CREDIT AGREEMENT

                          $450,000,000 REVOLVING CREDIT

                          AND COMPETITIVE BID FACILITY

                                      AMONG

                           SEAGULL ENERGY CORPORATION,

                            THE CHASE MANHATTAN BANK,
                           Individually and as Agent,

                                       AND

                        THE OTHER BANKS SIGNATORY HERETO



                                  June 17, 1997




<PAGE>



                                TABLE OF CONTENTS

Section 1.         Definitions and Accounting Matters..........................1
                    
        1.1        Certain Defined Terms.......................................1
                   
        1.2        Accounting Terms and Determinations........................24
                   
        1.3        Types of Loans.............................................25
                    
        1.4        Miscellaneous..............................................25
                    

Section 2.         Commitments; Borrowing Base Determinations;
                   Competitive Bid Facility...................................25
                    
        2.1        Committed Loans............................................25
                    
        2.2        Letters of Credit..........................................25
                    
        2.3        Reductions and Changes of Commitments......................28
                    
        2.4        Fees.......................................................28
                   
        2.5        Affiliates; Lending Offices................................29
                   
        2.6        Several Obligations........................................29
                    
        2.7        Notes......................................................29
                    
        2.8        Use of Proceeds............................................30
                   
        2.9        Borrowing Base Determinations..............................30
                    
        2.10       Competitive Bid Procedure..................................30
                   

Section 3.         Borrowings, Prepayments and Selection of Interest Rates....32
                     
        3.1        Borrowings.................................................32
                   
        3.2        Prepayments................................................33
                    
        3.3        Selection of Interest Rates................................34
                    

Section 4.         Payments of Principal and Interest.........................34

        4.1        Repayment of Loans and Reimbursement Obligations...........34
       
        4.2        Interest...................................................34


Section 5.         Payments; Pro Rata Treatment; Computations, Etc............35
                   
        5.1        Payments...................................................35
                    
        5.2        Pro Rata Treatment.........................................36
                    
        5.3        Computations...............................................36
                    
        5.4        Minimum and Maximum Amounts................................36
                    
        5.5        Certain Actions, Notices, Etc..............................37
                    
        5.6        Non-Receipt of Funds by Agent..............................38
                    
        5.7        Sharing of Payments, Etc...................................38
                    

Section 6.         Yield Protection and Illegality............................39

        6.1        Additional Costs...........................................39




                                       (1)


<PAGE>



        6.2        Limitation on Types of Loans...............................40
                    
        6.3        Illegality.................................................41
                    
        6.4        Substitute Alternate Base Rate Loans.......................41
                    
        6.5        Compensation...............................................42
                    
        6.6        Additional Costs in Respect of Letters of Credit...........42
                    
        6.7        Capital Adequacy...........................................43
                    
        6.8        Limitation on Additional Charges; Substitute Banks; 
                   Non-Discrimination.........................................43
                    

Section 7.         Conditions Precedent.......................................44
        
        7.1        Initial Loans..............................................44
       
        7.2        Initial and Subsequent Loans...............................46


Section 8.         Representations and Warranties.............................47
                    
        8.1        Corporate Existence........................................47
                    
        8.2        Corporate Power and Authorization..........................47
                   
        8.3        Binding Obligations........................................47
                   
        8.4        No Legal Bar or Resultant Lien.............................47
                   
        8.5        No Consent.................................................48
                   
        8.6        Financial Condition........................................48
                    
        8.7        Investments and Guaranties.................................48
                    
        8.8        Liabilities and Litigation.................................48
                    
        8.9        Taxes and Governmental Charges.............................49
                    
        8.10       Title to Properties........................................49
                    
        8.11       Defaults...................................................49
                    
        8.12       Location of Businesses and Offices.........................49
                    
        8.13       Compliance with Law........................................49
                    
        8.14       Margin Stock...............................................50
                    
        8.15       Subsidiaries...............................................50
                   
        8.16       ERISA......................................................50
                    
        8.17       Investment Company Act.....................................50
                   
        8.18       Public Utility Holding Company Act.........................51
                   
        8.19       Environmental Matters......................................51
                    
        8.20       Claims and Liabilities.....................................52
                   
        8.21       Solvency...................................................52
                    

Section 9.         Affirmative Covenants......................................52
                     
        9.1        Financial Statements and Reports...........................52
                    
        9.2        Officers' Certificates.....................................54
                    
        9.3        Taxes and Other Liens......................................55
                    
        9.4        Maintenance................................................55
                    
        9.5        Further Assurances.........................................56
                    




                                       (2)






        9.6        Performance of Obligations.................................56
                    
        9.7        Reimbursement of Expenses..................................56
                    
        9.8        Insurance..................................................57
                    
        9.9        Accounts and Records.......................................57
                    
        9.10       Rights of Inspection.......................................58
                    
        9.11       Notice of Certain Events...................................58
                    
        9.12       ERISA Information and Compliance...........................59
                    

Section 10.        Negative Covenants.........................................60
                    
        10.1       Debts, Guaranties and Other Obligations....................60
                    
        10.2       Liens......................................................63
                    
        10.3       Investments, Loans and Advances............................66
                    
        10.4       Dividend Payment Restrictions..............................68
                    
        10.5       Mergers and Sales of Assets................................68
                    
        10.6       Proceeds of Notes..........................................69
                    
        10.7       ERISA Compliance...........................................69
                    
        10.8       Amendment of Certain Documents.............................69
                    
        10.9       Tangible Net Worth.........................................69
                    
        10.10      Company Debt/Capitalization Ratio..........................70
                    
        10.11      EBITDAX/Interest Ratio.....................................70
                    
        10.12      Nature of Business.........................................70
                    
        10.13      Futures Contracts..........................................70
                    
        10.14      Covenants in Other Agreements..............................70
                    

Section 11.        Defaults...................................................71
                    
        11.1       Events of Default..........................................71
                    
        11.2       Collateral Account.........................................74
                    
        11.3       Preservation of Security for Unmatured Reimbursement
                   Obligations................................................74
                   
        11.4       Right of Setoff............................................74
                   

Section 12.        Agent......................................................75
                    
        12.1       Appointment, Powers and Immunities.........................75
                    
        12.2       Reliance by Agent..........................................76
                    
        12.3       Defaults...................................................76
                    
        12.4       Rights as a Bank...........................................77
                    
        12.5       Indemnification............................................77
                    
        12.6       Non-Reliance on Agent and Other Banks......................77
                    
        12.7       Failure to Act.............................................78
                    
        12.8       Resignation or Removal of Agent............................78
                  





                                       (3)


<PAGE>



Section 13.        Miscellaneous..............................................78
                    
        13.1       Waiver.....................................................78
                   
        13.2       Notices....................................................79
                  
        13.3       Indemnification............................................79
                   
        13.4       Amendments, Etc............................................80
                   
        13.5       Successors and Assigns.....................................80
                   
        13.6       Limitation of Interest.....................................83
                   
        13.7       Survival...................................................85
                   
        13.8       Captions...................................................85
                   
        13.9       Counterparts...............................................85
                   
        13.10      Governing Law..............................................85
                    
        13.11      Severability...............................................86
                    
        13.12      Chapter 15 Not Applicable..................................86
                  
        13.13      Confidential Information...................................86
                    
        13.14      Tax Forms..................................................87
                    
        13.15      Amendment and Restatement..................................87
                   
        13.16      Intercreditor Agreement....................................87
                   




EXHIBITS:

Exhibit A           Oil and Gas Subsidiaries
Exhibit B           Form of Borrowing Base Certificate
Exhibit C           Form of Request for Extension of Credit
Exhibit D           Existing Competitive Loans
Exhibit E           Form of Committed Note
Exhibit F           Subsidiaries (with Addresses)
Exhibit G           Form of Compliance Certificate
Exhibit H           Assignment and Acceptance
Exhibit I           Form of Engineering Report Certificate
Exhibit J           Parameters Interest Rate Protection and Commodities Futures
                    Programs
Exhibit K           Form of Competitive Bid Request
Exhibit L           Form of Notice to Banks of Competitive Bid Request
Exhibit M           Form of Competitive Bid
Exhibit N           Form of Competitive Bid Administrative Questionnaire
Exhibit O           Form of Competitive Note






                                       (4)


<PAGE>



                                CREDIT AGREEMENT


         This  CREDIT  AGREEMENT,  dated as of June  17,  1997  (the  "Effective
Date"),  is  by  and  among  SEAGULL  ENERGY  CORPORATION  (the  "Company"),   a
corporation  duly organized and validly  existing under the laws of the State of
Texas;  each of the  banks  which is or which  may  from  time to time  become a
signatory hereto (individually,  a "Bank" and,  collectively,  the "Banks"); THE
CHASE  MANHATTAN  BANK  ("Chase"),  as agent for the  Banks  (in such  capacity,
together with its successors in such capacity, "Agent").

         The parties hereto agree as follows:

         Section 1.        Definitions and Accounting Matters.

         1.1 Certain  Defined Terms.  As used herein,  the following terms shall
have the  following  meanings (all terms defined in this Section 1.1 or in other
provisions of this Agreement in the singular to have the same meanings when used
in the plural and vice versa):

         "Additional  Costs"  shall have the  meaning  ascribed  to such term in
Section 6.1 hereof.

         "Affiliate"  shall  mean,  as to any  Person,  any other  Person  which
directly  or  indirectly  controls,  or is  under  common  control  with,  or is
controlled by, such Person and, if such Person is an  individual,  any member of
the  immediate  family   (including   parents,   siblings,   spouse,   children,
stepchildren,  grandchildren,  nephews  and nieces) of such  individual  and any
trust whose  principal  beneficiary is such individual or one or more members of
such  immediate  family and any Person who is  controlled  by any such member or
trust.  As used in  this  definition,  "control"  (including,  with  correlative
meanings,   "controlled   by"  and  "under  common  control  with")  shall  mean
possession, directly or indirectly, of power to direct or cause the direction of
management or policies  (whether through  ownership of securities or partnership
or other ownership interests, by contract or otherwise).

         "Agreement"  shall  mean  this  Credit  Agreement,  as the  same may be
amended, modified, restated or supplemented from time to time.

         "Alaskan  Gas  Component  Value"  shall  mean (A) prior to the  initial
Borrowing Base  Determination,  $75,000,000  and (B)  thereafter,  the amount by
which (i) the product of 5-1/2 times an amount  equal to (I) the average  annual
EBITDA of ENSTAR Alaska on a consolidated  basis for the three year period ended
on the most recent December 31st plus (II) 70% of the average annual  management
fees paid to the Company by ENSTAR  Alaska  during such three year period  minus
(III)  average  annual  Capital  Expenditures  attributable  to ENSTAR Alaska in
accordance  with GAAP and on a consolidated  basis during such three year period
exceeds (ii) the Alaskan Gas Debt  determined as of (x) the preceding  January 1
(in the case of a Scheduled Redetermination)


                                        1

<PAGE>



or (y) the last  day of the  second  month  prior  to the  month  in  which  the
effective  date of the  Borrowing  Base  Determination  occurs (in the case of a
Requested Redetermination).

         "Alaskan  Gas Debt"  shall mean the sum of (i) Funded  Indebtedness  of
ENSTAR  Alaska  plus  (ii)  Current  Maturities  of  ENSTAR  Alaska  plus  (iii)
Redemption  Obligations  of ENSTAR Alaska plus (iv) the highest  amount of Short
Term Borrowings outstanding during the Short Term Borrowings Measuring Period.

         "Alternate  Base Rate" shall mean,  for any day, a rate per annum equal
to the  higher of (a) the Prime Rate in effect on such day or (b) 1/2 of 1% plus
the Federal Funds Rate in effect for such day (rounded upwards, if necessary, to
the nearest 1/16th of 1%). For purposes hereof, "Federal Funds Rate" shall mean,
for any period, a fluctuating  interest rate per annum equal for each day during
such period to the  weighted  average of the rates on  overnight  Federal  funds
transactions  with  members of the Federal  Reserve  System  arranged by Federal
funds brokers, as published for such day (or, if such day is not a Business Day,
for the next  preceding  Business Day) by the Federal  Reserve Bank of New York,
or, if such rate is not so  published  for any day which is a Business  Day, the
average of the  quotations for such day on such  transactions  received by Agent
from three  Federal funds  brokers of  recognized  standing  selected by it. For
purposes  of this  Agreement,  any  change in the  Alternate  Base Rate due to a
change in the Federal  Funds Rate shall be  effective on the  effective  date of
such  change in the  Federal  Funds  Rate.  If for any reason  Agent  shall have
determined (which determination shall be conclusive and binding, absent manifest
error) that it is unable to  ascertain  the  Federal  Funds Rate for any reason,
including,  without  limitation,  the  inability  or  failure of Agent to obtain
sufficient  bids or  publications  in  accordance  with the  terms  hereof,  the
Alternate Base Rate shall be the Prime Rate until the circumstances  giving rise
to such inability no longer exist. For the purposes  hereof,  "Prime Rate" shall
mean the prime  rate as  announced  from time to time by Agent,  and  thereafter
entered in the minutes of Agent's Loan and Discount Committee. Without notice to
the Company or any other Person, the Prime Rate shall change  automatically from
time to time as and in the amount by which said prime rate shall fluctuate.  The
Prime Rate is a reference rate and does not necessarily  represent the lowest or
best rate actually  charged to any customer.  Agent may make commercial loans or
other loans at rates of interest at, above or below the Prime Rate. For purposes
of this  Agreement any change in the Alternate  Base Rate due to a change in the
Prime  Rate  shall be  effective  on the date such  change in the Prime  Rate is
announced.

         "Alternate  Base Rate Loans" shall mean Loans which bear  interest at a
rate based upon the Alternate Base Rate.

         "APC" shall mean Alaska  Pipeline  Company,  an Alaska  corporation,  a
Subsidiary of the Company.

         "APC Long Term Financing  Documents" shall mean that certain Inducement
Agreement and that certain Note Agreement  (together with the Notes,  as defined
therein), each dated as of


                                        2

<PAGE>



May 14, 1992,  by and among the Company,  Aid  Association  for  Lutherans,  The
Equitable Life Assurance Society of the United States,  Equitable  Variable Life
Insurance  Company,  Provident Life and Accident  Insurance Company and Teachers
Insurance  & Annuity  Association  of  America,  any  documentation  executed in
connection with any renewal, extension or rearrangement of the Indebtedness that
is the  subject  of  the  foregoing  documents,  the  Gas  Sales  Contract,  the
Intercompany Mortgage, as defined in the above-mentioned Note Agreement, and any
documents executed in replacement of any of the foregoing documents, if any, and
only if Agent has received notice thereof pursuant to Section 10.8.

         "Applicable Lending Office" shall mean, for each Bank and for each Type
of Loan, such office of such Bank (or of an affiliate of such Bank) as such Bank
may from time to time  specify  to Agent and the  Company as the office by which
its Loans of such Type are to be made and/or issued and maintained.

         "Applicable  Margin" shall mean, on any day, (i) zero percent (0%) with
respect to any Alternate  Base Rate Loan and (ii) with respect to any Eurodollar
Loan,  the  applicable  per  annum  percentage  set  forth  at  the  appropriate
intersection  in the table shown  below,  based on the Rating as of the close of
business on the preceding Business Day:

<TABLE>
<CAPTION>

                                                              Eurodollar
                                                                 Loan
                                                              Applicable
     Rating                                                     Margin
     <S>                                                      <C>    
     Baa2 and higher                                              0.20

     BBB-/Baa3                                                    0.275

     BB+/Ba1                                                      0.40

     BB/Ba2 and lower                                             0.45

</TABLE>

Notwithstanding  the foregoing,  at all times that a Borrowing  Base  Deficiency
shall exist and is  continuing  for more than 30 days,  the  Applicable  Margins
provided for in this definition shall each be increased by adding 1.00%.

         "Applications"  shall mean all  applications and agreements for Letters
of Credit, or similar  instruments or agreements,  now or hereafter  executed by
any Person in connection with any Letter of Credit now or hereafter issued or to
be issued.

         "Bankruptcy  Code" shall mean the United  States  Bankruptcy  Code,  as
amended, and any successor statute.


                                        3

<PAGE>



         "Beluga  Financing   Documents"  shall  mean  that  certain  Inducement
Agreement and that certain Note Agreement  (together with the Notes,  as defined
therein),  each dated June 17,  1985,  and amended as of June 15,  1990,  by and
among the Company and The Equitable Life Assurance  Society of the United States
and the Travelers  Insurance Company,  any documentation  executed in connection
with any renewal,  extension or rearrangement  of the  Indebtedness  that is the
subject of the foregoing  documents,  the Gas Sales Contract,  the  Intercompany
Mortgage,  as defined in the above-mentioned  Note Agreement,  and any documents
executed in replacement of any of the foregoing documents,  if and only if Agent
has received notice thereof pursuant to Section 10.8.

         "Borrowing Base" shall mean, as at any date, the sum of

         (i)        the Oil and Gas Reserves Component Value plus

         (ii)       the Alaskan Gas Component Value.

If the Company fails to provide a current Borrowing Base Certificate as required
by Section  9.2(c),  two (2)  Business  Days  after  notice to the  Company  the
Majority  Banks may  determine the Alaskan Gas Component  Value  comprising  the
Borrowing  Base from time to time in their  reasonable  discretion,  taking into
account  all  information  reasonably  available  to them,  and the  Alaskan Gas
Component  Value  from  time to time so  determined  shall  be the  Alaskan  Gas
Component  Value for all purposes of this  Agreement  until a current  Borrowing
Base Certificate is furnished.

         "Borrowing Base  Certificate"  shall mean a certificate with respect to
the Alaskan Gas Component Value,  duly executed by the chief executive  officer,
chief financial officer,  treasurer or controller of the Company,  appropriately
completed and in substantially the form of Exhibit B hereto.

         "Borrowing Base Debt" shall mean, without  duplication,  the sum of (i)
borrowed money Indebtedness (including without limitation contingent obligations
in respect of  borrowed  money  Indebtedness  under any  Guarantee  or letter of
credit) plus (ii) the "Maximum  Outstanding  Amount" in effect from time to time
under the Canadian  Facility plus (iii)  Redemption  Obligations  payable within
five  (5)  years  after  any  applicable   determination   date,  together  with
obligations  (excluding  volumetric  obligations  with  respect to  pre-sales of
Hydrocarbon  production which have already been accounted for in the calculation
of  the  Borrowing   Base)  payable  out  of  Hydrocarbon   production   (except
Indebtedness  permitted  by  Sections  10.1(l)  and (s)  hereof) but only to the
extent  the  reserves  from  which  the  aforementioned  Hydrocarbon  production
payments are made are Included Reserves;  provided, however, that Borrowing Base
Debt shall not  include  the  Loans,  the  Letter of Credit  Liabilities  or any
Subordinated  Debt and shall not include any  borrowed  money  Indebtedness  (or
contingent  liabilities in respect thereto)  incurred after the date hereof with
an original bullet maturity of twenty (20) years or more.



                                        4

<PAGE>



         "Borrowing Base Deficiency"  shall mean the amount by which (a) the sum
of (i) the aggregate outstanding amount of all Revolving Credit Obligations plus
(ii) the aggregate  outstanding amount of all Borrowing Base Debt of the Company
and its  Subsidiaries  (other than ENSTAR  Alaska)  exceeds (b) the then current
Borrowing Base.

         "Borrowing  Base Deficiency  Notification  Date" shall mean the date on
which any notice of a Borrowing Base Deficiency is received by the Company.

         "Borrowing Base Determination" shall  mean a  Scheduled Redetermination
or a Requested Redetermination.

         "Business Day" shall mean any day other than a day on which  commercial
banks are  authorized  or required to close in Houston,  Texas or New York,  New
York, and where such term is used in the definition of "Quarterly  Date" in this
Section 1.1 or if such day relates to a borrowing of, a payment or prepayment of
principal of or interest on, or an Interest  Period for, a Eurodollar  Loan or a
notice by the Company with respect to any such borrowing, payment, prepayment or
Interest  Period, a day which is also a day on which dealings in Dollar deposits
are carried out in the relevant interbank market.

         "Canadian  Facility"  shall mean that certain  Credit  Agreement  dated
concurrently  herewith  executed by and among Seagull  Energy  Canada Ltd.,  The
Chase  Manhattan  Bank of Canada,  as  Arranger  and as Agent,  The Bank of Nova
Scotia, as Paying Agent and as Co-Agent,  Canadian Imperial Bank of Commerce, as
Co-Agent,  and certain  banks  therein  named,  as amended by the  Intercreditor
Agreement, and as the same may be further amended or modified from time to time.

         "Capital  Expenditures"  shall mean expenditures in respect of fixed or
capital assets  (calculated in accordance with GAAP) excluding  expenditures for
the  restoration,  repair or replacement of any fixed or capital asset which was
destroyed  or  damaged,  in whole  or in part,  to the  extent  financed  by the
proceeds of an insurance  policy.  Expenditures in respect of  replacements  and
maintenance  consistent  with the  business  practices  of the  Company  and its
Subsidiaries in respect of plant facilities,  machinery, fixtures and other like
capital  assets  utilized in the  ordinary  course of  business  are not Capital
Expenditures to the extent such  expenditures are not capitalized in preparing a
balance sheet of the Company in accordance with GAAP.

         "Capital  Lease   Obligations"  shall  mean,  as  to  any  Person,  the
obligations  of such  Person to pay rent or other  amounts  under a lease of (or
other agreement  conveying the right to use) real and/or personal property which
obligations  are required to be classified  and accounted for as a capital lease
on a  balance  sheet  of such  Person  under  GAAP  and,  for  purposes  of this
Agreement,  the  amount  of such  obligations  shall be the  capitalized  amount
thereof, determined in accordance with GAAP.



                                        5

<PAGE>



         "Capitalization"  shall  mean an amount  equal to the sum of (a) Funded
Indebtedness of the Company and its  Subsidiaries  on a consolidated  basis plus
(b) Current  Maturities of the Company and its  Subsidiaries  on a  consolidated
basis plus (c) borrowed money  Indebtedness of the Company and its  Subsidiaries
on a consolidated basis that is not Funded Indebtedness plus (d) Indebtedness of
the  Company  and  its  Subsidiaries  on  a  consolidated   basis   constituting
obligations payable out of Hydrocarbons  (except such obligations payable solely
by recourse to  properties  not  included  in the  Borrowing  Base) plus (e) the
Tangible Net Worth of the Company and its Subsidiaries on a consolidated basis.

         "Change of Control"  shall mean a change  resulting  when any Unrelated
Person or any Unrelated  Persons acting together which would  constitute a Group
together  with any  Affiliates  or Related  Persons  thereof  (in each case also
constituting  Unrelated  Persons) shall at any time either (i)  Beneficially Own
more than 50% of the  aggregate  voting  power of all classes of Voting Stock of
the  Company  or (ii)  succeed  in having  sufficient  of its or their  nominees
elected to the Board of Directors of the Company such that such  nominees,  when
added to any  existing  director  remaining  on the  Board of  Directors  of the
Company  after such  election  who is an  Affiliate  or  Related  Person of such
Unrelated Person or Group, shall constitute a majority of the Board of Directors
of the Company.  As used herein (a) "Beneficially Own" means  "beneficially own"
as defined in Rule 13d-3 of the Securities  Exchange Act of 1934, as amended, or
any successor provision thereto;  provided,  however, that, for purposes of this
definition, a Person shall not be deemed to Beneficially Own securities tendered
pursuant  to a tender or  exchange  offer made by or on behalf of such Person or
any of such Person's  Affiliates until such tendered securities are accepted for
purchase or exchange;  (b) "Group" means a "group" for purposes of Section 13(d)
of the Securities Exchange Act of 1934, as amended; (c) "Unrelated Person" means
at any time any Person other than the Company or any  Subsidiary  and other than
any trust for any employee  benefit plan of the Company or any Subsidiary of the
Company;  (d) "Related  Person" of any Person shall mean any other Person owning
(1) 5% or more of the outstanding  common stock of such Person or (2) 5% or more
of the Voting Stock of such Person;  and (e) "Voting  Stock" of any Person shall
mean  capital  stock of such Person  which  ordinarily  has voting power for the
election of directors (or persons  performing similar functions) of such Person,
whether at all times or only so long as no senior class of  securities  has such
voting power by reason of any contingency.

         "Chapter  One" shall mean Chapter One of the Texas  Credit Code,  as in
effect on the date the document using such term was executed.

         "Code" shall mean the Internal Revenue Code of 1986, as amended, or any
successor statute,  together with all regulations,  rulings and  interpretations
thereof or thereunder by the Internal Revenue Service.

         "Commitment  Percentage"  shall mean,  as to any Bank,  the  percentage
equivalent  of a fraction  the  numerator  of which is the amount of such Bank's
Commitment  and  the  denominator  of  which  is  the  aggregate  amount  of the
Commitments of all Banks.


                                        6

<PAGE>



         "Commitment"  shall mean, as to any Bank,  the  obligation,  if any, of
such Bank to make Committed  Loans and incur Letter of Credit  Liabilities in an
aggregate  principal  amount at any one time outstanding up to but not exceeding
the amount,  if any, set forth opposite such Bank's name on the signature  pages
hereof under the caption  "Commitment"  (as the same may be reduced from time to
time pursuant to Section 2.3).

         "Committed Loans" shall  mean the loans  provided for  in  Section  2.1
hereof.

         "Committed  Notes"  shall  mean the  promissory  notes  of the  Company
evidencing the Committed  Loans, in the form of Exhibit E hereto,  together with
all  renewals,   extensions,   modifications   and   replacements   thereof  and
substitutions therefor.

         "Company Report" shall mean one or more reports,  in form  satisfactory
to Agent and the Majority Banks, prepared by petroleum engineers employed by the
Company or its  Subsidiaries,  which shall  evaluate at least 85% of the present
value of the Included Reserves effective as of the immediately preceding July 1.
Each  Company  Report  shall  set forth  production,  drilling  and  acquisition
information  and other  information  requested  by Agent and shall be based upon
updated  economic  assumptions  acceptable to Agent and approved by the Majority
Banks at the beginning of the applicable year.

         "Competitive  Bid" shall mean an offer by a Bank to make a  Competitive
Loan pursuant to Section 2.10 hereof.

         "Competitive   Bid   Administrative   Questionnaire"   shall   mean   a
questionnaire substantially in the form of Exhibit N hereto.

         "Competitive  Bid Rate" shall mean, as to any Competitive Bid made by a
Bank pursuant to Section 2.10 hereof, the fixed rate of interest,  in each case,
offered by the Bank making such Competitive Bid.

         "Competitive  Bid Request" shall have the meaning ascribed to such term
in Section 2.10 hereof.

         "Competitive Loans" shall mean the Existing Competitive Loans and loans
provided for in Section 2.10 hereof.

         "Competitive  Notes"  shall mean the  promissory  notes of the  Company
evidencing the Competitive Loans, in the form of Exhibit O hereto, together with
all  renewals,   extensions,   modifications   and   replacements   thereof  and
substitutions therefor.

         "Cover" for Letter of Credit Liabilities shall be effected by paying to
Agent immediately  available funds, to be held by Agent in a collateral  account
maintained by Agent at its Principal


                                        7

<PAGE>



Office and  collaterally  assigned as security for the financial  accommodations
extended pursuant to this Agreement using  documentation  satisfactory to Agent,
in an amount equal to any required prepayment.  Such amount shall be retained by
Agent in such  collateral  account  until  such time as (x) in the case of Cover
being provided pursuant to Section 2.2(a), the applicable Letter of Credit shall
have expired and Reimbursement  Obligations,  if any, with respect thereto shall
have been fully satisfied or (y) in the case of Cover being provided pursuant to
Section  3.2(b)(1),  the outstanding  principal  amount of all Revolving  Credit
Obligations is not greater than the aggregate amount of the Commitments.

         "Current Maturities" shall mean, on any day on which Current Maturities
are  calculated,   the  sum  of  (a)  scheduled  principal  payments  on  Funded
Indebtedness  which are payable  within one (1) year after such day plus (b) the
principal  component  of payments  required  to be made with  respect to Capital
Lease  Obligations  within one (1) year of said date plus (c), to the extent not
included  above,  all items which in accordance with GAAP would be classified as
current maturities of long term debt.

         "Debt/Capitalization  Ratio"  shall  mean  the  ratio of (a) the sum of
Funded  Indebtedness of the Company and its Subsidiaries on a consolidated basis
plus Current  Maturities of the Company and its  Subsidiaries  on a consolidated
basis plus borrowed money  Indebtedness of the Company and its Subsidiaries on a
consolidated  basis that is not Funded  Indebtedness  plus  Indebtedness  of the
Company and its Subsidiaries on a consolidated  basis  constituting  obligations
payable out of Hydrocarbons  (except such obligations payable solely by recourse
to properties not included in the Borrowing Base) to (b) Capitalization.

         "Default"  shall mean an Event of Default or an event which with notice
or lapse of time or both  would,  unless  cured or  waived,  become  an Event of
Default.

         "Disclosure  Statement"  shall  mean  the  Disclosure  Statement  dated
December 31, 1992 delivered to Agent by the Company.

         "Dividend  Payment" shall mean,  with respect to any Person,  dividends
(in cash,  property or obligations)  on, or other payments or  distributions  on
account of, or the redemption of, or the setting apart of money for a sinking or
other  analogous  fund  for  the  purchase,  redemption,   retirement  or  other
acquisition of, any shares of any class of capital stock of such Person,  or the
exchange  or  conversion  of any  shares of any class of  capital  stock of such
Person for or into any  obligations  of or shares of any other  class of capital
stock of such  Person or any other  property,  but  excluding  dividends  to the
extent  payable in, or exchanges or  conversions  for or into,  shares of common
stock of the  Company or options or warrants  to  purchase  common  stock of the
Company.

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



                                        8

<PAGE>



         "EBITDA" shall mean net earnings  (excluding  gains and losses on sales
and  retirement  of  assets,   non-cash  write  downs,  charges  resulting  from
accounting  convention  changes)  before  deduction for federal and state taxes,
interest expense (including  capitalized  interest),  operating lease rentals or
depreciation,  depletion and amortization  expense, all determined in accordance
with GAAP.

         "EBITDAX" shall mean net earnings  (excluding gains and losses on sales
and  retirement  of  assets,   non-cash  write  downs,  charges  resulting  from
accounting  convention  changes and  deductions  for dry hole  expenses)  before
deduction for federal and state taxes,  interest expense (including  capitalized
interest),  operating lease rentals or depreciation,  depletion and amortization
expense, all determined in accordance with GAAP.

         "EBITDAX/Interest  Ratio"  shall  mean the ratio of (a)  EBITDAX of the
Company and its  Subsidiaries  on a  consolidated  basis to (b) operating  lease
rentals and interest  expense  (including  capitalized  interest  but  excluding
non-cash  amortization of deferred  financing  costs) on all Indebtedness of the
Company and its Subsidiaries on a consolidated basis for any twelve-month period
ending on the last day of every calendar  quarter during the period with respect
to which the EBITDAX/Interest Ratio is to be calculated.

         "Engineering   Report"  shall  mean  one  or  more  reports,   in  form
satisfactory  to  Agent  and  the  Majority  Banks,  prepared  by  one  or  more
independent consulting firms acceptable to Agent and the Majority Banks in their
reasonable  business judgment,  which shall evaluate at least 85% of the present
value of the Included  Reserves as of the immediately  preceding January 1. Each
Engineering  Report  shall  set  forth  a  projection  of  the  future  rate  of
production,  Net Proceeds of Production and present value of the Net Proceeds of
Production, in each case based upon economic assumptions acceptable to Agent and
approved by the Majority Banks.

