MORTGAGE, ASSIGNMENT OF PROCEEDS,
                   SECURITY AGREEMENT AND FINANCING STATEMENT
                                  (Oil and Gas)

                                      FROM

                            PEASE OIL AND GAS COMPANY

                                       TO

                 HOLDERS OF 1996 10% COLLATERALIZED SUBORDINATED
                             CONVERTIBLE DEBENTURES

                          DATED AS OF NOVEMBER 15, 1996

--------------------------------------------------------------------------------


THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS.

THE OIL AND GAS INTERESTS INCLUDED IN THE MORTGAGED PROPERTY WILL BE FINANCED AT
THE  WELLHEADS  OF THE WELLS  LOCATED  ON THE  PROPERTY  DESCRIBED  IN EXHIBIT A
HERETO,  AND THIS  FINANCING  STATEMENT  IS TO BE FILED FOR RECORD,  AMONG OTHER
PLACES, IN THE REAL ESTATE RECORDS OF THE COUNTY RECORDER.

THE SECURED  PARTY IS NOT A SELLER OR PURCHASE  MONEY  LENDER OF THE  COLLATERAL
COVERED BY THIS INSTRUMENT.

THIS DOCUMENT WAS PREPARED BY AND WHEN RECORDED  AND/OR FILED SHOULD BE RETURNED
TO:

Alan W. Peryam, Esq.
Hopper and Kanouff, P.C.
1610 Wynkoop Street, Suite 200
Denver, Colorado 80202

                                      - 1 -

<PAGE>


                 SUBORDINATED MORTGAGE, ASSIGNMENT OF PROCEEDS,
                   SECURITY AGREEMENT AND FINANCING STATEMENT

     This SUBORDINATED Mortgage,  Assignment of Proceeds, Security Agreement and
Financing  Statement  (the  "Mortgage") is entered into as of the Effective Date
(as defined below) by and between the undersigned  Pease Oil and Gas Company,  a
Nevada corporation  (formerly Willard Pease Oil and Gas Company and successor by
merger  to Skaer  Enterprises,  Inc.,  a  Colorado  corporation,  herein  called
"Mortgagor"),  whose address is 751 Horizon Court,  Suite 203,  Grand  Junction,
Colorado  81506-8758,  and those persons who are the  registered  holders of the
1996 10% Collateralized Subordinated Convertible Debentures of Pease Oil and Gas
Company,   the  total  principal   amount  of  which  is  Five  Million  Dollars
($5,000,000) (hereafter the "Debentures") and the names, addresses and principal
amount of Debentures held is set forth on Exhibit B, incorporated herein by this
reference (hereafter the "Debenture Mortgagees"),  is subject and subordinate to
the Mortgage,  Assignment,  Proceeds, Security Agreement and Financing Statement
pertaining to the collateral, dated August 23, 1996, recorded in Larimer County,
Colorado as Reception No. 93062241 and No. 93062242 and in Weld County, Colorado
in Book 1399 at File 1122 as Reception  No.  02348218 and Book 0189 at File 1186
as Reception No. U0253060.

The parties hereto agree as follows:

                             ARTICLE 1 - DEFINITIONS

     Section 1.1 Defined Terms. For the purposes of this instrument:

     "Collateral" includes Fixture Collateral,  Personalty Collateral and Realty
Collateral as hereinafter defined.

     "Dollars" and "US$" mean lawful money of the United States of America.

     "Effective Date" means as of November 15, 1996.

     "Environmental  Laws" shall mean any and all laws,,  statutes,  ordinances,
rules,  regulations,  orders, or  determinations  of any Governmental  Authority
pertaining to health or the  environment in effect in any and all  jurisdictions
in which Mortgagor is conducting or at any time has conducted business, or where
any  Property  of  Mortgagor  is  located,  or where  any  hazardous  substances
generated  by or  disposed  of by  Mortgagor  are  located,  including,  without
limitation,  the Clean Air Act, as  amended;  the  Comprehensive  Environmental,
Response,  Compensation,  and Liability Act of 1980 ("CERCLA"),  as amended; the
Federal Water Pollution  Control Act, as amended;  the  Occupational  Safety and
Health Act of 1970, as amended;  the Resource  Conservation  and Recovery Act of
1976 ("RCRA"),  as amended;  the Safe Drinking Water Act, as amended;  the Toxic
Substances Control Act, as amended; the Superfund Amendments and Reauthorization

                                      - 2 -

<PAGE>


Act of 1986,  as amended;  and other  environmental  conservation  or protection
laws. The terms "hazardous  substance,"  "release" and "threatened release" have
the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or
"disposed") have the meanings specified in RCRA; provided, however, in the event
either  CERCLA or RCRA is  amended  so as to  broaden  the  meaning  of any term
defined  thereby,  such broader meaning shall apply  subsequent to the effective
date of such  amendment with respect to all  provisions of this  Agreement,  and
provided further that, to the extent the laws of the state in which any Property
of  Mortgagor  is  located  establish  a  meaning  for  "hazardous   substance,"
"release,"  "solid waste" or "disposal"  which is broader than that specified in
either CERCLA or RCRA, such broader meaning shall apply.

     "Fixture  Collateral"  means  all  of  Mortgagor's  interest  in and to all
Operating  Equipment  which is or becomes so related to the Oil and Gas Property
or any part thereof that an interest in the Operating Equipment arises under the
real  property  law of the State in which it is situated,  including  all oil or
natural gas delivery pipelines.

     "Hazardous Materials" means (a) petroleum or petroleum products, natural or
synthetic gas other than crude oil, natural gas and natural gas liquids prior to
capture and production thereof; (b) asbestos in any form that is or could become
friable,  urea  formaldehyde  foam insulation,  and radon gas; and (c) any other
substances  defined as or included in the definition of "hazardous  substances,"
"hazardous  wastes,"  "hazardous   materials,"   "extremely  hazardous  wastes,"
"restricted   hazardous  wastes,"  "toxic   substances,"   "toxic   pollutants,"
"contaminants" or "pollutants" under any applicable Environmental Law.

     "Hydrocarbons"  means oil,  gas and other  liquid or gaseous  hydrocarbons,
whether or not treated or processed.

