridors surrounding the
                  Permits  which is subject  to a now  existing  after  acquired
                  provision between Farmee and third parties, or the Farmor, or

         (b)      interests  acquired by either  party in any lands by virtue of
                  the  selection of leases  pursuant to the  provisions  of this
                  Operating Procedure, or

         (c)      interests  acquired in any lands by virtue of an assignment to
                  either  party  pursuant  to the  provisions  of  Clause  24 or
                  subclause II of Clause 6, or which are surrendered or assigned
                  pursuant to the provisions of Clause 25.

39.      ALIENATION:

         (a) Either party may dispose of any interest  hereunder,  provided that
no such  disposition  hereinabove  referred to shall be effective to increase or
multiply the obligations of the other party, whether as Operator or Non-Operator
under this Operating  Procedure,  and any disposition made as aforesaid shall be
subject to this express provision,  and the disposing party and such third party
shall enter into, execute and deliver any documents  necessary to give effect to
this  provision  and assume all the  obligations  attributable  to the  interest
affected.  The  remaining  party hereto shall not be bound to take notice of any
such  disposition  until such  documents are executed end delivered to it by the
disposing party.

         (b) Subject to the foregoing, this Operating Procedure shall be binding
upon and  enure to the  benefit  of the  parties  hereto  and  their  respective
successors and assigns.

40.      PARTITION:

         Each  party to this  Operating  Procedure  covenants  by its  execution
hereof that it will not at any time while this Operating  Procedure is in effect
commence an action for  partition of the  ownership of the Lands or any interest
therein which are or may become subject to this Operating  Procedure unless both
parties  hereto concur in the partition  thereof.


<PAGE>

4l.      NOTICES AND ADDRESSES FOR SERVICE:

         The addresses for service  hereunder of the parties  hereto shall be as
follows:
                              Panarctic Oils Ltd.,
                                  P.O. Box 190
                              703 - 6th Avenue S.W.
                               Calgary 2, Alberta

                         Canada Southern Petroleum Ltd.,
                    Fifth Floor, 505 Eighth Avenue Building,
                                Calgary, Alberta

Any party may from time to time  change its address  for  service  hereunder  on
written notice  to  the  other  party.  Any  notice  may  be  served by personal
delivery  or by mailing  the same by  registered  post,  postage  prepaid,  in a
properly  addressed  envelope addressed to the party to whom the notice is to be
given at its address for service  hereunder,  and shall be deemed to be received
seventy-two  (72) hours after the mailing thereof in one of Her Majesty's Postal
Stations in Canada,  Saturdays,  Sundays and statutory  holidays  excepted.  Any
notice may also be served by  prepaid  telegram  addressed  to the party to whom
such notice is to be given at such  party's  stated  address for service and any
such  notice  so  served  shall be  deemed  to be given to and  received  by the
addressee  eighteen  (18)  hours  after the time of  delivery  to the  telegraph
office, Saturdays,  Sundays and statutory holidays excepted. Any notice may also
be given by  telephone  to a  responsible  officer or employee  during  business
hours, followed immediately by letter or telegram, and any notice so given shall
be  deemed  to have  been  received  as of the date  and time of the  telephoned
notice.

42.  Notwithstanding  the provisions of clause 26 hereof,  if Panarctic  assigns
interests in the Permits  pursuant to the Tenneco  Agreement to any of the other
parties to such Agreement or their assigns,  such assignment shall not be a sale
of a majority of its interest in the lands as contemplated by clause 26 hereof.

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

<PAGE>




                                   EXHIBIT "A"

THIS IS EXHIBIT "A" to an Operating Procedure  entered  into  between  PANARCTIC
OILS LTD. and CANADA SOUTHERN PETROLEUM LTD.





                              ACCOUNTING PROCEDURE


                              I. GENERAL PROVISIONS

1.       Definitions

         "Joint  property"  shall mean the  properties  subject to the Operating
         Procedure to which this "Accounting Procedure" is attached.

         "Material" shall include equipment and supplies.

         "Operator"  shall  mean  the  Operator  as  defined  in  the  Operating
         Procedure to which this "Accounting Procedure" is attached.

         "Non-Operator"  shall  mean  any  one  or  more of the  parties  to the
         Operating Procedure who are not the Operator.

2.       Statements and Billings

         The Operator shall bill  Non-Operator  either on or before the last day
         of each month for its share of charges and credits during the preceding
         month. Such bills will be accompanied by statements, as follows:

         (1)      Detailed   statement   of   material   ordinarily   considered
                  controllable by operators of oil and gas properties;

         (2)      Statement  of  ordinary  charges  and  credits  to  the  joint
                  account,  summarized by appropriate classifications indicative
                  of the nature thereof; and

         (3)      Detailed statement of any other charges and credits.

3.       Payments by Non-Operator

         Each  Non-Operator  shall pay all such bills  within  fifteen (15) days
         after  receipt  thereof.  If payment is not made within such time,  the
         unpaid  balance  may, at the  Operator's  option,  and without  further
         notice  to the  Non-Operator,  bear  interest  at the  rate of six (6%)
         percent per annum until paid.


<PAGE>

4.       Advances

         Unless otherwise provided for in the Operating Procedure,  the Operator
         may require the  Non-Operator  to advance its share of  estimated  cash
         outlay for the current month's operation.

5.       Adjustments

         Payment of any such bills shall not prejudice the right of Non-Operator
         to protest or question the correctness thereof. All statements rendered
         to Non-Operator by Operator during any calendar year shall conclusively
         be  presumed  to be true and  correct  after  twenty-four  (24)  months
         following  the end of any such  calendar  year,  unless within the said
         twenty-four  (24) month period  Non-Operator  takes  written  exception
         thereto and makes claim on Operator for adjustment. Failure on the part
         of  Non-Operator  to make claim on Operator for adjustment  within such
         period shall establish the correctness  thereof and preclude the filing
         of exceptions thereto or making of claims for adjustment thereon.