         "ENSTAR Alaska" shall collectively mean (i) the gas distribution system
in south-central  Alaska known as ENSTAR Natural Gas Company,  a division of the
Company, and (ii) APC.

         "Environmental  Claim"  means any third party  (including  Governmental
Authorities  and  employees)  action,  lawsuit,  claim or proceeding  (including
claims or proceedings at common law or under the Occupational  Safety and Health
Act or similar  laws  relating  to safety of  employees)  which  seeks to impose
liability for (i) noise;  (ii) pollution or  contamination  of the air,  surface
water,  ground water or land or the clean-up of such pollution or contamination;
(iii) solid, gaseous or liquid waste generation,  handling,  treatment, storage,
disposal or  transportation;  (iv)  exposure to  Hazardous  Substances;  (v) the
safety or health of employees or (vi) the manufacture,  processing, distribution
in commerce or use of Hazardous  Substances.  An "Environmental Claim" includes,
but is not limited to, a common law action,  as well as a  proceeding  to issue,
modify or terminate an Environmental  Permit,  or to adopt or amend a regulation
to the  extent  that such a  proceeding  attempts  to redress  violations  of an
applicable  permit,  license,  or  regulation  as  alleged  by any  Governmental
Authority.


                                        9

<PAGE>



         "Environmental  Liabilities"  includes all liabilities arising from any
Environmental  Claim,  Environmental  Permit or Requirement of Environmental Law
under  any  theory  of  recovery,  at law or in  equity,  and  whether  based on
negligence,  strict  liability  or  otherwise,  including  but not  limited  to:
remedial,  removal, response,  abatement,  investigative,  monitoring,  personal
injury and damage to property or  injuries  to  persons,  and any other  related
costs, expenses, losses, damages, penalties, fines, liabilities and obligations,
and all costs  and  expenses  necessary  to cause the  issuance,  reissuance  or
renewal of any  Environmental  Permit including  reasonable  attorneys' fees and
court costs.

         "Environmental  Permit"  means any permit,  license,  approval or other
authorization  under any applicable Legal  Requirement  relating to pollution or
protection of health or the  environment,  including laws,  regulations or other
requirements relating to emissions,  discharges, releases or threatened releases
of pollutants, contaminants or hazardous substances or toxic materials or wastes
into ambient air, surface water,  ground water or land, or otherwise relating to
the manufacture,  processing,  distribution,  use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants or Hazardous Substances.

         "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, and all rules,  regulations and interpretations by
the Internal Revenue Service or the Department of Labor thereunder.

         "ERISA  Affiliate"  shall mean any trade or  business  (whether  or not
incorporated)  which is a member of a group of which the Company is a member and
which is under  common  control  within  the  meaning of the  regulations  under
Section 414 of the Code.

         "Eurodollar  Base Rate" shall mean, with respect to any Interest Period
for any Eurodollar Loan, the lesser of (A) the rate per annum (rounded  upwards,
if necessary,  to the nearest  1/16th of 1%) equal to the average of the offered
quotations  appearing on Telerate  Page 3750 (or if such Telerate Page shall not
be available,  any successor or similar  service as may be selected by Agent and
the Company) as of 11:00 a.m.,  Houston,  Texas time (or as soon  thereafter  as
practicable)  on the  day two  Business  Days  prior  to the  first  day of such
Interest  Period for Dollar  deposits  having a term comparable to such Interest
Period and in an amount  comparable  to the principal  amount of the  Eurodollar
Loan to which such Interest  Period  relates or (B) the Highest  Lawful Rate. If
none of such  Telerate  Page  3750  nor any  successor  or  similar  service  is
available,  then the  "Eurodollar  Base Rate"  shall mean,  with  respect to any
Interest Period for any applicable  Eurodollar  Loan, the lesser of (A) the rate
per  annum  (rounded  upwards,  if  necessary,  to  the  nearest  1/16th  of 1%)
determined by Agent to be the average of the rates quoted by the Reference Banks
at  approximately  11:00 a.m.,  Houston,  Texas time (or as soon  thereafter  as
practicable)  on the  day two  Business  Days  prior  to the  first  day of such
Interest Period for the offering by such Reference Banks to leading banks in the
London  interbank  market of Dollar  deposits  having a term  comparable to such
Interest  Period  and in an amount  comparable  to the  principal  amount of the
Eurodollar  Loan to which such Interest Period relates or (B) the Highest Lawful
Rate. If any


                                       10

<PAGE>



Reference Bank does not furnish a timely  quotation,  Agent shall  determine the
relevant interest rate on the basis of the quotation or quotations  furnished by
the remaining  Reference Bank or Banks;  if none of such quotations is available
on a timely basis, the provisions of Section 6.2 shall apply. Each determination
of the  Eurodollar  Base Rate shall be conclusive and binding,  absent  manifest
error,  and may be  computed  using any  reasonable  averaging  and  attribution
method.

         "Eurodollar Loans" shall mean Loans the interest on which is determined
on the basis of rates referred to in the definition of "Eurodollar Base Rate" in
this Section 1.1.

         "Eurodollar   Rate"  shall  mean,  for  any  Interest  Period  for  any
Eurodollar  Loan,  a rate  per  annum  determined  by  Agent  to be equal to the
Eurodollar Base Rate for such Loan for such Interest Period.

         "Event of  Default"  shall have the  meaning  assigned  to such term in
Section 11 hereof.

         "Existing Competitive Loans" shall mean the Competitive Loans described
on Exhibit D hereto.

         "Facility Fee  Percentage"  shall mean, on any date, the applicable per
annum  percentage set forth at the  appropriate  intersection in the table shown
below, based on the Rating as of the close of business on the preceding Business
Day:

<TABLE>
<CAPTION>

                                                                  Facility
                                                                    Fee
      Rating                                                     Percentage
      <S>                                                        <C>

      BBB/Baa2 and higher                                           0.125

      BBB-/Baa3                                                     0.150

      BB+/Ba1                                                       0.20

      BB/Ba2 and lower                                              0.30

</TABLE>

         "Financial   Statements"   shall  mean  the   financial   statement  or
statements, together with the notes and schedules thereto, described or referred
to in Sections 8.6 and 9.1.

         "Funded  Indebtedness"  shall mean all Indebtedness  which by its terms
matures  more  than one (1) year from the date as of which  any  calculation  of
Funded  Indebtedness is made, and any Indebtedness  maturing within one (1) year
from such date which is  renewable at the option of the obligor to a date beyond
one (1) year from such date (if Indebtedness provides for amortization, only the
amount of the principal payment required to be made within one (1) year from the
date


                                       11

<PAGE>



as of which any  calculation  of Funded  Indebtedness  is made shall be excluded
from "Funded Indebtedness").

         "GAAP" shall mean as to a particular Person,  such accounting  practice
as, in the  opinion of KPMG Peat  Marwick or other  independent  accountants  of
recognized  national  standing  retained  by such Person and  acceptable  to the
Majority  Banks,   conforms  at  the  time  to  generally  accepted   accounting
principles, consistently applied. Generally accepted accounting principles means
those principles and practices (a) which are recognized as such by the Financial
Accounting Standards Board, (b) which are applied for all periods after the date
hereof in a manner  consistent  with the  manner in which  such  principles  and
practices  were applied to the most recent audited  financial  statements of the
relevant  Person  furnished  to the  Banks,  except  only  for such  changes  in
principles  and  practices  with  which  the   applicable   independent   public
accountants  concur and which are  disclosed  to the Banks in  writing,  and (c)
which are  consistently  applied for all periods  after the date hereof so as to
reflect  properly the  financial  condition  and results of  operations  of such
Person.

         "Gas and Liquids Pipeline  Subsidiaries" shall mean each company (which
may include the Company) engaged in the Pipeline Operations.

         "Gas Sale  Contract"  shall mean that certain Gas Sale  Contract  dated
January 1, 1984,  between APC, as Seller,  and ENSTAR  Natural Gas  Company,  as
Purchaser, as amended on June 17, 1985, and from time to time thereafter, if and
only if Agent has received notice thereof pursuant to Section 10.8.

         "Governmental   Authority"   shall  mean  any  sovereign   governmental
authority,  the United States of America, any State of the United States and any
political  subdivision  of any of the foregoing,  and any central bank,  agency,
instrumentality,  department,  commission,  board, bureau,  authority,  court or
other tribunal or  quasi-governmental  authority in each case whether executive,
legislative,  judicial,  regulatory or administrative,  having jurisdiction over
the Company, any of its Subsidiaries, any of their respective property, Agent or
any Bank.

         "Guarantee"  by  any  Person  means  any   obligation,   contingent  or
otherwise,   of  any  such  Person  directly  or  indirectly   guaranteeing  any
Indebtedness  of any other Person and,  without  limiting the  generality of the
foregoing, any obligation,  direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or  advance or supply  funds for the  purchase or
payment  of)  such  Indebtedness  (whether  arising  by  virtue  of  partnership
arrangements,  by agreement to keep- well, to purchase assets, goods, securities
or services,  to take-or-pay,  or to maintain financial statement  conditions or
otherwise,  other than  agreements  to purchase  assets,  goods,  securities  or
services at an arm's length  price in the  ordinary  course of business) or (ii)
entered  into for the purpose of assuring in any other manner the holder of such
Indebtedness  of the payment  thereof or to protect such holder  against loss in
respect thereof (in whole or in part), provided that the


                                       12

<PAGE>



term "Guarantee" shall not include endorsements for collection or deposit in the
ordinary  course  of  business.  The  term  "Guarantee"  used  as a  verb  has a
corresponding meaning.

         "Hazardous Substance" shall mean petroleum products,  and any hazardous
or toxic waste or  substance  defined or  regulated as such from time to time by
any law, rule,  regulation or order described in the definition of "Requirements
of Environmental Law".

         "Highest  Lawful Rate" shall mean, on any day, the maximum  nonusurious
rate of interest  permitted for that day by whichever of  applicable  federal or
Texas law permits the higher interest rate,  stated as a rate per annum. On each
day, if any, that Chapter One  establishes  the Highest Lawful Rate, the Highest
Lawful Rate shall be the  "indicated  rate  ceiling" (as defined in Chapter One)
for that day.

         "Hydrocarbons"  shall mean oil, gas,  casinghead  gas,  drip  gasoline,
natural  gasoline,  condensate and all other liquid or gaseous  hydrocarbons and
related minerals, in each case whether in a natural or a processed state.

         "Included Reserves" shall mean those producing and non-producing proved
oil and gas reserves of the Company and its Oil and Gas  Subsidiaries  which are
to be  taken  into  account  in the  determination  of the Oil and Gas  Reserves
Component Value from time to time in effect, as designated by the Company.

         "Indebtedness"  shall mean, as to any Person:  (i) indebtedness of such
Person for  borrowed  money  (whether by loan or the  issuance  and sale of debt
securities)  or for the deferred  purchase or  acquisition  price of property or
services,  including,  without  limitation,  obligations  (excluding  volumetric
obligations  with  respect to  pre-sales of  Hydrocarbon  production  which have
already been accounted for in the calculation of the Borrowing Base) payable out
of Hydrocarbon  production;  (ii) obligations,  whether fixed or contingent,  of
such Person in respect of letters of credit,  acceptances or similar instruments
issued or accepted by banks and other financial  institutions for the account of
such Person or any other Person; (iii) Capital Lease Obligations of such Person;
(iv) Redemption  Obligations of such Person and other obligations of such Person
to redeem or  otherwise  retire  shares of capital  stock of such  Person or any
other Person,  in each case to the extent that the redemption  obligations  will
arise  prior to the stated  maturity of the  Obligations;  (v)  indebtedness  of
others of the type described in clause (i), (ii), (iii) or (iv) above secured by
a Lien on the property of such Person,  whether or not the respective obligation
so secured has been assumed by such Person;  and (vii) indebtedness of others of
the type described in clause (i), (ii),  (iii) or (iv) above  Guaranteed by such
Person.

         "Intercreditor   Agreement"  shall  mean  that  certain   Intercreditor
Agreement  dated  December 30, 1993  executed by and among the Company,  Seagull
Energy  Canada  Ltd.,  Agent and the  "Administrative  Agent" under the Canadian
Facility, as amended by that certain First Amendment to Intercreditor  Agreement
dated May 24, 1994 and by that certain Second Amendment to


                                       13

<PAGE>



Intercreditor  Agreement dated December 23, 1996, and as the same may be further
amended or modified from time to time.

         "Interest Period" shall mean:

         (a) With respect to any Eurodollar  Loan, the period  commencing on (i)
the date such Loan is made or converted  into or continued as a Eurodollar  Loan
or (ii) in the case of a roll-over to a successive Interest Period, the last day
of the  immediately  preceding  Interest  Period and  ending on the  numerically
corresponding  day  in  the  first,   second,  third  or  sixth  calendar  month
thereafter,  as the Company may select as provided in Section 3.3 hereof, except
that each such Interest  Period which commences on any day for which there is no
numerically corresponding day in the appropriate subsequent calendar month shall
end on the last Business Day of the appropriate subsequent calendar month.

         (b) With respect to any Alternate Base Rate Loan, the period commencing
on the date such Loan is made and ending on the next succeeding Quarterly Date.

         (c) With  respect to any  Existing  Competitive  Loan,  the  applicable
interest  period  specified  on Exhibit D hereto,  and with respect to any other
Competitive Loan, the period commencing on the date such Loan is made and ending
on the date  specified  in the  Competitive  Bid in which  the offer to make the
Competitive Loan was extended;  provided,  however,  that each such period shall
have a duration of not less than seven  calendar  days or more than 180 calendar
days.

Notwithstanding  the  foregoing:  (i)  no  Interest  Period  applicable  to  any
Eurodollar  Loan or any  Competitive  Loan may commence before and end after the
date of any  scheduled  reduction in the  Commitments  if,  after giving  effect
thereto,  the aggregate  principal amount of the Eurodollar Loans or Competitive
Loans which have Interest  Periods which end after such  reduction date shall be
greater than the aggregate  principal amount of the Commitments  scheduled to be
in effect  after such  reduction  date;  (ii) each  Interest  Period which would
otherwise  end on a day  which  is not a  Business  Day  shall  end on the  next
succeeding  Business Day (or, in the case of an Interest  Period for  Eurodollar
Loans,  if such  next  succeeding  Business  Day  falls in the  next  succeeding
calendar  month, on the next preceding  Business Day);  (iii) no Interest Period
applicable to any Eurodollar  Loan or any  Competitive  Loan shall extend beyond
the end of the  scheduled  Revolving  Credit  Availability  Period,  and (iv) no
Interest Period for any Eurodollar  Loans shall have a duration of less than one
month and, if the Interest  Period therefor would otherwise be a shorter period,
such Loans shall not be available hereunder.

         "Investments" shall have  the meaning assigned  to such term in Section
10.3 hereof.

         "Investments  Tests" shall mean  compliance  with each of the following
restrictions  (both before and immediately after giving effect to the applicable
Investments):


                                       14

<PAGE>



         (i)    there shall exist no Borrowing Base Deficiency;

         (ii)   no Default or Event of Default  shall  have  occurred
                and be continuing; and

         (iii)  the applicable  Investment,  when aggregated with any
                prior permitted Investments (exclusive of Investments
                permitted under Sections 10.3(a) through (o) hereof),
                shall not  exceed  10% of  Tangible  Net Worth of the
                Company and its Subsidiaries on a consolidated basis.

         "Issuer" shall mean each Bank issuing a Letter of Credit hereunder.

         "Legal  Requirement"  shall mean any law, statute,  ordinance,  decree,
requirement,  order, judgment, rule, regulation (or interpretation of any of the
foregoing)  of,  and  the  terms  of  any  license  or  permit  issued  by,  any
Governmental Authority, now or hereafter in effect.

         "Letter of  Credit"  shall have the  meaning  assigned  to such term in
Section 2.2 hereof.

         "Letter  of  Credit  Fee"  shall  mean a per  annum  rate  equal to the
Applicable Margin for Eurodollar Loans in effect from time to time.

         "Letter of Credit  Liabilities"  shall mean, at any time and in respect
of any Letter of Credit,  the sum of (i) the amount available for drawings under
such Letter of Credit plus (ii) the aggregate unpaid amount of all Reimbursement
Obligations  at the time due and  payable in respect of previous  drawings  made
under such Letter of Credit.

         "Lien"  shall mean,  with  respect to any asset,  any  mortgage,  lien,
pledge, charge,  collateral assignment,  security interest or encumbrance of any
kind in respect of such  asset.  For the  purposes of this  Agreement,  a Person
shall be deemed to own  subject  to a Lien any asset  which it has  acquired  or
holds subject to the interest of a vendor or lessor under any  conditional  sale
agreement,  capital lease or other title  retention  agreement  relating to such
asset.

         "Liquid Investments" shall mean:

         (I) in the case of investments of U.S. Dollars

                (i)   securities issued or  directly, fully and  unconditionally
                      guaranteed  or insured by the United States of America  or
                      any  agency or instrumentality thereof (provided  that the
                      full faith and credit of the  United  States of America is
                      pledged in support thereof) having  maturities of not more
                      than one year from the date of issue;



                                       15

<PAGE>



                (ii)  U.S. Dollar time  deposits and certificates of deposit (A)
                      of any Bank having capital  and  surplus in excess of U.S.
                      $300,000,000, or (B) of any  commercial  bank incorporated
                      in  the  United  States, of  recognized  standing,  having
                      capital  and  surplus  in  excess of U.S. $500,000,000 and
                      which has (or  which  is a Subsidiary of a holding company
                      which has) publicly traded debt  securities  rated, at the
                      time of issuance of such  time  deposits,  AA or higher by
                      Standard  &  Poor's Ratings  Group  or  Aa-2 or  higher by
                      Moody's  Investors  Service,  Inc.  with maturities of not
                      more than one year from the date of issue;

                (iii) repurchase  obligations with a term of not more than seven
                      days for underlying  securities of  the types described in
                      clause (I)(i) above entered into with any bank meeting the
                      qualifications specified in clause (I)(ii) above, provided
                      that  the  terms   of  such  agreements  comply  with  the
                      guidelines set  forth in the Federal Financial Institution
                      Examination   Counsel   Supervisory   Policy -- Repurchase
                      Agreements  of  Depository  Institutions  With  Securities
                      Dealers  and  Others, as adopted by the Comptroller of the
                      Currency on October 31, 1985;

                (iv)  commercial paper or other U.S.  Dollar  obligations issued
                      by the parent  corporation (A) of any Bank  having capital
                      and surplus in excess of U.S.  $300,000,000, or (B) of any
                      commercial bank (provided that the parent  corporation and
                      the bank  are  both  incorporated in the United States) of
                      recognized standing  having  capital and surplus in excess
                      of U.S. $500,000,000  and  commercial  paper or other U.S.
                      Dollar obligations issued  by  any  Person incorporated in
                      the United States, which  commercial  paper  is  rated  at
                      least A-2  or  the equivalent thereof by Standard & Poor's
                      Ratings Group or at least P-2 or the equivalent thereof by
                      Moody's Investors  Service, Inc. and in each case maturing
                      not more than six months after the date of issue;

                (v)   obligations of any state or political subdivision  thereof
                      rated  at  least  F-1  by  Fitch   Investors ervice,  Inc.
                      or AA by Standard & Poor's  Ratings Group with an original
                      maturity of 180 days or less; and

                (vi)  investments in money market funds  substantially  all  the
                      assets of which are  comprised of securities  of the types
                      described  in clauses  (I)(i)  through (v) above; and

         (II) in the case of investments of Canadian dollars



                                       16

<PAGE>



                    (i)    bonds or other evidences of  indebtedness  of, or the
                           principal  and interest of which is fully  guaranteed
                           by,  the  Government  of  Canada or any  province  of
                           Canada,  payable in Canadian dollars and (in the case
                           of any provincial  obligations  and any Government of
                           Canada  obligations  that are rated)  rated AAA or AA
                           (or the  then  equivalent  grade)  by  Dominion  Bond
                           Rating  Service  Limited,  or  any  other  nationally
                           recognized bond rating service, having a maturity not
                           in excess of one year,

                    (ii)   certificates  of deposit  issued or  guaranteed  by a
                           bank or trust  company  organized  under  the laws of
                           Canada or any province thereof, provided such bank or
                           trust  company has capital and  retained  earnings in
                           the aggregate in excess of Canadian  $500,000,000  on
                           its most recent  balance  sheet  (whether  audited or
                           unaudited),  having a  maturity  not in excess of one
                           year,

                    (iii)  bankers' acceptances of any bank or trust company the
                           certificates  of  deposit of which  would  constitute
                           Liquid  Investments  as provided  in clause  (II)(ii)
                           above, if outstanding  unsecured debt of such bank or
                           trust  company  is rated no less than AA (or the then
                           equivalent  grade) by Dominion  Bond  Rating  Service
                           Limited,  or any  other  nationally  recognized  bond
                           rating service; and

                    (iv)   commercial  paper rated no less than R-1 (or the then
                           equivalent  grade) by Dominion  Bond  Rating  Service
                           Limited or A-1 (or the then equivalent grade) by CBRS
                           Inc.,  having a  maturity  not in excess of one year;
                           excluding   any   bonds   or   other   evidences   of
                           indebtedness,  certificates  of deposit or commercial
                           paper which a Canadian chartered bank may not hold as
                           security under the Bank Act (Canada).

         "Loan   Documents"   shall  mean  this   Agreement,   the  Notes,   the
Intercreditor  Agreement,  all Applications,  all instruments,  certificates and
agreements now or hereafter  executed or delivered to Agent or any Bank pursuant
to  any  of  the  foregoing,  and  all  amendments,   modifications,   renewals,
extensions,  increases and  rearrangements of, and substitutions for, any of the
foregoing.

         "Loans" shall mean Committed Loans and Competitive Loans.

         "Majority  Banks"  shall  mean  (a)  prior  to the  termination  of the
Commitments,  Banks having  greater than 66-2/3% of the aggregate  amount of the
Commitments  and (b) after the  termination  of the  Commitments,  Banks  having
greater  than  66-2/3% of the  aggregate  principal  amount of the Loans and the
Letter of Credit Liabilities.


                                       17

<PAGE>



         "Material  Adverse Effect" shall mean a material  adverse effect on the
business,   condition   (financial  or  otherwise),   operations  or  properties
(including  proven oil and gas  reserves)  of the Company and its  Subsidiaries,
taken as a whole,  or on the  ability of the  Company to  perform  its  material
obligations under any Loan Document to which it is a party.

         "Maximum Revolving Credit Available Amount" shall mean, at any date, an
amount equal to the lesser of (i) the aggregate of the  Commitments  or (ii) the
amount by which (a) the  Borrowing  Base exceeds (b) the  aggregate  outstanding
amount of all  Borrowing  Base Debt of the Company and its  Subsidiaries  (other
than ENSTAR Alaska).

         "Mesa  Contract"  shall mean that certain  Purchase and Sale  Agreement
dated  Febru ary 6, 1991  executed  by and among  Mesa  Limited  Partnership,  a
Delaware limited  partnership,  Mesa Operating Limited  Partnership,  a Delaware
limited  partnership,  and Mesa  Midcontinent  Limited  Partnership,  a Delaware
limited  partnership,  as Sellers, and the Company, as Buyer, as amended by that
certain First  Amendment to Purchase and Sale Agreement  dated February 22, 1991
and as further  amended by that  certain  Second  Amendment to Purchase and Sale
Agreement dated March 8, 1991.

         "Net Proceeds of  Production"  shall mean,  with respect to any Person,
all revenue  received by or credited to the account of such Person from the sale
of Hydrocarbons  and other minerals in, under or produced from their  respective
oil, gas and mineral properties after deducting royalties, overriding royalties,
volumetric   production  payments  with  respect  to  pre-sales  of  Hydrocarbon
production, production payments pledged to secure non-recourse financing payable
solely out of such production payments,  net profits interests and other burdens
payable  out  of  production,  normal  and  reasonable  operating  expenses  and
severance, ad valorem, excise and windfall profit taxes.

         "Notes" shall mean the Committed Notes and the Competitive Notes.

         "Obligations" shall mean, as at any date of determination  thereof, the
sum of the following:  (i) the aggregate  principal amount of Loans  outstanding
hereunder  plus (ii) the  aggregate  amount of the Letter of Credit  Liabilities
hereunder plus (iii) all other liabilities,  obligations and indebtedness of the
Company or any Subsidiary of the Company under any Loan Document.

         "Oil and Gas  Reserves  Component  Value"  shall  mean (A) prior to the
initial  Borrowing Base  Determination,  $575,000,000  and (B) thereafter,  that
amount  of  Indebtedness  that the  Super  Majority  Banks  shall  agree  can be
supported by the Included Reserves,  after an engineering and economic review of
the  Included  Reserves  conducted  by the Banks  using  such  Banks'  customary
standards for oil and gas lending.



                                       18

<PAGE>



         "Oil and Gas  Subsidiaries"  shall mean any  Subsidiary  of the Company
whose assets consist primarily of oil and gas properties. As of the date hereof,
the Oil and Gas Subsidiaries are listed as such on Exhibit A hereto.

         "Organizational  Documents"  shall mean, with respect to a corporation,
the certificate of  incorporation,  articles of incorporation and bylaws of such
corporation;   with  respect  to  a  partnership,   the  partnership   agreement
establishing  such  partnership;  with  respect  to a joint  venture,  the joint
venture agreement  establishing such joint venture, and with respect to a trust,
the  instrument  establishing  such trust;  in each case  including  any and all
modifications  thereof  as of the date of the Loan  Document  referring  to such
Organizational Document.

         "PBGC"  shall mean the  Pension  Benefit  Guaranty  Corporation  or any
entity succeeding to any or all of its functions under ERISA.

         "Person" shall mean an individual, a corporation,  a company, a bank, a
voluntary association, a partnership,  a trust, an unincorporated  organization,
any Governmental Authority or any other entity.

         "Pipeline   Operations"  shall  mean  the  natural  gas  gathering  and
transmission, gas liquids plant, gas marketing, engineering and construction and
liquids pipeline  operations of the Company and its Subsidiaries,  excluding any
portion of such operations attributable to ENSTAR Alaska.

         "Plan" shall mean an employee  pension benefit plan which is covered by
Title IV of ERISA or subject to the minimum funding  standards under Section 412
of the Code and is either (a)  maintained by the Company or any ERISA  Affiliate
for employees of the Company or any ERISA  Affiliate or (b) maintained  pursuant
to a collective  bargaining  agreement or any other arrangement under which more
than one  employer  makes  contributions  and to which the  Company or any ERISA
Affiliate is then making or accruing an obligation to make  contributions or has
within the preceding five plan years made contributions.

         "Post-Default  Rate" shall  mean,  in respect of any  principal  of any
Loan, any Reimburse  ment  Obligation or any other amount payable by the Company
under  this  Agreement  or any other  Loan  Document  which is not paid when due
(whether at stated maturity,  by acceleration,  or otherwise),  a rate per annum
during the period  commencing  on the due date until such amount is paid in full
equal to the lesser of (a) the sum of (x) with respect to Eurodollar  Loans,  2%
per annum plus the applicable Eurodollar Rate then in effect plus the Applicable
Margin for  Eurodollar  Loans until the  expiration of the  applicable  Interest
Period,  (y) with respect to Competitive Loans, 2% per annum plus the applicable
fixed  rate  offered  by the  applicable  Bank and  accepted  by the  Company in
accordance with Section 2.10 hereof (or, in the case of the Existing Competitive
Loans,  the applicable  fixed rate specified on Exhibit D hereto),  and (z) with
respect to Alternate Base Rate Loans and with respect to Eurodollar  Loans after
the  expiration  of the  applicable  Interest  Period (and also with  respect to
indebtedness other than Loans), 2% plus


                                       19

<PAGE>



the  Alternate  Base  Rate as in effect  from  time to time plus the  Applicable
Margin for Alternate Base Rate Loans or (b) the Highest Lawful Rate.

         "Principal Office" shall mean  the principal office of Agent, presently
located at 1 Chase  Manhattan Plaza,  8th  Floor,  New  York,  New  York  10081,
Attention: Agent Services.

         "Quarterly  Dates"  shall  mean  the  last  day of  each  March,  June,
September and December,  provided  that, if any such date is not a Business Day,
then the relevant Quarterly Date shall be the next succeeding Business Day.

         "Rating"  shall mean the senior debt  rating for the  Company  publicly
announced by Standard & Poor's Ratings Group or Moody's Investors Service,  Inc.
In the event the ratings are not equivalent,  the higher rating shall be treated
as the "Rating"  hereunder;  provided,  that if such ratings differ by more than
one (1) level,  the Rating shall be the  average,  rounded  upwards,  of the two
ratings.

         "Redemption  Obligations"  shall  mean with  respect  to any Person all
mandatory redemption  obligations of such Person with respect to preferred stock
or other equity  securities  issued by such Person or put rights in favor of the
holder of such preferred  stock or other equity  securities,  to the extent that
the  redemption  obligations  will  arise  prior to the stated  maturity  of the
Obligations.

         "Reference  Banks"  shall  mean  Chase  and such  other  Banks (up to a
maximum of two (2) additional Banks) as the Company,  with the approval of Agent
(which  approval  shall  not be  unreasonably  withheld),  may from time to time
designate.

         "Regulation D" shall mean Regulation D of the Board of Governors of the
Federal Reserve System as the same may be amended or  supplemented  from time to
time and any successor or other regulation relating to reserve requirements.

         "Regulatory Change" shall mean, with respect to any Bank, any change on
or after the date of this Agreement in Legal Requirements  (including Regulation
D) or the  adoption  or  making  on or after  such  date of any  interpretation,
directive or request  applying to a class of banks including such Bank under any
Legal Requirements  (whether or not having the force of law) by any Governmental
Authority.

         "Reimbursement Obligations" shall mean, as at any date, the obligations
of the  Company  then  outstanding  in respect  of Letters of Credit  under this
Agreement,  to reimburse Agent for the account of the applicable  Issuer for the
amount paid by the applicable Issuer in respect of any drawing under such Letter
of Credit.

         "Relevant  Party" shall mean the Company and each other party to any of
the Loan Documents other than (a) the Banks and (b) Agent.


                                       20

<PAGE>



         "Request for Extension of Credit" shall mean a request for extension of
credit duly executed by any  Responsible  Officer of the Company,  appropriately
completed and substantially in the form of Exhibit C attached hereto.

         "Requested  Redetermination"  shall have the  meaning  assigned to such
term in Section 2.9 hereof.

         "Requesting  Banks"  shall  mean (a)  prior to the  termination  of the
Commitments,  Banks  having  greater  than 50% of the  aggregate  amount  of the
Commitments  and (b) after the  termination  of the  Commitments,  Banks  having
greater than 50% of the aggregate  principal  amount of the Loans and the Letter
of Credit Liabilities.

         "Requirements of Environmental  Law" means all requirements  imposed by
any law (including for example and without limitation The Resource  Conservation
and Recovery Act and The Comprehensive Environmental Response, Compensation, and
Liability  Act),  rule,  regulation,  or  order of any  federal,  state or local
executive, legislative,  judicial, regulatory or administrative agency, board or
authority  in effect at the  applicable  time which  relate to (i)  noise;  (ii)
pollution,  protection or clean-up of the air,  surface  water,  ground water or
land;  (iii) solid,  gaseous or liquid  waste  generation,  treatment,  storage,
disposal or  transportation;  (iv)  exposure to  Hazardous  Substances;  (v) the
safety or health of employees or (vi) regulation of the manufacture, processing,
distribution in commerce, use, discharge or storage of Hazardous Substances.