     "Obligations" means the aggregate of:

          (a) all amounts payable  pursuant to any of the Debentures at any time
     outstanding  in the aggregate  principal  amount not to exceed Five Million
     Dollars ($5,000,000) issued by Mortgagor to the Debenture Mortgagees with a
     stated  maturity  date of April 15.  2001,  bearing  interest  at the rates
     specified in and otherwise  subject to the terms of the Debentures dated on
     or  about   November  15,  1996  among  the  Mortgagor  and  the  Debenture
     Mortgagees,  with such Debentures,  and all  modifications,  extensions and
     renewals thereof referred to as the  "Debentures,"  and with the holders of
     the  Debentures  and all  subsequent  holders  of all or any  part  thereof
     referred to as the "Secured Parties";

          (b) claims, as defined in Section 3.5 which are identified (whether or
     not the specific  amount thereof has been  determined)  prior to payment of
     all principal and interest due under the Debentures;


                                      - 3 -

<PAGE>


          (c) any and all other or additional  indebtedness  or liabilities  for
     which  Mortgagor  is now or may  become  liable  to any  Secured  Party  or
     Debenture Mortgagees in any manner pursuant to the Debentures;

          (d) all sums advanced and costs and expenses  incurred by or on behalf
     of the  Debenture  Mortgagees,  including  without  limitation  all  legal,
     accounting,  engineering,  management,  consulting  or like fees,  made and
     incurred in connection with the Obligations described in paragraphs (i) and
     (ii) above or any part thereof, any renewal,  extension or modification of,
     or substitution for, the foregoing  Obligations or any part thereof, or the
     acquisition,  perfection or maintenance  and  preservation  of the security
     therefor, whether such advances, costs or expenses shall have been made and
     incurred at the request of Mortgagor or the Debenture Mortgagees; and

          (e) any and all  extensions  and  renewals of,  substitutions  for, or
     modifications or amendments of any of the foregoing Obligations or any part
     thereof.

     "Oil and Gas Property" means all of the oil and gas leasehold interests and
estates and other  interests of Mortgagor  in the lands,  leases and  agreements
described  in  Exhibit  A  attached  hereto  and made a part  hereof,  (it being
expressly  understood and agreed that the undivided interests in such properties
set forth in Exhibit A are for information purposes and do not establish a limit
on Mortgagor's interests therein which are subject to this Mortgage) whether now
owned or hereafter acquired, by operation of law or otherwise, together with all
of Mortgagor's  interests of any nature whatsoever now or hereafter  incident or
appurtenant  thereto,  including,  but not  limited  to, fee mineral and surface
interests  in  said  lands,   royalty  interests  therein,   all  unsevered  and
unextracted  Hydrocarbons in, under or attributable to Mortgagor's  interests in
said lands,  oil and gas (or oil, gas and mineral)  leases,  subleases,  mineral
agreements, farmin agreements, farmout agreements, bottom hole agreements, other
participation  agreements  of any kind,  royalties,  overriding  royalties,  net
profits interests,  production payments, licenses,  servitudes,  orders, acreage
contribution agreements,  processing agreements,  options and similar interests,
and all  rights-of-way,  surface leases,  and easements  affecting the foregoing
interests of Mortgagor or useful or  appropriate  in exploring  and/or  drilling
for,  producing,   processing,  treating,  handling,  storing,  transporting  or
marketing  Hydrocarbons  therefrom  or the  disposal of water,  Hydrocarbons  or
associated substances from said lands.

     "Operating Equipment" means all surface or subsurface machinery, equipment,
facilities,  supplies  or other  property of  whatsoever  kind or nature and any
replacements  thereof,  substitutions  therefor or accessions thereto (including
leases of  equipment),  now or  hereafter  located  in, on or under,  affixed or
attributable  to or obtained or used in  connection  with any of the Oil and Gas
Property or any portion thereof or interest therein, including, without limiting
the  generality of the foregoing,  goods which are or are to become  fixtures on
the Oil and Gas Property,  oil wells, gas wells,  water wells,  injection wells,
casing,  tubing,  rods,  pumps,  pumping  units and  engines,  Christmas  trees,
derricks,   separators,  gun  barrels,  flow  lines,  tanks,  gas  systems  (for
gathering, treatment, compression and transmission), chemicals, solutions, water
systems (for treating,  disposal and injection),  power plants,  boilers, poles,

                                      - 4 -

<PAGE>


lines,  transformers,   starters  and  controllers,  valves,  meters,  measuring
devices,  machine  shops,  tools,  storage yards and equipment  stored  therein,
buildings  and  camps,  secondary  and other  recovery  equipment,  systems  and
processes, plans, drawings, specifications, surveys, engineering, geological and
geophysical   studies  and  reports,   well  logs,  reports  and  related  data,
seismographic  studies,  reports and  information,  office and personnel  books,
files, records and correspondence,  computer output and data files, maps, plats,
abstracts of title, lease files, unit files,  production  marketing files, title
curative opinions,  title files and title records,  division orders and division
order records,  ownership maps,  warranties and guarantees of manufacturers  and
others,  telegraph,  telephone and other communication  systems,  roads, loading
docks, shipping facilities and building and construction materials.

     "Personalty  Collateral"  means all of  Mortgagor's  interest  now owned or
hereafter   acquired  in  and  to:  (i)  all  Operating   Equipment;   (ii)  all
Hydrocarbons,  whether or not extracted from or  attributable to the Oil and Gas
Property;  (iii) all  Production  Sales  Contracts;  and (iv) all other personal
property,  movable and immovable,  tangible or intangible,  of whatsoever nature
and  kind,  wherever  located,  including,  without  limitation,  all  accounts,
contract rights,  general  intangibles,  equipment,  inventory,  goods,  chattel
paper, permits, authorizations,  seismic or other data, title information, title
abstracts and maps, now owned or existing or hereafter  acquired by Mortgagor or
arising in  connection  with the  conduct by  Mortgagor  of any  activity  on or
relating to the Collateral,  except that organizational,  tax and other internal
records,  agreements or documents of the Mortgagor or any partner  therein which
are  not  related  to or  necessary  for  the  ownership  and  operation  of the
Collateral and sale of Hydrocarbons are excluded from Personalty Collateral.

     "Proceeds"   includes  whatever  is  received  upon  the  sale,   exchange,
collection or other  disposition  of the  Collateral  and  insurance  payable or
damages or other payments by reason of loss or damage to the Collateral, and all
additions thereto, substitutions and replacements thereof or accessions thereto.

     "Production  Sales Contract" means each contract now in effect or hereafter
entered  into by Mortgagor or  Mortgagor's  predecessors  in title for the sale,
purchase,  exchange or processing of Hydrocarbons extracted from or attributable
to the Oil and Gas Property.

     "Realty Collateral" means all of Mortgagor's interest in and to the Oil and
Gas  Property,  including,  but not  limited  to,  the  interests  of  Mortgagor
described or specified in Exhibit A hereto.

                        ARTICLE 2 - CREATION OF SECURITY

     Section  2.1  Grant.  In   consideration   of  the  Debenture   Mortgagees'
acquisition of the Debentures constituting the Obligations, and in consideration
of the mutual  covenants  contained  herein,  and for the  purpose  of  securing
payment of the Obligations,  Mortgagor hereby grants, bargains, sells, warrants,
mortgages,  assigns,  transfers  and conveys the Realty  Collateral  and Fixture

                                      - 5 -

<PAGE>


Collateral  to the  Debenture  Mortgagees,  pari passu  among all the  Debenture
Mortgagees  with  power of sale to have and to hold the  Realty  Collateral  and
Fixture  Collateral,  together  with all and  singular  the rights,  privileges,
contracts, and appurtenances now or hereafter at any time before the foreclosure
or release  hereof,  in any way  appertaining  or  belonging  thereto,  unto the
Debenture Mortgagees and to their substitutes or successors,  forever,  upon the
terms and conditions  herein set forth; and Mortgagor hereby binds and obligates
Mortgagor and Mortgagor's  successors and assigns, to warrant and to defend, all
and singular,  title to the  Collateral  unto the Debenture  Mortgagees  and its
substitutes  or successors,  forever,  against the claims of any and all persons
whomsoever claiming any part thereof.