         The  provisions  of  this  paragraph  shall  not  prevent   adjustments
         resulting  from  physical  inventory  of  materials  as provided for in
         Section VI, Inventories, hereof.

6.       Audits

         A  Non-Operator,  upon  notice in  writing  to  Operator  and all other
         Non-Operators,  shall  have the right at its sole cost and  expense  to
         audit  Operator's  accounts  and  records  relating  to the  accounting
         hereunder  for any  calendar  year  within the  twenty-four  (24) month
         period following the end of such calendar year, provided, however, that
         Non-Operator  must take  written  exception  to and make claim upon the
         Operator  for all  discrepancies  disclosed  by said audit  within said
         twenty-four   (24)  month   period.   Where   there  are  two  or  more
         Non-Operators the  Non-Operators  shall make every reasonable effort to
         conduct joint or simultaneous audits in a manner which will result in a
         minimum of inconvenience to the Operator.


                        II. EXPLORATION, DEVELOPMENT AND
                                OPERATING CHARGES

         Subject to limitations  hereinafter  prescribed,  Operator shall charge
         the joint account with the cost of the following items:

1.       Rentals and Royalties

         All deposits,  rentals, renewal and extension fees, payments in lieu of
         actual production (where applicable),  and royalties,  paid by Operator
         for the joint account.


<PAGE>

2.       Labor

         A.       Salaries and wages of Operator's employees directly engaged on
                  the   joint   property   in  the   exploration,   development,
                  maintenance and operation thereof including salaries and wages
                  paid to technical employees such as geologists,  engineers and
                  other employees who are temporarily assigned to and located at
                  and directly engaged on the joint property.

         B.       Holiday, vacation, sickness and disability benefits, and other
                  customary  allowances  applicable  to the  salaries  and wages
                  chargeable  under  Sub-paragraph  2 A and Paragraph 11 of this
                  Section II. Costs under this  Sub-paragraph 2 B may be charged
                  on a "when and as paid basis" or by "percentage assessment" on
                  the  amount  of  such   salaries  and  wages.   If  percentage
                  assessment is used,  the rate shall be based on the Operator's
                  cost experience.

         C.       Expenditures  or  contributions  made pursuant to  assessments
                  imposed by  governmental  authority  which are  applicable  to
                  Operator's labor costs as provided under Sub-paragraphs 2 A, 2
                  B and Paragraph 11 of this Section II.

3.       Employee Benefits

         Operator's  current cost of established plans for employees' group life
         insurance,   hospitalization,   pension,  retirement,  stock  purchase,
         thrift, bonus, and other benefit plans of a like nature,  applicable to
         Operator's  labor cost,  provided  that the total of such charges shall
         not exceed fifteen (l5%) percent of Operator's  labor costs as provided
         under  Sub-paragraphs  A and B of Paragraph 2 of this Section II and in
         Paragraph 11 of this Section II.

4.       Material

         Material  purchased  or  furnished  by  Operator,  for use of the joint
         property.  So far as it is  reasonably  practical and  consistent  with
         efficient  and  economical  operation,  only  such  material  shall  be
         purchased  for or  transferred  to the joint  property as required  for
         immediate use, and the accumulation of surplus stocks shall be avoided.

5.       Transportation

         Transportation of personnel and material necessary for the exploration,
         development,  maintenance,  and operation of the joint property subject
         to the following limitations:

         A.       When material is moved to the joint property,  no charge shall
                  be made to the joint  account for a distance  greater than the
                  distance from the nearest practical supply store or railway or
                  seaport  receiving  point where such  material  is  available,
                  except by agreement with Non-Operator.


<PAGE>

         B.       If  surplus  material  is moved  from the  joint  property  to
                  Operator's  warehouse or other storage point,  no charge shall
                  be made to the joint  account for a distance  greater than the
                  distance  from the nearest  practical  supply store or railway
                  receiving  point  to such  warehouse  or other  storage  point
                  except by agreement with Non-Operator. No charge shall be made
                  to the joint  account  for moving  material to  properties  in
                  which persons  other than the parties  hereto have an interest
                  except by agreement with Non-Operator.

6.       Service

         A.       Outside Services:
                  The cost of contract services  (including without  limitation,
                  professional  consultants) and utilities procured from outside
                  sources.

         B.       Use of Operator's Equipment and Facilities:
                  Use of and service by Operator's  exclusively  owned equipment
                  and  facilities  as  provided in  Paragraph 5 of Section  III,
                  "Basis of Charges to Joint Account."

7.       Damages and Losses to Joint Property and Equipment

         Replacement  or repair  resulting  from  damages or losses  incurred by
         fire,  explosion,  flood, storm or any other causes not controllable by
         Operator through the exercise of reasonable  diligence.  Operator shall
         furnish  Non-Operator written notice of damage or loss howsoever caused
         as soon as  practicable  after report of the same has been  received by
         Operator.

8.       Litigation, Judgments and Claims

         All costs and expenses of litigation,  or legal  services  necessary or
         expedient  for  the  protection  of  the  joint  interests,   including
         attorney's  fees and expenses,  together  with all  judgments  obtained
         against  the parties or any of them and agreed  settlements  insofar as
         the same  relate  to the joint  account  or the  subject  matter of the
         Operating  Procedure;  actual expenses incurred by any party or parties
         hereto in securing evidence for the purpose of defending or prosecuting
         any action or claim or negotiating any settlement relating to the joint
         account or the subject matter of the Operating Procedure.