         "Reserve  Requirement"  shall  mean,  for any  Eurodollar  Loan for any
Interest Period  therefor,  the stated maximum rate for all reserves  (including
any  marginal,  supplemental  or emergency  reserves)  required to be maintained
during such Interest Period under Regulation D by any member bank of the Federal
Reserve System or any Bank against  "Eurocurrency  liabilities" (as such term is
used in Regulation D). Without limiting the effect of the foregoing, the Reserve
Requirement  shall  reflect  and  include  any  other  reserves  required  to be
maintained by such member banks by reason of any  Regulatory  Change against (i)
any category of liabilities  which  includes  deposits by reference to which the
Eurodollar Rate is to be determined as provided in the definition of "Eurodollar
Base Rate" in this Section 1.1 or (ii) any category of  extensions  of credit or
other assets which include  Eurodollar  Loans. Any determination by Agent of the
Reserve Requirement shall be conclusive and binding,  absent manifest error, and
may be made using any reasonable averaging and attribution method.

         "Responsible  Officer"  shall  mean  the  chairman  of the  board,  the
president,  any  executive  vice  president,  the vice  president of finance and
administration,  the chief executive  officer or the chief operating  officer or
any equivalent officer (regardless of title) and in the case of the Company, any
other vice president,  and in respect of financial or accounting matters,  shall
also include the chief  financial  officer,  the treasurer and the controller or
any equivalent officer (regardless of title).



                                       21

<PAGE>



         "Revolving Credit  Availability  Period" shall mean the period from and
including  the date  hereof to but not  including  May 31,  2004 or the date the
Commitments  are  terminated  pursuant to Section  11.1,  whichever  is first to
occur.

         "Revolving  Credit   Obligations"   shall  mean,  as  at  any  date  of
determination   thereof,   the  sum  of  the   following   (determined   without
duplication):  (i) the aggregate principal amount of Loans outstanding hereunder
plus (ii) the aggregate amount of the Letter of Credit Liabilities hereunder.

         "Scheduled  Redetermination"  shall having the meaning assigned to such
term in Section 2.9 hereof.

         "Senior  Debt"  shall  mean  Indebtedness  having  a  weighted  average
maturity  at least  seven  (7) years  from the date of  issuance  and  having no
conditions  precedent or covenants  materially  more onerous to the Company than
the conditions  precedent and covenants  contained  herein and in the other Loan
Documents  with respect to the Loans.  The documents  evidencing any Senior Debt
shall  contain a provision  substantially  identical to Section  10.2(y)  hereof
permitting  Liens  securing the Notes and the other  Obligations on a pari passu
basis with such Senior Debt.

         "Short Term  Borrowings"  shall  mean,  as of any date,  the  aggregate
outstanding  principal  amount of ENSTAR  Alaska's  borrowed money  Indebtedness
(other than borrowed  money  Indebtedness  owed by ENSTAR Natural Gas Company to
APC or by APC to ENSTAR Natural Gas Company) which is not Funded Indebtedness.

         "Short  Term  Borrowings  Measuring  Period"  shall mean that period of
ninety  (90)  consecutive  days  during the  twelve-month  period  ending on the
applicable  date that average  Short Term  Borrowings  were lower than any other
period of ninety (90) consecutive days during such twelve-month period.

         "Subordinated  Debt" shall mean  Indebtedness  of the Company  having a
weighted average maturity at least seven (7) years from the date of issuance and
having no  conditions  precedent  or  covenants  materially  more onerous to the
Company than the conditions  precedent and covenants contained herein and in the
other  Loan  Documents  with  respect to the Loans and which is  expressly  made
subordinate  and junior in right of payment to the Obligations and in respect of
any  collateral or security by the express terms of the  instruments  evidencing
the Subordinated  Debt or the indenture or other similar  instrument under which
the  Subordinated  Debt is issued (which  indenture or other  instrument will be
binding on all  holders  of such  Subordinated  Debt),  by  provisions  not more
favorable to the holders of the Subordinated Debt than the following:

         (a) in the event a Default  exists  and is  continuing,  no  payment of
principal or interest will be made on account of Subordinated Debt and no remedy
for default  shall be  exercised  until (i) such Default will have been cured or
waived or until the Obligations will have been paid in full


                                       22

<PAGE>



(or provisions made therefor  reasonably  satisfactory to the Banks) or (ii) 179
days after the  occurrence of such Default (as to which the Banks have knowledge
as a result  of  having  received  notice  from  the  Company  pursuant  to this
Agreement or  otherwise)  and no action being taken by the Banks with respect to
such Default, whichever occurs earlier;

         (b) upon the occurrence of any of the events or  proceedings  specified
in Subsec tions 11.1(f) or (g) hereof (or, as to any  Subsidiary of the Company,
Subsection 11.1(j) to the extent that it refers to Subsections  11.1(f) or (g)),
the holders of any  Obligations  will be entitled to receive  payment in full of
all  principal  or  interest  on  all  Obligations  before  the  holders  of the
Subordinated Debt are entitled to receive any payment on account of principal or
interest on the Subordinated  Debt, and to that end (but subject to the power of
a court of competent  jurisdiction  to make other  provision) the holders of the
Obligations will be entitled to receive  distributions of any kind or character,
whether in cash or property or  securities  (other  than equity  securities  and
other  securities   establishing   rights  in  the  holders  thereof  which  are
subordinate to the rights of the holders of the  Obligations in accordance  with
this  definition  of  Subordinated  Debt),  which may be or would  otherwise  be
payable or  deliverable in any such  proceedings in respect of the  Subordinated
Debt (provided that, the  Subordinated  Debt may provide that if the Obligations
have been paid in full or  provision  therefor  reasonably  satisfactory  to the
Banks has been made, the holders of the Subordinated  Debt will be subrogated to
the rights of the holders of the Obligations);

         (c) in the event that any Subordinated Debt is declared due and payable
before its expressed  maturity  because of the occurrence of an event of default
thereunder (under circumstances when the provisions of the foregoing clauses (a)
and (b) will not be applicable), the holders of the Obligations at the time such
Subordinated  Debt  becomes due and payable  because of such an event of default
will  be  entitled  to  receive  payment  in full of all  Obligations  (or  have
provision  therefor  satisfactory  to the Banks made)  before the holders of the
Subordinated  Debt are  entitled  to  receive  any  payment  on  account  of the
principal or interest on the Subordinated Debt; and

         (d) no  holder  of  the  Obligations will be prejudiced in its right to
enforce subordination  of  the Subordinated Debt by any act or failure to act on
the part of the Company or the part of the holders of the Obligations;

provided that, the Subordinated  Debt may provide that the foregoing  provisions
are solely for the purpose of defining the relative rights of the holders of the
Obligations  on the one hand,  and the holders of the  Subordinated  Debt on the
other hand, and that nothing therein will impair, as between the Company and the
holders of the  Subordinated  Debt, the obligation of the Company,  which may be
unconditional  and absolute,  to pay to the holders of the Subordinated Debt the
principal and interest  thereon in accordance with its terms,  nor will anything
herein prevent the holders of the Subordinated Debt from exercising all remedies
otherwise  permitted by applicable  law or thereunder  upon default  thereunder,
subject to the rights under clauses (a), (b) and (c)


                                       23

<PAGE>



above of the holders of the Obligations to receive cash,  property or securities
otherwise payable or deliverable to the holders of the Subordinated Debt.

         "Subsidiary" shall mean, with respect to any Person (the "parent"), (a)
any corporation of which at least a majority of the outstanding  shares of stock
having by the terms  thereof  ordinary  voting  power to elect a majority of the
board of directors of such  corporation  (irrespective  of whether or not at the
time stock of any other class or classes of such corporation shall have or might
have voting power by reason of the happening of any  contingency) is at the time
directly or  indirectly  owned or controlled by the parent or one or more of the
Subsidiaries of the parent or by the parent and one or more of the  Subsidiaries
of the parent, and (b) any partnership,  limited  partnership,  joint venture or
other form of entity, the majority of the legal or beneficial ownership of which
is at the time directly or  indirectly  owned or controlled by the parent or one
or more of the  Subsidiaries  of the  parent or by the parent and one or more of
the Subsidiaries of the parent.

         "Super  Majority  Banks" shall mean (a) prior to the termination of the
Commitments, Banks having 75% or more of the aggregate amount of the Commitments
and (b) after the  termination of the  Commitments,  Banks having 75% or more of
the  aggregate   principal  amount  of  the  Loans  and  the  Letter  of  Credit
Liabilities.

         "Tangible  Net  Worth"  shall mean the sum of the  redemption  price of
preferred  stock,  par value of common stock,  capital in excess of par value of
common stock (additional  paid-in capital) and retained earnings,  less treasury
stock,  goodwill,  deferred development costs,  franchises,  licenses,  patents,
trademarks and copyrights and all other assets which are properly  classified as
intangible assets in accordance with GAAP less any Redemption Obligations.

         "Type"  shall have the  meaning  assigned  to such term in Section  1.3
hereof.

         "Unfunded  Liabilities"  shall mean,  with respect to any Plan,  at any
time,  the amount (if any) by which (a) the present value of all benefits  under
such Plan exceeds (b) the fair market value of all Plan assets allocable to such
benefits,  all determined as of the then most recent actuarial  valuation report
for such Plan,  but only to the extent that such excess  represents  a potential
liability of any ERISA Affiliate to the PBGC or a Plan under Title IV of ERISA.

         1.2 Accounting Terms and  Determinations.  Unless  otherwise  specified
herein,   all   accounting   terms  used  herein  shall  be   interpreted,   all
determinations  with respect to accounting  matters hereunder shall be made, and
all financial  statements and certificates  and reports as to financial  matters
required to be delivered  hereunder shall be prepared,  in accordance with GAAP.
To enable the ready  determination of compliance with the provisions hereof, the
Company  will not  change  from  December  31 in each year the date on which its
fiscal year ends, nor from March 31, June 30 and September 30 the dates on which
the first three fiscal quarters in each fiscal year end.



                                       24

<PAGE>



         1.3 Types of Loans.  Loans hereunder are  distinguished by "Type".  The
"Type" of a Loan refers to the  determination  whether such Loan is a Eurodollar
Loan, a Competitive Loan or an Alternate Base Rate Loan.

         1.4  Miscellaneous.  The words  "hereof",  "herein" and "hereunder" and
words  of  similar  import  when  used in this  Agreement  shall  refer  to this
Agreement as a whole and not to any particular provision of this Agreement.  Any
reference to Sections shall refer to Sections of this Agreement.

         Section 2.  Commitments; Borrowing Base Determinations; Competitive Bid
                     Facility.

         2.1 Committed Loans.  From time to time on or after the date hereof and
during the Revolving Credit Availability  Period, each Bank shall make Committed
Loans under this Section 2.1 to the Company in an aggregate  principal amount at
any one time outstanding  (including its Commitment  Percentage of all Letter of
Credit  Liabilities at such time) up to but not exceeding such Bank's Commitment
Percentage of the amount by which the Maximum  Revolving Credit Available Amount
exceeds the aggregate  unpaid  principal  balance of all  Competitive  Loans and
Letter  of Credit  Liabilities  from time to time  outstanding.  Subject  to the
conditions  herein,  any  such  Committed  Loan  repaid  prior to the end of the
Revolving Credit  Availability Period may be reborrowed pursuant to the terms of
this Agreement; provided, that any and all such Committed Loans shall be due and
payable in full at the end of the Revolving Credit Availability Period.

         2.2        Letters of Credit.

         (a) Letters of Credit.  Subject to the terms and conditions hereof, and
on the condition that aggregate Letter of Credit  Liabilities shall never exceed
$100,000,000,  the Company shall have the right,  in addition to Committed Loans
provided for in Section 2.1 hereof, to utilize the Commitments from time to time
from and after the Effective Date through the expiration of the Revolving Credit
Availability  Period by  obtaining  the  issuance  of  letters of credit for the
account of the Company and on behalf of the Company by the applicable  Issuer if
the  Company  shall so request in the notice  referred  to in Section  2.2(b)(i)
(such  letters of credit  being  collectively  referred  to as the  "Letters  of
Credit").  Upon the date of the issuance of a Letter of Credit,  the  applicable
Issuer shall be deemed, without further action by any party hereto, to have sold
to each Bank, and each Bank shall be deemed, without further action by any party
hereto,  to have purchased from the applicable  Issuer, a participation,  to the
extent of such Bank's  Commitment  Percentage,  in such Letter of Credit and the
related Letter of Credit Liabilities. Any Letter of Credit having an expiry date
after the end of the Revolving Credit  Availability Period shall have been fully
Covered  or shall be backed by a letter  of  credit in form and  substance,  and
issued by an issuer, acceptable to Agent in its reasonably exercised discretion.
Subject to the terms and conditions hereof,  upon the request of the Company, if
Chase is the designated Issuer, Chase shall


                                       25

<PAGE>



issue the  applicable  Letter of Credit and if any other Bank is the  designated
Issuer,  such Bank may,  but shall not be  obligated  to,  issue such  Letter of
Credit.

         (b)        Additional Provisions.  The following additional  provisions
shall apply to each Letter of Credit:

                    (i) The Company shall give Agent at least three (3) Business
Days' prior notice  (effective upon receipt)  specifying the proposed Issuer and
the date such Letter of Credit is to be issued and describing the proposed terms
of such  Letter  of Credit  and the  nature of the  transaction  proposed  to be
supported thereby, and shall furnish such additional  information regarding such
transaction  as Agent or the  applicable  Issuer may  reasonably  request.  Upon
receipt of such notice  Agent shall  promptly  notify each Bank of the  contents
thereof and of such Bank's Commitment  Percentage of the amount of such proposed
Letter of Credit.

                    (ii) No  Letter of  Credit  may be  issued  if after  giving
effect  thereto  the  Revolving  Credit  Obligations  would  exceed the  Maximum
Revolving Credit Available Amount. On each day during the period commencing with
the  issuance of any Letter of Credit and until such Letter of Credit shall have
expired or been  terminated,  the  Commitment of each Bank shall be deemed to be
utilized  for all purposes  hereof in an amount equal to such Bank's  Commitment
Percentage  of the amount  then  available  for  drawings  under such  Letter of
Credit.

                    (iii) Upon  receipt  from the  beneficiary  of any Letter of
Credit of any  demand  for  payment  thereunder,  the  applicable  Issuer  shall
promptly  notify  the  Company  and each  Bank as to the  amount to be paid as a
result of such demand and the payment date. If at any time the applicable Issuer
shall have made a payment to a beneficiary of a Letter of Credit in respect of a
drawing under such Letter of Credit, each Bank will pay to the applicable Issuer
immediately  upon demand by the applicable  Issuer at any time during the period
commencing  after  such  payment  until  reimbursement  thereof  in  full by the
Company,  an amount equal to such Bank's Commitment  Percentage of such payment,
together  with  interest on such amount for each day from the date of demand for
such payment (or, if such demand is made after 11:00 a.m. Houston, Texas time on
such date, from the next succeeding Business Day) to the date of payment by such
Bank of such amount at a rate of interest  per annum equal to the Federal  Funds
Rate for such period.

                    (iv) The Company shall be  irrevocably  and  unconditionally
obligated  forthwith to reimburse the  applicable  Issuer for any amount paid by
the  applicable  Issuer  upon any  drawing  under any Letter of Credit,  without
presentment,   demand,   protest  or  other   formalities  of  any  kind.   Such
reimbursement  may, subject to satisfaction of any other  applicable  conditions
set forth in this  Agreement,  including the existence of the Maximum  Revolving
Credit Available Amount (after adjustment in the same to reflect the elimination
of the corresponding  Letter of Credit Liability) be made by borrowing of Loans.
In the event  any such  reimbursement  is not made by  borrowing  of Loans,  the
Company shall make such reimbursement in immediately available funds within five
(5) days after demand therefor by the applicable  Issuer.  The applicable Issuer
will pay to each


                                       26

<PAGE>



Bank such Bank's Commitment  Percentage of all amounts received from the Company
for application in payment, in whole or in part, of the Reimbursement Obligation
in respect of any  Letter of Credit,  but only to the extent  such Bank has made
payment to the applicable Issuer in respect of such Letter of Credit pursuant to
clause (iii) above.

                    (v) The Company  will pay to Agent at the  Principal  Office
for the account of each Bank a fee on such Bank's  Commitment  Percentage of the
daily average amount available for drawings under each Letter of Credit, in each
case for the period  from and  including  the date of issuance of such Letter of
Credit to and including the date of expiration or termination  thereof at a rate
per annum  equal to the Letter of Credit Fee in effect  from time to time,  such
fee to be  paid  in  arrears  on the  Quarterly  Dates  and on the  date  of the
expiration or termination  thereof.  Agent will pay to each Bank, promptly after
receiving  any  payment in respect of letter of credit  fees  referred to in the
preceding sentence of this clause (v), an amount equal to such Bank's Commitment
Percentage  of such fees.  The  Company  shall pay to the  applicable  Issuer an
administration and issuance fee in an amount equal to 1/8 of 1% per annum of the
daily average amount available for drawings under such Letter of Credit, in each
case for the period  from and  including  the date of issuance of such Letter of
Credit to and including the date of expiration or termination thereof,  such fee
to be paid in arrears on the Quarterly  Dates and on the date of the  expiration
or termination  thereof.  Such administration and issuance fee shall be retained
by the applicable Issuer.

                    (vi) The issuance by the applicable Issuer of each Letter of
Credit  shall,  in addition to the  conditions  precedent set forth in Section 7
hereof, be subject to the conditions  precedent that such Letter of Credit shall
be in such form and contain such terms as shall be  reasonably  satisfactory  to
the  applicable  Issuer and that the Company  shall have  executed and delivered
such other  instruments and agreements  relating to such Letter of Credit as the
applicable Issuer shall have reasonably  requested and are not inconsistent with
the terms of this Agreement including an Application therefor. In the event of a
conflict  between the terms of this Agreement and the terms of any  Application,
the terms of this Agreement  shall control.  Without  limiting the generality of
the  foregoing  sentence,  in the  event  any  such  Application  shall  include
requirements for Cover, it is agreed that there shall be no requirements for the
Company to provide Cover except as expressly required in this Agreement.

         (c) Indemnification.  The Company hereby indemnifies and holds harmless
Agent,  the applicable  Issuer and each Bank from and against any and all claims
and  damages,  losses,  liabilities,  costs or  expenses  which such  Bank,  the
applicable Issuer or Agent may incur (or which may be claimed against such Bank,
the applicable Issuer or Agent by any Person  whatsoever) in connection with the
execution  and  delivery  or  transfer of or payment or failure to pay under any
Letter of Credit,  including,  without limitation,  any claims, damages, losses,
liabilities,  costs or expenses which Agent, the applicable Issuer or such Bank,
as the  case  may  be,  may  incur  (whether  incurred  as a  result  of its own
negligence or  otherwise) by reason of or in connection  with the failure of any
other Bank (whether as a result of its own negligence or otherwise) to fulfill


                                       27

<PAGE>



or comply with its obligations to Agent, the applicable  Issuer or such Bank, as
the case may be, hereunder (but nothing herein contained shall affect any rights
the Company may have against such defaulting  Bank);  provided that, the Company
shall not be required to indemnify any Bank, the applicable  Issuer or Agent for
any claims, damages, losses,  liabilities,  costs or expenses to the extent, but
only to the extent,  caused by (i) the willful misconduct or gross negligence of
the  party  seeking  indemnification,  or (ii) by such  Bank's,  the  applicable
Issuer's  or  Agent's,  as the case may be,  failure  to pay under any Letter of
Credit  after the  presentation  to it of a request  required  to be paid  under
applicable  law.  Nothing  in this  Section  2.2(c)  is  intended  to limit  the
obligations of the Company under any other provision of this Agreement.

         (d) Co-issuance or Separate Issuance of Letters of Credit.  The Company
may, at its option,  request that any  requested  Letter of Credit which exceeds
$1,000,000 be issued severally, but not jointly, by any two or more of the Banks
or issued  through  separate  Letters of Credit issued by any two or more of the
Banks,  respectively,  each in an amount equal to a portion of the amount of the
applicable Letter of Credit requested by the Company.  In either such event, the
Banks  issuing such Letters of Credit shall each  constitute an "Issuer" and the
Letters of Credit so issued  shall each  constitute a "Letter of Credit" for all
purposes hereunder and under the Loan Documents.  Notwithstanding the foregoing,
no Bank  other  than  Chase  shall  have any  obligation  to issue any Letter of
Credit, but may do so at its option.

         2.3        Reductions and Changes of Commitments.

         (a)  Mandatory. On May 31, 2004, all Commitments  shall  be  terminated
in their entirety unless terminated at an earlier date pursuant to Section 11.1.

         (b)  Optional.  The Company shall have the right to terminate or reduce
the unused portion of the Commitments at any time or from time to time, provided
that: (i) the Company shall give notice of each such termination or reduction to
Agent as  provided in Section  5.5 hereof and (ii) each such  partial  reduction
shall be permanent and in an aggregate amount at least equal to $5,000,000.

         (c)  No  Reinstatement.  Any  reduction   in   or  termination  of  the
Commitments may not be  reinstated  without  the  approval of Agent and any Bank
whose Commitment (or the applicable part thereof) is to be so reinstated.

         2.4        Fees.

         (a) The  Company  shall  pay to Agent  for the  account  of each Bank a
facility fee accruing from the Effective  Date,  computed for each day at a rate
per annum equal to the Facility Fee Percentage  times such Bank's pro rata share
(based on its respective  Commitment) of the Maximum  Revolving Credit Available
Amount on such day. Such facility fees shall be payable


                                       28

<PAGE>



on the  Quarterly  Dates  and on the  earlier  of the date the  Commitments  are
terminated  in  their  entirety  or  the  last  day  of  the  Revolving   Credit
Availability Period.

         (b) The Company agrees to pay to Agent fees as provided in the separate
letter agreements executed by and between Agent and the Company.

         2.5        Affiliates; Lending Offices.

         (a) Any Bank may,  if it so elects,  fulfill any  obligation  to make a
Eurodollar Loan or Competitive  Loan by causing a branch,  foreign or otherwise,
or Affiliate of such Bank to make such Loan and may transfer and carry such Loan
at, to or for the  account  of any  branch  office or  Affiliate  of such  Bank;
provided  that, in such event for the purposes of this Agreement such Loan shall
be deemed to have been made by such Bank and the  obligation  of the  Company to
repay  such Loan  shall  nevertheless  be to such Bank and shall be deemed to be
held by such Bank and,  to the  extent of such  Loan,  to have been made for the
account of such branch or Affiliate.

         (b)  Notwithstanding  any provision of this  Agreement to the contrary,
each Bank shall be entitled to fund and  maintain its funding of all or any part
of its Loans hereunder in any manner it sees fit, it being understood,  however,
that for the purposes of this Agreement all  determinations  hereunder  shall be
made as if such Bank had actually  funded and maintained  each  Eurodollar  Loan
during each Interest  Period through the purchase of deposits  having a maturity
corresponding  to such Interest Period and bearing an interest rate equal to the
Eurodollar Rate for such Interest Period.

         2.6 Several Obligations. The failure of any Bank to make any Loan to be
made by it on the date  specified  therefor  shall not relieve any other Bank of
its  obligation  to make its Loan on such date,  but neither  Agent nor any Bank
shall be responsible for the failure of any other Bank to make a Loan to be made
by such other Bank.

         2.7 Notes.  The Committed Loans made by each Bank shall be evidenced by
a single  Committed Note of the Company in  substantially  the form of Exhibit E
hereto  payable  to the order of such Bank in a  principal  amount  equal to the
Commitment of such Bank, and otherwise duly  completed.  The  Competitive  Loans
made by each Bank shall be evidenced by a single Competitive Note of the Company
in substantially  the form of Exhibit O hereto payable to the order of such Bank
and otherwise duly completed.  Each Bank is hereby  authorized by the Company to
endorse on the schedules (or a continuations  thereof)  attached to the Notes of
such  Bank,  to the  extent  applicable,  the date,  amount  and Type of and the
Interest  Period for each Loan made by such Bank to the Company  hereunder,  and
the amount of each payment or  prepayment  of principal of such Loan received by
such Bank, provided,  that any failure by such Bank to make any such endorsement
shall not affect the  obligations of the Company under such Note or hereunder in
respect of such Loan.



                                       29

<PAGE>



         2.8 Use of Proceeds.  The  proceeds  of  the  Loans  shall  be used for
general corporate purposes.

         2.9 Borrowing Base Determinations.

         (a) Within 45 days after receipt of the Engineering  Report required to
be delivered each year,  commencing with the  Engineering  Report required to be
delivered in 1998,  Agent shall notify the Company,  in writing,  of the Oil and
Gas Reserves  Component Value determined on the basis of such Engineering Report
and the  Borrowing  Base  determined  on the basis of such Oil and Gas  Reserves
Component  Value,  together with the  determination of the Alaskan Gas Component
Value. Each such  determination is herein called a "Scheduled  Redetermination".
Each Scheduled  Redetermination  shall be effective when the Company is notified
of the amount of the redetermined Borrowing Base by Agent.

         (b) The Requesting Banks or the Company may, from time to time (but not
more frequently  than one time during any calendar year by the Requesting  Banks
and one time during any calendar year by the Company), request a redetermination
of the Oil and Gas  Reserves  Component  Value  based  upon  the  most  recently
received  Engineering  Report or Company Report,  as the case may be, and of the
Borrowing  Base  based  upon such  redetermination  of the Oil and Gas  Reserves
Component  Value,  together with the  determination of the Alaskan Gas Component
Value.  Each  such  requested  redetermination  is  herein  called a  "Requested
Redetermination."  Each  Requested  Redetermination  shall be effective when the
Company is notified,  in writing,  of the amount of the  redetermined  Borrowing
Base by Agent.

         2.10 Competitive Bid Procedure.

         (a) In order to  request  Competitive  Bids,  the  Company  shall  hand
deliver,  telex or telecopy to Agent a duly completed  request  substantially in
the form of Exhibit K, with the blanks  appropriately  completed (a "Competitive
Bid Request"), to be received by Agent not later than 11:00 a.m., Houston, Texas
time,  five Business Days before the date  specified for a proposed  Competitive
Loan. No Alternate Base Rate Loan shall be requested in, or, except  pursuant to
Section 6, made  pursuant to, a  Competitive  Bid  Request.  A  Competitive  Bid
Request  that does not conform  substantially  to the format of Exhibit K may be
rejected at Agent's sole discretion, and Agent shall promptly notify the Company
of such rejection by telecopier. Each Competitive Bid Request shall in each case
refer to this  Agreement  and  specify  (x) the date of such  Competitive  Loans
(which  shall be a Business  Day) and the  aggregate  principal  amount  thereof
(which shall not be less than  $25,000,000 or greater than the unused portion of
the  Maximum  Revolving  Credit  Available  Amount  on such date and shall be an
integral  multiple of  $5,000,000)  and (y) the  Interest  Period  with  respect
thereto  (which  may not end  after  the  termination  of the  Revolving  Credit
Availability  Period).  Promptly after its receipt of a Competitive  Bid Request
that is not  rejected  as  aforesaid,  Agent  shall  invite  by  telecopier  (in
substantially  the form set forth in Exhibit L hereto)  the Banks to bid, on the
terms and conditions of this Agreement, to make Competitive


                                       30

<PAGE>



Loans pursuant to such Competitive Bid Request.  Notwithstanding  the foregoing,
Agent  shall have no  obligation  to invite any Bank to make a  Competitive  Bid
pursuant  to this  Section  2.10(a)  until  such Bank has  delivered  a properly
completed Competitive Bid Administrative Questionnaire to Agent.

         (b) Each Bank may, in its sole discretion, make one or more Competitive
Bids to the Company responsive to each Competitive Bid Request. Each Competitive
Bid by a Bank must be received by Agent via telecopier, in the form of Exhibit M
hereto,  not later than 11:00 a.m.,  Houston,  Texas time,  four  Business  Days
before the date specified for a proposed Competitive Loan. Competitive Bids that
do not conform substantially to the format of Exhibit M may be rejected by Agent
after conferring with, and upon the instruction of, the Company, and Agent shall
notify the Bank of such rejection as soon as practicable.  Each  Competitive Bid
shall refer to this Agreement and (x) specify the principal  amount (which shall
be in a minimum  principal  amount of $5,000,000 and in an integral  multiple of
$1,000,000  and which may equal the  entire  aggregate  principal  amount of the
Competitive Loan requested by the Company) of the Competitive Loan that the Bank
is willing to make to the Company, (y) specify the Competitive Bid Rate at which
the Bank is prepared to make the  Competitive  Loan and (z) confirm the Interest
Period with  respect  thereto  specified by the Company in its  Competitive  Bid
Request.  A Competitive  Bid submitted by a Bank pursuant to this  paragraph (b)
shall be irrevocable.

         (c) Agent  shall,  by 2:00 p.m.  four  Business  Days  before  the date
specified for a proposed  Competitive  Loan, notify the Company by telecopier of
all the  Competitive  Bids  made,  the  Competitive  Bid  Rate  and the  maximum
principal  amount of each Competitive Loan in respect of which a Competitive Bid
was made and the  identity  of the Bank that made each bid.  Agent  shall send a
copy  of all  Competitive  Bids  to the  Company  for  its  records  as  soon as
practicable  after  completion of the bidding  process set forth in this Section
2.10.

         (d) The Company may in its sole and absolute  discretion,  subject only
to the provisions of this Section 2.10(d),  accept or reject any Competitive Bid
referred to in Section 2.10(c); provided,  however, that the aggregate amount of
the  Competitive  Bids so accepted  by the Company may not exceed the  principal
amount of the  Competitive  Loan  requested  by the Company.  The Company  shall
notify Agent by  telecopier  whether and to what extent it has decided to accept
or reject any or all of the bids referred to in Section 2.10(c),  not later than
11:00 a.m.,  Houston,  Texas time, three Business Days before the date specified
for a proposed Competitive Loan; provided,  however, that (w) the failure by the
Company to give such notice  shall be deemed to be a  rejection  of all the bids
referred  to in  Section  2.10(c)  and  (x)  no  bid  shall  be  accepted  for a
Competitive Loan unless such  Competitive Loan is in a minimum  principal amount
of  $5,000,000  and an integral  multiple  of  $1,000,000.  Notwithstanding  the
foregoing,  if the  Company  accepts  more  than one bid made in  response  to a
Competitive Bid Request and the available  principal amount of Competitive Loans
to be allocated among the Banks is not sufficient to enable Competitive Loans to
be allocated to each Bank in a minimum  principal  amount of  $5,000,000  and in
integral multiples of $1,000,000, then the Company shall select the Banks to


                                       31

<PAGE>



be allocated such  Competitive  Loans and shall round  allocations up or down to
the next higher or lower multiple of $1,000,000 as it shall deem appropriate. In
addition,  the Company  shall be permitted  under the  foregoing  procedures  to
accept a bid or bids in a principal  amount of less than $5,000,000 (i) in order
to enable  the  Company  to  accept  bids  equal to (but not in  excess  of) the
principal  amount of the  Competitive  Loan  requested by the Company or (ii) in
order to enable the Company to accept all remaining  bids, or all remaining bids
at a particular Competitive Bid Rate. A notice given by Company pursuant to this
paragraph (d) shall be irrevocable.

         (e) Agent shall  promptly  notify each  bidding Bank whether or not its
Competitive  Bid has  been  accepted  (and if so,  in  what  amount  and at what
Competitive Bid Rate) by telex or telecopier sent by Agent,  and each successful
bidder will thereupon become bound,  subject to the other applicable  conditions
hereof,  to make the  Competitive  Loan in  respect  of  which  its bid has been
accepted.  After  completing the  notifications  referred to in the  immediately
preceding  sentence,  Agent shall (i) notify Agent of each  Competitive Bid that
has been accepted,  the amount thereof and the Competitive Bid Rate therefor and
(ii) notify each Bank of the aggregate  principal amount of all Competitive Bids
accepted.