     Section  2.2  Creation  of  Security  Interest.  In  addition  to the grant
contained in Section 2.1, and for the same consideration and purpose,  Mortgagor
hereby  grants to the Debenture  Mortgagees,  pari passu among all the Debenture
Mortgagees,  security  interest  in all  Personalty  Collateral,  now  owned  or
hereafter acquired by the Mortgagor,  and in all Proceeds.  Without limiting the
foregoing  provisions of this Section 2.2,  Mortgagor  stipulates that the grant
made by this Section 2.2 includes a grant of a security interest in Hydrocarbons
extracted from or  attributable  to the Oil and Gas Property and in the Proceeds
resulting from sale of such Hydrocarbons  (including,  but not limited to, sales
at the  wellhead),  such  security  interest to attach to such  Hydrocarbons  as
extracted and to the accounts resulting from such sales.

     Section  2.3  Proceeds.  The  security  interest  of  Debenture  Mortgagees
hereunder  in the Proceeds  shall not be  construed  to mean that any  Debenture
Mortgagees  consent  to  the  sale  or  other  disposition  of any  part  of the
Collateral other than Hydrocarbons extracted from or attributable to the Oil and
Gas Property and sold in the ordinary course of business.

                  ARTICLE 3 - ASSIGNMENT OF PRODUCTION PROCEEDS

     Section  3.1  Assignment.  As  further  security  for  the  payment  of the
Obligations,  upon default by the Company under the terms of the Debentures, the
Mortgagor shall transfer,  assign,  warrant and convey to Debenture  Mortgagees,
pari  passu  among  all the  Debenture  Mortgagees,  all  Hydrocarbons  (and the
Proceeds  therefrom) which are extracted from or attributable to the Oil and Gas
Property.  All parties producing,  purchasing and receiving such Hydrocarbons or
the  Proceeds   therefrom  are  authorized  and  directed  to  treat   Debenture
Mortgagees,  pari  passu  among  all the  Debenture  Mortgagees,  as the  person
entitled in Mortgagor's place and stead to receive the same; and further,  those
parties will be fully protected in so treating Debenture  Mortgagees and will be
under no obligation  to see to the  application  by Debenture  Mortgagees of any
Proceeds received by it.



                                      - 6 -

<PAGE>


     Section 3.2 Application of Proceeds.

     (a) All payments received by Debenture  Mortgagees  pursuant to Section 3.1
above  shall be placed  in a  collateral  collection  account  at the  financial
institution  designated by the Debenture  Mortgagees and on the last day of each
month shall be applied as follows:

          (i) first,  toward  satisfaction of all costs and expenses incurred in
     connection  with the  collection of Proceeds and the payment of any part of
     the Obligations not represented by a written instrument;

          (ii) second,  to the payment of all accrued interest on the Debentures
     and of all other fees or payments required in the Debentures;

          (iii) third, to the payment of any then due and owing principal on the
     Debentures; and

          (iv) the balance, if any, shall be released to Mortgagor.

     (b) If any date of  application  specified  above (herein called a "regular
application  date") shall be a Saturday,  Sunday or legal banking  holiday under
the laws of the  jurisdiction  in which  such  proceeds  shall be  applied,  the
proceeds to be applied by  Debenture  Mortgagees  pursuant  to this  Section 3.2
shall  be  applied  on  the  last  business  day  next  preceding  such  regular
application date that is not a Saturday,  Sunday or legal banking  holiday,  but
the amount to be applied pursuant to paragraph (a)(ii) of this Section 3.2 shall
nevertheless  be the  amount  accrued  up to, but not  including,  such  regular
application date.

     Section 3.3 Mortgagor's Payment Duties. Nothing contained herein will limit
Mortgagor's duty to make payment on the Obligations  when the Proceeds  received
by Debenture  Mortgagees  pursuant to this Article 3 are insufficient to pay the
costs, interest,  principal and any other portion of the Obligations then owing,
and the receipt of Proceeds by Debenture  Mortgagees  will be in addition to all
other security now or hereafter existing to secure payment of the Obliga tions.

     Section 3.4 Debenture  Mortgagees  Collection Duties.  Debenture Mortgagees
have no obligation to enforce collection of any Proceeds and are hereby released
from all  responsibility in connection  therewith,  except the responsibility to
account to Mortgagor for Proceeds actually received.

     Section  3.5  Indemnification.  Mortgagor  agrees  to  indemnify  Debenture
Mortgagees  and each other Secured Party against and hold  Debenture  Mortgagees
and each other Secured Party  harmless  from all claims,  actions,  liabilities,
losses, judgments,  attorneys' fees, costs and expenses and other charges of any
description  whatsoever (all of which are hereafter  referred to in this Section
3.5 as "Claims")  made against or sustained or incurred by Debenture  Mortgagees
or any other Secured Party as a consequence of the  assertion,  either before or
after the payment in full of the Obligations,  that Debenture  Mortgagees or any

                                      - 7 -

<PAGE>


other  Secured  Party  received   Hydrocarbons  or  Proceeds  pursuant  to  this
instrument.  Debenture  Mortgagees  and each other  Secured  Party will have the
right to employ  attorneys and to defend against any Claims and unless furnished
with satisfactory indemnity, after notice to Mortgagor,  Debenture Mortgagees or
any other Secured Party will have the right to pay or compromise  and adjust all
Claims in its sole reasonable  discretion.  Mortgagor shall indemnify and pay to
Debenture  Mortgagees  or any other  Secured Party all amounts paid by Debenture
Mortgagees  or any other Secured Party in compromise or adjustment of any of the
Claims or amounts  adjudged  against  Debenture  Mortgagees or any other Secured
Party in respect of any of the Claims. The liabilities of Mortgagor as set forth
in this Section 3.5 will constitute Obligations and will survive the termination
of this instrument for a period of six months.

     Section 3.6  Limitation of Liability.  The Mortgagor is liable for the full
amount  of the  Obligations,  including,  without  limitation,  the  Obligations
evidenced  by the  Debentures.  If, in  connection  with this  Mortgage  and the
transactions  contemplated  hereby,  there is a foreclosure  of Liens by private
power of sale or otherwise, and attachment,  execution or other writ against the
assets of the  Mortgagor,  no judgment for any deficiency  upon the  Obligations
shall be sought or obtained by the  Debenture  Mortgagees  or any other  Secured
Party  against  any  general  partner  (other than as may be required to enforce
rights and remedies against the Mortgagor).

                ARTICLE 4 - MORTGAGOR'S WARRANTIES AND COVENANTS

     Section 4.1 Warranties and Covenants.