9.       Taxes

         All  taxes,  rates,  levies  and  assessments  of every kind and nature
         levied,  assessed  or  imposed  upon or in  connection  with the  joint
         property or any part thereof, the production therefrom or the operation
         thereof,  which shall have been paid by the Operator for the benefit of
         the parties hereto.


<PAGE>

10.      Insurance

         Premiums paid for  insurance  required to be carried for the benefit of
         the joint account together with all  expenditures  incurred and paid in
         settlement of any and all losses, claims, damages, judgments, and other
         expenses, including legal services, not recovered from the insurer.

11.      Camp Expense

         The expense of operating and maintaining all necessary  camps,  housing
         facilities for employees and boarding employees, including salaries and
         wages  relative  thereto.  When  other  operations  are served by these
         facilities the expense, including depreciation or a fair monthly rental
         in lieu of depreciation,  less any revenue therefrom, shall be prorated
         against all operations served on an equitable basis.

12.      District Expense and Administrative Overhead

         District  expense and  administrative  overhead on the following  fixed
         rate  basis   which   shall  be  in  lieu  of   district   expense  and
         administrative overhead as defined hereunder:

                  District   expense,   means  the   salaries  and  expenses  of
                  Operator's district  superintendent and other general district
                  and field employees serving the joint property,  whose time is
                  not  allocated  direct to the joint  property  and the cost of
                  maintaining  and operating a district  office and  sub-offices
                  incurred  in the  development  and  operations  on  the  joint
                  property and other properties operated by Operator in the same
                  locality.

                  Administrative  overhead, means the expenses of all offices of
                  the Operator, including the salaries or compensation and other
                  expenses of personnel  assigned  thereto which are incurred in
                  the  exploration,  development  and  operation  of  the  joint
                  property, except those expenses chargeable under paragraphs 2,
                  3 and 11 of this Section II.

         The fixed rate basis will be as follows:

                  (i)      [This paragraph was deleted.]

                  (ii)     (a) A  Management  Fee of  $50.00  per day  for  each
                           drilling  well,  charges to  commence on the date the
                           well is spudded and  terminate  when the  drilling or
                           completion  rig is released from the well except that
                           if the drilling operations are suspended for a period
                           of fifteen (15) or more  consecutive  days, no charge
                           shall  be  made  for  any  part  of  such  period  of
                           suspension without approval of the Non-Operator.


<PAGE>

                           (b) A  Management  Fee of  $50.00  per day for  costs
                           incurred  during the  move-in and  move-out  periods,
                           charges  to  commence  the day the  preparatory  work
                           begins and end when the move-out has been  finalized,
                           provided such charges shall not exceed  $4,500.00 for
                           the  move-in  and  $4,500.00  for the  move-out,  and
                           provided  further that such charges  shall only apply
                           when a drilling  rig, camp  equipment,  supplies etc.
                           are being moved into or out of the joint property.

                  (iii)    $50.00  per  day  Management  Fee  for  seismic  work
                           commencing  with the date of entry into the work area
                           by the  seismic  party  and  ending  on the  date  of
                           departure from the work area by the seismic party.

                  (iv)     For surface work (i.e. geological,  surveying,  etc.)
                           and for gravity  meter  operations  the sum of $15.00
                           per day Management Fee beginning on the date of entry
                           into the work area by the party  concerned and ending
                           on the date of departure from the work area.

                  (v)      A Management  Fee for producing  wells within a field
                           at the following rate per well per month:

                                    First 5 wells          -       $225.00;
                                    Next 5 wells           -       $200.00;
                                    All wells over 10      -       $175.00.

                  (vi)     It is  specifically  understood  that the above rates
                           shall  apply only to the above  mentioned  operations
                           and are not  intended  to cover the  construction  or
                           operation of additional  facilities  such as, but not
                           limited to, gasoline plants,  compressor plants, salt
                           water disposal facilities and similar  installations.
                           If  such   additional   facilities   are  required  a
                           Management   Fee  will  be  negotiated   between  the
                           Operator and the Non-Operator.

13.      Application of Management Fees for  Exploration  Drilling,  Development
         Drilling and Producing Wells

         A.       In  connection   with  the  Management  Fee  for   exploration
                  drilling, development drilling and producing wells, the status
                  of wells shall be as follows:

                  (1)      Each well  which  produces  for any  period  during a
                           month shall be deemed to have  produced  for the full
                           month in determining the Management Fee applicable to
                           producing wells.

                  (2)      Injection wells for recovery operations,  such as for
                           repressure  or water flood,  shall be included in the
                           Management Fee the same as producing oil wells.


<PAGE>

                  (3)      Water  supply  wells   utilized  for  water  flooding
                           operations  shall be included in the  Management  Fee
                           the same as producing oil wells.

                  (4)      Wells  permanently  shut  down but on which  plugging
                           operations  are  deferred  shall be dropped  from the
                           Management Fee at the time the shutdown is effective.
                           When such wells are plugged,  a Management  Fee shall
                           be charged at the drilling  well rate during the time
                           required for the plugging operation.

                  (5)      Wells  being  plugged  back,   drilled   deeper,   or
                           converted  to  a  source  or  input  well,  shall  be
                           included in the  Management  Fee the same as drilling
                           wells.

                  (6)      Various wells may be shut down  temporarily and later
                           replaced  on  production.  If and when a well is shut
                           down and not  produced or worked upon for a period of
                           a full  calendar  month,  it shall not be included in
                           the  Management  Fee for such month;  however,  wells
                           shut  in  by  government  regulatory  body  shall  be
                           included in the  Management Fee only in the event the
                           allowable production is transferred to other wells on
                           the joint property.