         (f) No Competitive  Loan shall be made within five Business Days of the
date of any other  Competitive Loan, unless the Company and Agent shall mutually
agree otherwise.

         (g) If Agent shall at any time have a  Commitment  hereunder  and shall
elect to submit a  Competitive  Bid in its  capacity as a Bank,  it shall submit
such bid  directly to the Company one quarter of an hour earlier than the latest
time at which  the other  Banks  are  required  to  submit  their  bids to Agent
pursuant to paragraph (b) above.

         (h)  All  notices  required  by  this  Section  2.10  shall  be made in
accordance   with  Section   13.2  and  the   Competitive   Bid   Administrative
Questionnaire most recently placed on file by each Bank with Agent.

         Section 3.  Borrowings, Prepayments and Selection of Interest Rates.

         3.1  Borrowings.  The Company shall give Agent notice of each borrowing
to be made hereunder as provided in Sections 2.10 and 5.5 hereof. Not later than
2:00 p.m.  Houston,  Texas time on the date  specified  for each such  borrowing
hereunder,  each Bank shall make available the amount of the Loan, if any, to be
made by it on such  date to  Agent,  at its  Principal  Office,  in  immediately
available funds, for the account of the Company. The amount so received by Agent
shall, subject to the terms and conditions of this Agreement,  be made available
to the Company by depositing the same, in  immediately  available  funds,  in an
account designated by the Company maintained with Agent at the Principal Office.


                                       32

<PAGE>



         3.2  Prepayments.

         (a)  Optional  Prepayments.  Subject to the provisions of Sections 4, 5
and 6, the Company shall have the right to prepay, on any Business Day, in whole
or in part, without the payment of any penalty or fee, Loans at any time or from
time to time,  provided  that,  the Company shall give Agent notice of each such
prepayment as provided in Section 5.5 hereof.  Eurodollar  Loans and Competitive
Loans may be prepaid on the last day of an Interest Period  applicable  thereto.
Neither  Eurodollar Loans nor Competitive  Loans may be otherwise prepaid unless
prepayment is accompanied by payment of all compensation required by Section 6.

         (b)  Mandatory Prepayments and Cover; Borrowing Base Deficiency.

         (1)  Reduction of  Commitments.  The Company shall from time to time on
demand  by Agent  prepay  the  Loans  (or  provide  Cover  for  Letter of Credit
Liabilities)  in such  amounts  as shall be  necessary  so that at all times the
aggregate outstanding principal amount of all Revolving Credit Obligations shall
not be in excess of the  aggregate  amount of the  Commitments,  as reduced from
time to time pursuant to Section 2.3 hereof plus any Cover  provided  under this
Section 3.2(b)(1).

         (2)  Borrowing  Base  Deficiency.  Should a Borrowing  Base  Deficiency
occur, Agent may (and, at the direction of the Majority Banks, shall) notify the
Company in writing of such  Borrowing Base  Deficiency.  Within 30 days from and
after the Borrowing Base Deficiency  Notification Date, the Company shall make a
payment on the Loans or Borrowing Base Debt of the Company or its  Subsidiaries,
as the Company may elect,  in an amount  sufficient to eliminate  such Borrowing
Base Deficiency, and deliver to Agent evidence satisfactory to Agent of any such
payment  of  Borrowing  Base Debt of the  Company  or its  Subsidiaries.  If the
Company fails to take the action described above within such 30-day period, then
without any necessity for notice to the Company or any other person, the Company
shall become  obligated to pay on the Loans three (3)  installments,  each in an
amount equal to one-third  (1/3rd) of the applicable  Borrowing Base Deficiency,
such installments to be due and payable on or before three (3), six (6) and nine
(9) calendar  months after the  Borrowing  Base  Deficiency  Notification  Date,
respectively.  Payments  of  principal  otherwise  required  hereunder  shall be
credited against such installments.

         (3)  Asset  Dispositions.  If  the  Company  or any  Subsidiary  sells,
transfers or otherwise disposes of assets that have been given value in the most
recent determination of the Borrowing Base and having a fair market value in the
aggregate for the Company and such Subsidiaries in excess of $50,000,000  during
the period from the effective date of any Borrowing Base Determination until the
effective  date of the next  Borrowing  Base  Determination,  the Borrowing Base
shall be  immediately  reduced,  until the effective  date of the next Borrowing
Base Determination, by an amount equal to, the value of such assets reflected in
the  most  recent  Borrowing  Base,  or if the  value  of the  applicable  asset
reflected in the most recent  Borrowing Base cannot be readily  determined,  the
net sales proceeds realized from the sale, transfer or other


                                       33

<PAGE>



disposition of such assets.  If such reduction  shall result in a Borrowing Base
Deficiency,  then in lieu of the  provisions of Section  3.2(b)(2)  hereof,  the
Company shall immediately make a payment on the Loans in an amount equal to such
Borrowing Base Deficiency.  In addition to and cumulative of the foregoing, if a
Borrowing  Base  Deficiency  exists  prior  to  such  sale,  transfer  or  other
disposition  of assets,  then in lieu of the  provisions  of  Section  3.2(b)(2)
hereof,  the Company shall  immediately make a payment on the Loans in an amount
equal to the lesser of the amount of the Borrowing Base Deficiency (after giving
effect to the applicable sale, transfer or other disposition) or 100% of the net
sales proceeds realized from the applicable sale, transfer or other disposition.

         3.3 Selection of Interest Rates. Subject to the terms and provisions of
this Agreement,  the Company shall have the right either to convert any Loan (in
whole or in part) into a Loan of another Type (provided that no such  conversion
of Eurodollar  Loans or Competitive  Loans shall be permitted  other than on the
last day of an Interest Period applicable  thereto) or to continue such Loan (in
whole or in part) as a Loan of the same Type.  In the event the Company fails to
so give such  notice  prior to the end of the  applicable  Interest  Period with
respect to any Eurodollar  Loan or Competitive  Loan,  such Loan shall become an
Alternate Base Rate Loan on the last day of such Interest Period.

         Section 4. Payments of Principal and Interest.

         4.1 Repayment of Loans and Reimbursement Obligations.  The Company will
pay to Agent for the account of each Bank (a) the principal of each Loan made by
such  Bank  on the  dates  provided  in the  respective  Notes  and as  provided
hereunder and (b) the amount of each Reimbursement  Obligation promptly upon its
occurrence.  The amount of any  Reimbursement  Obligation may, if the applicable
conditions precedent specified in Section 7 hereof have been satisfied,  be paid
with the proceeds of Loans.

         4.2 Interest.

         (a) Subject to Section 13.6  hereof,  the Company will pay to Agent for
the account of each Bank  interest on the unpaid  principal  amount of each Loan
made by such  Bank for the  period  commencing  on the date of such  Loan to but
excluding  the date such Loan  shall be paid in full,  at the  lesser of (I) the
following rates per annum:

               (i)    if such Loan is an Alternate Base Rate Loan, the Alternate
Base Rate plus the Applicable Margin,

               (ii)   if  such  Loan  is   a  Eurodollar  Loan,  the  applicable
Eurodollar Rate plus the Applicable Margin, and



                                       34

<PAGE>



               (iii) if such Loan is a Competitive  Loan, the  applicable  fixed
rate offered  by the  applicable  Bank and accepted by the Company in accordance
with Section  2.10  hereof  (or,  in the  case of  Existing  Competitive  Loans,
the  applicable  fixed  rate specified on Exhibit D hereto), or (II) the Highest
Lawful Rate.

         (b)  Notwithstanding  any of the  foregoing but subject to Section 13.6
hereof,  the Company will pay to Agent for the account of each Bank  interest at
the applicable Post-Default Rate on any principal of any Loan made by such Bank,
on any  Reimbursement  Obligation and on any other amount payable by the Company
hereunder  to or for the account of such Bank (but,  if such amount is interest,
only to the extent  legally  allowed),  which shall not be paid in full when due
(whether at stated  maturity,  by  acceleration  or  otherwise),  for the period
commencing on the due date thereof until the same is paid in full.

         (c)  Accrued  interest on each Loan shall be payable on the last day of
each Interest  Period for such Loan (and, if such Interest  Period exceeds three
months' duration,  quarterly,  commencing on the first quarterly  anniversary of
the first day of such Interest Period), except that (i) accrued interest payable
at the Post-Default Rate shall be due and payable from time to time on demand of
Agent or the Majority  Banks  (through  Agent) and (ii) accrued  interest on any
amount  prepaid or  converted  pursuant to Section 6 hereof shall be paid on the
amount so prepaid or converted.

         Section 5.        Payments; Pro Rata Treatment; Computations, Etc.

         5.1        Payments.

         (a) Except to the extent  otherwise  provided  herein,  all payments of
principal,  interest,  Reimbursement Obligations and other amounts to be made by
the  Company  hereunder  and  under  the  Notes  shall  be made in  Dollars,  in
immediately available funds, to Agent at the Principal Office (or in the case of
a successor Agent, at the principal office of such successor Agent in the United
States), not later than 11:00 a.m. Houston, Texas time on the date on which such
payment  shall  become due (each such  payment  made after such time on such due
date to be deemed to have been made on the next succeeding Business Day).

         (b) The Company shall, at the time of making each payment  hereunder or
under any Note,  specify  to Agent the  Loans or other  amounts  payable  by the
Company  hereunder or  thereunder  to which such payment is to be applied.  Each
payment received by Agent hereunder or under any Note or any other Loan Document
for the account of a Bank shall be paid  promptly to such Bank,  in  immediately
available funds for the account of such Bank's Applicable Lending Office.



                                       35

<PAGE>



         (c) If the due date of any payment  hereunder  or under any Note or any
other Loan Document falls on a day which is not a Business Day, the due date for
such payment (subject to the definition of Interest Period) shall be extended to
the next succeeding Business Day and interest shall be payable for any principal
so extended for the period of such extension.

         5.2 Pro Rata Treatment. Except to the extent otherwise provided herein:
(a) each borrowing from the Banks under Section 2.1 hereof shall be made ratably
from the Banks on the basis of their respective  Commitments and each payment of
commitment or facility fees shall be made for the account of the Banks, and each
termination  or  reduction  of the  Commitments  of the Banks under  Section 2.3
hereof  shall  be  applied,   pro  rata,  according  to  the  Banks'  respective
Commitments;  (b) each  payment by the  Company of  principal  of or interest on
Loans of a  particular  Type shall be made to Agent for the account of the Banks
pro rata in accordance  with the  respective  unpaid  principal  amounts of such
Loans held by the Banks;  and (c) the Banks (other than the  applicable  Issuer)
shall  purchase  from the  applicable  Issuer  participations  in the Letters of
Credit to the extent of their respective Commitment Percentages.

         5.3  Computations.  Interest on Competitive Loans and interest based on
the Eurodollar Base Rate or the Federal Funds Rate will be computed on the basis
of a year of 360 days and  actual  days  elapsed  (including  the  first day but
excluding the last day)  occurring in the period for which  payable,  unless the
effect of so  computing  shall be to cause the rate of  interest  to exceed  the
Highest  Lawful Rate, in which case interest shall be calculated on the basis of
the actual  number of days elapsed in a year composed of 365 or 366 days, as the
case may be. All other  interest  and fees shall be  computed  on the basis of a
year of 365 (or 366) days and actual days elapsed  (including  the first day but
excluding the last day) occurring in the period for which payable.

         5.4 Minimum and Maximum  Amounts.  Except for prepayments made pursuant
to Section 3.2(b)  hereof,  and subject to the provisions of Section 2.10 hereof
with respect to Competitive  Loans, each borrowing and repayment of principal of
Loans,  each termination or reduction of Commitments,  each optional  prepayment
and each conversion of Type shall be in an aggregate  principal  amount at least
equal to (a) in the case of Eurodollar Loans and Competitive Loans,  $5,000,000,
and (b) in the case of  Alternate  Base Rate Loans,  $1,000,000  (borrowings  or
prepayments of Loans of different Types or, in the case of Eurodollar  Loans and
Competitive Loans,  having different Interest Periods at the same time hereunder
to be deemed separate  borrowings and prepayments for purposes of the foregoing,
one for each Type or Interest Period).  Upon any mandatory prepayment that would
reduce  Eurodollar  Loans or Competitive  Loans,  respectively,  having the same
Interest  Period to less than  $5,000,000  such  Loans  shall  automatically  be
converted  into  Alternate  Base  Rate  Loans on the last day of the  applicable
Interest  Period.  Notwithstanding  anything to the  contrary  contained in this
Agreement,  there  shall not be, at any one time,  more than eight (8)  Interest
Periods in effect with respect to Eurodollar Loans or Competitive  Loans, in the
aggregate.



                                       36

<PAGE>



         5.5 Certain Actions,  Notices, Etc. Notices to Agent of any termination
or reduction of  Commitments,  of borrowings and  prepayments,  conversions  and
continuations  of  Loans  and of the  duration  of  Interest  Periods  shall  be
irrevocable  and shall be  effective  only if  received  by Agent not later than
11:00 a.m. Houston,  Texas time on the number of Business Days prior to the date
of the relevant termination,  reduction, borrowing and/or repayment,  conversion
or continuance specified below:

<TABLE>
<CAPTION>

                                                                   Number of
                                                                   Business
                       Notice                                     Days Prior
              <S>                                                 <C>

              Termination or
              Reduction of Commitments                                 2

              Borrowing or prepayment
              of or conversion into or
              continuance of Alternate Base
              Rate Loans                                           same day

              Borrowing or
              prepayment of or conversion
              into or continuance of
              Eurodollar Loans                                         3

</TABLE>

Each such notice of  termination  or reduction  shall  specify the amount of the
Commitments  to be  terminated  or  reduced.  Each such notice of  borrowing  or
prepayment  shall  specify  the amount and Type of the Loans to be  borrowed  or
prepaid  (subject to Sections  3.2(a) and 5.4 hereof),  the date of borrowing or
prepayment (which shall be a Business Day) and, in the case of Eurodollar Loans,
the duration of the  Interest  Period  therefor  (subject to the  definition  of
"Interest  Period").  Each such  notice of  conversion  of a Loan into a Loan of
another Type shall identify such Loan (or portion  thereof) being  converted and
specify  the Type of Loan into which such Loan is being  converted  (subject  to
Section 5.4 hereof) and the date for conversion  (which shall be a Business Day)
and,  unless such Loan is being  converted into an Alternate Base Rate Loan, the
duration (subject to the definition of "Interest Period") of the Interest Period
therefor  which is to commence as of the last day of the then  current  Interest
Period therefor (or the date of conversion, if such Loan is being converted from
an Alternate  Base Rate Loan).  Each such notice of  continuation  of a Loan (or
portion  thereof) as the same Type of Loan shall  identify such Loan (or portion
thereof) being  continued  (subject to Section 5.4 hereof) and, unless such Loan
is an Alternate  Base Rate Loan,  the  duration  (subject to the  definition  of
"Interest  Period") of the Interest  Period  therefor which is to commence as of
the last day of the then current Interest Period therefor.  Agent shall promptly
notify the affected  Banks of the  contents of each such  notice.  Notice of any
prepayment  having been given,  the principal  amount  specified in such notice,
together with interest thereon


                                       37

<PAGE>



to the date of  prepayment,  shall be due and payable on such  prepayment  date.
Section 2.10 hereof shall  control the time periods  applicable  to  Competitive
Loans.

         5.6  Non-Receipt  of Funds by  Agent.  Unless  Agent  shall  have  been
notified by a Bank or the Company (the "Payor")  prior to the date on which such
Bank is to make  payment  to  Agent of the  proceeds  of a Loan to be made by it
hereunder (or the payment of any amount by such Bank to reimburse the applicable
Issuer for a drawing  under any  Letter of  Credit) or the  Company is to make a
payment to Agent for the account of one or more of the Banks, as the case may be
(such payment being herein called the "Required Payment"), which notice shall be
effective  upon  receipt,  that the Payor does not  intend to make the  Required
Payment to Agent,  Agent may assume that the Required  Payment has been made and
may, in reliance upon such  assumption  (but shall not be required to), make the
amount  thereof  available  to the  intended  recipient on such date and, if the
Payor has not in fact made the Required Payment to Agent on or before such date,
the  recipient of such payment (or, if such  recipient is the  beneficiary  of a
Letter of  Credit,  the  Company  and,  if the  Company  fails to pay the amount
thereof to Agent forthwith upon demand, the Banks ratably in proportion to their
respective  Commitment  Percentages)  shall, on demand,  pay to Agent the amount
made  available to it together  with  interest  thereon in respect of the period
commencing on the date such amount was so made available by Agent until the date
Agent  recovers  such amount at a rate per annum equal to the Federal Funds Rate
for such period.

         5.7 Sharing of  Payments,  Etc. If a Bank shall  obtain  payment of any
principal of or interest on any Loan made by it under this Agreement,  or on any
Reimbursement  Obligation or other  obligation  then due to such Bank hereunder,
through the exercise of any right of set-off,  banker's  lien,  counterclaim  or
similar right,  or otherwise,  it shall  promptly  purchase from the other Banks
participations  in  the  Loans  made,  or  Reimbursement  Obligations  or  other
obligations  held,  by the other  Banks in such  amounts,  and make  such  other
adjustments  from  time to time as  shall be  equitable  to the end that all the
Banks shall share the benefit of such payment (net of any expenses  which may be
incurred by such Bank in  obtaining  or  preserving  such  benefit)  pro rata in
accordance with the unpaid principal and interest on the Obligations then due to
each of them (provided,  however, that the foregoing shall not apply to payments
of Competitive Loans made prior to the termination of the Commitments  following
the  occurrence  of an Event of  Default).  To such end all the Banks shall make
appropriate  adjustments among themselves (by the resale of participations  sold
or  otherwise) if such payment is rescinded or must  otherwise be restored.  The
Company agrees,  to the fullest extent it may effectively do so under applicable
law,  that  any  Bank so  purchasing  a  participation  in the  Loans  made,  or
Reimbursement Obligations or other obligations held, by other Banks may exercise
all rights of  set-off,  bankers'  lien,  counterclaim  or similar  rights  with
respect to such  participation  as fully as if such Bank were a direct holder of
Loans and  Reimbursement  Obligations or other obligations in the amount of such
participation.  Nothing  contained herein shall require any Bank to exercise any
such  right or shall  affect the right of any Bank to  exercise,  and retain the
benefits of exercising, any such right with respect to any other Indebtedness or
obligation of the Company.



                                       38

<PAGE>



         Section 6.        Yield Protection and Illegality.

         6.1        Additional Costs.

         (a) Subject to Section 13.6, the Company shall pay to Agent,  on demand
for the  account  of each Bank from time to time such  amounts  as such Bank may
determine to be necessary to compensate  it for any costs  incurred by such Bank
which such Bank determines are  attributable to its making or maintaining of any
Eurodollar Loan or any Competitive  Loan hereunder or its obligation to make any
such Loan  hereunder,  or any  reduction in any amount  receivable  by such Bank
hereunder in respect of any of such Loans or such obligation  (such increases in
costs and  reductions  in amounts  receivable  being herein  called  "Additional
Costs"), in each case resulting from any Regulatory Change which:

                    (i) subjects  such Bank (or makes it apparent that such Bank
is subject) to any tax (including  without limitation any United States interest
equalization tax), levy, impost, duty, charge or fee (collectively, "Taxes"), or
any deduction or withholding  for any Taxes on or from the payment due under any
Eurodollar  Loan or any Competitive  Loan or other amounts due hereunder,  other
than  income  and  franchise  taxes  of each  jurisdiction  (or any  subdivision
thereof) in which such Bank has an office or its Applicable Lending Office; or

                    (ii) changes the basis of taxation of any amounts payable to
such Bank  under  this  Agreement  or its Notes in  respect of any of such Loans
(other than changes which affect taxes measured by or imposed on the overall net
income or franchise  taxes of such Bank or of its Applicable  Lending Office for
any of such Loans by each  jurisdiction  (or any  subdivision  thereof) in which
such Bank has an office or such Applicable Lending Office); or

                    (iii)  imposes or modifies or increases or deems  applicable
any  reserve,  special  deposit  or  similar  requirements  (including,  without
limitation,  any such  requirement  imposed  by the  Board of  Governors  of the
Federal Reserve System) relating to any extensions of credit or other assets of,
or any deposits  with or other  liabilities  of, such Bank or loans made by such
Bank, or against any other funds, obligations or other property owned or held by
such  Bank  (including  any of such  Loans or any  deposits  referred  to in the
definition  of  "Eurodollar  Base Rate" in  Section  1.1  hereof)  and such Bank
actually incurs such additional costs.

Each Bank (if so  requested  by the  Company  through  Agent)  will  designate a
different  available  Applicable  Lending Office for the Eurodollar Loans or the
Competitive  Loans of such Bank or take such  other  action as the  Company  may
request if such  designation  or action  will avoid the need for,  or reduce the
amount of,  such  compensation  and will not,  in the sole  opinion of such Bank
exercised in good faith,  be  disadvantageous  to such Bank  (provided that such
Bank shall have no obligation so to designate an Applicable  Lending  Office for
Eurodollar  Loans  located  in the  United  States of  America).  Each Bank will
furnish the Company with a statement setting forth the


                                       39

<PAGE>



basis  and  amount of each  request  by such Bank for  compensation  under  this
Section 6.1(a);  subject to Section 6.8, such  certificate  shall be conclusive,
absent  manifest error,  and may be prepared using any reasonable  averaging and
attribution methods.

         (b) Without  limiting the effect of the  foregoing  provisions  of this
Section 6.1, in the event that,  by reason of any  Regulatory  Change,  any Bank
either (i) incurs  Additional  Costs based on or measured by the excess  above a
specified level of the amount of a category of deposits or other  liabilities of
such Bank which  includes  deposits by reference  to which the interest  rate on
Eurodollar  Loans is determined  as provided in this  Agreement or a category of
extensions  of credit or other  assets of such Bank  which  includes  Eurodollar
Loans or Competitive Loans or (ii) becomes subject to restrictions on the amount
of such a category of  liabilities  or assets which it may hold,  then,  if such
Bank so elects by notice to the Company (with a copy to Agent),  the  obligation
of such Bank to make Eurodollar Loans or Competitive  Loans, as the case may be,
hereunder shall be suspended until the date such Regulatory  Change ceases to be
in  effect  (in  which  case the  provisions  of  Section  6.4  hereof  shall be
applicable).

         (c) Good faith  determinations and allocations by any Bank for purposes
of this  Section  6.1 of the  effect  of any  Regulatory  Change on its costs of
maintaining its  obligations to make Loans or of making or maintaining  Loans or
on amounts  receivable by it in respect of Loans, and of the additional  amounts
required to compensate  such Bank in respect of any Additional  Costs,  shall be
conclusive, absent manifest error.

         (d) The Company's  obligation to pay Additional  Costs and compensation
with regard to each  Eurodollar  Loan and each  Competitive  Loan shall  survive
termination of this Agreement.

         6.2        Limitation  on  Types  of  Loans.  Anything  herein  to  the
contrary notwithstanding, if, with respect to any Eurodollar Loans:

         (a)  Agent  determines  in good  faith  (which  determination  shall be
conclusive) that quotations of interest rates for the relevant deposits referred
to in the  definition  of  "Eurodollar  Base Rate" in Section 1.1 hereof are not
being  provided  by the  Reference  Banks  in the  relevant  amounts  or for the
relevant  maturities for purposes of  determining  the rate of interest for such
Loans for Interest Periods therefor as provided in this Agreement; or

         (b) the Majority  Banks  determine  in good faith (which  determination
shall be  conclusive)  and notify  Agent  that the  relevant  rates of  interest
referred to in the  definition of  "Eurodollar  Base Rate" in Section 1.1 hereof
upon  the  basis of  which  the  rates of  interest  for  such  Loans  are to be
determined  do not  accurately  reflect  the  cost to such  Banks of  making  or
maintaining such Loans for Interest Periods therefor; or



                                       40

<PAGE>



         (c)  Agent  determines  in good  faith  (which  determination  shall be
conclusive)  that by reason of  circumstances  affecting  the  interbank  Dollar
market  generally,  deposits in United States dollars in the relevant  interbank
Dollar market are not being offered for the applicable Interest Period and in an
amount equal to the amount of the Eurodollar Loan requested by the Company; then
Agent shall promptly notify the Company and each Bank thereof, and, so  long  as
such condition  remains in effect,  the Banks shall  be  under  no obligation to
make  Eurodollar  Loans (but shall maintain until the end of the Interest Period
then in effect the Eurodollar Loans then outstanding).

         6.3 Illegality.  Notwithstanding  any other provision of this Agreement
to the  contrary,  if (x) by  reason of the  adoption  of any  applicable  Legal
Requirement  or  any  change  in  any  applicable  Legal  Requirement  or in the
interpretation  or  administration  thereof  by any  Governmental  Authority  or
compliance by any Bank with any request or directive  (whether or not having the
force  of law)  of any  central  bank or  other  Governmental  Authority  or (y)
circumstances  affecting the relevant interbank Dollar market or the position of
a Bank therein shall at any time make it unlawful or  impracticable  in the sole
discretion  of a Bank  exercised  in good faith for such Bank or its  Applicable
Lending  Office  to (a)  honor  its  obligation  to  make  Eurodollar  Loans  or
Competitive  Loans  hereunder,  or (b) maintain  Eurodollar Loans or Competitive
Loans  hereunder,  then such Bank  shall  promptly  notify the  Company  thereof
through Agent and such Bank's obligation to make or maintain Eurodollar Loans or
Competitive  Loans, as the case may be,  hereunder shall be suspended until such
time as such Bank may again make and maintain  Eurodollar  Loans or  Competitive
Loans,  as the case may be (in which case the  provisions  of Section 6.4 hereof
shall be  applicable).  Before giving such notice  pursuant to this Section 6.3,
such Bank will designate a different available Applicable Lending Office for the
Eurodollar  Loans or the Competitive  Loans, as the case may be, of such Bank or
take such other action as the Company may request if such  designation or action
will avoid the need to suspend such Bank's  obligation to make Eurodollar  Loans
or Competitive  Loans,  as the case may be,  hereunder and will not, in the sole
opinion of such Bank exercised in good faith,  be  disadvantageous  to such Bank
(provided, that such Bank shall have no obligation so to designate an Applicable
Lending Office for Eurodollar Loans located in the United States of America).

         6.4 Substitute Alternate Base Rate Loans. If the obligation of any Bank
to make or maintain  Eurodollar Loans or Competitive  Loans, as the case may be,
shall be suspended  pursuant to Section 6.1, 6.2 or 6.3 hereof,  all Loans which
would otherwise be made by such Bank as Eurodollar  Loans or Competitive  Loans,
as the case may be, shall be made instead as Alternate  Base Rate Loans (and, if
an event  referred to in Section 6.1(b) or 6.3 hereof has occurred and such Bank
so requests by notice to the Company with a copy to Agent,  each Eurodollar Loan
or each  Competitive  Loan,  as the case may be, of such  Bank then  outstanding
shall be  automatically  converted  into an Alternate Base Rate Loan on the date
specified by such Bank in such notice) and, to the extent that Eurodollar  Loans
or Competitive Loans, as the case may be, are so made as (or


                                       41

<PAGE>



converted into) Alternate Base Rate Loans, all payments of principal which would
otherwise be applied to such Eurodollar Loans or such Competitive  Loans, as the
case may be, shall be applied instead to such Alternate Base Rate Loans.

         6.5 Compensation. Subject to Section 13.6 hereof, the Company shall pay
to Agent for the  account  of each Bank,  within  four (4)  Business  Days after
demand  therefor by such Bank through Agent,  such amount or amounts as shall be
sufficient  (in the  reasonable  opinion of such Bank) to  compensate it for any
loss, cost or expense actually  incurred by it (exclusive of any lost profits or
opportunity costs) as a result of:

         (a) any payment,  prepayment or  conversion  of a Eurodollar  Loan or a
Competitive  Loan  made by such  Bank on a date  other  than  the last day of an
Interest Period for such Loan; or

         (b) any  failure  by the  Company  to  borrow  a  Eurodollar  Loan or a
Competitive  Loan to be  made  by such  Bank  on the  date  for  such  borrowing
specified in the relevant  notice of borrowing under Section 5.5 or Section 2.10
hereof;  such compensation to include,  without limitation,  any loss or expense
actually incurred (exclusive of any lost profits or opportunity costs) by reason
of the liquidation  or  reemployment of  deposits or other funds acquired by the
applicable  Bank to fund or maintain  its share of any Loan.  Subject to Section
6.8, each  determination  of the amount of such  compensation by a Bank shall be
conclusive and binding,  absent  manifest  error,  and may be computed using any
reasonable  averaging and  attribution  method.  No costs shall be payable under
this  Section  solely  by  reason  of the  conversion  of  loans  designated  as
"Eurodollar  Loans" under that certain  Amended and  Restated  Credit  Agreement
referred to in Section 13.15 hereof into the Existing Competitive Loans.

         6.6 Additional Costs in Respect of Letters of Credit. If as a result of
any Regulatory Change there shall be imposed,  modified or deemed applicable any
tax, reserve,  special deposit or similar requirement against or with respect to
or measured by reference to Letters of Credit  issued or to be issued  hereunder
or participations in such Letters of Credit, and the result shall be to increase
the cost to any Bank of  issuing  or  maintaining  any  Letter  of Credit or any
participation  therein, or reduce any amount receivable by any Bank hereunder in
respect of any Letter of Credit or any participation  therein (which increase in
cost,  or  reduction  in amount  receivable,  shall be the result of such Bank's
reasonable allocation of the aggregate of such increases or reductions resulting
from such event),  then such Bank shall notify the Company  through  Agent,  and
upon demand therefor by such Bank through Agent, the Company (subject to Section
13.6  hereof)  shall pay to such Bank,  from time to time as  specified  by such
Bank, such additional amounts as shall be sufficient to compensate such Bank for
such increased costs or reductions in amount. Before making such demand pursuant
to this Section 6.6, such Bank will designate a different  available  Applicable
Lending  Office for the Letter of Credit of such Bank or take such other  action
as the


                                       42

<PAGE>



Company may request,  if such  designation or action will avoid the need for, or
reduce the amount of, such  compensation  and will not,  in the sole  opinion of
such Bank exercised in good faith, be  disadvantageous to such Bank. A statement
as to such  increased  costs or  reductions  in amount  incurred  by such  Bank,
submitted  by such Bank to the  Company,  shall be  conclusive  as to the amount
thereof, absent manifest error.

         6.7  Capital  Adequacy.  If  any  Bank  shall  have  determined  that a
Regulatory   Change   resulting  in  the  adoption  after  the  date  hereof  or
effectiveness after the date hereof (whether or not previously announced) of any
applicable law, rule,  regulation or treaty regarding capital  adequacy,  or any
change  therein after the date hereof,  or any change in the  interpretation  or
administration  thereof  after  the date  hereof by any  Governmental  Authority
charged with the interpretation or administration  thereof, or compliance by any
Bank (or its Applicable  Lending Office) with any request or directive after the
date hereof regarding  capital adequacy (whether or not having the force of law)
of any such Governmental  Authority has or would have the effect of reducing the
rate  of  return  on  such  Bank's  capital  as a  consequence  of  such  Bank's
obligations  hereunder,  under the Loans made by it, under the Letters of Credit
and under the Notes held by it to a level  below that which such Bank could have
achieved but for such adoption,  change or compliance (taking into consideration
such Bank's  policies  with respect to capital  adequacy) by an amount deemed by
such  Bank to be  material,  then from time to time,  upon  satisfaction  of the
conditions  precedent  set forth in this Section  6.7,  upon demand by such Bank
(with a copy to Agent),  the Company  (subject to Section 13.6 hereof) shall pay
to such Bank such additional  amount or amounts as will compensate such Bank for
such reduction.  A certificate as to such amounts,  submitted to the Company and
Agent by such Bank,  setting  forth the basis for such Bank's  determination  of
such amounts,  shall  constitute a demand  therefor and shall be conclusive  and
binding for all  purposes,  absent  manifest  error.  The Company  shall pay the
amount shown as due on any such certificate  within four (4) Business Days after
delivery  of such  certificate.  Subject  to  Section  6.8,  in  preparing  such
certificate,  a Bank may employ such  assumptions  and  allocations of costs and
expenses as it shall in good faith deem  reasonable  and may use any  reasonable
averaging and attribution method.