     (a) Mortgagor warrants and covenants that:

          (i) Mortgagor,  to the extent of the interests of Mortgagor in Exhibit
     A, has good and  defensible  title (as defined in the Credit  Agreement) to
     each property right or interest  constituting  the  Collateral  free of any
     adverse claim, burden, mortgage,  lien, security interest,  pledge, charge,
     encumbrance  or  interest  of or in favor of any third  party other than as
     stated in Exhibit A, except as previously disclosed to Debenture Mortgagees
     in  writing,  or  as  previously  disclosed  to  Debenture  Mortgagees,  no
     financing  statement  covering any of the  Collateral in favor of any third
     party  is on  file  in any  public  office;  Mortgagor  holds  the  working
     interests in the Oil and Gas Property described in Exhibit A; and Mortgagor
     has a good and legal right and full  authority  to grant and convey same to
     Debenture Mortgagees pursuant to this instrument;

          (ii) the oil and gas (or oil,  gas and  mineral)  leases  and  mineral
     agreements  included in the Oil and Gas Property  are valid and  subsisting
     and all  payments,  rentals and  royalties due under each of them have been
     properly and timely paid, and all conditions and  obligations  necessary to
     keep  them in force  have  been  fully  satisfied  and  performed;  and all
     producing wells located on the Oil and Gas Property or properties  unitized

                                      - 8 -

<PAGE>



     therewith have been drilled,  operated and produced in conformity  with all
     applicable  laws and  rules,  regulations  and  orders of all  governmental
     authorities having  jurisdiction and are subject to no penalties on account
     of past production;

          (iii) no  approval  or consent  of any  regulatory  or  administrative
     commission  or  authority  or of any other  governmental  body or any other
     party  is  necessary  to  authorize  the  execution  and  delivery  of this
     instrument or of any other written  instrument  constituting  or evidencing
     the Obligations, or to authorize the observance or performance by Mortgagor
     of the  covenants  contained  in this  instrument  or in the other  written
     instruments  constitut ing or evidencing  the  Obligations or to enable the
     Debenture Mortgagees to exercise its rights hereunder; and

          (iv) Mortgagor has taken all proper  corporate action to authorize the
     execution  and  delivery  of the  Debentures  secured  hereby  and of  this
     instrument and to make the Debentures and this instrument the legal,  valid
     and binding obligations of Mortgagor.

     (b) Mortgagor  warrants and shall  forever  defend the  Collateral  against
every person  whomsoever  lawfully  claiming the same or any part  thereof,  and
Mortgagor  shall  maintain and preserve  the lien and security  interest  herein
created until this instrument has been terminated as provided herein.

     Section 4.2 Operation of Mortgaged Property. As long as this instrument has
not been released in  accordance  with Section 9.5, and whether or not Mortgagor
is the operator of all or any part of the Oil and Gas Property, Mortgagor shall,
at Mortgagor's own expense:

          (a) comply,  or cause the  operator  to comply,  fully with all of the
     terms  and  conditions  of  all  leases,   mineral   agreements  and  other
     instruments  of  title  described  in  Exhibit  A  and  all  rights-of-way,
     easements and privileges  necessary for the proper operation of such leases
     and instruments,  and otherwise do all things necessary to keep Mortgagor's
     rights and Debenture Mortgagees' interest in the Collateral unimpaired;

          (b) except to the extent a prudent  operator  would do so, not abandon
     any well which is producing or capable of production or forfeit,  surrender
     or  release  any  lease,  sublease,  mineral  agreement  or  farmout or any
     operating  agreement  or  other  agreement  or  instrument   comprising  or
     affecting the Oil and Gas Property  without  Debenture  Mortgagees's  prior
     written consent, which consent shall not be withheld unreasonably;

          (c) cause the Oil and Gas  Property to be  maintained,  developed  and
     protected against drainage and continuously  operated for the production of
     Hydrocarbons in a good and workmanlike  manner as a prudent  operator would
     in accordance  with  generally  accepted  practices,  applicable  operating
     agreements and all applicable federal, state, tribal and local laws, rules,
     regulations and orders;

                                      - 9 -

<PAGE>



          (d)  promptly  pay or cause to be paid when due and owing all rentals,
     other  payments  and  royalties  payable  in  respect  of the  Oil  and Gas
     Property, if any; all expenses incurred in or arising from the operation or
     development of the Collateral;  and all taxes, assessments and governmental
     charges imposed upon the Collateral or Mortgagor;

          (e) cause the  Operating  Equipment  to be kept in good and  effective
     operating   condition   and  cause  to  be  made  all  repairs,   renewals,
     replacements,  additions and improvements  thereof or thereto  necessary or
     appropriate for the production  Hydrocarbons  from the Oil and Gas Property
     and permit the  Debenture  Mortgagees  (through its agents and  employees),
     upon  reasonable  prior notice and during normal  business  hours, to enter
     upon  the  Oil and  Gas  Property  for the  purpose  of  investigating  and
     inspecting the condition and operation of the Collateral;

          (f) cause the Collateral to be kept free and clear of liens,  charges,
     security interests, encumbrances, adverse claims and title defects of every
     character  other than (i) the lien and  security  interest  created by this
     instrument,  (ii) taxes constituting a lien but not due and payable,  (iii)
     defects  or  irregularities  in  title  which  are not  such  as  interfere
     materially with the  development,  operation or value of the Collateral and
     not such as to  materially  affect title  thereto,  (iv) those set forth or
     referred to in Exhibit A hereto, (v) those being contested in good faith by
     Mortgagor  and  which do not,  in the  judgment  of  Debenture  Mortgagees,
     jeopardize the Debenture Mortgagees's rights in and to the Collateral,  and
     (vi)  those  consented  to in writing by  Debenture  Mortgagees;  provided,
     however,  that Debenture  Mortgagees may take such  reasonable  independent
     action in connection  with any such matters  affecting the Collateral as it
     deems advisable,  and all costs and expenses  thereof,  including,  without
     limitation, attorneys' fees incurred by Debenture Mortgagees in taking such
     action, shall be part of the Obligations hereunder;

          (g) defend,  indemnify and hold harmless the Debenture  Mortgagees and
     other Secured Parties, and their respective employees, agents, officers and
     directors,  from  and  against  any  claims,  demands,   penalties,  fines,
     liabilities,  settlements,  damages, costs and expenses of whatever kind or
     nature known or unknown, contingent or otherwise, arising out of, or in any
     way relating to the violation of or  noncompliance  with any  Environmental
     Laws  applicable to the properties  owned or operated by the Mortgagor,  or
     any orders,  requirements  or demands of governmental  authorities  related
     thereto, including,  without limitation,  attorney's and consultant's fees,
     investigation  and  laboratory  fees,  environmental  response  and cleanup
     costs, court costs and litigation  expenses,  except to the extent that any
     of the foregoing arise out of the gross negligence or willful misconduct of
     the party seeking indemnification therefor; and

          (h)  execute,  acknowledge  and deliver to Debenture  Mortgagees  such
     other and further  instruments  and do such other acts as in the opinion of
     Debenture  Mortgagees  are  necessary  or desirable to effect the intent of
     this  instrument  or  otherwise  protect  and  preserve  the  interests  of

                                     - 10 -

<PAGE>



     Debenture  Mortgagees   hereunder,   promptly  upon  request  of  Debenture
     Mortgagees.