                  (7)      Gas wells shall be included in the  Management Fee if
                           directly  connected to a permanent  sales outlet even
                           though  temporarily shut in due to  overproduction or
                           failure of purchaser to take scheduled allowable.

                  (8)      Wells completed in dual or multiple horizons shall be
                           considered  as one well for each such  completion  in
                           the   Management   Fee  whenever  the  production  is
                           segregated.

                  (9)      Salt water  disposal  wells  shall not be included in
                           Management  Fee as producing  wells unless such wells
                           are used in a secondary recovery program on the joint
                           property.

         B.       The  Management  Fee  for  exploration  drilling,  development
                  drilling  and  producing  wells  shall be applied to the total
                  number of wells  operated  under the  Operating  Procedure  to
                  which this accounting  procedure is attached,  irrespective of
                  individual leases or permits.

14.      Warehouse Handling Charges

         All operating and maintenance  costs of a jointly owned warehouse shall
         be for the joint account.

         A  charge  to  cover  the  cost of  handling  material  into and in the
         warehouse shall be assessed on new and used material furnished from the
         Operator's warehouse on the following basis:


<PAGE>

         A.       Two and one-half percent (2 1/2%) of the cost of tubular goods
                  (2" and  over)  and major  items  such as  tanks,  separators,
                  engines, etc.

         B.       Five percent (5%) of the cost of all other material.

15.      Other Expenditures

         Any other  expenditures  incurred by  Operator  for the  necessary  and
         proper development, exploration, maintenance, operation and abandonment
         of the joint property.  Notwithstanding  anything herein contained,  no
         charge shall be made for any interest or financing  charges incurred by
         the Operator, except where incurred with the consent of Non-Operator.

                              III. BASIS OF CHARGES
                                TO JOINT ACCOUNT

1.       Purchases

         Material  purchased and all services  procured  shall be charged at the
         price paid by the Operator,  after deduction of all discounts  actually
         received.

2.       Material Furnished by Operator

         Material  required for operations  shall be purchased for direct charge
         to joint account whenever practicable, except that Operator may furnish
         such material from Operator's stocks under the following conditions:

         A.       New Material (Condition "A")

                  (1)      New material transferred from Operator's warehouse or
                           other  properties  shall be priced f.o.b. the nearest
                           receiving  point, at current  replacement cost of the
                           same kind of  material.  This will  include  material
                           such as tanks, rigs, pumps, sucker rods, boilers, and
                           engines. Tubular goods (2" and over) shall be charged
                           on the basis of  effective  price at date of transfer
                           and f.o.b. nearest receiving point.

                  (2)      Other  material  shall be  priced  on the  basis of a
                           reputable  supply company's  preferential  price list
                           effective  at  date  of  transfer   and  f.o.b.   the
                           receiving point nearest the joint property where such
                           material is available.

                  (3)      Cash  discount  shall not be deducted in  determining
                           prices  provided  for in this  Paragraph 2 of Section
                           III.


<PAGE>

         B.       Used Material (Condition "B" and "C")

                  (1)      Material which is in sound and serviceable  condition
                           and is  suitable  for re-use  without  reconditioning
                           shall be classed as  Condition  "B" and priced at 75%
                           of current new price.

                  (2)      Material which cannot be classified as  Condition "B"
                           but which,

                           (a)      After   reconditioning   will   be   further
                                    serviceable  for  original  function as good
                                    secondhand material (Condition "B") or

                           (b)      Is  serviceable  for  original  function but
                                    substantially      not      suitable     for
                                    reconditioning,    shall   be   classed   as
                                    Condition  "C" and  priced at 50% of current
                                    new price.

                  (3)      Tanks,  derricks,   buildings,   and  other  material
                           involving   erection   costs   shall  be  charged  at
                           applicable percentage of dismantled current new price
                           for similar materials.

                  (4)      There may also be cases where some items of material,
                           due to their unusual condition,  should be fairly and
                           equitably priced by Operator,  subject to approval of
                           Non-Operator.

                  (5)      Current   new   price,    wherever   used   in   this
                           sub-paragraph  2 B  of  this  Section  III  shall  be
                           determined in accordance  with  sub-paragraph  2 A of
                           this Section III.

3.       Premium Prices

         Whenever  materials are not readily  obtainable at the customary supply
         point and at prices specified in Paragraphs 1 and 2 of this Section III
         because of national  emergencies,  strikes or other unusual causes over
         which the  Operator  has no control,  the Operator may charge the joint
         account  for the  required  materials  on the  basis of the  Operator's
         direct cost and expense incurred in procuring such materials, in making
         it  suitable  for use,  and in  moving  it to the  location,  provided,
         however,  that notice in writing is  furnished to  Non-Operator  of the
         proposed  charge  prior to billing the  Non-Operator  for the  material
         acquired pursuant to this provision,  whereupon Non-Operator shall have
         the right,  by so electing and notifying  Operator  within  forty-eight
         (48) hours  after  receiving  notice from the  Operator,  to furnish in
         kind, or in tonnage as the parties may agree, at the location,  nearest
         receiving  point,  or  Operator's  storage  point  within a  comparable
         distance,  all or part of his share of  material  suitable  for use and
         acceptable to the Operator and shall furnish such new material within a
         reasonable  period of time after making such  election.  Transportation
         costs on any such  material  furnished  by  Non-Operator,  at any point
         other than at the location,  shall be borne by such  Non-Operator.  If,
         pursuant  to  the  provisions  of  this  paragraph,   any  Non-Operator
         furnishes material in kind, the Operator shall make appropriate credits
         therefor to the account of said Non-Operator.