         6.8        Limitation   on   Additional   Charges;   Substitute  Banks;
Non-Discrimination. Anything in this Section 6 notwithstanding:

         (a) the Company shall not be required to pay to any Bank  reimbursement
with regard to any costs or expenses,  unless such Bank  notifies the Company of
such costs or expenses within 90 days after the date paid or incurred;

         (b) none of the Banks shall be permitted to pass through to the Company
charges and costs under this Section 6 on a  discriminatory  basis (i.e.,  which
are not also  passed  through  by such  Bank to  other  customers  of such  Bank
similarly  situated  where such  customer is subject to documents  providing for
such pass through); and


                                       43

<PAGE>



         (c) if any Bank  elects to pass  through to the  Company  any  material
charge or cost under this Section 6 or elects to terminate the  availability  of
Eurodollar  Loans for any material  period of time,  the Company may,  within 60
days after the date of such event and so long as no Default  shall have occurred
and be continuing,  elect to terminate  such Bank as a party to this  Agreement;
provided that, concurrently with such termination the Company shall (i) if Agent
and each of the other Banks shall consent, pay that Bank all principal, interest
and fees and other amounts owed to such Bank through such date of termination or
(ii) have  arranged for another  financial  institution  approved by Agent (such
approval  not  to be  unreasonably  withheld)  as of  such  date,  to  become  a
substitute  Bank for all purposes under this Agreement in the manner provided in
Section 13.5;  provided  further that,  prior to substitution  for any Bank, the
Company shall have given written notice to Agent of such intention and the Banks
shall have the option, but no obligation,  for a period of 60 days after receipt
of such notice,  to increase their  Commitments in order to replace the affected
Bank in lieu of such substitution.

         Section 7.        Conditions Precedent.

         7.1 Initial Loans. The obligation of each Bank or any applicable Issuer
to make its initial  Loans after the date  hereof or issue or  participate  in a
Letter of Credit after the date hereof (if such Letter of Credit is issued prior
to the funding of the initial Loans after the date hereof)  hereunder is subject
to the following conditions  precedent,  each of which shall have been fulfilled
or waived to the satisfaction of the Majority Banks:

         (a)  Corporate  Action and Status.  Agent shall have  received from the
appropriate  Governmental  Authorities  certified  copies of the  Organizational
Documents (other than bylaws) of the Company and each of its  Subsidiaries,  and
evidence  satisfactory to Agent of all corporate  action taken by the Company or
any of its Subsidiaries  authorizing the execution,  delivery and performance of
the Loan Documents and all other documents related to this Agreement to which it
is a party  (including,  without  limitation,  a certificate of the secretary of
each  such  party  setting  forth  the  resolutions  of its  Board of  Directors
authorizing the  transactions  contemplated  thereby and attaching a copy of its
bylaws),  together with such  certificates  as may be appropriate to demonstrate
the  qualification  and good standing of and payment of taxes by the Company and
each of its Subsidiaries in each state in which such qualification is necessary.

         (b)  Incumbency.  The  Company  and  each  Relevant  Party  shall  have
delivered to Agent a certificate in respect of the name and signature of each of
the officers (i) who is  authorized  to sign on its behalf the  applicable  Loan
Documents  related to any Loan or the  issuance of any Letter of Credit and (ii)
who will, until replaced by another officer or officers duly authorized for that
purpose,  act as its  representative  for the purposes of signing  documents and
giving  notices  and other  communications  in  connection  with any Loan or the
issuance of any Letter of Credit.  Agent and each Bank may conclusively  rely on
such  certificates  until they receive notice in writing from the Company or the
appropriate Relevant Party to the contrary.


                                       44

<PAGE>



         (c) Notes.  Agent  shall  have  received  the appropriate  Notes of the
Company for each Bank, duly completed and executed.

         (d) Loan  Documents.  The Company and each other  Relevant  Party shall
have duly executed and delivered the other Loan Documents to which it is a party
(in such  number of copies as Agent  shall  have  requested)  and each such Loan
Document shall be in form  satisfactory to Agent.  Each such Loan Document shall
be in substantially  the form furnished to the Banks prior to their execution of
this Agreement, together with such changes therein as Agent may approve.

         (e) Fees and  Expenses.  The  Company  shall have paid to Agent for the
account of each Bank all  accrued and unpaid  commitment  fees and other fees in
the amounts  previously  agreed upon in writing among the Company and Agent; and
shall  have in  addition  paid to Agent all  amounts  payable  under the  letter
agreements  referred to Section 2.4(c) hereof and under Section 9.7 hereof on or
before the date of this Agreement.

         (f)  Opinions of Counsel.  Agent shall have  received (1) an opinion of
Vinson & Elkins L.L.P., counsel to the Company, in form and substance reasonably
satisfactory  to Agent and (2) such opinions of counsel to the Company and other
Relevant  Parties and special local  counsel of Agent as Agent shall  reasonably
request with respect to the Company and the Loan Documents.

         (g) Execution by Banks. Agent shall have received  counterparts of this
Agreement  executed and  delivered by or on behalf of each of the Banks or Agent
shall have received evidence satisfactory to it of the execution and delivery by
each of the Banks of a counterpart hereof.

         (h) Consents.  Agent shall have received  evidence  satisfactory  to it
that, except as disclosed in the Disclosure Statement,  all material consents of
each  Governmental  Authority  and of each  other  Person,  if  any,  reasonably
required in connection  with (a) the Loans and the Letters of Credit and (b) the
execution,  delivery  and  performance  of this  Agreement  and the  other  Loan
Documents have been satisfactorily obtained.

         (i)  Amendment to  Intercreditor  Agreement.  Agent shall have received
counterparts of the Second Amendment to Intercreditor  Agreement  referred to in
the definition of  "Intercreditor  Agreement" in Section 1.1 hereof executed and
delivered  by or on behalf  of each of the  Company  and by the  "Administrative
Agent"  under the  Canadian  Facility  or Agent  shall  have  received  evidence
satisfactory  to it of the  execution  and  delivery  by each  such  Person of a
counterpart of such Second Amendment to Intercreditor Agreement.

         (j)  Canadian Facility.  Agent  shall have received counterparts of the
Credit Agreement referred to in the definition of "Canadian Facility" in Section
1.1 hereof executed and  delivered by  or  on  behalf  of each of Seagull Energy
Canada Ltd., The Chase Manhattan Bank of


                                       45

<PAGE>



Canada,  as Arranger and as Agent, The Bank of Nova Scotia,  as Paying Agent and
as Co-Agent,  Canadian Imperial Bank of Commerce, as Co-Agent, and certain banks
parties thereto or Agent shall have received evidence  satisfactory to it of the
execution  and  delivery  by each such  Person of a  counterpart  of such Credit
Agreement.

         (k)  Other Documents.  Agent  shall have received  such other documents
consistent  with  the  terms of  this Agreement and relating to the transactions
contemplated hereby as Agent may reasonably request.

         All provisions and payments required by this Section 7.1 are subject to
the provisions of Section 13.6.

         7.2 Initial and  Subsequent  Loans.  The obligation of each Bank or any
applicable Issuer to make any Loan (including,  without limitation,  its initial
Loan) to be made by it  hereunder  or to issue or  participate  in any Letter of
Credit is subject to the  additional  conditions  precedent that (i) Agent shall
have received a Request for Extension of Credit and such other certifications as
Agent may reasonably require, (ii) in the case of Competitive Loans, the Company
shall have complied  with the  provisions of Section 2.10 hereof and (iii) as of
the date of such Loan or such issuance, and after giving effect thereto:

         (a) no Default shall have occurred and be continuing;

         (b) except  for facts  timely  disclosed  to Agent from time to time in
writing,  which facts (i) are not materially more adverse to the Company and its
Subsidiaries,  (ii) do not  materially  decrease  the  ability  of the  Banks to
collect the  Obligations as and when due and payable and (iii) do not materially
increase the  liability of Agent or any of the Banks,  in each case  compared to
those facts  existing on the date hereof and the material  details of which have
been set forth in the Financial  Statements delivered to Agent prior to the date
hereof or in the Disclosure  Statement,  and except for the  representations set
forth in the Loan Documents which, by their terms, are expressly (or by means of
similar phrasing) made as of the Effective Date or as of the date hereof, as the
case may be, only, the representations and warranties made in each Loan Document
shall be true and correct in all material  respects on and as of the date of the
making of such Loan or such issuance,  with the same force and effect as if made
on and as of such date;

         (c) the making of such Loan or the  issuance  of such  Letter of Credit
shall not violate any Legal Requirement applicable to any Bank.

         Each  Request  for  Extension  of Credit by the  Company  hereunder  or
request for issuance of a Letter of Credit shall  include a  representation  and
warranty  by the Company to the effect set forth in  Subsections  7.2(a) and (b)
(both as of the date of such notice and, unless the Company


                                       46

<PAGE>



otherwise notifies Agent prior to the date of such borrowing or issuance,  as of
the date of such borrowing or issuance).

         Section 8. Representations and Warranties. To induce the Banks to enter
into  this  Agreement  and to make the Loans  and  issue or  participate  in the
Letters of Credit, the Company represents and warrants (such representations and
warranties  to  survive  any  investigation  and the making of the Loans and the
issuance of the Letters of Credit) to the Banks and Agent as follows:

         8.1 Corporate Existence. The Company and each Subsidiary of the Company
are corporations duly  incorporated and organized,  legally existing and in good
standing  under  the laws of the  respective  jurisdictions  in  which  they are
incorporated,   and  are  duly   qualified  as  foreign   corporations   in  all
jurisdictions  wherein the  property  owned or the business  transacted  by them
makes  such  qualification  necessary  and  the  failure  to  so  qualify  could
reasonably be expected to result in a Material Adverse Effect.

         8.2 Corporate Power and  Authorization.  The Company is duly authorized
and  empowered  to create  and issue the  Notes;  each of the  Company  and each
Subsidiary of the Company is duly authorized and empowered to execute,  deliver,
and perform this  Agreement and the other Loan Documents to which it is a party;
and all corporate  action on the Company's  part  requisite for the due creation
and  issuance  of the  Notes and on the  Company's  part and on the part of each
Subsidiary of the Company for the due execution,  delivery,  and  performance of
this  Agreement  and the other Loan  Documents  to which each of the Company and
each such Subsidiary is a party has been duly and effectively taken.

         8.3 Binding Obligations.  This Agreement,  the Notes and the other Loan
Documents constitute legal, valid and binding obligations of the Company and its
Subsidiaries,  to the extent each is a party  thereto,  enforceable  against the
Company  and  its  Subsidiaries,  to the  extent  each is a  party  thereto,  in
accordance  with  their  respective  terms,  except  as  may be  limited  by any
bankruptcy,  insolvency,  moratorium or other similar laws or judicial decisions
affecting  creditors' rights generally and general  principles of equity whether
considered at law or in equity.

         8.4 No Legal  Bar or  Resultant  Lien.  The  Company's  and each of its
Subsidiaries' creation,  issuance,  execution,  delivery and performance of this
Agreement,  the Notes and the  other  Loan  Documents,  to the  extent  they are
parties   thereto,   do  not  and  will  not  violate  any   provisions  of  the
Organizational  Documents of the Company or any Subsidiary of the Company or any
Legal  Requirement  to which the  Company or any  Subsidiary  of the  Company is
subject or by which its property may be presently bound or encumbered, or result
in the creation or imposition of any Lien upon any  properties of the Company or
any Subsidiary of the Company, other than those permitted by this Agreement.



                                       47

<PAGE>



         8.5 No Consent.  Except as set forth in the Disclosure  Statement,  the
Company's  creation and issuance of the Notes and the  Company's and each of its
Subsidiaries' execution,  delivery, and performance of this Agreement, the Notes
and the other  Loan  Documents  to which  they are  parties  do not and will not
require the consent or approval of any Person  other than such  consents  and/or
approvals  obtained  by the  Company  contemporaneously  with  or  prior  to the
execution of this Agreement,  including,  without  limitation,  any Governmental
Authorities,  other than those consents the failure to obtain which could not be
reasonably expected to have a Material Adverse Effect.

         8.6 Financial  Condition.  The audited  consolidated  annual  financial
statements of the Company and its  Subsidiaries  for the year ended December 31,
1996 and the unaudited  consolidated interim financial statements of the Company
and its  Subsidiaries  for the quarter and  three-month  period  ended March 31,
1997,  which have been delivered to the Banks,  have been prepared in accordance
with  GAAP,  and  present  fairly the  financial  condition  and  results of the
operations of the Company and its  Subsidiaries for the period or periods stated
(subject only to normal year-end audit adjustments with respect to the unaudited
interim  statements).  No material adverse change,  either in any case or in the
aggregate,  has  occurred  since  March  31,  1997 in the  assets,  liabilities,
financial  condition,  business,  operations,  affairs or  circumstances  of the
Company and its Subsidiaries taken as a whole,  except as disclosed to the Banks
in the Disclosure  Statement.  Each Engineering Report and Company Report fairly
presents  the values and  prospective  performances  of the  property  described
therein and there are no statements or conclusions therein which were based upon
or  included  materially  misleading  information  or fail to take into  account
material information.

         8.7 Investments and Guaranties.  As of the Effective Date,  neither the
Company nor any Subsidiary of the Company had made  Investments in, advances to,
or Guarantees of, the obligations of any Person,  except as (a) disclosed to the
Banks in the Disclosure Statement or (b) not prohibited by applicable provisions
of Section 10.

         8.8 Liabilities and Litigation.  Neither the Company nor any Subsidiary
of the Company has any material (individually or in the aggregate)  liabilities,
direct or  contingent,  except as (a)  disclosed or referred to in the Financial
Statements,  (b)  disclosed  to the  Banks  in  the  Disclosure  Statement,  (c)
disclosed in a notice to Agent  pursuant to Section 9.11 with respect to such as
could  reasonably  be  expected  to have a  Material  Adverse  Effect or (d) not
prohibited  by  applicable  provisions of Section 10. Except as (a) described in
the Financial Statements, (b) otherwise disclosed to the Banks in the Disclosure
Statement,  (c)  disclosed  in a notice to Agent  pursuant to Section  9.11 with
respect to such as could  reasonably  be  expected  to have a  Material  Adverse
Effect  or (d) not  prohibited  by  applicable  provisions  of  Section  10,  no
litigation,  legal,  administrative or arbitral  proceeding,  investigation,  or
other  action of any  nature  exists or (to the  knowledge  of the  Company)  is
threatened  against or affecting  the Company or any  Subsidiary  of the Company
which could reasonably be expected to result in any judgment which could


                                       48

<PAGE>



reasonably be expected to have a Material Adverse Effect, or which in any manner
challenges  or may  challenge  or  draw  into  question  the  validity  of  this
Agreement,  the Notes or any other Loan  Document,  or enjoins or  threatens  to
enjoin or otherwise  restrain  any of the  transactions  contemplated  by any of
them.

         8.9 Taxes and  Governmental  Charges.  The Company and its Subsidiaries
have filed,  or obtained  extensions with respect to the filing of, all material
tax returns and reports  required to be filed and have paid all material  taxes,
assessments, fees and other governmental charges levied upon any of them or upon
any of  their  respective  properties  or  income  which  are due  and  payable,
including  interest and penalties,  or have provided  adequate  reserves for the
payment thereof.

         8.10 Title to Properties.  The Company and its  Subsidiaries  have good
and defensible  title to their respective  properties  included in the Borrowing
Base (including,  without limitation, all fee and leasehold interests), free and
clear of all Liens except (a) those referred to in the Financial Statements, (b)
as  disclosed  to the Banks in the  Disclosure  Statement or (c) as permitted by
Section 10.2.

         8.11 Defaults. Neither the Company nor any Subsidiary of the Company is
in  default,  which  default  could  reasonably  be  expected to have a Material
Adverse Effect, under any indenture, mortgage, deed of trust, agreement or other
instrument  to which the Company or any  Subsidiary of the Company is a party or
by which the Company or any  Subsidiary  of the  Company or the  property of the
Company or any  Subsidiary  of the Company is bound,  except as (a) disclosed to
the  Banks in the  Disclosure  Statement,  (b)  disclosed  in a notice  to Agent
pursuant to Section 9.11 with respect to such as could reasonably be expected to
have a Material  Adverse  Effect or (c)  specifically  permitted  by  applicable
provisions  of Section  10. No Default  under this  Agreement,  the Notes or any
other Loan Document has occurred and is continuing.

         8.12  Location of  Businesses  and  Offices.  Except to the extent that
Agent  has been  furnished  written  notice  to the  contrary  or of  additional
locations,  pursuant to Section 9.11, the Company's  principal place of business
and chief  executive  offices are located at the address stated on the signature
page hereof and the principal places of business and chief executive  offices of
each Subsidiary are described on Exhibit F hereto.

         8.13 Compliance with Law. Neither the Company nor any Subsidiary of the
Company (except as (a) disclosed to the Banks in the Disclosure  Statement,  (b)
disclosed in a notice to Agent  pursuant to Section 9.11 with respect to such as
could  reasonably  be  expected  to have a  Material  Adverse  Effect or (c) not
prohibited by applicable provisions of Section 10):

         (a)        is in violation of any Legal Requirement; or



                                       49

<PAGE>



         (b) has  failed to  obtain  any  license,  permit,  franchise  or other
governmental authorization necessary to the ownership of any of their respective
properties or the conduct of their respective business;

which  violation  or failure  could  reasonably  be  expected to have a Material
Adverse Effect.

         8.14 Margin  Stock.  None of the proceeds of the Notes will be used for
the purpose of, and  neither  the Company nor any  Subsidiary  of the Company is
engaged in the business of extending credit for the purpose of (a) purchasing or
carrying any "margin stock" as defined in Regulation U of the Board of Governors
of the Federal  Reserve System (12 C.F.R.  Part 221) or (b) reducing or retiring
any  indebtedness  which was  originally  incurred to  purchase or carry  margin
stock,  if such  purpose  under  either (a) or (b) above would  constitute  this
transaction a "purpose  credit" within the meaning of said  Regulation U, or for
any other purpose which would  constitute this  transaction a "purpose  credit".
Neither the Company nor any Subsidiary of the Company is engaged principally, or
as one of its important activities,  in the business of extending credit for the
purpose of purchasing  or carrying  margin  stocks.  Neither the Company nor any
Subsidiary  of the Company nor any Person acting on behalf of the Company or any
Subsidiary  of the Company  has taken or will take any action  which might cause
the Notes or any of the Loan  Documents,  including this  Agreement,  to violate
Regulation  U or any other  regulation  of the Board of Governors of the Federal
Reserve System, or to violate any similar  provision of the Securities  Exchange
Act of 1934 or any rule or regulation under any such provision thereof.

         8.15  Subsidiaries.  The  Company has no Subsidiaries as of the date of
this Agreement except those shown in Exhibit F hereto.

         8.16  ERISA.  With  respect to each Plan,  the  Company  and each ERISA
Affiliate have fulfilled  their  obligations,  including  obligations  under the
minimum  funding  standards of ERISA and the Code,  and are in compliance in all
material  respects with the provisions of ERISA and the Code. The Company has no
knowledge  of any event which could  result in a liability of the Company or any
ERISA Affiliate to the PBGC or a Plan (other than to make  contributions  in the
ordinary course).  Since the effective date of Title IV of ERISA, there have not
been any nor are there now  existing any events or  conditions  that would cause
the Lien  provided  under Section 4068 of ERISA to attach to any property of the
Company or any ERISA Affiliate.  There are no Unfunded  Liabilities with respect
to any Plan other than those specifically described in the certificate delivered
in accordance with Section 7.1(i). No "prohibited transaction" has occurred with
respect to any Plan.

         8.17  Investment  Company  Act.  Neither  the  Company  nor  any of its
Subsidiaries  is an  investment  company  within the  meaning of the  Investment
Company Act of 1940, as amended,  or,  directly or indirectly,  controlled by or
acting  on behalf of any  Person  which is an  investment  company,  within  the
meaning of said Act.


                                       50

<PAGE>



         8.18 Public Utility Holding Company Act. Neither the Company nor any of
its  Subsidiaries  (i) is subject to regulation under the Public Utility Holding
Company Act of 1935, as amended (the "PUHC Act"),  except as to Section  9(a)(2)
thereof (15  U.S.C.A.  ss.79(i)(a)(2)),  or (ii) is in  violation  of any of the
provisions, rules, regulations or orders of or under the PUHC Act. Further, none
of  the  transactions  contemplated  under  this  Agreement,  including  without
limitation,  the making of the Loans and the  issuance of the Letters of Credit,
shall  cause  or  constitute  a  violation  of  any of  the  provisions,  rules,
regulations  or orders of or under the PUHC Act and the PUHC Act does not in any
manner impair the legality, validity or enforceability of the Notes. The Company
has  duly  filed  with  the  Securities  and  Exchange   Commission  good  faith
applications  (each an "Application")  under Section 2(a)(8) of the PUHC Act (15
U.S.C.A.  ss.79(b)(a)(8)) for a declaration of non-subsidiary status pursuant to
such   Section   2(a)(8)   with  respect  to  each  Person  (each  a  "Specified
Shareholder")  which  owns,  controls  or holds with power to vote,  directly or
indirectly,  a sufficient quantity of the voting securities of the Company to be
construed  as a "holding  company",  as such term is defined in the PUHC Act, in
respect of the Company.  All of the information  contained in such Applications,
as amended,  was true as of the most recent  filing  date with  respect  thereto
(provided that the Company may,  unless it has actual  current  knowledge to the
contrary,  rely solely  upon  written  information  furnished  by any  Specified
Shareholder  with  respect  to  background   information   about  the  Specified
Shareholder and the nature of the ownership by such Specified Shareholder or its
Affiliates of the voting securities of the Company), and the Company knows of no
reason why each such  Application,  if acted upon by the Securities and Exchange
Commission,  would  not be  approved.  True  and  correct  copies  of each  such
Application and any amendments  thereto, as filed, have been furnished to Agent.
The Company has not received any written notice from the Securities and Exchange
Commission  with  respect to any such  Application  other than as  disclosed  in
writing to Agent.

         8.19  Environmental  Matters.  Except as  disclosed  in the  Disclosure
Statement,  (i) the Company and it Subsidiaries  have obtained and maintained in
effect all  Environmental  Permits  (or has  initiated  the  necessary  steps to
transfer the  Environmental  Permits into its name), the failure to obtain which
could reasonably be expected to have a Material Adverse Effect, (ii) the Company
and its Subsidiaries and their properties,  assets, business and operations have
been and are in compliance with all applicable Requirements of Environmental Law
and  Environmental  Permits  failure to comply  with which could  reasonably  be
expected  to  have  a  Material  Adverse  Effect,  (iii)  the  Company  and  its
Subsidiaries  and their  properties,  assets,  business and  operations  are not
subject to any (A)  Environmental  Claims or (B) Environmental  Liabilities,  in
either case direct or contingent,  and whether known or unknown, arising from or
based upon any act,  omission,  event,  condition or  circumstance  occurring or
existing on or prior to the date hereof  which could  reasonably  be expected to
have a Material Adverse Effect,  and (iv) no Responsible  Officer of the Company
or any of its  Subsidiaries  has received any notice of any violation or alleged
violation of any  Requirements of Environmental  Law or Environmental  Permit or
any Environmental Claim in connection with its assets,  properties,  business or
operations which could reasonably be expected to have a Material Adverse Effect.
The liability (including without limitation any


                                       51

<PAGE>



Environmental Liability and any other damage to persons or property), if any, of
the Company and its Subsidiaries and with respect to their  properties,  assets,
business and operations which is reasonably expected to arise in connection with
Requirements of Environmental  Laws currently in effect and other  environmental
matters presently known by a Responsible  Officer of the Company will not have a
Material  Adverse  Effect.  No  Responsible  Officer of the Company knows of any
event or condition with respect to Environmental  Matters with respect to any of
its  properties  or  the  properties  of any of  its  Subsidiaries  which  could
reasonably be expected to have a Material  Adverse Effect.  For purposes of this
Section 8.19,  "Environmental  Matters" shall mean matters relating to pollution
or protection of the  environment,  including,  without  limitation,  emissions,
discharges,  releases or threatened  releases of Hazardous  Substances  into the
environment (including, without limitation, ambient air, surface water or ground
water, or land surface or subsurface), or otherwise relating to the manufacture,
processing,  distribution,  use,  treatment,  storage,  disposal,  transport  or
handling of Hazardous Substances.

         8.20  Claims  and  Liabilities.  Except  as  disclosed  to the Banks in
writing,  neither  the  Company  nor any of its  Subsidiaries  has  accrued  any
liabilities under gas purchase  contracts for gas not taken, but for which it is
liable to pay if not made up and  which,  if not  paid,  would  have a  Material
Adverse  Effect.  Except as disclosed  to the Banks in writing,  no claims exist
against the  Company or its  Subsidiaries  for gas  imbalances  which  claims if
adversely  determined  would have a Material  Adverse  Effect.  No  purchaser of
product supplied by the Company or any of its Subsidiaries has any claim against
the  Company or any of its  Subsidiaries  for  product  paid for,  but for which
delivery was not taken as and when paid for, which claim if adversely determined
would have a Material Adverse Effect.

         8.21  Solvency.  Neither   the   Company   nor   the  Company  and  its
Subsidiaries, on a  consolidated basis, is "insolvent", as such term is used and
defined  in  (i)  the  Bankruptcy Code and (ii)  the  Texas  Uniform  Fraudulent
Transfer Act, Tex. Bus. & Com. Code Ann. ss.24.001 et seq.

         Section 9.  Affirmative  Covenants.  A deviation from the provisions of
this  Section 9 will not  constitute  a Default  under  this  Agreement  if such
deviation is consented  to in writing by the Majority  Banks.  Without the prior
written  consent of the Majority  Banks,  the Company  agrees with the Banks and
Agent that, so long as any of the  Commitments is in effect and until payment in
full of all Loans hereunder,  the termination or expiry of all Letters of Credit
and payment in full of Letter of Credit  Liabilities,  all interest  thereon and
all other amounts payable by the Company hereunder:

         9.1 Financial Statements and Reports. The Company will promptly furnish
to any Bank  from time to time  upon  request  such  information  regarding  the
business and affairs and financial condition of the Company and its Subsidiaries
as such Bank may reasonably  request,  and will furnish to Agent and each of the
Banks:



                                       52

<PAGE>



         (a) Annual Reports - promptly after becoming available and in any event
within 100 days after the close of each fiscal year of the Company:

                    (i)    the audited consolidated balance sheet of the Company
                           and its Subsidiaries as of the end of such year;

                    (ii)   the audited consolidated statement of earnings of the
                           Company and its Subsidiaries for such year;

                    (iii)  the  audited  consolidated statement of cash flows of
                           the Company and its Subsidiaries for such year;

                    (iv)   a report prepared by a petroleum engineer, who may be
                           an  employee  of the  Company  or  its  Subsidiaries,
                           setting forth the historical  monthly production data
                           for Hydrocarbons produced and sold by the Company and
                           its Subsidiaries for such year;

setting forth in each case in comparative form the corresponding figures for the
preceding  fiscal year,  and, in the case of the audited  Financial  Statements,
audited and  accompanied  by the related  opinion of KPMG Peat  Marwick or other
independent   certified  public  accountants  of  recognized  national  standing
acceptable  to the Majority  Banks,  which opinion shall state that such audited
balance  sheets  and  statements  have been  prepared  in  accordance  with GAAP
consistently  followed  throughout  the period  indicated and fairly present the
consolidated  financial  condition and results of  operations of the  applicable
Persons as at the end of, and for, such fiscal year; and

         (b) Quarterly Reports - as soon as available and in any event within 50
days after the end of each of the first three  quarterly  periods in each fiscal
year of the Company:

                    (i)    the  unaudited  consolidated  balance  sheet  of  the
                           Company and its Subsidiaries  as  of the  end of such
                           quarter;

                    (ii)   the unaudited  consolidated  statement of earnings of
                           the Company and its Subsidiaries for such quarter and
                           for the period from the  beginning of the fiscal year
                           to the close of such quarter;

                    (iii)  the unaudited consolidated statement of cash flows of
                           the Company and its Subsidiaries for such quarter and
                           for the period from the  beginning of the fiscal year
                           to the close of such quarter;

                    (iv)   a report prepared by a petroleum engineer, who may be
                           an  employee  of the  Company  or  its  Subsidiaries,
                           setting forth the historical monthly production


                                       53

<PAGE>



                           data  for  Hydrocarbons  produced  and  sold  by  the
                           Company and its Subsidiaries for such quarter; all of
                           items   (i)   through   (iv)   above   prepared    on
                           substantially the same accounting basis as the annual
                           reports described in Subsection  9.1(a),  subject  to
                           normal  changes  resulting from year-end adjustments;
                           and

         (c) Company Report - promptly after becoming available and in any event
on or before September 1 of each year, a Company Report; and

         (d) Other Bank  Requirements - at such time as the same are required to
be furnished to other lenders under other  financing  arrangements  to which the
Company or any of its Subsidiaries may be a party or be bound from time to time,
a copy of any report, certificate, affidavit or other information required to be
furnished to any such lender; and

         (e) SEC and Other  Reports -  promptly  upon  their  becoming  publicly
available,  one copy of each financial statement,  report,  notice or definitive
proxy statement sent by the Company or any Subsidiary to shareholders generally,
and  of  each  regular  or  periodic  report  and  any  registration  statement,
prospectus or written  communication (other than transmittal letters) in respect
thereof filed by the Company or any of its Subsidiaries with, or received by the
Company or any of its Subsidiaries in connection  therewith from, any securities
exchange or the Securities and Exchange Commission or any successor agency; and

         (f)  Engineering  Report and other  Component  Values - promptly  after
becoming  available  and in any  event  on or  before  March  15 of  each  year,
commencing with March 15, 1998, an Engineering Report.

         All of the balance sheets and other financial statements referred to in
this Section 9.1 will be in such detail as any Bank may  reasonably  request and
will conform to GAAP applied on a basis  consistent  with those of the Financial
Statements  as of December  31,  1996.  In  addition,  if GAAP shall change with
respect  to any  matter  relative  to  determination  of  compliance  with  this
Agreement, the Company will also provide financial information necessary for the
Banks to determine compliance with this Agreement.

         9.2        Officers' Certificates.

         (a) Concurrently with the furnishing of the annual financial statements
pursuant to Subsection 9.1(a),  commencing with the annual financial  statements
required  to be  delivered  in 1998,  the  Company  will  furnish or cause to be
furnished to Agent certificates of compliance, as follows:



                                       54

<PAGE>



                    (i)    a certificate  signed  by  the  principal   financial
                           officer of the Company in the form of Exhibit G; and

                    (ii)   a certificate from the independent public accountants
                           stating  that  their  audit  has  not  disclosed  the
                           existence  of  any  condition  which   constitutes  a
                           Default,   or  if  their  audit  has   disclosed  the
                           existence  of  any  such  condition,  specifying  the
                           nature and period of existence.