     Section 4.3 Recording and Filing.  Mortgagor shall pay all costs of filing,
registering  and  recording  this and every  other  instrument  in  addition  or
supplemental  hereto and all  financing  state ments  Debenture  Mortgagees  may
require, in such offices and places and at such times and as often as may be, in
the judgment of Debenture Mortgagees,  necessary to preserve,  protect and renew
the  lien  and  security   interest   herein   created  as  a  second  lien  and
second-in-priority  security  interest on and in the Collateral and otherwise do
and perform all matters or things  necessary or expedient to be done or observed
by reason of any law or  regulation  of any state or of the United  States or of
any  other  competent  authority  for  the  purpose  of  effectively   creating,
maintaining and preserving the lien and security  interest created herein and on
the Collateral and the priority  thereof.  Mortgagor shall also pay the costs of
obtaining  reports  from  appropriate  filing  officers   concerning   financing
statement  filings  in  respect  of any of the  Collateral  in which a  security
interest is granted herein.

     Section 4.4 Debenture Mortgagees' Right to Perform Mortgagor's Obligations.
Mortgagor  agrees that, if Mortgagor fails to perform any act which Mortgagor is
required to perform  under this  instrument,  any  Debenture  Mortgagees  or any
receiver  appointed  hereunder  may, but shall not be obligated  to,  perform or
cause to be performed such act, and any expense incurred by Debenture Mortgagees
in so doing  shall be a  demand  obligation  owing  by  Mortgagor  to  Debenture
Mortgagees,  shall bear interest at an annual rate equal to the maximum interest
rate provided in the Note until paid and shall be a part of the Obligations, and
Debenture  Mortgagees,  or any receiver shall be subrogated to all of the rights
of the party receiving the benefit of such performance.  The undertaking of such
performance  by Debenture  Mortgagees  or any  receiver as  aforesaid  shall not
obligate  such  person  to  continue  such  performance  or to  engage  in  such
performance  or  performance  of any other act in the future,  shall not relieve
Mortgagor  from the  observance  or  performance  of any  covenant,  warranty or
agreement  contained  in this  instrument  or  constitute  a waiver  of  default
hereunder  and shall not affect the right of Debenture  Mortgagees to accelerate
the payment of all  indebtedness  and other sums secured  hereby or to resort to
any other of its rights or remedies  hereunder or under  applicable  law. In the
event the Debenture  Mortgagees or any receiver appointed  hereunder  undertakes
any such action,  no such party shall have any liability to the Mortgagor in the
absence of a showing of gross  negligence  or willful  misconduct of such party,
and in all  events  no party  other  than the  acting  party  shall be liable to
Mortgagor.

                               ARTICLE 5 - DEFAULT

     Section  5.1  Events of  Default.  The term  "Event of  Default"  means the
occurrence  of any of  the  following  events  or  the  existence  of any of the
following conditions:


                                     - 11 -

<PAGE>


          (a) failure by  Mortgagor  to make any payment  when due of any of the
     Obligations  provided  for  herein  or other  failure  to keep,  punctually
     perform  or  observe  any of the  covenants,  obligations  or  prohibitions
     contained  herein  or in any  other  agreement  with  Debenture  Mortgagees
     (whether now existing or entered into  hereafter) or the  occurrence of any
     other event which is, or is deemed to be, an Event of Default  under and as
     that term is defined in any such other written instrument or agreement; or

          (b)  any  warranty,   information,   representation  or  statement  by
     Mortgagor  made or  furnished to  Debenture  Mortgagees  by or on behalf of
     Mortgagor in  connection  with the  Obligations  is determined by Debenture
     Mortgagees to be untrue or misleading in any material respect.

     Section 5.2 Acceleration Upon Default.  Upon the occurrence of any Event of
Default,  or at  any  time  thereafter,  the  holders  of at  least  25%  of the
outstanding  principal amount of the Debentures may, at their option,  on behalf
of all Debenture  Mortgagees  pari passu,  by notice to  Mortgagor,  declare the
entire unpaid principal of and the interest accrued on the Obligations to be due
and payable forthwith  without any further notice,  presentment or demand of any
kind, all of which are hereby expressly waived.

     Section 5.3  Possession  and Operation of Property.  Upon the occurrence of
any Event of Default,  or at any time  thereafter,  and in addition to all other
rights therein conferred on the Debenture  Mortgagees,  the Debenture Mortgagees
or any person, firm or corporation designated by Debenture Mortgagees, will have
the right and power, but will not be obligated,  to have an audit performed,  at
Mortgagor's  expense,  of the books and records of Mortgagor,  and to enter upon
and take possession of all or any part of the Collateral,  to exclude  Mortgagor
therefrom,  and to  hold,  use,  administer,  manage  and  operate  the same (in
compliance with the terms of contracts binding on the Oil and Gas Property known
to the  Debenture  Mortgagees  and  all  applicable  laws)  to the  extent  that
Mortgagor  could  do so.  The  Debenture  Mortgagees  or  any  person,  firm  or
corporation designated by the Debenture Mortgagees,  may operate and develop the
Collateral,  or any portion  thereof,  without any  liability  to  Mortgagor  in
connection  with the  operations  except with  respect to gross  negligence  and
willful  misconduct;  and  the  Debenture  Mortgagees  or any  person,  firm  or
corporation  designated by Debenture  Mortgagees will have the right to collect,
receive and receipt for all Hydrocarbons  produced and sold from the Oil and Gas
Property,  to make  repairs,  to purchase  machinery and  equipment,  to conduct
workover  operations,  to drill  additional  wells  as  necessary  in  Debenture
Mortgagees's  good faith judgment for the protection of the  Collateral,  and to
exercise  every power,  right and  privilege  of  Mortgagor  with respect to the
Collateral.  Providing  there  has  been no  foreclosure  sale,  when and if the
expenses of the  operation  and  development  (including  costs of  unsuccessful
workover operations or additional wells) have been paid and the Obligations paid
in full, the remaining Collateral shall be returned to the Mortgagor.