<PAGE>

4.       Warranty of Material Furnished by Operator

         Operator does not warrant the material  furnished beyond or back of the
         dealer's  or  manufacturer's  guaranty  or  warranty;  and in  case  of
         defective  material,  credit shall not be passed until  adjustment  has
         been received by Operator from the manufacturers or their agents.

5.       Operator's Exclusively Owned Facilities

         The following rates shall apply to services  rendered by facilities and
         equipment owned exclusively by Operator, provided such rates are not in
         excess  of  current  prevailing  rates of like  service  and  equipment
         available in the area where the joint property is located:

         A.       Water service, gas and power, booster and compressor services,
                  and other auxiliary services;  cost of such services including
                  operation,  maintenance,  insurance,  taxes and  allowance for
                  depreciation.

         B.       Automotive and aircraft equipment,  at rates commensurate with
                  cost of  ownership  and  operation  and in line with  schedule
                  adopted by Operator for use in his operations. Charges will be
                  based on use in actual service on, or in connection  with, the
                  development,  exploration  operation  and  maintenance  of the
                  joint property.

         C.       A fair  rate  shall  be  charged  for  the  use  of  drilling,
                  exploration  and other  machinery  and  equipment  exclusively
                  owned by Operator while used  hereunder to cover  maintenance,
                  repairs,  depreciation,  for the service  furnished  the joint
                  property;  provided  that such charges  shall not exceed those
                  currently  prevailing in the field where the joint property is
                  located.

         D.       A fair rate shall be charged for laboratory services performed
                  by Operator for the benefit of the joint account, such as gas,
                  water,  core and any other  analyses and tests;  provided such
                  charges  shall  not  exceed  those  currently   prevailing  if
                  performed by outside service laboratories.

         E.       Whenever  requested,  Operator shall  inform  Non-Operator  in
                  advance of the rates it proposes to charge.


<PAGE>

                            IV. DISPOSAL OF MATERIAL

         The  Operator  shall be under no  obligation  to  purchase  interest of
         Non-Operator in surplus new or secondhand material.  Tanks,  buildings,
         and other major  items shall not be removed by Operator  from the joint
         property without the approval of Non-Operator.  Operator shall not sell
         major items of material to an outside party without giving Non-Operator
         an opportunity  either to purchase same at the price offered or to take
         Non-Operator's  share in kind. Operator shall have the right to dispose
         of  normal  accumulations  of junk and  scrap  material  from the joint
         property.

1.       Material Purchased by Operator

         Material  purchased by Operator  shall be credited to the joint account
         and included in the monthly  statement of  operations  for the month in
         which the material is removed from the joint property.

2.       Material Purchased by Non-Operator

         Material  purchased by  Non-Operator  shall be invoiced by Operator and
         paid for by Non-Operator  within fifteen (15) days following receipt of
         invoice.  The  Operator  shall  pass  credit to the joint  account  and
         include the same in the monthly statement of operations.

3.       Division in Kind

         Division  of  material  in  kind,   if  made   between   Operator   and
         Non-Operator,  shall be in proportion to their respective  interests in
         such material.  Each party will thereupon be charged  individually with
         the value of the  material  received  or  receivable  by each party and
         corresponding  credits  will  be  made  by the  Operator  to the  joint
         account,  and such  credits  shall  appear in the monthly  statement of
         operations.

4.       Sales to Outsiders

         Sales to  outsiders  of  material  from  the  joint  property  shall be
         credited by Operator to the joint  account at the net amount  collected
         by Operator from vendee.  Any claims by vendee for  defective  material
         etc.  shall be charged back to the joint  account,  if and when paid by
         Operator.

                    V. BASIS OF PRICING MATERIAL TRANSFERRED
                               FROM JOINT PROPERTY

         Jointly-owned  material  sold to either  Operator  or  Non-Operator  or
         divided in kind between them, unless otherwise agreed,  shall be valued
         on the following  basis of condition  and price:  (new price as used in
         the following sub-divisions shall have the same meaning and be computed
         on the same basis as the price for new material in Sub-paragraph 2 A of
         Section III hereof.)


<PAGE>

1.       New Material

         New material  (Condition "A") being new material  purchased or procured
         for the joint property but never used thereon,  at one hundred  percent
         (100%) of current new price.

2.       Good Used Material

         Good used material  (Condition "B"),  being good  serviceable  material
         which is further usable without reconditioning:

         A.       At 75% of current  new price if material  was charged to joint
                  account as new, or

         B.       At 75% of current new price less depreciation  consistent with
                  its usage on and  service to the joint  property,  if material
                  was originally  charged to the joint property as secondhand at
                  75% of new price.

3.       Other Used Material

         Other used material (Condition "C"), being material which:

         A.       After reconditioning will be further serviceable for  original
                  function as good secondhand material (Condition "B"), or

         B.       Is serviceable  for original  function but  substantially  not
                  suitable for reconditioning,

         at 50% of current new price.

4.       Bad Order Material

         Bad order material  (Condition  "D"), being material not further usable
         for its original  function but for possible other  service,  at a value
         commensurate with its use.

5.       Junk

         Junk (Condition "E"),  being obsolete and  unserviceable  material,  at
         prevailing junk prices in the district.

6.       There  may also be cases  where  some  items of  material  due to their
         unusual  condition  should be fairly and  equitably  priced by Operator
         subject to approval of Non-Operator.


<PAGE>

                                 VI. INVENTORIES

1.       Periodic Inventories

         Periodic  inventories  of  material  which  is  ordinarily   considered
         controllable shall be taken by Operator at reasonable  intervals but at
         least once in every five years.