         (b)  Concurrently  with  the  furnishing  of  the  quarterly  financial
statements  pursuant to Subsection  9.1(b),  the Company will furnish to Agent a
principal financial officer's certificate in the form of Exhibit G.

         (c) Not later  than  concurrently  with the  furnishing  of any  annual
reports  pursuant  to Section  9.1(a) or  concurrently  with any  request by the
Company  for  a  Requested   Redetermination  (using  then  available  Financial
Statements)  and  within  ten  (10)  Business  Days  after  any  request  by the
Requesting Banks for a Requested Redetermination (using then available Financial
Statements), the Company will furnish to Agent a Borrowing Base Certificate.

         (d)  Concurrently  with the  furnishing  of any  Engineering  Report or
Company  Report,  the Company will furnish to Agent a  certificate  signed by an
appropriate officer of the Company and the applicable Relevant Party in the form
of Exhibit I.

         9.3  Taxes  and Other  Liens.  The  Company  will and will  cause  each
Subsidiary of the Company to pay and discharge  promptly all taxes,  assessments
and governmental  charges or levies imposed upon the Company or such Subsidiary,
or upon the income or any property of the Company or such Subsidiary, as well as
all claims of any kind (including claims for labor,  materials,  supplies,  rent
and  payment of proceeds  attributable  to  Hydrocarbon  production)  which,  if
unpaid,  might result in or become a Lien upon any or all of the property of the
Company or such Subsidiary; provided, however, that neither the Company nor such
Subsidiary  will be required to pay any such tax,  assessment,  charge,  levy or
claims if the  amount,  applicability  or validity  thereof  will  currently  be
contested in good faith by appropriate  proceedings  diligently conducted and if
the Company or such Subsidiary will have set up reserves therefor adequate under
GAAP.

         9.4  Maintenance.  Except as referred  to in Sections  8.1 and 8.13 and
except as  permitted  under  Section  10.5 the Company  will and will cause each
Subsidiary  of the  Company  to: (i)  maintain  its  corporate  existence;  (ii)
maintain  its rights and  franchises,  except for any mergers or  consolidations
otherwise  permitted by this  Agreement  and except to the extent  failure to so
maintain the same would not have a Material  Adverse  Effect;  (iii) observe and
comply (to the extent that any  failure  would have a Material  Adverse  Effect)
with all valid Legal Requirements  (including without limitation Requirements of
Environmental Law); and (iv)


                                       55

<PAGE>



maintain  (except to the extent failure to so maintain the same would not have a
Material  Adverse  Effect)  its  properties  (and any  properties  leased  by or
consigned to it or held under title  retention or conditional  sales  contracts)
consistent with the standards of a reasonably  prudent operator at all times and
make all repairs, replacements,  additions,  betterments and improvements to its
properties consistent with the standards of a reasonably prudent operator.

         9.5 Further Assurances. The Company will and will cause each Subsidiary
of the Company to cure  promptly any defects in the creation and issuance of the
Notes and the  execution  and  delivery of the Loan  Documents,  including  this
Agreement. The Company at its expense will promptly execute and deliver to Agent
upon request all such other and further  documents,  agreements and  instruments
(or cause any of its  Subsidiaries  to take such action) in  compliance  with or
accomplishment  of the  covenants  and  agreements  of the Company or any of its
Subsidiaries in the Loan Documents,  including this Agreement, or to correct any
omissions in the Loan Documents, or to make any recordings, to file any notices,
or obtain any  consents,  all as may be necessary or  appropriate  in connection
therewith.

         9.6  Performance  of  Obligations.  The  Company  will  pay  the  Notes
according to the reading,  tenor and effect thereof; and the Company will do and
perform every act and discharge all of the obligations  provided to be performed
and  discharged by the Company under this Agreement and the other Loan Documents
at the  time  or  times  and in the  manner  specified,  and  cause  each of its
Subsidiaries  to take  such  action  with  respect  to their  obligations  to be
performed and discharged under the Loan Documents to which they respectively are
parties.

         9.7 Reimbursement of Expenses.  Whether or not any Loan is ever made or
any Letter of Credit is ever  issued,  the  Company  agrees to pay or  reimburse
Agent for paying the reasonable fees and expenses of Liddell, Sapp, Zivley, Hill
& LaBoon,  L.L.P.,  special counsel to Agent,  together with the reasonable fees
and  expenses  of  local  counsel  engaged  by  Agent,  in  connection  with the
negotiation  of the terms and  structure of the  Obligations,  the  preparation,
execution and delivery of this  Agreement  and the other Loan  Documents and the
making of the Loans and the issuance of Letters of Credit hereunder,  as well as
any modification, supplement or waiver of any of the terms of this Agreement and
the other Loan  Documents.  The Company  will  promptly  upon request and in any
event within 30 days from the date of receipt by the Company of a copy of a bill
for  such  amounts,  reimburse  any  Bank or Agent  for all  amounts  reasonably
expended,  advanced or incurred by such Bank or Agent to satisfy any  obligation
of the Company under this Agreement or any other Loan  Document,  to protect the
properties  or business  of the Company or any  Subsidiary  of the  Company,  to
collect  the  Obligations,  or to enforce the rights of such Bank or Agent under
this  Agreement or any other Loan Document,  which amounts will include  without
limitation all court costs,  attorneys' fees (but not including  allocated costs
of in-house  counsel),  any  engineering  fees and  expenses,  fees of auditors,
accountants  and  appraisers,   investigation  expenses,  all  transfer,  stamp,
documentary or similar taxes,  assessments or charges levied by any governmental
or  revenue  authority  in  respect  of any of the Loan  Documents  or any other
document


                                       56

<PAGE>



referred to therein, all costs, expenses,  taxes,  assessments and other charges
incurred in connection with any filing, registration, recording or perfection of
any lien  contemplated by any of the Loan Documents or any document  referred to
therein, fees and expenses incurred in connection with such Bank's participation
as a member of a creditors'  committee in a case commenced  under the Bankruptcy
Code or other  similar law of the United States or any state  thereof,  fees and
expenses  incurred in connection  with lifting the automatic stay  prescribed in
ss.362  Title 11 of the United  States Code,  and fees and expenses  incurred in
connection  with any action  pursuant to ss.1129  Title 11 of the United  States
Code and all other  customary  out-of-pocket  expenses  incurred by such Bank or
Agent in  connection  with  such  matters,  together  with  interest  after  the
expiration  of the 30-day  period  stated  above in this  Section if no Event of
Default has occurred and is  continuing,  or from the date of the request to the
Company if an Event of Default has occurred and is continuing, at either (i) the
Post-Default  Rate on each such amount until the date of  reimbursement  to such
Bank or  Agent,  or (ii) if no  Event  of  Default  will  have  occurred  and be
continuing,  the  Alternate  Base Rate plus the  highest  Applicable  Margin for
Alternate  Base Rate Loans (not to exceed the Highest  Lawful Rate) on each such
amount until the date of the Company's  receipt of written  demand or request by
such  Bank or  Agent  for the  reimbursement  of  same,  and  thereafter  at the
applicable  Post-Default  Rate until the date of  reimbursement  to such Bank or
Agent.  The  obligations of the Company under this Section are  compensatory  in
nature, shall be deemed liquidated as to amount upon receipt by the Company of a
copy of any  invoice  therefor,  and will  survive  the  non-assumption  of this
Agreement in a case commenced  under the Bankruptcy Code or other similar law of
the United States or any state  thereof,  and will remain binding on the Company
and any trustee,  receiver,  or liquidator of the Company  appointed in any such
case.

         9.8 Insurance.  The Company and its  Subsidiaries  will maintain,  with
financially  sound and  reputable  insurers,  insurance  with  respect  to their
respective properties and business against such liabilities,  casualties,  risks
and  contingencies  and in such types and amounts as is customary in the case of
corporations  engaged in the same or similar businesses and similarly  situated.
Upon the request of Agent acting at the instruction of the Majority  Banks,  the
Company  will  furnish  or cause to be  furnished  to Agent  from time to time a
summary of the insurance  coverage of the Company and its  Subsidiaries  in form
and substance  satisfactory to the Majority Banks in their reasonable  judgment,
and if requested will furnish Agent copies of the applicable  policies.  Subject
to the terms of  Section 3 hereof,  in the case of any fire,  accident  or other
casualty  causing loss or damage to any  properties of the Company or any of its
Subsidiaries,  the  proceeds  of such  policies  will be used (i) to  repair  or
replace the damaged property or (ii) to prepay the Obligations,  at the election
of the Company.

         9.9  Accounts  and  Records.  The Company will keep and will cause each
Subsidiary  of the  Company  to keep books of record and  account  which  fairly
reflect all dealings or transactions in relation to their respective  businesses
and activities,  in accordance with GAAP, which books of record and account will
be maintained, to the extent necessary to enable


                                       57

<PAGE>



compliance  with all  provisions  of this  Agreement,  separately  for each such
Subsidiary, the Company and any division of the Company.

         9.10 Rights of Inspection.  The Company will permit and will cause each
of its  Subsidiaries to permit any officer,  employee,  or agent of Agent or any
Bank to meet with the consultants who prepared any applicable Engineering Report
and to review such  Engineering  Report with such  consultants  and to visit and
inspect any of the  properties  of the Company or such  Subsidiary,  examine the
Company's or such  Subsidiary's  books of record and  accounts,  take copies and
extracts therefrom,  and discuss the affairs,  finances and accounts of the Bank
or such Subsidiary with the Company's or such Subsidiary's officers, accountants
and auditors,  all at such reasonable  times during normal business hours and as
often as Agent or such Bank may reasonably  desire,  and will assist in all such
matters.

         9.11 Notice of Certain  Events.  The Company will promptly notify Agent
(and Agent will then  notify all of the Banks) if a  Responsible  Officer of the
Company  learns of the  occurrence  of, or if the  Company  causes or intends to
cause, as the case may be:

                    (i) any event which  constitutes a Default,  together with a
detailed  statement by a  Responsible  Officer of the Company of the steps being
taken to cure the effect of such Default; or

                    (ii) the  receipt of any notice  from,  or the taking of any
other action by, the holder of any promissory note,  debenture or other evidence
of  indebtedness  of the  Company  or any  Subsidiary  of the  Company or of any
security (as defined in the  Securities  Act of 1933, as amended) of the Company
or any  Subsidiary  of the Company with respect to a claimed  default,  together
with a detailed statement by a Responsible Officer of the Company specifying the
notice  given or other action taken by such holder and the nature of the claimed
default and what action the Company or such  Subsidiary is taking or proposes to
take with respect thereto; or

                    (iii)  any  legal,   judicial  or   regulatory   proceedings
affecting the Company or any  Subsidiary of the Company or any of the properties
of the Company or any Subsidiary of the Company in which the amount  involved is
materially  adverse to the Company and its Subsidiaries taken as a whole, and is
not  covered  by  insurance  or which,  if  adversely  determined,  would have a
Material Adverse Effect; or

                    (iv) any dispute  between the Company or any  Subsidiary  of
the  Company  and any  Governmental  Authority  or any other  Person  which,  if
adversely  determined,  could  reasonably be expected to have a Material Adverse
Effect; or



                                       58

<PAGE>



                    (v) the  occurrence  of a default or event of default by the
Company or any  Subsidiary of the Company under any other  agreement to which it
is a party,  which default or event of default  could  reasonably be expected to
have a Material Adverse Effect; or

                    (vi)   any change in the accuracy of the representations and
warranties of the  Company  or  any  Subsidiary  contained  in this Agreement or
any other Loan Document; or

                    (vii) any material  violation or alleged material  violation
of  any  Requirements  of  Environmental  Law  or  Environmental  Permit  or any
Environmental Claim or any Environmental Liability; or

                    (viii) any tariff and rate cases and other material  reports
filed by the Company or any of its Subsidiaries with any Governmental  Authority
and any notice to the Company or any of its  Subsidiaries  from any Governmental
Authority concerning noncompliance with any applicable Legal Requirement; or

                    (ix)   the existence of any Borrowing Base Deficiency; or

                    (x)  within 10 days  after  the date on which a  Responsible
Officer of the Company has actual knowledge  thereof,  the receipt of any notice
by the Company or any of its  Subsidiaries of any claim of nonpayment of, or any
attempt to collect or  enforce,  accounts  payable of the  Company or any of its
Subsidiaries  exceeding,  in the  case of any one  account  payable  at one time
outstanding, $1,000,000 and in the case of all accounts payable in the aggregate
at any one time outstanding, $3,000,000; or

                    (xi) any  requirement  for the payment of all or any portion
of any  Indebtedness  of the  Company  or any of its  Subsidiaries  prior to the
stated maturity  thereof (whether by acceleration or otherwise) or as the result
of any failure to maintain or the reaching of any threshold  amount  provided in
any promissory note, bond, debenture, or other evidence of Indebtedness or under
any credit agreement, loan agreement, indenture or similar agreement executed in
connection with any of the foregoing; or

                    (xii) any notice from the Securities and Exchange Commission
with respect to any Application (as defined in Section 8.18 hereof).

         9.12 ERISA  Information  and  Compliance.  The  Company  will  promptly
furnish to Agent (i) immediately upon receipt,  a copy of any notice of complete
or partial withdrawal  liability under Title IV of ERISA and any notice from the
PBGC under Title IV of ERISA of an intent to  terminate  or appoint a trustee to
administer any Plan,  (ii) if requested by Agent,  acting on the  instruction of
the Majority  Banks,  promptly  after the filing  thereof with the United States
Secretary of Labor or the PBGC or the Internal Revenue  Service,  copies of each
annual and other report


                                       59

<PAGE>



with respect to each Plan or any trust  created  thereunder,  (iii)  immediately
upon becoming aware of the occurrence of any "reportable event", as such term is
defined in  Section  4043 of ERISA,  for which the  disclosure  requirements  of
Regulation  Section 2615.3  promulgated by the PBGC have not been waived,  or of
any  "prohibited  transaction",  as such term is defined in Section  4975 of the
Code, in connection  with any Plan or any trust  created  thereunder,  a written
notice signed by the President or the principal financial officer of the Company
or the applicable ERISA Affiliate specifying the nature thereof, what action the
Company or the  applicable  ERISA  Affiliate  is taking or proposes to take with
respect  thereto,  and, when known,  any action taken by the PBGC,  the Internal
Revenue Service or the Department of Labor with respect  thereto,  (iv) promptly
after the filing or receiving  thereof by the Company or any ERISA  Affiliate of
any notice of the  institution  of any  proceedings  or other  actions which may
result in the  termination  of any Plan,  and (v) each request for waiver of the
funding standards or extension of the amortization  periods required by Sections
303 and 304 of ERISA or Section  412 of the Code  promptly  after the request is
submitted  by the  Company  or any  ERISA  Affiliate  to  the  Secretary  of the
Treasury,  the Department of Labor or the Internal Revenue Service,  as the case
may be. To the extent required under applicable statutory funding  requirements,
the Company will fund, or will cause each ERISA  Affiliate to fund,  all current
service  pension  liabilities  as they are incurred  under the provisions of all
Plans from time to time in effect, and comply with all applicable  provisions of
ERISA, except to the extent that any such failure to comply could not reasonably
be expected to have a Material  Adverse  Effect.  The Company  covenants that it
shall and shall cause each ERISA  Affiliate  to (1) make  contributions  to each
Plan  in a  timely  manner  and in an  amount  sufficient  to  comply  with  the
contribution  obligations  under  such Plan and the  minimum  funding  standards
requirements  of ERISA;  (2) prepare and file in a timely manner all notices and
reports  required  under the terms of ERISA  including but not limited to annual
reports;  and (3) pay in a timely  manner all required  PBGC  premiums,  in each
case, to the extent failure to do so would have a Material Adverse Effect.

         Section 10. Negative Covenants. A deviation from the provisions of this
Section 10 will not  constitute a Default under this Agreement if such deviation
is consented to in writing by the Majority  Banks.  The Company  agrees with the
Banks and Agent that, so long as any of the  Commitments  is in effect and until
payment in full of all Loans hereunder, the termination or expiry of all Letters
of Credit and  payment  in full of Letter of Credit  Liabilities,  all  interest
thereon and all amounts payable by the Company hereunder:

         10.1 Debts, Guaranties and Other Obligations.  The Company will not and
will not  permit  any of its  Subsidiaries  (other  than APC) to incur,  create,
assume or in any  manner  become or be liable  in  respect  of any  Indebtedness
(including obligations for the payment of rentals); and the Company will not and
will not  permit  any of its  Subsidiaries  (other  than  APC) to  Guarantee  or
otherwise  in any way  become or be  responsible  for  obligations  of any other
Person, whether by agreement to purchase the Indebtedness of any other Person or
agreement for the  furnishing of funds to any other Person  through the purchase
or lease of goods, supplies or services (or by


                                       60

<PAGE>



way of stock purchase, capital contribution, advance or loan) for the purpose of
paying or discharging the Indebtedness of any other Person, or otherwise, except
that the foregoing restrictions will not apply to:

         (a) the Notes or other Indebtedness under the Loan Documents;

         (b) liabilities, direct or contingent, of the Company or any Subsidiary
of the Company existing on the date of this Agreement which are reflected in the
Financial Statements or the Disclosure  Statement and all renewals,  extensions,
refinancings and rearrangements, but not increases, thereof;

         (c) endorsements of negotiable or similar instruments for collection or
deposit in the ordinary course of business;

         (d) trade   payables,   lease   acquisition   and   lease   maintenance
obligations,  extensions of credit from  suppliers or  contractors,  liabilities
incurred in  exploration,  development  and  operation  of the  Company's or any
Subsidiary's  oil and gas  properties or similar  obligations  from time to time
incurred in the  ordinary  course of business,  other than for  borrowed  money,
which are paid within 90 days after the invoice date  (inclusive  of  applicable
grace  periods) or (i) are being  contested  in good faith,  if such  reserve as
required by GAAP has been made  therefor or (ii) trade  accounts  payable of the
Company  and its  Subsidiaries  (with  respect to which no legal  proceeding  to
enforce  collection has been  commenced or, to the knowledge of any  Responsible
Officer of the Company,  threatened) not exceeding, in the aggregate at any time
outstanding, $25,000,000;

         (e) taxes,  assessments or other  government  charges which are not yet
due or are  being  contested  in  good  faith  by  appropriate  action  promptly
initiated and diligently conducted,  if such reserve as will be required by GAAP
will have been made therefor;

         (f) Borrowing Base Debt of the Company;  provided that the aggregate of
all  Indebtedness  permitted under this Subsection  10.1(f) shall not exceed the
amount  by which  the then  current  Borrowing  Base  exceeds  the then  current
Revolving Credit Obligations;

         (g) to the extent,  if any, not covered by Subsection (b)  hereinabove,
the  Indebtedness  of the Company to APC  evidenced  solely by the  Intercompany
Notes,  as  defined  in the  Beluga  Financing  Documents  and the APC Long Term
Financing  Documents,  together  with  any  renewals,  extensions,   amendments,
refinancings,  rearrangements,  modifications,  restatements or supplements, but
not increases  (other than increases which are permitted under the present terms
of the Beluga  Financing  Documents and the APC Long Term  Financing  Documents)
thereof from time to time;



                                       61

<PAGE>



         (h) intercompany  Indebtedness owed to the Company by any Subsidiary of
the Company and intercompany  Indebtedness owed to any Subsidiary of the Company
by  the  Company  or  any  other  Subsidiary  of  the  Company  which  is  fully
subordinated to the Obligations;

         (i) loans,  advances  or  extensions  of credit to the  Company for the
purpose of financing no more than 75% of the purchase  price of any fixed assets
which are not included in the property  taken into  account in  determining  the
Borrowing Base and which are considered in the categories of property,  plant or
equipment according to GAAP applied on a consistent basis;

         (j) obligations of the Company under the Gas Sales  Contract,  together
with  any  renewals,  extensions,  amendments,   refinancings,   rearrangements,
modifications, restatements or supplements, but not increases, thereof from time
to time;

         (k) the  Guarantee by the Company or any  Subsidiary  of the Company of
payment or  performance  by any Subsidiary of the Company under any agreement so
long as the obligation guaranteed does not constitute  Indebtedness for borrowed
money;

         (l)  obligations  of  the Company  or any of its Subsidiaries under gas
purchase contracts  for gas not taken, as to which the Company or its respective
Subsidiary is liable to pay if not made up;

         (m)  obligations  of the Company or any of its  Subsidiaries  under any
contract for sale for future  delivery of oil or gas (whether or not the subject
oil  or  gas is to be  delivered),  hedging  contract,  forward  contract,  swap
agreement, futures contract or other similar agreement;

         (n)  obligations  of the Company or any of its  Subsidiaries  under any
interest rate swap  agreement,  or any contract  implementing  any interest rate
cap, collar or floor, or any similar interest hedging contract;

         (o)  obligations  in  connection  with  gas  imbalances  arising in the
ordinary course of business;

         (p)  Indebtedness  not  exceeding  $1,000,000 in the aggregate borrowed
from the  Amarillo  Economic  Development  Commission and related Guarantees and
related obligations of the Company and its Subsidiaries;

         (q) liabilities  under leases and lease  agreements  which do not cover
oil and gas  properties  to the  extent the  incurrence  and  existence  of such
liabilities will still enable the Company and each Subsidiary to comply with all
other  requirements of this Agreement and the other Loan Documents to which they
respectively are parties;



                                       62

<PAGE>



         (r) Subordinated Debt;

         (s) Indebtedness  of  any Oil and Gas  Subsidiary  for  borrowed  money
payable  solely by recourse to properties not included in the Borrowing Base and
Indebtedness  incurred by any Gas and Liquids Pipeline  Subsidiary in connection
with the  construction  or  acquisition  of new  assets in  connection  with the
Pipeline  Operations  which is  payable  solely  by  recourse  to the  assets so
constructed or acquired, each to the extent not otherwise expressly permitted by
this Section 10.1;

         (t) the  Canadian Facility (and the "Bankers' Acceptances" provided for
therein) and the guaranty by the Company of the Canadian Facility; and

         (u) Indebtedness of Seagull Energy Canada Ltd. having a maturity of 364
days or less from  the  date of its  incurrence in an aggregate principal amount
not exceeding Canadian $10,000,000 at any one time outstanding.

         10.2  Liens.  The  Company  will  not and will  not  permit  any of its
Subsidiaries to create,  incur, assume or permit to exist any Lien on any of its
or their properties (now owned or hereafter acquired), except:

         (a) Liens securing the Indebtedness described in Subsection 10.1(a);

         (b) Liens for  taxes,  assessments  or other  governmental  charges  or
levies not yet due or which are being  contested  in good  faith by  appropriate
action promptly initiated and diligently  conducted,  if such reserve as will be
required by GAAP will have been made therefor;

         (c) Liens of landlords, vendors, contractors, subcontractors, carriers,
warehousemen,  mechanics, laborers or materialmen or other like Liens arising by
law in the ordinary  course of business for sums not yet due or being  contested
in good faith by appropriate action promptly initiated and diligently conducted,
if such reserve as will be required by GAAP will have been made therefor;

         (d) Liens  existing  on  property  owned by the  Company  or any of its
Subsidiaries  on the date of this  Agreement  which have been  disclosed  to the
Banks in the  Disclosure  Statement,  together  with any  renewals,  extensions,
amendments,  refinancings,   rearrangements,   modifications,   restatements  or
supplements, but not increases, thereof from time to time;

         (e)  pledges or  deposits  made in the  ordinary  course of business in
connection with worker's compensation,  unemployment insurance,  social security
and other like laws;



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<PAGE>



         (f)  inchoate liens  arising  under  ERISA  to  secure  the  contingent
liability of the Company permitted by Section 9.12;

         (g)  Liens in the  ordinary  course of  business,  not to exceed in the
aggregate  $10,000,000  as to the  Company and its  Subsidiaries  at any time in
effect,  regarding (i) the performance of bids,  tenders,  contracts (other than
for the repayment of borrowed  money or the deferred  purchase price of property
or services) or leases, (ii) statutory obligations, (iii) surety appeal bonds or
(iv) Liens to secure progress or partial  payments made to the Company or any of
its Subsidiaries and other Liens of like nature;

         (h)   covenants,   restrictions,    easements,   servitudes,   permits,
conditions,  exceptions,  reservations,  minor rights, minor encumbrances, minor
irregularities  in  title  or  conventional  rights  of  reassignment  prior  to
abandonment  which do not  materially  interfere  with the  occupation,  use and
enjoyment  by the Company or any  Subsidiary  of the  Company of its  respective
assets in the normal  course of business as presently  conducted,  or materially
impair the value thereof for the purpose of such business;

         (i) Liens of  operators  under joint  operating  agreements  or similar
contractual  arrangements  with respect to the relevant  entity's  proportionate
share of the expense of  exploration,  development and operation of oil, gas and
mineral leasehold or fee interests owned jointly with others, to the extent that
same  relate to sums not yet due or which are being  contested  in good faith by
appropriate action promptly initiated and diligently conducted,  if such reserve
as will be required by GAAP will have been made therefor;

         (j)  Liens  created  pursuant  to  the  creation  of  trusts  or  other
arrangements  funded  solely with cash,  cash  equivalents  or other  marketable
investments or securities of the type customarily  subject to such  arrangements
in  customary  financial  practice  with  respect to  long-term  or  medium-term
indebtedness  for borrowed money, the sole purpose of which is to make provision
for the retirement or defeasance,  without prepayment, of Indebtedness permitted
under Section 10.1;

         (k) Liens on the assets or properties of ENSTAR Alaska;

         (l) the  Vendor  Financing  Arrangements  (as  defined  in   the   Mesa
Contract), to the  extent  that the same shall have been deducted in calculating
the Borrowing Base;

         (m) purchase money Liens for the  acquisition of fixed assets  pursuant
to Subsec tion 10.1(i),  so long as such Liens exist solely against the relevant
fixed asset acquired and secure only the purchase money debt; provided, that the
aggregate  amount of  Indebtedness  which is secured by Liens  described in this
subsection (other than  Indebtedness  which is payable solely by recourse to the
applicable property) shall not exceed $10,000,000 at any one time outstanding;


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<PAGE>



         (n)  any  Lien  existing  on  any  real  or  personal  property  of any
corporation or partnership at the time it becomes a Subsidiary of the Company or
of any  other  Subsidiary  of the  Company,  or  existing  prior  to the time of
acquisition upon any real or personal property acquired by the Company or any of
its  Subsidiaries;  provided,  that such Liens may at all times be  deducted  in
calculating the Borrowing Base from time to time in effect;

         (o) legal or  equitable  encumbrances  deemed to exist by reason of the
existence  of any  litigation  or other  legal  proceeding  or arising  out of a
judgment or award with  respect to which an appeal is being  prosecuted  in good
faith by appropriate action promptly initiated and diligently conducted, if such
reserve as will be required by GAAP will have been made therefor;

         (p) any Liens securing  Indebtedness  neither assumed nor guaranteed by
the  Company  or any of  its  Subsidiaries  nor on  which  it  customarily  pays
interest,  existing  upon real  estate or rights in or  relating  to real estate
acquired  by the Company or any of its  Subsidiaries  for  substation,  metering
station,   pump   station,   storage,   gathering   line,   transmission   line,
transportation line,  distribution line or right-of-way  purposes, and any Liens
reserved in leases for rent and full  compliance with the terms of the leases in
the case of leasehold  estates,  to the extent that any such Lien referred to in
this clause arises in the normal  course of business as presently  conducted and
does not materially  impair the use of the property covered by such Lien for the
purposes  for which  such  property  is held by the  Company  or its  applicable
Subsidiary;

         (q) rights reserved to or vested in any  municipality or  governmental,
statutory  or public  authority  by the terms of any  right,  power,  franchise,
grant,  license or permit,  or by any provision of law, to terminate such right,
power, franchise, grant, license or permit or to purchase, condemn,  expropriate
or  recapture  or to designate a purchaser of any of the property of the Company
or any of its Subsidiaries;

         (r) rights reserved to or vested in any  municipality or  governmental,
statutory or public authority to control or regulate any property of the Company
or any of its  Subsidiaries,  or to use such property in a manner which does not
materially impair the use of such property for the purposes for which it is held
by the Company or its applicable Subsidiary;

         (s) any obligations or duties  affecting the property of the Company or
any of its Subsidiaries to any municipality,  governmental,  statutory or public
authority with respect to any franchise, grant, license or permit;

         (t)  rights  of  a  common  owner  of  any  interest  in  real  estate,
rights-of-way  or easements held by the Company or any of its  Subsidiaries  and
such common owner as tenants in common or through other common ownership;



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<PAGE>



         (u) any  Liens  arising  from the matters described in Schedule 3.19 of
the Mesa Contract;

         (v) Liens  securing Indebtedness permitted under Section 10.1(s) hereof
(to the extent such Liens are permitted under such Section 10.1(s));

         (w) as to assets located in Canada, reservations, limitations, provisos
and conditions in any original grant from the Crown or freehold lessor of any of
the properties of the Company or its Subsidiaries;

         (x) other Liens  securing Indebtedness not exceeding, in the aggregate,
$10,000,000 at any one time outstanding;

         (y) other Liens  securing  Senior Debt,  but only so long as such Liens
shall  also  secure  the  Obligations  on a pari  passu  basis,  in a manner and
pursuant to documentation acceptable to the Majority Banks;

         (z) Liens (i)  granted  to or  existing  in favor of third  parties  on
margin accounts of the Company or any of its  Subsidiaries  relating to exchange
traded  contracts  for the delivery of natural gas pursuant to which the Company
or any such  Subsidiary  intends to take  actual  delivery  of such  natural gas
within  forty (40) days from the then  current  date in the  ordinary  course of
business and not for  speculative  purposes,  and (ii) on margin accounts of the
Company or any of its Subsidiaries relating to exchange traded contracts for the
delivery of natural gas, provided,  however, the aggregate balance of the margin
accounts  subject to the Liens  permitted  by this  clause (ii) shall not exceed
from time to time $10,000,000.