                                     - 12 -

<PAGE>


     Section 5.4 Ancillary  Rights.  Upon the occurrence of an Event of Default,
or at any time  thereafter,  and in  addition to all other  rights of  Debenture
Mortgagees  hereunder,  Debenture  Mortgagees  may,  without  notice,  demand or
declaration of default,  all of which are hereby  expressly waived by Mortgagor,
proceed by a suit or suits in equity or at law,  (i) for the seizure and sale of
the  Collateral or any part thereof,  (ii) for the specific  performance  of any
covenant or agreement  herein  contained or in aid of the execution of any power
herein granted,  (iii) for the foreclosure or sale of the Collateral or any part
thereof  under the  judgment or decree of any court of  competent  jurisdiction,
(iv) without  regard to the solvency or  insolvency  of any person,  and without
regard to the value of the Collateral,  and without notice to Mortgagor  (notice
being hereby expressly  waived),  for the ex parte  appointment of a receiver to
serve without bond pending any  foreclosure  or sale  hereunder,  or (v) for the
enforcement of any other appropriate legal or equitable remedy.  Notwithstanding
the foregoing,  the Debenture  Mortgagees  agrees to give reasonable  efforts to
give Mortgagor prior notice of any of the foregoing  actions,  provided that the
failure of Debenture  Mortgagees  to use such  reasonable  efforts to give prior
notice shall not invalidate any action so taken by Debenture  Mortgagees.  It is
hereby  expressly  agreed that  Mortgagor's  sole remedy for any such failure by
Debenture  Mortgagees  shall be an action for damages suffered by Mortgagor as a
direct and proximate result of such failure.

                 ARTICLE 6 - DEBENTURE MORTGAGEES'S RIGHTS AS TO
                         REALTY COLLATERAL UPON DEFAULT

     Section 6.1 Foreclosure.  Upon the occurrence of an Event of Default, or at
any  time  thereafter,  Debenture  Mortgagees  may,  subject  to  any  mandatory
requirements of applicable law,  proceed by suit to foreclose its lien hereunder
and to sell or have sold the  Realty  Collateral  or any part  thereof at one or
more sales, as an entirety or in parcels, at such place or places and otherwise,
in such  manner  and upon such  notice  as may be  required  by law,  or, in the
absence of any such requirement,  as Debenture  Mortgagees may deem appropriate,
and Debenture  Mortgagees shall thereafter make or cause to be made a conveyance
to the purchaser or purchasers  thereof.  Debenture  Mortgagees may postpone the
sale of the real  property  included in the  Collateral  or any part  thereof by
public  announcement  at the time and place of such sale,  and from time to time
thereafter  may further  postpone such sale by public  announcement  made at the
time of sale fixed by the preceding  postponement.  Sale of a part of the Realty
Collateral  will not exhaust the power of sale,  and sales may be made from time
to time until all such property is sold or the Obligations are paid in full.

         ARTICLE 7 - DEBENTURE MORTGAGEES'S RIGHTS AS TO PERSONALTY AND
                         FIXTURE COLLATERAL UPON DEFAULT

     Section  7.1  Personalty  Collateral.  Upon the  occurrence  of an Event of
Default, or at any time thereafter,  Debenture Mortgagees may, without notice to
Mortgagor,  exercise  their  rights  to  declare  all of the  Obligations  to be
immediately  due and payable,  in which case Debenture  Mortgagees will have all
rights and remedies granted by law, and  particularly by the Uniform  Commercial
Code,  including,  but not  limited  to,  the  right to take  possession  of the
Personalty Collateral,  and for this purpose Debenture Mortgagees may enter upon
any premises on which any or all of the  Personalty  Collateral  is situated and
take possession of and operate the Personalty Collateral or remove it therefrom.

                                     - 13 -

<PAGE>


Debenture Mortgagees may require Mortgagor to assemble the Personalty Collateral
and  make it  available  to  Debenture  Mortgagees  or a  representative  of the
Debenture  Mortgagees at a place to be designated by Debenture  Mortgagees which
is reasonably  convenient to all parties.  Unless the  Personalty  Collateral is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market, Debenture Mortgagees will give Mortgagor reasonable
notice of the time and place of any public  sale or of the time after  which any
private sale or other  disposition of the  Personalty  Collateral is to be made.
This  requirement  of  sending  reasonable  notice  will be met if the notice is
mailed,  postage prepaid,  to Mortgagor at the address designated above at least
five days before the time of the sale or disposition.

     Section  7.2 Sale with  Realty  Collateral.  In the  event of  foreclosure,
whether judicial or nonjudicial, at Debenture Mortgagees's option it may proceed
under the Uniform  Commercial Code as to the Personalty  Collateral or Debenture
Mortgagees may proceed as to both Realty Collateral and Personalty Collateral in
accordance with their rights and remedies in respect of the Realty Collateral.

     Section 7.3 Fixture Collateral. Upon the occurrence of an Event of Default,
or at any time thereafter,  Debenture  Mortgagees may elect to treat the Fixture
Collateral as either Realty  Collateral or as Personalty  Collateral and proceed
to exercise such rights as apply to the type of Collateral selected.

               ARTICLE 8 - OTHER PROVISIONS CONCERNING FORECLOSURE

     Section  8.1  Possession  and  Delivery  of  Collateral.  It  shall  not be
necessary for Debenture  Mortgagees to have physically present or constructively
in their possession any of the Collateral at any foreclosure sale, and Mortgagor
shall deliver to the  purchasers at such sale on the date of sale the Collateral
purchased by such  purchasers  at such sale,  and if it should be  impossible or
impracticable  for  any of  such  purchasers  to  take  actual  delivery  of the
Collateral,  then the title and right of possession to the Collateral shall pass
to the  purchaser at such sale as  completely  as if the same had been  actually
present and delivered.

     Section 8.2 Debenture  Mortgagees as Purchaser.  Debenture  Mortgagees will
have the right to become the purchaser at any foreclosure sale, and it will have
the right to credit  upon the amount of the bid the amount  payable to it out of
the net proceeds of sale.

     Section 8.3 Recitals  Conclusive:  Ratification.  Recitals contained in any
conveyance  to any  purchaser  at any  sale  made  hereunder  will  conclusively
establish  the truth and  accuracy of the  matters  therein  stated,  including,
without  limiting the  generality  of the  foregoing,  nonpayment  of the unpaid
principal  sum  of,  and  the  interest  accrued  on,  the  written  instruments
constituting  part or all of the Obligations  after the same have become due and
payable, nonpayment of any other of the Obligations or advertisement and conduct

                                     - 14 -

<PAGE>


of the sale in the manner provided herein.  Mortgagor  ratifies and confirms all
legal acts that  Debenture  Mortgagees  may do in carrying out the provisions of
this instrument.

     Section 8.4 Effect of Sale. Any sale or sales of the Collateral or any part
thereof  will  operate to divest all right,  title,  interest,  claim and demand
whatsoever,  either at law or in equity, of Mortgagor in and to the premises and
the  property  sold,  and will be a  perpetual  bar,  both at law and in equity,
against  Mortgagor,  Mortgagor's  successors  or assigns and against any and all
persons  claiming or who shall  thereafter claim all or any of the property sold
from,  through or under  Mortgagor,  or Mortgagor's  successors or assigns.  The
purchaser  or  purchasers  at  the  foreclosure  sale  will  receive   immediate
possession of the property purchased; and if Mortgagor retains possession of the
Realty Collateral,  or any part thereof,  subsequent to sale,  Mortgagor will be
considered  a tenant  at  sufferance  of the  purchaser  or  purchasers,  and if
Mortgagor remains in such possession after demand of the purchaser or purchasers
to remove,  Mortgagor will be guilty of forcible detainer and will be subject to
eviction and removal, forcible or otherwise, with or without process of law, and
without any right to damages arising out of such removal.