2.       Notice

         Notice of  intention  to take  inventory  shall be given by Operator at
         least  thirty  days  before  any   inventory  is  to  begin,   so  that
         Non-Operator may be represented when any inventory is taken.

3.       Failure to be Represented

         Failure of  Non-Operator  to be represented  at the physical  inventory
         shall bind Non-Operator to accept the inventory taken by Operator,  who
         shall in that event furnish Non-Operator with a copy thereof.

4.       Reconciliation of Inventory

         Reconciliation  of inventory with charges to the joint account shall be
         made by each party at interest,  and a list of overages  and  shortages
         shall be jointly determined by said parties.

5.       Adjustment of Inventory

         Inventory  adjustments  shall be made by Operator to the joint  account
         for overages and shortages,  but Operator shall be held  accountable to
         Non-Operator only for shortages due to lack of reasonable diligence.

6.       Inventory Expenses

         The expense of more than one  representative of the Operator,  and more
         than one representative for all of the Non-Operators  jointly,  present
         at the taking of regular  inventory,  shall not be charged to the joint
         account.

7.       Special Inventories

         Non-Operator shall have the right at any time to request in writing the
         taking of a special  inventory.  The taking of such  special  inventory
         shall be commenced  within thirty (30) days after the receipt of notice
         thereof.  All expenses  incurred by Operator in conducting  any special
         inventory so requested shall be charged to the separate  account of the
         requesting party.


<PAGE>

                     VII. REVISIONS TO ACCOUNTING PROCEDURE

         The parties to the Operating  Procedure  acknowledge and agree that the
         purpose of this Accounting  Procedure is to establish equitable methods
         for determining  charges and credits applicable to operations under the
         Operating Procedure,  it being the parties' intention that the Operator
         as such, should not profit by or suffer any losses by its operations as
         Operator;   the  parties  also  recognize  that  operations   north  of
         70(degree)  Latitude  differ  substantially  from  operations  in  more
         southerly  locations and that at the date of  negotiation  of the terms
         and  provisions of this  Accounting  Procedure  there is  comparatively
         little knowledge or experience in the conduct of operations in the area
         in which the joint property is located.  Accordingly the parties to the
         Operating  Procedure agree that  notwithstanding the provisions of that
         Clause of the Operating  Procedure entitled "Change of Operator" (which
         Clause  shall  remain in full  force and  effect but shall not be or be
         deemed to be a limitation  or  restriction  on the  provisions  of this
         Section VII), this Accounting  Procedure shall be subject to review and
         possible revision from time to time but only in the manner  hereinafter
         provided for.

         If in practice the charges,  rates,  and/or other terms and  provisions
         (whether similar or dissimilar) of this Accounting  Procedure are found
         to be  insufficient  or excessive  then any party hereto may serve upon
         the other  parties  hereto,  at any time during the  calendar  month of
         January in any  calendar  year,  a notice  setting  forth the  specific
         revisions to the Accounting  Procedure  requested by it,  whereupon the
         parties shall meet together,  at the instigation of any of them, during
         the following  calendar month of February and in good faith endeavor to
         agree  on  such   revisions   as  may  be   necessary  to  remedy  such
         insufficiency  or excess and to establish  the  effective  date of such
         revisions, which effective date may be retroactive.

         In the  event  the  parties  cannot  reach  agreement  within  the said
         calendar  month of February  then  Operator  shall during the following
         calendar  month of March  serve upon the other  parties  notice of such
         specific  revisions  to  this  Accounting  Procedure,  together  with a
         suggested effective date of such revisions (which effective date may be
         retroactive  to a date not earlier  than  January 1st of the  preceding
         calendar  year) which it is prepared to accept,  or in the  alternative
         that it does not desire any revisions,  and,  unless one or more of the
         other parties  serves a notice of objection on all other parties within
         fifteen  (15) days of  receipt of the notice  from the  Operator,  this
         Accounting  Procedure  shall  be and be  deemed  to be  revised  or not
         revised,  as the case may be, in accordance with the Operator's notice,
         and any  revisions  shall be effective on that date so specified in the
         Operator's  notice.  In the  event a  Non-Operator  files a  notice  of
         objection as to either the specific revisions or the effective date, or
         both, the matter shall be submitted to  arbitration in accordance  with
         the  provisions of the  Arbitration  Act of the Province of Alberta (in
         the event the parties  cannot reach  agreement on a single  arbitrator,
         each shall appoint an  arbitrator  and those  arbitrators  so appointed
         shall appoint a third) for the purpose of reaching a decision as to the
         most equitable revision,  if any, required to this Accounting Procedure
         and to establish  the most  equitable  effective  date  thereof  (which
         effective  date may be  retroactive  to a date not earlier than January
         1st of the preceding  calendar  year)  provided  always that only those
         items or matters specifically  contained in the notices of the parties,
         including the Operator,  served in accordance with all of the foregoing
         provisions   of  this  Section  VII,   shall  be   considered  in  such
         arbitration.


<PAGE>

         Any revisions made to this Accounting  Procedure shall continue in full
         force and effect and be applicable  as, of and from the effective  date
         thereof  as  established  in  accordance  with the  foregoing  and this
         Accounting Procedure shall be and be deemed to be amended accordingly.


<PAGE>


                                 THIS IS SCHEDULE "C" to  Agreement  made  as of
                                 the 28th day of January 1972  between Panarctic
                                 Oils  Ltd.  (herein  called  "Panarctic")   and
                                 Canada Southern Petroleum Ltd. (herein called
                                 "Canada Southern")



                           CARRIED INTEREST PROCEDURE

         In the event that the Farmor exercises its right to convert its working
interest  in any Block or  Blocks  to a net  carried  interest  pursuant  to the
provisions of the said Farmout  Agreement,  then this Carried Interest Procedure
shall be and be deemed to be an agreement entered into between Panarctic and the
Farmor  and  each of them  shall be bound  by all of the  terms,  covenants  and
conditions  hereof as fully and effectively as if named herein as a party and if
executed by it.