         10.3 Investments, Loans and Advances. The Company will not and will not
permit its  Subsidiaries  to make or permit to remain  outstanding any advances,
loans or other extensions of credit or capital contributions (other than prepaid
expenses  in the  ordinary  course of  business)  to (by means of  transfers  of
property or assets or otherwise),  or purchase or own any stocks,  bonds, notes,
debentures or other securities of, or incur contingent liability with respect to
(except for the  endorsement  of checks in the  ordinary  course of business and
except for the Indebtedness and Liens permitted under this Agreement) any Person
(all such  transactions  being  herein  called  "Investments"),  except that the
foregoing restriction will not apply to:

         (a) Investments  (all prior to the date hereof) the material details of
which have been set forth in the Financial  Statements  delivered to Agent prior
to the date hereof or the Disclosure Statement;

         (b) Liquid Investments;



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<PAGE>



         (c) advances or extensions of credit in the form of accounts receivable
incurred in the ordinary course of business;

         (d) the  acquisition  of  all  of  the capital  stock  of  wholly owned
Subsidiaries incorporated or acquired subsequent to the date of this Agreement;

         (e) investments  where the  consideration  paid is capital stock of the
Company,  plus cash paid in lieu of issuing  fractional  shares and cash paid in
settlement of claims of dissenters, such cash not to exceed 10% of the aggregate
purchase price in any such transaction;

         (f) Investments in any Person which after giving effect thereto will be
a Subsidiary  of the Company,  so long as the  Investment  in such Person,  when
consummated,  would not result in a breach of the covenants set forth in Section
10.1;

         (g) intercompany loans, advances or investments by the Company to or in
any Subsidiary of the Company (other than a Subsidiary  that is obligated to pay
Funded  Indebtedness for borrowed money payable solely by recourse to properties
not included in the Borrowing  Base) or, to the extent  permitted  under Section
10.1(h)  hereof,  by any Subsidiary of the Company to or in the Company or to or
in any other Subsidiary of the Company, provided, however, that APC may not make
any intercompany loans, advances or investments in any Subsidiary of the Company
pursuant to this clause (g);

         (h) intercompany loans, advances or investments by the Company,  solely
from  income  or cash  flow  of the  Company  subject  to the  Beluga  Financing
Documents,  to APC as required under the Beluga Financing  Documents and the APC
Long Term Financing Documents;

         (i) to the extent,  if any, not covered by Subsection (a)  hereinabove,
the  Indebtedness  of the Company to APC  evidenced  solely by the  Intercompany
Notes,  as  defined  in the  Beluga  Financing  Documents  and the APC Long Term
Financing  Documents,  together  with  any  renewals,  extensions,   amendments,
refinancings,  rearrangements,  modifications,  restatements or supplements, but
not increases  (other than increases which are permitted under the present terms
of the Beluga  Financing  Documents and the APC Long Term  Financing  Documents)
thereof from time to time;

         (j) loans  or  advances  to  employees made  in  the ordinary course of
business, up to the  aggregate  principal  amount at any one time outstanding of
$5,000,000;

         (k) Investments  in  reasonable  amounts  of securities for purposes of
funding employee benefit plans maintained by the Company;



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<PAGE>



         (l) advances or  extensions  of credit made in the  ordinary  course of
business  to  third  parties  under  applicable   contracts  and  agreements  in
connection  with (i) oil,  gas or other  mineral  exploration,  development  and
production  activities or (ii)  Hydrocarbon  or chemical  pipeline  gathering or
transportation activities;

         (m) Investments where the consideration paid is assets  of  the Company
or its Subsidiaries other than capital stock, cash or oil and gas reserves;

         (n) Investments  in  EBOC  Energy  Ltd.  made  in  connection  with and
pursuant to that  certain Sale Agreement dated November 19, 1993 executed by and
between Novacor Petrochemicals Ltd., as Vendor, and the Company, as Purchaser;

         (o) any payment, prepayment,  purchase or retirement of Indebtedness of
the Company  (other than  payments,  prepayments,  purchases  or  retirement  of
Subordinated Debt prohibited under the definition of "Subordinated Debt"); and

         (p) any other  Investments  which  in  the  aggregate do  not cause the
Company to be in violation of the Investments Tests.

         10.4  Dividend  Payment  Restrictions.  The Company will not declare or
make any Dividend Payment if any Default or Event of Default has occurred and is
continuing or if there exists any Borrowing Base Deficiency.

         10.5  Mergers and Sales of Assets.  The  Company  will not (a) merge or
consolidate with, or sell, assign, lease or otherwise dispose of, whether in one
transaction or in a series of  transactions,  more than ten percent (10%) in the
aggregate  of the  Company's  and its  Subsidiaries'  consolidated  total assets
(whether  now owned or hereafter  acquired) to any Person or Persons  during the
period  since the most  recent  Borrowing  Base  Determination,  or  permit  any
Subsidiary  of the  Company  to do so  (other  than to the  Company  or  another
Subsidiary  of the Company or the issuance by any  Subsidiary  of the Company of
any stock to the Company or another  Subsidiary  of the  Company),  or (b) sell,
assign, lease or otherwise dispose of, whether in one transaction or in a series
of transactions,  any other properties if receiving therefor consideration other
than cash or other  consideration  readily  convertible to cash or which is less
than the fair market value of the relevant properties,  or permit any Subsidiary
of the  Company to do so;  provided  that the Company or any  Subsidiary  of the
Company may merge or consolidate with any other Person and any Subsidiary of the
Company may transfer properties to any other Subsidiary of the Company or to the
Company so long as, in each case, (i)  immediately  thereafter and giving effect
thereto, no event will occur and be continuing which constitutes a Default, (ii)
in the case of any such merger or consolidation to which the Company is a party,
the  Company is the  surviving  Person,  (iii) in the case of any such merger or
consolidation  to which any  Subsidiary  of the  Company is a party (but not the
Company),  after giving effect to all transactions closing concurrently relating
to such


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<PAGE>



merger or consolidation, the surviving Person is a Subsidiary of the Company and
(iv) the surviving  Person  ratifies each  applicable Loan Document and provided
further that any  Subsidiary  of the Company may merge or  consolidate  with any
other  Subsidiary  of the  Company  so long as,  in each  case  (i)  immediately
thereafter  and giving  effect  thereto,  no event will occur and be  continuing
which  constitutes  a  Default  and  (ii) the  surviving  Person  ratifies  each
applicable Loan Document.

         10.6 Proceeds of Notes. The Company will not permit the proceeds of the
Notes to be used for any purpose other than those permitted by this Agreement.

         10.7 ERISA Compliance. The Company will not at any time permit any Plan
maintained by it or any Subsidiary of the Company to:

         (a)  engage  in any "prohibited transaction" as such term is defined in
Section 4975 of the Code;

         (b)  incur any "accumulated funding deficiency" as such term is defined
in Section 302 of ERISA; or

         (c)  terminate or be terminated in a manner which could result  in  the
imposition of a  Lien  on  the  property of the Company or any Subsidiary of the
Company pursuant to Section 4068 of ERISA,  in each  case,  to the  extent  that
permitting  the Plan to do so would have a Material Adverse Effect.

         10.8 Amendment of Certain Documents. The Company will not amend, modify
or  obtain or grant a waiver  of  (except  for  waivers  only of  cross-defaults
created  by a Default  under  this  Agreement),  or allow APC to enter  into any
amendment or  modification  or obtain or grant any waiver of (except for waivers
only of cross-defaults created by a Default under this Agreement), any provision
of those documents relating to or constituting the Beluga Financing Documents or
the APC Long Term Financing  Documents,  without prior written  notification  to
Agent.

         10.9  Tangible Net Worth.  The Company will not permit the Tangible Net
Worth of the Company and its Subsidiaries,  on a consolidated basis, at any time
to be less  than  $465,000,000  plus 50% of net  income of the  Company  and its
Subsidiaries  on a consolidated  basis,  if positive,  beginning with the fiscal
year ended  December  31, 1997 and  calculated  annually  thereafter  based upon
positive  net income of the Company  and its  Subsidiaries  for each  applicable
fiscal year taken cumulatively.



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<PAGE>



         10.10   Company Debt/Capitalization Ratio.  The Company will not permit
the Debt/Capitalization Ratio to be, at any time, more than 65%.

         10.11   EBITDAX/Interest   Ratio.  The  Company  will  not  permit  the
EBITDAX/Interest  Ratio to be, at any time,  less than  3.50:1.00 for any twelve
month period ending on the last day of any calendar quarter.

         10.12 Nature of Business.  The Company will not engage in, and will not
permit any Subsidiary of the Company to engage in, businesses other than oil and
gas  exploration and production,  gas  processing,  transmission,  distribution,
marketing and storage and gas and liquids  pipeline  operations  and  activities
related or ancillary thereto; provided, that if the Company acquires one or more
Subsidiaries in transactions  otherwise  permitted by the terms hereof, any such
Subsidiary may be engaged in businesses  other than those listed in this Section
so long as the assets of such Subsidiaries which are used in the conduct of such
other  businesses  do  not  constitute  more  than  five  percent  (5%)  of  the
consolidated  total  assets  of the  Company  (inclusive  of the  assets  of the
Subsidiary so acquired).

         10.13 Futures Contracts.  The Company will not, and will not permit any
Subsidiary of the Company to, enter into or be obligated  under any contract for
sale for future delivery of oil or gas (whether or not the subject oil or gas is
to be delivered),  hedging contract,  forward contract, swap agreement,  futures
contract or other similar agreement except for (i) such contracts (x) which fall
within the parameters set forth on Exhibit J hereto or are otherwise approved in
writing by the Majority Banks and (y) which in the aggregate do not cover at any
time a volume of oil  and/or  gas  equal to or  greater  than 50% of the  proved
producing reserves attributable to the oil and gas properties of the Company and
its Subsidiaries, taken as a whole, as evidenced by the most current Engineering
and Company  Reports and (ii)  production  sales  contracts  entered into in the
ordinary course of the Company's or the applicable Subsidiary's business.

         10.14 Covenants in Other Agreements.  The Company will not and will not
permit any of its Subsidiaries to become a party to or to agree that  it  or any
of its property is bound by any agreement, indenture, mortgage, deed of trust or
any other instrument directly or indirectly

                 (i)    restricting any loans, advances or any other Investments
to or in the Company by any of its Subsidiaries;

                 (ii)   restricting the ability of any Subsidiary of the Company
to make tax payments or management fee payments;


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<PAGE>



                 (iii)  restricting   the   capitalization   structure  of   any
Subsidiary of the Company; or

                 (iv)   restricting the ability or capacity of any Subsidiary of
the Company to  make  Dividend Payments;  provided,  however,  nothing  in  this
Section 10.14 shall  restrict the  existence  of  negative  covenants  otherwise
prohibited   by   this   Section   in  documentation  evidencing  or  related to
Indebtedness  permitted  by  Subsection  10.1(t)  and, to  the  extent  that the
applicable  Subsidiary does not own any property included in the Borrowing Base,
Subsections  10.1(m),  (n)  and (s).  Notwithstanding  the  foregoing, either of
ENSTAR Alaska or APC  may  become  a party  to,  or  grant  a Lien in any of its
property by way of, or agree that it will be  bound by, any indenture, mortgage,
deed of trust or other instrument containing provisions of the  types  described
above  in this  Section  10.14 so long as the terms and provisions  thereof  are
not materially more restrictive than the  terms or provisions  which are legally
binding on ENSTAR  Alaska or APC on the Effective Date.

         Section 11.       Defaults.

         11.1       Events of Default.  If one or more of the  following  events
(herein called "Events of Default") shall occur and be continuing:

         (a)  Payments - (i) the  Company or any other  Relevant  Party fails to
make any payment or prepayment of any  installment  of principal on the Loans or
any  Reimbursement  Obligation  payable under the Notes,  this  Agreement or the
other Loan  Documents  when due or (ii) the Company or any other  Relevant Party
fails to make any payment or  prepayment  of interest with respect to the Loans,
any  Reimbursement  Obligation or any other fee or amount under the Notes,  this
Agreement  or the  other  Loan  Documents  and  such  failure  to pay  continues
unremedied for a period of five (5) Business Days; or

         (b)  Representations  and Warranties - any  representation  or warranty
made by the  Company or any other  Relevant  Party in this  Agreement  or in any
other Loan  Document or in any  instrument  executed in  connection  herewith or
therewith  proves to have been incorrect in any material  respect as of the date
thereof;  or any representation,  statement  (including  Financial  Statements),
certificate or data furnished or made by the Company or any other Relevant Party
(or any  officer  of the  Company  or any  other  Relevant  Party)  under  or in
connection  with this  Agreement or any other Loan Document,  including  without
limitation  in the  Disclosure  Statement,  proves  to have  been  untrue in any
material  respect,  as of the date as of which the facts  therein set forth were
stated or certified; or

         (c) Affirmative  Covenants - (i)  default  shall  be  made  in  the due
observance  or  performance  of  any of the covenants or agreements contained in
Sections 9.11 (or in Section 9.6


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<PAGE>



to the extent such  default is  considered  an Event of Default  under the other
Subsections of this Sec tion 11.1) or (ii) default is made in the due observance
or performance of any of the other covenants or agreements  contained in Section
9 of this  Agreement  or any other  affirmative  covenant  of the Company or any
other Relevant Party  contained in this Agreement or any other Loan Document and
such  default  continues  unremedied  for a period of 30 days  after (x)  notice
thereof is given by Agent to the Company or (y) such default  otherwise  becomes
known to the Company, whichever is earlier; or

         (d) Negative Covenants - (i) default shall be made in the observance or
performance of any of the covenants or agreements  contained in Section 10.8 and
such default  continues  unremedied for a period of five (5) Business Days after
(x)  notice  thereof  is  given  by Agent  to the  Company  or (y) such  default
otherwise becomes known to the Company, whichever is earlier, or (ii) default is
made in the due  observance  or  performance  by the Company of any of the other
covenants  or  agreements  contained  in Section 10 of this  Agreement or of any
other negative  covenant of the Company or any other Relevant Party contained in
this Agreement or any other Loan Document; or

         (e)  Other  Obligations  -  default  is made in the due  observance  or
performance by the Company or any of its Subsidiaries (as principal or guarantor
or other surety) of any of the  covenants or  agreements  contained in any bond,
debenture,  note or other  evidence  of  Indebtedness  in excess of  $25,000,000
(singly or aggregating several such bonds,  debentures,  notes or other evidence
of  Indebtedness)  which default  gives the holder the right to  accelerate  the
maturity  of such  Indebtedness,  other  than the Loan  Documents,  or under any
credit  agreement,  loan  agreement,   indenture,  promissory  note  or  similar
agreement or instrument  executed in connection  with any of the  foregoing,  to
which it  (respectively)  is a party and such  default is unwaived or  continues
unremedied  beyond the  expiration of any  applicable  grace period which may be
expressly allowed under such instrument or agreement; or

         (f) Involuntary  Bankruptcy or  Receivership  Proceedings - a receiver,
conservator,  liquidator  or trustee of the Company or of any of its property is
appointed by the order or decree of any court or agency or supervisory authority
having jurisdiction, and such decree or order remains in effect for more than 60
days;  or the  Company  is  adjudicated  bankrupt  or  insolvent;  or any of its
property is sequestered by court order and such order remains in effect for more
than 60 days;  or a petition is filed  against  the  Company  under any state or
federal bankruptcy,  reorganization,  arrangement,  insolvency,  readjustment of
debt, dissolution,  liquidation or receivership law of any jurisdiction, whether
now or  hereafter  in  effect,  and is not  dismissed  within 60 days after such
filing; or

         (g) Voluntary Petitions or Consents - the Company commences a voluntary
case or  other  proceeding  seeking  liquidation,  reorganization,  arrangement,
insolvency, readjustment of debt, dissolution,  liquidation or other relief with
respect to itself or its debt or other liabilities


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<PAGE>



under any bankruptcy, insolvency or other similar law nor or hereafter in effect
or seeking the  appointment  of a trustee,  receiver,  liquidator,  custodian or
other  similar  official  of it or any  substantial  part  of its  property,  or
consents to any such relief or to the appointment of or taking possession by any
such official in an involuntary case or other proceeding  commenced  against it,
or fails generally to, or cannot,  pay its debts generally as they become due or
takes any corporate action to authorize or effect any of the foregoing; or

         (h)  Assignments for Benefit of Creditors or Admissions of Insolvency -
the Company makes an assignment for the benefit of its  creditors,  or admits in
writing its inability to pay its debts generally as they become due, or consents
to the  appointment of a receiver,  trustee,  or liquidator of the Company or of
all or any part of its property; or

         (i)  Undischarged  Judgments  -  judgments   (individually  or  in  the
aggregate)  for the payment of money in excess of $10,000,000 is rendered by any
court or other  governmental body against the Company or any of its Subsidiaries
and the Company or such  Subsidiary  does not  discharge the same or provide for
its  discharge  in  accordance  with its terms,  or procure a stay of  execution
thereof within 60 days from the date of entry thereof, and within said period of
60 days  from the date of entry  thereof  or such  longer  period  during  which
execution of such judgment will have been stayed, the Company or such Subsidiary
fails to appeal  therefrom and cause the  execution  thereof to be stayed during
such appeal while  providing  such  reserves  therefor as may be required  under
GAAP; or

         (j)  Subsidiary Defaults -any Subsidiary of the Company takes, suffers,
or permits  to  exist any of the events or conditions referred to in Subsections
11.1(f), (g) or (h); or

         (k)  Change in Control - there should occur any Change of Control.

THEREUPON: Agent may (and, if directed by the Majority Banks, shall) (a) declare
the  Commitments  terminated  (whereupon  the  Commitments  shall be terminated)
and/or (b) terminate  any Letter of Credit  providing  for such  termination  by
sending a notice of  termination  as  provided  therein  and/or (c)  declare the
principal  amount then  outstanding of and the accrued interest on the Loans and
Reimbursement  Obligations and all fees and all other amounts payable  hereunder
and under the Notes to be  forthwith  due and  payable,  whereupon  such amounts
shall be and become  immediately  due and  payable,  without  notice  (including
without  limitation  notice of acceleration and notice of intent to accelerate),
presentment,  demand, protest or other formalities of any kind, all of which are
hereby  expressly  waived  by the  Company;  provided  that  in the  case of the
occurrence  of an Event of Default  with  respect to the Company  referred to in
clause (f) or (g) of this  Section 11.1 or in clause (j) of this Section 11.1 to
the  extent  it  refers  to  clauses  (f)  or  (g),  the  Commitments  shall  be
automatically  terminated and the principal  amount then  outstanding of and the
accrued interest on the Loans and Reimbursement Obligations and all fees and all
other  amounts  payable  hereunder  and  under  the  Notes  shall be and  become
automatically and


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immediately due and payable, without notice (including but not limited to notice
of intent to accelerate  and notice of  acceleration)  and without  presentment,
demand,  protest  or other for  malities  of any kind,  all of which are  hereby
expressly  waived by the Company  and/or (d)  exercise  any and all other rights
available to it under the Loan Documents, at law or in equity.

         11.2 Collateral Account.  The Company hereby agrees, in addition to the
provisions  of Section  11.1  hereof,  that upon the  occurrence  and during the
continuance  of any Event of Default,  it shall,  if  requested  by Agent or the
Majority Banks (through Agent), pay to Agent an amount in immediately  available
funds  equal to the then  aggregate  amount  available  for  drawings  under all
Letters of Credit  issued for the account of the  Company,  which funds shall be
held by Agent as Cover.

         11.3 Preservation of Security for Unmatured Reimbursement  Obligations.
In the event that,  following (i) the  occurrence of an Event of Default and the
exercise of any rights  available  to Agent under the Loan  Documents,  and (ii)
payment in full of the  principal  amount  then  outstanding  of and the accrued
interest  on the  Loans  and  Reimbursement  Obligations  and fees and all other
amounts  payable  hereunder  and under the Notes,  any  Letters of Credit  shall
remain  outstanding  and undrawn upon,  Agent shall be entitled to hold (and the
Company  hereby  grants and conveys to Agent a security  interest in and to) all
cash or other property  ("Proceeds of Remedies")  realized or arising out of the
exercise by Agent of any rights available to it under the Loan Documents, at law
or in equity, including, without limitation, the proceeds of any foreclosure, as
collateral  for the  payment  of any  amounts  due or to become  due under or in
respect of such Letters of Credit.  Such Proceeds of Remedies  shall be held for
the ratable benefit of the applicable  Issuers.  The rights,  titles,  benefits,
privileges,  duties and  obligations  of Agent  with  respect  thereto  shall be
governed by the terms and  provisions  of this  Agreement.  Agent may, but shall
have no  obligation  to,  invest any such Proceeds of Remedies in such manner as
Agent, in the exercise of its sole discretion, deems appropriate.  Such Proceeds
of Remedies shall be applied to Reimbursement  Obligations arising in respect of
any such Letters of Credit and/or the payment of any Issuer's  obligations under
any such Letter of Credit when such Letter of Credit is drawn upon.  The Company
hereby  agrees to  execute  and  deliver  to Agent and the Banks  such  security
agreements,  pledges or other  documents as Agent or any of the Banks may,  from
time to time,  require to perfect the pledge,  lien and security interest in and
to any such Proceeds of Remedies provided for in this Section 11.3.

         11.4  Right  of  Setoff.   Upon  (i)  the  occurrence  and  during  the
continuance  of any Event of Default  referred to in clauses  (f), (g) or (h) of
Section  11.1,  or in  clause  (j) of  Section  11.1 to the  extent it refers to
clauses  (f), (g) or (h), or upon (ii) the  occurrence  and  continuance  of any
other  Event of Default and upon the making of the notice  specified  in Section
11.1 to  authorize  Agent to declare the Notes due and  payable  pursuant to the
provisions thereof,  or if (iii) the Company or any of its Subsidiaries  becomes
insolvent,  however  evidenced,  the Banks are hereby authorized at any time and
from time to time, without notice to the Company or any of its


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Subsidiaries  (any such  notice  being  expressly  waived by the Company and its
Subsidiaries),  to setoff and apply any and all  deposits  (general  or special,
time or demand,  provisional or final, whether or not such setoff results in any
loss of  interest  or  other  penalty,  and  including  without  limitation  all
certificates  of deposit)  at any time held,  and any other funds or property at
any time held,  and other  Indebtedness  at any time owing by any Bank to or for
the credit or the account of the Company  against any and all of the Obligations
irrespective  of whether  or not such Bank will have made any demand  under this
Agreement or the Notes and although such  obligations  may be unmatured.  Should
the right of any Bank to realize  funds in any manner set forth  hereinabove  be
challenged and any application of such funds be reversed, whether by court order
or otherwise, the Banks shall make restitution or refund to the Company pro rata
in accordance  with their  Commitments.  The Banks agree  promptly to notify the
Company  and Agent  after any such  setoff and  application,  provided  that the
failure to give such  notice  will not affect the  validity  of such  setoff and
application.  The  rights of Agent  and the  Banks  under  this  Section  are in
addition to other rights and remedies (including without limitation other rights
of setoff) which Agent or the Banks may have.

         Section 12.       Agent.

         12.1 Appointment,  Powers and Immunities.  Each Bank hereby irrevocably
appoints  and  authorizes  Agent to act as its  agent  hereunder  and  under the
Letters  of  Credit  and the  other  Loan  Documents  with  such  powers  as are
specifically  delegated to Agent by the terms hereof and thereof,  together with
such other powers as are  reasonably  incidental  thereto.  Agent (which term as
used in this Section 12 shall include  reference to its  affiliates  and its own
and their affiliates' officers,  directors,  employees and agents) shall not (a)
have any duties or  responsibilities  except those  expressly  set forth in this
Agreement,  the  Letters of Credit,  and the other Loan  Documents,  or shall by
reason of this  Agreement  or any other Loan  Document be a trustee or fiduciary
for any  Bank;  (b) be  responsible  to any Bank for any  recitals,  statements,
representations or warranties contained in this Agreement, the Letters of Credit
or any other Loan Document,  or in any certificate or other document referred to
or  provided  for in, or  received by any of them  under,  this  Agreement,  the
Letters  of Credit or any  other  Loan  Document,  or for the  value,  validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement, the
Letters of Credit,  or any other Loan Document or any other document referred to
or provided  for herein or therein or any  property  covered  thereby or for any
failure  by any  Relevant  Party  or any  other  Person  to  perform  any of its
obligations hereunder or thereunder;  (c) be required to initiate or conduct any
litigation or collection proceedings hereunder or under the Letters of Credit or
any other  Loan  Document  except to the  extent  Agent is so  requested  by the
Majority  Banks,  or (d) be  responsible  for any action  taken or omitted to be
taken by it hereunder or under the Letters or Credit or any other Loan  Document
or any other  document  or  instrument  referred  to or  provided  for herein or
therein or in connection herewith or therewith,  including,  without limitation,
pursuant to their own negligence, except for its own gross negligence or willful
misconduct.  Agent may  employ  agents  and  attorneys-in-fact  and shall not be
responsible for the negligence or misconduct of any


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such agents or attorneys-in-fact selected by it with reasonable care. Without in
any way limiting any of the foregoing, each Bank acknowledges that neither Agent
nor any Issuer  shall have any greater  responsibility  in the  operation of the
Letters of Credit than is  specified  in the Uniform  Customs and  Practice  for
Documentary   Credits  (1993   Revision,   International   Chamber  of  Commerce
Publication  No. 500). In any foreclosure  proceeding  concerning any collateral
for the Notes,  each  holder of a Note if bidding for its own account or for its
own account and the accounts of other Banks is prohibited  from including in the
amount of its bid an amount to be applied as a credit  against its Note or Notes
or the Notes of the other  Banks;  instead,  such  holder must bid in cash only;
provided that this  provision is for the sole benefit of Agent and the Banks and
shall  not  inure to the  benefit  of the  Company  or any of its  Subsidiaries.
However,  in any  such  foreclosure  proceeding,  Agent  may (but  shall  not be
obligated  to)  submit a bid for all Banks  (including  itself) in the form of a
credit against the Notes of all of the Banks, and Agent or its designee may (but
shall not be obligated to) accept title to such  collateral for and on behalf of
all Banks.

         12.2  Reliance  by  Agent.  Agent  shall be  entitled  to rely upon any
certification,   notice  or  other  communication   (including  any  thereof  by
telephone,  telex,  telegram or cable)  believed by it to be genuine and correct
and to have been signed or sent by or on behalf of the proper Person or Persons,
and upon advice and  statements of legal  counsel  (which may be counsel for the
Company), independent accountants and other experts selected by Agent. As to any
matters not expressly provided for by this Agreement,  the Letters of Credit, or
any other Loan Document,  Agent shall in all cases be fully protected in acting,
or in  refraining  from acting,  hereunder and  thereunder  in  accordance  with
instructions of the Majority Banks (or, where  unanimous  consent is required by
the terms  hereof or of the other Loan  Documents,  all of the  Banks),  and any
action taken or failure to act pursuant  thereto  shall be binding on all of the
Banks.  Pursuant to  instructions  of the  Majority  Banks  (except as otherwise
provided in Section  13.4  hereof),  Agent shall have the  authority  to execute
releases of security documents on behalf of the Banks without the joinder of any
Bank.

         12.3  Defaults.  Agent  shall not be deemed  to have  knowledge  of the
occurrence of a Default (other than the  non-payment of principal of or interest
on Loans or Reimbursement Obligations) unless it has received notice from a Bank
or the Company specifying such Default and stating that such notice is a "Notice
of Default". In the event that Agent receives such a notice of the occurrence of
a Default,  Agent shall give prompt notice  thereof to the Banks (and shall give
each Bank  prompt  notice of each such  non-payment).  Agent  shall  (subject to
Section  12.7  hereof) take such action with respect to such Default as shall be
directed by the Majority  Banks and within its rights  under the Loan  Documents
and at law or in  equity,  provided  that,  unless  and until  Agent  shall have
received  such  directions,  Agent may (but shall not be obligated to) take such
action,  or refrain  from taking such action,  permitted  hereby with respect to
such Default as it shall deem  advisable in the best  interests of the Banks and
within its rights under the Loan Documents, at law or in equity.



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         12.4 Rights as a Bank.  With respect to its  Commitments  and the Loans
made and Letter of Credit Liabilities, Chase in its capacity as a Bank hereunder
shall  have the same  rights  and  powers  hereunder  as any other  Bank and may
exercise  the same as though it were not acting as Agent and the term  "Bank" or
"Banks" shall, unless the context otherwise indicates,  include the Chase in its
individual capacity.  Agent may (without having to account therefor to any Bank)
accept deposits from, lend money to and generally engage in any kind of banking,
trust,  letter of credit,  agency or other business with the Company (and any of
its Affiliates) as if it were not acting as Agent, and Agent may accept fees and
other consideration from the Company and its Affiliates (in addition to the fees
heretofore  agreed to between the Company and Agent) for services in  connection
with this  Agreement or otherwise  without having to account for the same to the
Banks.

         12.5 Indemnification. The Banks agree to indemnify Agent (to the extent
not reimbursed  under Section  2.2(c),  Section 9.7 or Section 13.3 hereof,  but
without limiting the obligations of the Company under said Sections 2.2(c),  9.7
and 13.3), ratably in accordance with their respective Commitments,  for any and
all liabilities,  obligations,  losses, damages, penalties,  actions, judgments,
suits,  costs,  expenses  or  disbursements  of any kind and  nature  whatsoever
(including  but not limited to, the  consequences  of the  negligence  of Agent)
which may be  imposed  on,  incurred  by or  asserted  against  Agent in any way
relating to or arising out of this Agreement, the Letters of Credit or any other
Loan Document or any other  documents  contemplat ed by or referred to herein or
therein or the transactions  contemplated hereby or thereby (including,  without
limitation,  the costs and expenses  which the Company is obligated to pay under
Sections  2.2(c),  9.8 and 13.3  hereof  but  excluding,  unless a  Default  has
occurred and is continuing, normal administrative costs and expenses incident to
the performance of their respective  agency duties hereunder) or the enforcement
of any of the terms hereof or thereof or of any such other  documents,  provided
that no Bank shall be liable for any of the  foregoing  to the extent they arise
from the gross negligence or willful  misconduct of the party to be indemnified.
The  obligations  of the  Banks  under  this  Section  12.5  shall  survive  the
termination of this Agreement and the repayment of the Obligations.

         12.6  Non-Reliance  on Agent and Other Banks.  Each Bank agrees that it
has received current financial  information with respect to the Company and that
it has,  independently and without reliance on Agent or any other Bank and based
on such  documents and  information as it has deemed  appropriate,  made its own
credit  analysis of the Company and  decision to enter into this  Agreement  and
that it will,  independently  and without reliance upon Agent or any other Bank,
and based on such documents and information as it shall deem  appropriate at the
time,  continue to make its own analysis  and  decisions in taking or not taking
action under this Agreement or any of the other Loan Documents.  Agent shall not
be required to keep itself  informed as to the  performance or observance by any
Relevant Party of this Agreement, the Letters of Credit or any of the other Loan
Documents or any other document referred to or provided for herein or therein or
to inspect the properties or books of the Company or any Relevant Party.  Except
for notices,


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reports and other documents and information  expressly  required to be furnished
to the Banks by Agent  hereunder,  under the Letters of Credit or the other Loan
Documents,  Agent shall not have any duty or  responsibility to provide any Bank
with any credit or other information concerning the affairs, financial condition
or  business  of the  Company  or any  other  Relevant  Party  (or any of  their
affiliates) which may come into the possession of Agent.

         12.7  Failure to Act.  Except for action  expressly  required  of Agent
hereunder, under the Letters of Credit and under the other Loan Documents, Agent
shall in all cases be fully  justified  in failing or refusing to act  hereunder
and thereunder unless it shall receive further assurances to its satisfaction by
the Banks of their indemnification obligations under Section 12.5 hereof against
any and all  liability  and  expense  which may be  incurred  by it by reason of
taking or continuing to take any such action.

         12.8  Resignation or Removal of Agent.  Subject to the  appointment and
acceptance of a successor Agent as provided below,  Agent may resign at any time
by giving notice thereof to the Banks and the Company,  and Agent may be removed
at any  time  with or  without  cause  by the  Majority  Banks.  Upon  any  such
resignation  or removal,  the  Majority  Banks shall have the right to appoint a
successor  Agent,  provided  deposits with a successor Agent shall be insured by
the Federal  Deposit  Insurance  Corporation or its  successor.  If no successor
Agent shall have been so appointed by the Majority Banks and shall have accepted
such  appointment  within 30 days after the retiring Agent's giving of notice of
resignation  or the  Majority  Banks'  removal of the retiring  Agent,  then the
retiring  Agent may,  on behalf of the Banks,  appoint a  successor  Agent.  Any
successor  Agent shall be a bank which has an office in the United  States and a
combined  capital and surplus of at least  $250,000,000.  Upon the acceptance of
any  appointment as Agent hereunder by a successor  Agent,  such successor Agent
shall  thereupon  succeed  to and become  vested  with all the  rights,  powers,
privileges  and duties of the retiring  Agent,  and the retiring  Agent shall be
discharged  from its duties and obligations  hereunder.  A successor Agent shall
promptly  specify by notice to the  Company and the Banks its  Principal  Office
referred to in Sections 3.1 and 5.1. After any retiring  Agent's  resignation or
removal  hereunder as Agent, the provisions of this Section 12 shall continue in
effect for its benefit in respect of any actions taken or omitted to be taken by
it while it was acting as an Agent.