     Section  8.5  Application  of  Proceeds.  The  proceeds  of any sale of the
Collateral or any part thereof will be applied as follows:

          (a) first,  to the payment of all expenses  incurred by the  Debenture
     Mortgagees  in  connection  therewith,   including,  without  limiting  the
     generality of the foregoing,  court costs, legal fees and expenses, fees of
     accountants, engineers, consultants, agents or managers and expenses of any
     entry or  taking  of  possession,  holding,  valuing,  preparing  for sale,
     advertising, selling and conveying;

          (b) second, to the payment of the Obligations; and

          (c)  third,   any  surplus   thereafter   remaining  to  Mortgagor  or
     Mortgagor's successors or assigns, as their interests may be established to
     Debenture Mortgagees' reasonable satisfaction.

     Section 8.6  Deficiency.  Mortgagor  will remain liable for any  deficiency
owing to Debenture  Mortgagees or any other Secured Party after  application  of
the net proceeds of any foreclosure sale.

     Section 8.7 Mortgagor's Waiver of Appraisement, Marshalling, etc. Mortgagor
agrees that Mortgagor will not at any time insist upon or plead or in any manner
whatsoever claim the benefit of any appraisement,  valuation, stay, extension or
redemption  law now or  hereafter  in force,  in order to  prevent or hinder the
enforcement  or  foreclosure  of  this  instrument,  the  absolute  sale  of the
Collateral or the possession  thereof by any purchaser at any sale made pursuant
to  this  instrument  or  pursuant  to the  decree  of any  court  of  competent

                                     - 15 -

<PAGE>


jurisdiction.  Mortgagor,  for  Mortgagor and all who may claim through or under
Mortgagor,  hereby  waives the  benefit of all such laws and to the extent  that
Mortgagor  may  lawfully do so under  applicable  state law,  waives any and all
right to have the Realty Collateral  marshalled upon any foreclosure of the lien
hereof or sold in inverse order of alienation.

                            ARTICLE 9 - MISCELLANEOUS

     Section 9.1 Pooling and Unitization. The interest of Mortgagor in any unit,
pooling   agreement  or  other  similar   arrangement,   whether   voluntary  or
involuntary,  to which the Oil and Gas Property (or any part  thereof) is or may
be  subject  will  become a part of the  Realty  Collateral  and the  Personalty
Collateral,  as the case may be, and will be  subject  to the lien and  security
interest  hereof in the same manner and with the same effect as though the unit,
pooling  agreement or other  arrangement  and the interest of Mortgagor  therein
were specifically described in Exhibit A.

     Section 9.2 Discharge of Purchaser.  Upon any sale made under the powers of
sale herein granted and conferred,  the receipt of Debenture  Mortgagees will be
sufficient discharge to the purchaser or purchasers at any sale for the purchase
money,  and such  purchaser  or  purchasers  and the heirs,  devisees,  personal
representatives,  successors  and assigns  thereof  will not,  after paying such
purchase money and receiving such receipt of Debenture Mortgagees, be obliged to
see to the  application  thereof  or be in  anyways  answerable  for  any  loss,
misapplication or nonapplication thereof.

     Section 9.3 Indebtedness of Obligations Absolute.  Nothing herein contained
shall be construed as limiting  Debenture  Mortgagees  to the  collection of any
indebtedness  of  Mortgagor  to  Debenture  Mortgagees  only out of the  income,
revenue,  rents,  issues  and  profits  from  the  Collateral  or as  obligating
Debenture  Mortgagees to delay or withhold  action upon any default which may be
occasioned  by failure of such income or revenue to be  sufficient to retire the
principal  or  interest  when  due on the  indebtedness  secured  hereby.  It is
expressly  understood  between  Debenture  Mortgagees  and  Mortgagor  that  any
indebtedness  of  Mortgagor  to  Debenture   Mortgagees   secured  hereby  shall
constitute an absolute, unconditional obligation of Mortgagor to pay as provided
herein or therein in accordance with the terms of the instrument evidencing such
indebtedness  in the amount  therein  specified at the  maturity  date or at the
respective maturity dates of the installments  thereof,  whether by acceleration
or otherwise.

     Section 9.4 Defense of Claims.  Mortgagor  will promptly  notify  Debenture
Mortgagees in writing of the  commencement  of any material  proceedings  or any
litigation affecting Debenture  Mortgagees'  interest in the Collateral,  or any
part thereof,  and shall take such action,  employing  attorneys  (which must be
reasonably acceptable to Debenture Mortgagees),  as may be necessary to preserve
Mortgagor's  and Debenture  Mortgagees's  rights  affected  thereby;  and should
Mortgagor fail or refuse to take any such action,  Debenture Mortgagees may take
the action on behalf of and in the name of Mortgagor and at Mortgagor's expense.

                                     - 16 -

<PAGE>


Moreover,  Debenture  Mortgagees  may  take  independent  action  in  connection
therewith as it may in its discretion deem proper,  and Mortgagor  hereby agrees
to make  reimbursement  for all sums advanced and all expenses  incurred in such
actions plus  interest at a rate equal to the maximum  interest rate provided in
the Debentures.

     Section 9.5  Termination.  If (i) all amounts of principal and interest due
under all the Debentures,  (ii) all other fees and expenses payable by Mortgagor
under the Debentures and hereunder, and (iii) all other Obligations which are in
sum certain  amounts have been paid in full and no Claims have been  identified,
then  Debenture   Mortgagees  shall,  upon  the  request  of  Mortgagor  and  at
Mortgagor's cost and expense,  deliver to Mortgagor proper instruments  executed
by or on behalf of the holders of at least eighty percent (80%) of the principal
amount of the Debentures  evidencing the release of this  instrument.  Mortgagor
shall be  authorized  to file and  record  such  instruments  and upon  delivery
thereof to Mortgagor, this instrument shall be terminated.  Until such delivery,
this instrument shall remain and continue in full force and effect.

     Section  9.6  Renewals,   Amendments  and  Other  Security.   Renewals  and
extensions of the Obligations  may be given at any time,  amendments may be made
to the agreements  relating to any part of the  Obligations or the Collateral in
accordance with the terms of the Debentures.

     Section  9.7  Effect of  Instrument.  This  instrument  shall be deemed and
construed  to be, and may be enforced  as, an  assignment,  chattel  mortgage or
security agreement,  contract,  deed of trust,  financing  statement,  financing
statement filed as a fixture filing, and real estate mortgage, and as any one or
more of them if appropriate under applicable state law. This instrument shall be
effective as a financing statement filed as a fixture filing with respect to all
Fixture  Collateral  and is to be filed for  record in the  Office of the County
Clerk  or  other  appropriate  office  of  each  county  where  any  part of the
Collateral,  including Fixture  Collateral,  is situated.  This instrument shall
also be  effective  as a  financing  statement  covering  minerals  or the  like
(including  oil  and  gas)  and  accounts   subject  to  Section   9-103(5)  (or
corresponding  provision)  of the  Uniform  Commercial  Code as  enacted  in the
appropriate  jurisdiction  and is to be filed for  record  in the  Office of the
County  Clerk or other  appropriate  office of each county where any part of the
collateral is situated.  A carbon,  photographic,  or other reproduction of this
Mortgage  or of any  financing  statement  relating  to this  Mortgage  shall be
sufficient as a financing statement.