1.       INTERPRETATION:

         (a) In this Carried Interest Procedure, this Clause, the foregoing, and
any Schedules  attached hereto or incorporated  herein by reference,  unless the
context otherwise requires:

                  (i)      "Farmout Agreement" means the Agreement to which this
                           Carried  Interest  Procedure  is annexed as  Schedule
                           "C".

                  (ii)     "Operating  Procedure"  means  Schedule  "B"  to  the
                           Farmout Agreement.

                  (iii)    "Block" means those Lands having the same block Roman
                           numeral  designation,  described  or  referred  to in
                           Schedule  "A"  to  the  Farmout  Agreement,  PROVIDED
                           HOWEVER  that  where  no such  block  designation  is
                           provided for therein, then all of the Lands contained
                           in  Schedule  "A"  to  the  Farmout  Agreement  shall
                           constitute a Block.


<PAGE>

                  (iv)     "Lands"  means  the  lands,  and lands  under  water,
                           including the geological formations thereunder,  made
                           subject to this Carried Interest  Procedure  pursuant
                           to the  provisions of the Farmout  Agreement and also
                           includes the petroleum  substances  within such lands
                           or formations.

                  (v)      "Permits" means the petroleum and natural gas permits
                           and leases,  together  with any leases  issued out of
                           such permits,  made subject to this Carried  Interest
                           Procedure  pursuant to the  provisions of the Farmout
                           Agreement,  but only insofar as such documents demise
                           the Lands.

                  (vi)     "petroleum  substances"  means the  substances  to be
                           granted to the holder of the Permits pursuant thereto
                           but  only  insofar  and to the  extent  the  same are
                           granted by the Permits.

                  (vii)    "Carried  Interest  Owner"  means  the  party to this
                           Carried Interest Procedure other than Panarctic.

                  (viii)   "affiliate    corporation",    "completion    costs",
                           "drilling  costs",  "operating  costs"  and  "spacing
                           unit" shall have the meanings assigned to those words
                           or phrases  respectively in Clause 1 of the Operating
                           Procedure.

                  (ix)     "gross proceeds of production"  shall mean the amount
                           actually  received  by  Panarctic  in an  arms-length
                           transaction  for  a  monetary   consideration   to  a
                           purchaser  other than an affiliate of  Panarctic,  in
                           the absence of which it shall mean the gross proceeds
                           which   Panarctic   would  have   received   for  the
                           production if sold at the prevailing  market price as
                           defined in the Operating Procedure.


<PAGE>

         (b) The headings of the Clauses of this Carried Interest  Procedure are
inserted for  convenience  of reference only and shall not affect the meaning or
construction thereof.

         (c)  Wherever the plural or masculine or neuter is used in this Carried
Interest  Procedure,  the same shall be  construed  as meaning  the  singular or
feminine  or body  politic  or  corporate  and vice versa  where the  context so
requires.

         (d) If any  term  or  condition  of  this  Carried  Interest  Procedure
conflicts  with a term or condition of the Permits,  then such term or condition
in the Permits shall prevail and this Carried Interest Procedure shall be deemed
to be modified accordingly.

2.       EXTENT OF NET CARRIED INTEREST:

         The percentage of net carried interest of the Carried Interest Owner in
a Block or Blocks held by it pursuant to this Carried  Interest  Procedure shall
be THIRTY (30%)  percent,  subject to the terms and  conditions  of this Carried
Interest  Procedure and, to the extent that the same are incorporated  herein or
applicable hereto, the terms and conditions of the Operating Procedure.

3.       EFFECT ON WORKING INTEREST OF PANARCTIC OF CONVERSION:

         Upon the exercise by the Carried Interest Owner of its right to convert
its  interest  in a Block or Blocks  from a working  interest  to a net  carried
interest,  the working  interest of Panarctic in such Block or Blocks,  which it
would  otherwise  have  earned  pursuant  to the  Farmout  Agreement,  shall  be
increased  to One  Hundred  (100%)  percent  and  thereupon  the entire  working
interest  held by  Panarctic in such Block or Blocks shall be subject to the net
carried interest herein provided for.


<PAGE>

4.       PAYMENTS TO CARRIED INTEREST OWNER:

         After  Panarctic  shall have  recovered  out of the gross  proceeds  of
production of petroleum substances produced,  saved or deemed to be produced and
saved and marketed from any Block,  together with the salvage of all recoverable
material and equipment from such Block (hereinafter  collectively referred to as
"gross  proceeds of  production")  an amount equal to the total of all costs and
expenses  incurred by it on or with  respect to such Block  after the  effective
date of this Carried Interest  Procedure,  including without limitation drilling
costs,  completion costs,  operating costs, and all other expenditures set forth
in the Accounting Procedure (but excluding any amounts which form any portion of
the total expenditures  required to be made by Panarctic to earn its interest in
any of the Lands  described in Schedule "A" to the Farmout  Agreement)  it shall
pay to the Carried  Interest Owner in each calendar month  thereafter a share of
the net proceeds of  production  of  petroleum  substances  produced,  saved and
marketed  from such  Block for such  month  equal to the  percentage  of its net
carried  interest in such  Block,  as  determined  in  accordance  with Clause 3
hereof. In calculating such net proceeds of production in any month, there shall
be deducted from the gross proceeds of production  the operating  costs relating
to such Block and all wells located  thereon,  in accordance with the Accounting
Procedure.  If at any time after the  commencement  of  payments  to the Carried
Interest Owner on any Block as aforesaid,

         (a)      Panarctic  makes  additional  expenditures  on such  Block for
                  drilling costs, completion costs, operating costs and/or other
                  amounts set forth in the Accounting Procedure, or

         (b)      the monthly operating costs exceed  the monthly gross proceeds
                  of production,


<PAGE>

it shall be entitled to recover the amount  thereof out of the gross proceeds of
production  from such Block  before  commencing  to make  payments  again to the
Carried Interest Owner as aforesaid, and so on from time to time.