     Section 9.8  Unenforceable  or  Inapplicable  Provisions.  If any provision
hereof  or of any of the  written  instruments  constituting  part or all of the
Obligations  is invalid  or  unenforceable  in any  jurisdiction,  whether  with
respect to all parties  hereto or with respect to less than all of such parties,
the other provisions  hereof and of the written  instruments will remain in full
force and effect in that  jurisdiction  with  respect to the parties as to which
such  provision is valid and enforce able, and the remaining  provisions  hereof
will be liberally  construed in favor of Debenture  Mortgagees in order to carry
out the provisions hereof. The invalidity of any provision of this instrument in
any jurisdiction will not affect the validity or enforceability of any provision
in any other jurisdiction.


                                     - 17 -

<PAGE>


     Section 9.9 Rights Cumulative. Each and every right, power and remedy given
to Debenture  Mortgagees herein or in any other written  instrument  relating to
the Obligations will be cumulative and not exclusive;  and each and every right,
power and remedy whether  specifically given herein or otherwise existing may be
exercised  from  time to time and as often  and in such  order as may be  deemed
expedient by Debenture  Mortgagees,  and the  exercise,  or the beginning of the
exercise,  of any such right, power or remedy will not be deemed a waiver of the
right to exercise,  at the same time or  thereafter,  any other right,  power or
remedy.  A waiver by Debenture  Mortgagees  of any right or remedy  hereunder or
under  applicable  law on any occasion  will not be a bar to the exercise of any
right or remedy on any subsequent occasion.

     Section  9.10  Non-Waiver.  No act,  delay,  omission  or course of dealing
between Debenture  Mortgagees and Mortgagor will be a waiver of any of Debenture
Mortgagees'  rights or remedies  hereunder or under  applicable  law. No waiver,
change  or  modification  in whole or in part of this  instrument  or any  other
written  instrument  will be effective  unless in a writing  signed by Debenture
Mortgagees.

     Section 9.11 Debenture  Mortgagees's  Expenses.  Mortgagor agrees to pay in
full all expenses and reasonable  attorneys' fees of Debenture  Mortgagees which
may have been or may be incurred by Debenture  Mortgagees in connection with the
collection  of the  Obligations  and  the  enforcement  of  any  of  Mortgagor's
obligations  hereunder and under any documents  executed in connection  with the
Obligations.

     Section 9.12 Partial  Releases.  In the event  Mortgagor sells for monetary
consideration  or otherwise any portion of the Oil and Gas  Property,  Debenture
Mortgagees shall release the lien of this instrument with respect to the portion
sold, at the request of Mortgagor.  No release from the lien of this  instrument
of any part of the  Collateral by Debenture  Mortgagees  shall in anyways alter,
vary or diminish the force,  effect or lien of this instrument on the balance or
remainder of the Collateral.

     Section 9.13 Notice.  All notices and deliveries of  information  hereunder
shall be deemed to have been duly given if to the  Debenture  Mortgagees  at the
addresses  of the  holders of the  Debentures  set forth on Exhibit B or at such
subsequent  addresses  as may be furnished to Mortgagor in writing by any holder
of a Debenture. Notwithstanding the provisions of Section 5.4 and Articles 6 and
7 wherein Debenture  Mortgagees is authorized to exercise certain rights or take
certain actions without notice to Mortgagor,  Debenture Mortgagees agrees to use
reasonable efforts to give Mortgagor prior notice of any such exercise of rights
or action.  It is  expressly  agreed,  however,  that any  failure by  Debenture
Mortgagees  to use  reasonable  efforts  to give  Mortgagor  prior  notice of an
exercise of rights or action shall not  invalidate  or preclude such exercise of
rights or action,  but shall  merely  entitle  the  Mortgagor  to  recover  from
Debenture  Mortgagees any actual damages  suffered by Mortgagor as the proximate
and direct result of such failure by Debenture Mortgagees.


                                     - 18 -

<PAGE>


     Section  9.14  Successors.  This  instrument  shall  bind and  inure to the
benefit of the respective successors and assigns of the parties.

     Section 9.15 Interpretation.

          (a) Article and section  headings used in this instrument are intended
     for  convenience  only  and  shall be given  no  significance  whatever  in
     interpreting and construing the provisions of this instrument.

          (b) As used in this instrument, "Debenture Mortgagees" and "Mortgagor"
     include their respective  successors and assigns.  Unless context otherwise
     requires, words in the singular number include the plural and in the plural
     number  include the  singular.  Words of the masculine  gender  include the
     feminine and neuter  gender and words of the neuter gender may refer to any
     gender.

     Section 9.16 Inconsistencies with Related Documents. To the extent, if any,
the provisions  hereof are  inconsistent  with the provisions of the Debentures,
such  inconsistencies  shall be  resolved  by giving  controlling  effect to the
Debentures.

     Section 9.17 Counterparts. This instrument may be executed in any number of
counterparts,  each of which will for all  purposes be deemed to be an original,
and all of  which  are  identical  except  that to  facilitate  recordation,  in
particular  counterparts  hereof  used for  recordation,  portions  of Exhibit A
hereto which describe  properties  situated in counties other than the county in
which the counterpart is to be recorded have been omitted.

     Executed as of the Effective Date.

                                            MORTGAGOR:

ATTEST                                      PEASE OIL AND GAS COMPANY


                                            By   
-------------------------------------          ---------------------------------
Secretary                                      Willard H. Pease, Jr., President


                                     - 19 -

<PAGE>



                                            DEBENTURE MORTGAGES:
                                            By:  PEASE OIL AND GAS COMPANY



                                            By 
                                               ---------------------------------
                                               Willard H. Pease, Jr.,
                                               as attorney-in-fact on behalf of
                                               all holders of Debentures as 
                                               identified on Exhibit B.

STATE OF COLORADO                   )
                                    )  ss.
COUNTY OF MESA                      )

     The  foregoing  instrument  was  acknowledged  before  me this  ____ day of
___________,  1996,  by Willard H. Pease,  Jr. as President of Pease Oil and Gas
Company, a Nevada corporation.

     Witness my hand and official seal.

     My commission expires:


S E A L
                                          --------------------------------------
                                          Notary Public

                                     - 20 -

<PAGE>

                                    EXHIBIT B

     Holders of 1996 10% Collateralized  Subordinated  Convertible Debentures of
Pease Oil and Gas Company (herein referred to as "Debenture Mortgagees"):

     Name and Address of Holders                  Principal Amount of Debenture
     ---------------------------                  -----------------------------




















                                     - 21 -