5.       APPLICATION OF OPERATING PROCEDURE:

         Subject to the specific  provisions of this Carried Interest Procedure,
all of the provisions of the Operating  Procedure  shall apply mutatis  mutandis
between the parties hereto and be deemed to be incorporated herein except to the
extent that any such terms and  conditions  are  inconsistent  with the specific
provisions and intent of this Carried Interest  Procedure and generally accepted
understandings  in the  industry  of a net  carried  interest,  and the  Carried
Interest Owner shall have the same rights as a Non-Operator  and Panarctic shall
have the same rights as the Operator  under such  applicable  provisions  of the
Operating Procedure. In particular,  but not so as to restrict the generality or
the  foregoing,  the  Carried  Interest  Owner  shall  be  entitled  to the same
information and statements furnished by the Operator to a Non-Operator under the
Operating  Procedure and all operations  shall be carried on by Panarctic in the
same  manner as  operations  are to be  carried on under the  provisions  of the
Operating Procedure.

         Notwithstanding anything to the contrary, expressed or implied above or
in the Operating Procedure,

         (a)      Panarctic  shall  have  the  sole and  exclusive  control  and
                  management of the  development and operation of the said Lands
                  and shall not  require  the  consent of the  Carried  Interest
                  Owner  to any  such  development  or  operation,  drilling  or
                  otherwise, or to the expenditure of monies thereon;


<PAGE>

         (b)      Panarctic  agrees to advance or obtain the  advancement of all
                  monies for the  conduct of  operations  on the said Lands such
                  that no monies need be advanced by the Carried Interest Owner;

         (c)      the Carried Interest Owner's entire interest in the operations
                  conducted  on the said Lands,  while  subject to this  Carried
                  Interest Procedure,  the equipment pertaining thereto, and the
                  petroleum   substances   produced   therefrom   shall  be  the
                  percentage  of the net  carried  interest  in net  proceeds of
                  production  of  petroleum  substances   produced,   saved  and
                  marketed as provided for above;

         (d)      under the provisions of the Clause in the Operating  Procedure
                  entitled "Area of Common  Interest",  the interest entitled to
                  be acquired by any party shall be the  participating  interest
                  of that party as set out in the  Operating  Procedure  and, if
                  acquired,  the  provisions  of the Operating  Procedure  shall
                  apply thereto;

         (e)      the  Carried  Interest  Owner  shall have no rights  under the
                  provisions of the Clause of the Operating  Procedure  entitled
                  "Independent Drilling and Deepening".

6.       EFFECTIVE DATE:

         The  effective  date of this Carried  Interest  Procedure  shall be the
effective  date of the  exercise of  conversion  rights,  as provided for in the
Farmout Agreement.

7.       INTEREST IN PERMITS:

         The  Carried  Interest  Owner shall have an interest in the Permits and
Lands subjected to this Carried Interest Procedure of the kind described in, and
subject to the terms and conditions of, this Carried Interest Procedure.


<PAGE>

8.       TERM OF AGREEMENT:

         This Carried Interest Procedure shall continue in full force and effect
so long as any  portion  of the  Lands  is  subject  to  this  Carried  Interest
Procedure.

9.       ENUREMENT:

         This  agreement  shall enure to the benefit of and be binding  upon the
parties hereto and their respective heirs, executors, administrators, successors
and assigns.

         Agreement 1-1-75

         Canada  Southern  and/or its assigns  shall have the right from time to
         time  Block by Block to revert  from a 30% net C.I.  position  to a 30%
         W.I.  position in two stages with no interest so  converted  to be less
         than 1/6th of the 30% C.I. The following  procedure shall apply to such
         conversion mutatis mutandis.

10.      CONVERSION TO WORKING INTEREST:

         (a)      At any time  when  Panarctic  has  recovered  from  the  gross
                  proceeds of production  from any Block  all costs and expenses
                  made by it on such Block, as hereinbefore provided in clause 4
                  (or at any date prior thereto if the  Carried  Interest  Owner
                  pays to Panarctic an amount equal to thirty 30% percent of all
                  such costs and expenses  incurred to that date by Panarctic on
                  such Block and which have not been recovered  by  Panarctic as
                  above provided for)  the Carried  Interest  Owner may elect to
                  convert its net carried interest in such Block to an undivided
                  Thirty (30%) percent  working  interest.  Such election may be
                  made by notice in writing served upon  Panarctic in the manner
                  provided in the Operating Procedure.


<PAGE>

                  Thereafter all the provisions of the Operating Procedure shall
                  apply and the participating  interests of the parties shall be
                  adjusted  accordingly  and  the  provisions  of  this  Carried
                  Interest  Procedure shall no longer apply with respect to such
                  Block.  After converting its net carried interest to a working
                  interest, as in this clause 10 provided,  the Carried Interest
                  Owner  shall  have no  further  right  of  conversion  and its
                  interest shall remain as a working interest.

         (b)      [Replaced  by new clause  giving  C.S.  right to sell & commit
                  products except for 42 sections in Permit #2719.]