         Section 13.       Miscellaneous.

         13.1  Waiver.  No waiver of any Default  shall be a waiver of any other
Default.  No  failure  on the part of any Agent or any Bank to  exercise  and no
delay in exercising,  and no course of dealing with respect to, any right, power
or privilege  under any Loan  Document  shall operate as a waiver  thereof,  nor
shall any single or partial exercise of any right, power or privilege thereunder
preclude  any other or further  exercise  thereof or the  exercise  of any other
right,  power or  privilege.  The remedies  provided in the Loan  Documents  are
cumulative and not exclusive of any remedies provided by law or in equity.


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         13.2 Notices. All notices and other communications  provided for herein
(including,  without  limitation,  any  modifications of, or waivers or consents
under,  this  Agreement)  shall be given or made by telex,  telegraph,  telecopy
(confirmed  by mail),  cable,  mail or other  writing and  telexed,  telecopied,
telegraphed,  cabled,  mailed or  delivered  to the  intended  recipient  at the
"Address for Notices"  specified  below its name on the signature  pages hereof;
or, as to any party,  at such other address as shall be designated by such party
in a notice to the Company,  Agent given in  accordance  with this Section 13.2.
Except as otherwise provided in this Agreement, all such communications shall be
deemed to have been duly received when transmitted by telex or telecopier during
regular business hours, delivered to the telegraph or cable office or personally
delivered  or, in the case of a mailed  notice,  three (3) days after deposit in
the United States mails,  postage  prepaid,  certified  mail with return receipt
requested (or upon actual receipt, if earlier),  in each case given or addressed
as aforesaid.

         13.3 Indemnification. The Company shall indemnify Agent, the Banks, and
each Affiliate thereof and their respective directors,  officers,  employees and
agents  from,  and  hold  each of them  harmless  against,  any and all  losses,
liabilities,  claims  or  damages  to  which  any of  them  may  become  subject
(regardless  of whether caused in whole or in part by the simple (but not gross)
negligence  of the Person  indemnified),  insofar as such  losses,  liabilities,
claims or damages  arise out of or result from any (i) actual or proposed use by
the Company of the  proceeds  of any  extension  of credit  (whether a Loan or a
Letter of  Credit) by any Bank  hereunder,  (ii)  breach by the  Company of this
Agreement or any other Loan Document,  (iii)  violation by the Company or any of
its  Subsidiaries of any Legal  Requirement,  including but not limited to those
relating to Hazardous Substances, (iv) Liens or security interests previously or
hereafter granted on any real or personal property, to the extent resulting from
any Hazardous Substance located in, on or under any such property, (v) ownership
by the Banks or Agent of any real or personal property following foreclosure, to
the extent such losses,  liabilities,  claims or damages  arise out of or result
from any Hazardous  Substance located in, on or under such property,  including,
without  limitation,  losses,  liabilities,  claims or damages which are imposed
upon Persons under laws relating to or regulating Hazardous Substances solely by
virtue of ownership, (vi) Bank's or Agent's being deemed an operator of any such
real or  personal  property  by a court or other  regulatory  or  administrative
agency or tribunal in  circumstances in which neither Agent nor any of the Banks
is generally  operating or generally  exercising control over such property,  to
the extent such losses,  liabilities,  claims or damages  arise out of or result
from any  Hazardous  Substance  located  in, on or under  such  property,  (vii)
investigation,   litigation  or  other  proceeding   (including  any  threatened
investigation or proceeding)  relating to any of the foregoing,  and the Company
shall  reimburse  Agent,  each  Bank,  and  each  Affiliate  thereof  and  their
respective  directors,  officers,  employees  and agents,  upon demand,  for any
expenses   (including   legal  fees)  incurred  in  connection   with  any  such
investigation  or  proceeding  or  (viii)  taxes  (excluding  income  taxes  and
franchise  taxes)  payable or ruled  payable by any  Governmental  Authority  in
respect of the Notes or any other Loan  Document,  together  with  interest  and
penalties,  if any;  provided,  however,  that the  Company  shall  not have any
obligations pursuant to this Section 13.3 with


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respect to any losses, liabilities, claims, damages or expenses (a) arising from
or relating solely to events,  conditions or circumstances  which, as to clauses
(iv), (v) or (vi) above, first came into existence or which first occurred after
the  date  on  which  the  Company  or any of its  Subsidiaries  conveyed  to an
unrelated  third  party  all of the  Company's  or the  applicable  Subsidiary's
rights,  titles  and  interests  to the  applicable  real or  personal  property
(whether  by  deed,  deed-in-lieu,   foreclosure  or  otherwise)  other  than  a
conveyance  made in violation of any Loan Document or (b) incurred by the Person
seeking  indemnification by reason of the gross negligence or willful misconduct
of  such  Person.   If  the  Company  ever  disputes  a  good  faith  claim  for
indemnification under this Section 13.3 on the basis of the proviso set forth in
the preceding  sentence,  the full amount of indemnification  provided for shall
nonetheless be paid,  subject to later  adjustment or reimbursement at such time
(if any) as a court of competent  jurisdiction enters a final judgment as to the
applicability of any such exceptions.

         13.4  Amendments,  Etc. No amendment or waiver of any provision of this
Agreement,  the  Notes  or any  other  Loan  Document,  nor any  consent  to any
departure by the Company  therefrom,  shall in any event be effective unless the
same shall be agreed or consented to by the Majority Banks and the Company,  and
each such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given; provided, that no amendment, waiver or
consent shall,  unless in writing and signed by each Bank affected  thereby,  do
any of the  following:  (a)  increase  the  Commitment  of such  Bank (it  being
understood  that the waiver of any reduction in the Commitments or any mandatory
repayment  other than (x) the repayment of all Loans at the end of the Revolving
Credit Availability  Period and (y) the mandatory  reductions of the Commitments
provided for in Section 2.3(a) and (z) the mandatory prepayments required by the
terms  of  Section  3.2(b),  shall  not  be  deemed  to be an  increase  in  any
Commitment)  or subject the Banks to any additional  obligation;  (b) reduce the
principal  of,  or  interest  on,  any  Loan,  Reimbursement  Obligation  or fee
hereunder;  (c) postpone any  scheduled  date fixed for any payment or mandatory
prepayment of principal of, or interest on, any Loan, Reimbursement  Obligation,
fee or other sum to be paid  hereunder;  (d) change the percentage of any of the
Commitments or of the aggregate  unpaid principal amount of any of the Loans and
Letter of Credit  Liabilities,  or the number of Banks,  which shall be required
for the Banks or any of them to take any action under this Agreement; (e) change
any provision  contained in Sections 2.2(c),  9.7 or 13.3 hereof or this Section
13.4 or Section 6.7  hereof,  or (f)  release  all or  substantially  all of any
security for the  obligations of the Company under this Agreement or any Note or
all or substantially all of the personal  liability of any obligor created under
any of the Loan  Documents.  Anything in this Section 13.4 to the  contrary,  no
amendment,  waiver or consent  shall be made with  respect to Section 12 without
the consent of Agent.  The consent of the Super Majority Banks shall be required
to any amendment of any  requirement  under this Agreement or the other the Loan
Documents that the consent of the Super Majority Banks be obtained.

         13.5       Successors and Assigns.



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         (a) This  Agreement  shall be binding  upon and inure to the benefit of
the Company,  Agent and the Banks and their  respective  successors and assigns.
The  Company  may not  assign  or  transfer  any of its  rights  or  obligations
hereunder  without the prior written consent of all of the Banks.  Each Bank may
sell  participations  to any  Person  in all or part of any  Loan or  Letter  of
Credit,  or all or part of its Notes or  Commitments,  in which  event,  without
limiting the  foregoing,  the provisions of Section 6 shall inure to the benefit
of each purchaser of a participation and the pro rata treatment of payments,  as
described in Section 5.2,  shall be determined as if such Bank had not sold such
participation.  In the event any Bank  shall sell any  participation,  such Bank
shall retain the sole right and responsibility to enforce the obligations of the
Company  relating  to  the  Loans  or  Letters  of  Credit,  including,  without
limitation,  the right to approve any amendment,  modification  or waiver of any
provision of this Agreement other than amendments, modifications or waivers with
respect to (i) any fees  payable  hereunder  to the Banks and (ii) the amount of
principal  or the rate of  interest  payable  on,  or the  dates  fixed  for the
scheduled repayment of principal of, the Loans.

         (b) Each Bank may assign to one or more  Banks or any other  Person all
or a portion of its  interests,  rights and  obligations  under this  Agreement,
provided,  however,  that (i) other than in the case of an assignment to another
Bank that is, at the time of such assignment,  a party hereto or an Affiliate of
such Bank, the Company must give its prior written  consent,  which consent will
not be unreasonably withheld, (ii) the aggregate amount of the Commitment and/or
Loans or Letters of Credit of the assigning Bank subject to each such assignment
(determined as of the date the Assignment and Acceptance (as defined below) with
respect to such assignment is delivered to Agent) shall in no event be less than
$10,000,000  (or  $5,000,000  in the case of an  assignment to an Affiliate of a
Bank or between  Banks),  (iii) no assignment  shall have the effect of reducing
the pro rata share of the Loans or Letters of Credit and the Commitments held by
the assignor and its Affiliates  below  $10,000,000,  (iv)  notwithstanding  any
other  term or  provision  of this  Agreement,  unless  the  Company  shall have
otherwise  consented in writing (such consent not to be unreasonably  withheld),
each such assignment shall be pro rata with respect to the Loans, the Letters of
Credit and the  Commitment  of the  assignor,  and (v) the  parties to each such
assignment  shall execute and deliver to Agent, for its acceptance and recording
in the Register (as defined below),  an Assignment and Acceptance in the form of
Exhibit H hereto (each an "Assignment and Acceptance") with blanks appropriately
completed,  together  with any Note or Notes  subject to such  assignment  and a
processing  and  recordation  fee of $2,500 paid by the assignee  (for which the
Company shall have no liability). Upon such execution,  delivery, acceptance and
recording,  from and after the effective date  specified in each  Assignment and
Acceptance,  which effective date shall be at least five Business Days after the
execution thereof,  (A) the assignee  thereunder shall be a party hereto and, to
the extent  provided  in such  Assignment  and  Acceptance,  have the rights and
obligations of a Bank hereunder and (B) the Bank thereunder shall, to the extent
provided in such  Assignment and  Acceptance,  be released from its  obligations
under this Agreement.  Notwithstanding  anything  contained in this Agreement to
the  contrary,  any Bank may at any time assign all or any portion of its rights
under this Agreement and the Notes issued to it

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<PAGE>



as collateral to a Federal Reserve Bank; provided, that no such assignment shall
release the assigning Bank from any of its obligations hereunder.

         (c) By executing and delivering an Assignment and Acceptance,  the Bank
assignor  thereunder and the assignee  thereunder confirm to and agree with each
other and the other parties hereto as follows: (i) other than the representation
and warranty  that it is the legal and  beneficial  owner of the interest  being
assigned  thereby free and clear of any adverse claim,  such Bank assignor makes
no representation or warranty and assumes no responsibility  with respect to any
statements,  warranties or  representations  made in or in connection  with this
Agreement  or  any of the  other  Loan  Documents  or the  execution,  legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement or
any of the other Loan  Documents or any other  instrument or document  furnished
pursuant  thereto;  (ii) such Bank assignor makes no  representation or warranty
and assumes no  responsibility  with respect to the  financial  condition of the
Company  or  the  performance  or  observance  by  the  Company  of  any  of its
obligations under this Agreement or any of the other Loan Documents or any other
instrument or document furnished  pursuant hereto;  (iii) such assignee confirms
that it has  received  a copy of this  Agreement,  together  with  copies of the
financial  statements  referred to in Section 8.6 and such other  documents  and
information  as it has deemed  appropriate  to make its own credit  analysis and
decision to enter into such Assignment and Acceptance;  (iv) such assignee will,
independently  and without  reliance  upon any Agent,  such Bank assignor or any
other  Bank and  based  on such  documents  and  information  as it  shall  deem
appropriate at the time,  continue to make its own credit decisions in taking or
not taking action under this  Agreement and the other Loan  Documents;  (v) such
assignee  appoints  and  authorizes  Agent to take  such  action as agent on its
behalf and to  exercise  such  powers  under this  Agreement  and the other Loan
Documents as are  delegated  to Agent by the terms  hereof,  together  with such
powers as are reasonably  incidental thereto; and (vi) such assignee agrees that
it will perform in accordance with their terms all obligations that by the terms
of this  Agreement and the other Loan  Documents are required to be performed by
it as a Bank.

         (d) Agent shall  maintain at its office a copy of each  Assignment  and
Acceptance  delivered to it and a register for the  recordation of the names and
addresses of the Banks and the Commitments of, and principal amount of the Loans
owing to,  each Bank from time to time  (the  "Register").  The  entries  in the
Register shall be conclusive, in the absence of manifest error, and the Company,
Agent and the Banks may treat each  person the name of which is  recorded in the
Register as a Bank  hereunder  for all purposes of this  Agreement and the other
Loan Documents. The Register shall be available for inspection by the Company or
any Bank at any  reasonable  time and from  time to time upon  reasonable  prior
notice.

         (e) Upon its receipt of an  Assignment  and  Acceptance  executed by an
assigning  Bank  and the  assignee  thereunder  together  with any Note or Notes
subject to such assignment,  the written consent to such assignment  executed by
the Company and the fee payable in respect


                                       82

<PAGE>



thereto,  Agent shall, if such Assignment and Acceptance has been completed with
blanks  appropriately  filled,  (i) accept such Assignment and Acceptance,  (ii)
record the information  contained  therein in the Register and (iii) give prompt
notice  thereof to the  Company.  Within  five  Business  Days after  receipt of
notice, the Company,  at its own expense,  shall execute and deliver to Agent in
exchange for the surrendered Notes new Notes to the order of such assignee in an
amount equal to the Commitments  and/or Loans or Letters of Credit assumed by it
pursuant  to such  Assignment  and  Acceptance  and, if the  assigning  Bank has
retained  Commitments  and/or  Loans  hereunder,  new  Notes to the order of the
assigning Bank in an amount equal to the Commitment  and/or Loans retained by it
hereunder. Such new Notes shall be in an aggregate principal amount equal to the
aggregate  principal  amount  of such  surrendered  Notes,  shall be  dated  the
effective  date of such  Assignment  and  Acceptance  and shall  otherwise be in
substantially  the form of the respective  Note.  Thereafter,  such  surrendered
Notes shall be marked renewed and substituted and the originals delivered to the
Company (with copies, certified by the Company as true, correct and complete, to
be retained by Agent).

         (f) Any Bank may, in connection with any assignment or participation or
proposed assignment or participation  pursuant to this Section 13.5, disclose to
the assignee or participant or proposed assignee or participant, any information
relating to the Company  furnished  to such Bank by or on behalf of the Company;
provided,  however,  that, prior to any such disclosure,  the Company shall have
consented thereto,  which consent shall not be unreasonably  withheld,  and each
such assignee or participant, or proposed assignee or participant, shall execute
an agreement  whereby such assignee or  participant  shall agree to preserve the
confidentiality  of any Confidential  Information  (defined in Section 13.13) on
terms substantially the same as those provided in Section 13.13.

         (g) The  Company  will  have  the  right  to  consent  to any  material
intercreditor  arrangements  in connection with an assignment by any Bank of any
interest,  right or obligation  under this Agreement  which is not pro rata with
respect to the Loans,  the Letters of Credit and the  Commitment of the assignor
and the  Company  may deny its consent to any such  arrangements  which,  in the
reasonable  judgement of the Company,  would  adversely  affect the Company in a
material respect.

         (h) The  provisions of this Section  shall not apply to the  assignment
and pledge of a Bank's rights hereunder or under any Note to any Federal Reserve
Bank for collateral  purposes pursuant to Regulation A of the Board of Governors
of the Federal Reserve System and any Operating  Circular issued by such Federal
Reserve Bank;  provided that such  assignment  and pledge shall not relieve such
Bank of any of its obligations hereunder.

         13.6  Limitation  of  Interest.  The  Company  and the Banks  intend to
strictly  comply with all  applicable  laws,  including  applicable  usury laws.
Accordingly,  the  provisions of this Section 13.6 shall govern and control over
every other provision of this Agreement or any other Loan


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<PAGE>



Document  which  conflicts or is  inconsistent  with this Section,  even if such
provision  declares  that  it  controls.  As  used in  this  Section,  the  term
"interest"  includes  the  aggregate  of all  charges,  fees,  benefits or other
compensation  which constitute  interest under applicable law, provided that, to
the maximum extent  permitted by applicable law, (a) any  non-principal  payment
shall be character  ized as an expense or as  compensation  for something  other
than the use, forbearance or detention of money and not as interest, and (b) all
interest at any time  contracted  for,  reserved,  charged or received  shall be
amortized,  prorated,  allocated and spread, in equal parts during the full term
of the  Obligations.  In no event  shall  the  Company  or any  other  Person be
obligated to pay, or any Bank have any right or privilege to reserve, receive or
retain, (a) any interest in excess of the maximum amount of nonusurious interest
permitted  under the laws of the State of Texas or the applicable  laws (if any)
of the United States or of any other applicable  state, or (b) total interest in
excess of the  amount  which  such Bank  could  lawfully  have  contracted  for,
reserved, received, retained or charged had the interest been calculated for the
full term of the  Obligations  at the Highest  Lawful Rate. On each day, if any,
that the interest rate (the "Stated  Rate")  called for under this  Agreement or
any other Loan  Document  exceeds the  Highest  Lawful  Rate,  the rate at which
interest shall accrue shall automatically be fixed by operation of this sentence
at the Highest  Lawful Rate for that day,  and shall remain fixed at the Highest
Lawful Rate for each day thereafter  until the total amount of interest  accrued
equals the total  amount of interest  which would have  accrued if there were no
such ceiling rate as is imposed by this  sentence.  Thereafter,  interest  shall
accrue at the Stated  Rate  unless and until the Stated  Rate again  exceeds the
Highest Lawful Rate when the provisions of the  immediately  preceding  sentence
shall again automatically  operate to limit the interest accrual rate. The daily
interest  rates to be used in  calculating  interest at the Highest  Lawful Rate
shall be determined by dividing the applicable  Highest Lawful Rate per annum by
the  number of days in the  calendar  year for which such  calculation  is being
made.  None of the terms and  provisions  contained in this  Agreement or in any
other Loan Document which  directly or indirectly  relate to interest shall ever
be construed without reference to this Section 13.6, or be construed to create a
contract to pay for the use,  forbearance  or  detention of money at an interest
rate in excess of the Highest  Lawful  Rate.  If the term of any  Obligation  is
shortened by reason of acceleration of maturity as a result of any Default or by
any other cause,  or by reason of any required or permitted  prepayment,  and if
for that (or any other)  reason any Bank at any time,  including but not limited
to, the stated maturity,  is owed or receives (and/or has received)  interest in
excess of interest  calculated at the Highest Lawful Rate,  then and in any such
event all of any such excess interest shall be canceled  automatically as of the
date of such acceleration,  prepayment or other event which produces the excess,
and, if such excess  interest  has been paid to such Bank,  it shall be credited
pro tanto  against  the  then-outstanding  principal  balance  of the  Company's
obligations  to such  Bank,  effective  as of the date or dates  when the  event
occurs which causes it to be excess interest,  until such excess is exhausted or
all of such principal has been fully paid and satisfied, whichever occurs first,
and any  remaining  balance of such  excess  shall be  promptly  refunded to its
payor.



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<PAGE>



         13.7 Survival. The obligations of the Company under Sections 2.2(c), 6,
9.7 and 13.3 hereof and the  obligations  of the Banks under Section 13.6 hereof
shall survive the repayment of the Loans and  Reimbursement  Obligations and the
termination of the Commitments and the Letters of Credit.

         13.8  Captions.  Captions  and section  headings  appearing  herein are
included  solely for convenience of reference and are not intended to affect the
interpretation of any provision of this Agreement.

         13.9  Counterparts.  This  Agreement  may be  executed in any number of
counterparts,  all of which taken  together  shall  constitute  one and the same
agreement  and any of the parties  hereto may execute this  Agreement by signing
any such counterpart.

         13.10  Governing  Law.  This  Agreement  and the Notes and  (except  as
therein  provided) the other Loan  Documents are  performable  in Harris County,
Texas, which shall be a proper place of venue for suit on or in respect thereof.
The  Company  irrevocably  agrees that any legal  proceeding  in respect of this
Agreement or the other Loan Documents shall be brought in the district courts of
Harris  County,  Texas or the  United  States  District  Court for the  Southern
District of Texas, Houston Division (collectively,  the "Specified Courts"). The
Company hereby irrevocably submits to the nonexclusive jurisdiction of the state
and federal courts of the State of Texas. The Company hereby irrevocably waives,
to the  fullest  extent  permitted  by law,  any  objection  which it may now or
hereafter have to the laying of venue of any suit, action or proceeding  arising
out of or relating to any Loan  Document  brought in any  Specified  Court,  and
hereby  further  irrevocably  waives  any claims  that any such suit,  action or
proceeding brought in any such court has been brought in an inconvenient  forum.
The Company further (1) agrees to designate and maintain an agent for service of
process  in the City of  Houston in  connection  with any such  suit,  action or
proceeding and to deliver to Agent evidence thereof and (2) irrevocably consents
to the  service of process out of any of the  aforementioned  courts in any such
suit,  action or proceeding by the mailing of copies thereof by certified  mail,
return  receipt  requested,  postage  prepaid,  to the Company at its address as
provided in this Agreement or as otherwise provided by Texas law. Nothing herein
shall affect the right of any Agent or any Bank to commence legal proceedings or
otherwise proceed against the Company in any jurisdiction or to serve process in
any manner permitted by applicable law. The Company agrees that a final judgment
in any such  action or  proceeding  shall be  conclusive  and may be enforced in
other  jurisdictions  by suit on the judgment or in any other manner provided by
law. THIS  AGREEMENT AND (EXCEPT AS THEREIN  PROVIDED) THE OTHER LOAN  DOCUMENTS
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS (OTHER
THAN THE CONFLICT OF LAWS RULES) OF THE STATE OF TEXAS AND THE UNITED  STATES OF
AMERICA FROM TIME TO TIME IN EFFECT.



                                       85

<PAGE>



         13.11  Severability.  Whenever  possible,  each  provision  of the Loan
Documents shall be interpreted in such manner as to be effective and valid under
applicable law. If any provision of any Loan Document shall be invalid,  illegal
or unenforceable in any respect under any applicable law, the validity, legality
and  enforceability of the remaining  provisions of such Loan Document shall not
be affected or impaired thereby.

         13.12  Chapter 15 Not  Applicable.  Chapter  15,  Subtitle 3, Title 79,
Revised  Civil  Statutes of Texas,  1925,  as  amended,  shall not apply to this
Agreement  or to any Loan or Letter of Credit,  nor shall this  Agreement or any
Loan or Letter of Credit be governed by or be subject to the  provisions of such
Chapter 15 in any manner whatsoever.

         13.13   Confidential Information. Agent and each Bank separately agrees
that:

         (a) As used herein, the term  "Confidential  Information" means written
information about the Company or the transactions  contemplated herein furnished
by the Company to Agent  and/or the Banks which is  specifically  designated  as
confidential  by the  Company;  Confidential  Information,  however,  shall  not
include  information  which (i) was publicly  known or  available,  or otherwise
available on a  non-confidential  basis to any Bank,  at the time of  disclosure
from a source other than the Company,  (ii) subsequently  becomes publicly known
through no act or omission by such Bank, (iii) otherwise  becomes available on a
non-confidential  basis to any Bank other than through disclosure by the Company
or (iv) has been in the  possession  of any Bank for a period  of more  than two
years from the date on which such  information  originally was furnished to such
Bank by the Company, unless the Company shall have requested Agent and the Banks
in  writing,  at least  30 days  prior to the end of such  two-year  period,  to
maintain the confidentiality of such information for another two (2) year period
(or for successive  two (2) year  periods);  provided that the Company shall not
unreasonably  withhold  its consent to a request  made after the initial two (2)
year period to eliminate information from "Confidential Information".

         (b) Agent and each Bank agrees that it will take normal and  reasonable
precautions  to maintain the  confidentiality  of any  Confidential  Information
furnished  to such  Person;  provided,  however,  that such Person may  disclose
Confidential  Information (i) upon the Company's consent;  (ii) to its auditors;
(iii)  when  required  by any  Legal  Requirement;  (iv) as may be  required  or
appropriate in any report,  statement or testimony submitted to any Governmental
Authority having or claiming to have  jurisdiction over it; (v) to such Person's
and its Subsidiaries' or Affiliates'  officers,  directors,  employees,  agents,
representatives  and professional  consultants in connection with this Agreement
or administration of the Loans and Letters of Credit; (vi) as may be required or
appropriate,  should such Bank elect to assign or grant participations in any of
the Obligations in connection with (1) the enforcement of the Obligations to any
such Person under any of the Loan  Documents or related  agreements,  or (2) any
potential  transfer  pursuant to this Agreement of any  Obligation  owned by any
Bank  (provided  any  potential  transferee  has been approved by the Company if
required by this Agreement,  which approval shall not be unreasonably  withheld,
and


                                       86

<PAGE>



has agreed in writing to be bound by substantially the same provisions regarding
Confidential Information contained in this Section); (vii) as may be required or
appropriate  in response to any  summons or subpoena or in  connection  with any
litigation or administrative  proceeding;  (viii) to any other Bank; (ix) to the
extent  reasonably  required  in  connection  with the  exercise  of any  remedy
hereunder  or under the other Loan  Documents;  or (x) to  correct  any false or
misleading   information  which  may  become  public  concerning  such  Person's
relationship to the Company.

         13.14 Tax Forms. With respect to each Bank which is organized under the
laws of a  jurisdiction  outside  the United  States,  on the day of the initial
borrowing hereunder and from time to time thereafter if requested by the Company
or  Agent,  such  Bank  shall  provide  Agent  and the  Company  with the  forms
prescribed by the Internal Revenue Service of the United States certifying as to
such Bank's  status for purposes of  determining  exemption  from United  States
withholding taxes with respect to all payments to be made to such Bank hereunder
or  other  documents  satisfactory  to the Bank and  Agent  indicating  that all
payments  to be made to such Bank  hereunder  are  subject to such tax at a rate
reduced by an  applicable  tax  treaty.  Unless the Company and Agent shall have
received such forms or such documents indicating that payments hereunder are not
subject to United  States  withholding  tax or are subject to such tax at a rate
reduced by an applicable  tax treaty,  the Company or Agent shall withhold taxes
from such payments at the  applicable  statutory rate in the case of payments to
or for any Bank organized  under the laws of a  jurisdiction  outside the United
States.

         13.15 Amendment and Restatement.  This Agreement amends and restates in
its  entirety  that  certain  Credit  Agreement  dated as of  December  23, 1996
executed by and among the Company, the Banks and Agent, as amended.

         13.16  Intercreditor  Agreement.   Reference  is  hereby  made  to  the
Intercreditor Agreement, which provides for certain matters relating to both the
Loans and the Canadian Facility. To the extent of any conflict between the terms
hereof and the terms of the Intercreditor Agreement, the Intercreditor Agreement
shall  control.  The  execution  and  delivery  by  Agent  of the  Intercreditor
Agreement on behalf of the Banks is hereby ratified and confirmed by each of the
Banks.  Any Bank that becomes a party to this Agreement after the Effective Date
agrees to be bound by the terms and provisions of the Intercreditor Agreement.



                                       87

<PAGE>



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

                                               SEAGULL ENERGY CORPORATION,
                                               a Texas corporation


                                               By: /s/ William L. Transier
                                               Name:   William L. Transier
                                               Title:  Senior Vice President and
                                                       Chief Financial Officer

                                               Address for Notices:

                                               1001 Fannin, Suite 1700
                                               Houston, Texas  77002
                                               Attention: Steve Thorington




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<PAGE>



                                                     THE CHASE MANHATTAN BANK,
                                                     as Agent


                                                     By: /s/  Peter M. Ling
                                                     Name:    Peter M. Ling
                                                     Title:   Vice President
Commitment:
                                                     Address for Notices:
$40,000,000
                                                     1 Chase Manhattan Plaza, 
                                                     8th Floor
                                                     New York, New York 10081
                                                     Attention: Agent Services

                                 with a copy to:

                    Texas Commerce Bank National Association
                                 712 Main Street
                              Houston, Texas 77002
                       Attention: Manager, Energy Division





                                       89

<PAGE>



                                                MORGAN GUARANTY TRUST COMPANY OF
                                                NEW YORK



                                                     By: /s/ John Kowalczuk
Commitment:                                          Name:   John Kowalczuk
                                                     Title:  Vice President
$40,000,000
                                                     Address for Notices:

                                 60 Wall Street
                          New York, New York 10260-0060
                           Attention: Loan Department





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<PAGE>



                                                     NATIONSBANK OF TEXAS, N.A.



                                                     By:  /s/ Paul A. Squires
Commitment:                                          Name:    Paul A. Squires
                                                     Title:   Sr. Vice President
$40,000,000
                                                     Address for Notices:

                                                     700 Louisiana, 8th Floor
                                                     Houston, Texas  77002
                                                     Attention:  Jo A. Tamalis






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<PAGE>



                                                     BANKBOSTON, N.A.



                                                   By:  /s/ George W. Passela
Commitment:                                        Name:    George W. Passela
                                                   Title:   Managing Director
$25,000,000
                                                   Address for Notices:

                                                   100 Federal Street
                                                   Energy & Utilities 01-08-04
                                                   Boston, Massachusetts  02110
                                                   Attention:  George W. Passela






                                       92

<PAGE>



                                             ABN AMRO BANK N.V., HOUSTON AGENCY


                                             By:  /s/ Cheryl L. Lipshutz
Commitment:                                  Name:    Cheryl L. Lipshutz
                                             Title:   Group Vice President
$15,000,000

                                             By:  /s/ Charles W. Randall
                                             Name:    Charles W. Randall
                                             Title:   Sr. Vice President 


                                             Address for Notices:

                                             Three Riverway, Suite 1700
                                             Houston, Texas  77056
                                             Attention: Ms. Cheryl Lipshutz





                                       93

<PAGE>



                                                   THE BANK OF NEW YORK



                                                   By: /s/ Renee Bijlani
Commitment:                                        Name:   Renee Bijlani
                                                   Title:  
$15,000,000
                                                   Address for Notices:

                                                   One Wall Street, 19th Floor
                                                   New York, New York  10286
                                                   Attention:  Ms. Renee Bijlani






                                       94

<PAGE>



                                                   BANQUE PARIBAS HOUSTON AGENCY



                                                   By:  /s/ Marian Livingston
Commitment:                                        Name:    Marian Livingston
                                                   Title:   Vice President
$25,000,000

                                                   By:  /s/ Barton D. Schouest
                                                   Name:    Barton D. Schouest
                                                   Title:   Group Vice President


                                                   Address for Notices:

                                                   1200 Smith, Suite 3100
                                                   Houston, Texas  77002
                                                   Attention:  Marian Livingston






                                       95

<PAGE>



                                                CREDIT LYONNAIS NEW YORK BRANCH



                                                By: /s/ Pascal Poupelle
Commitment:                                     Name:   Pascal Poupelle
                                                Title:  Executive Vice President
$25,000,000


                                                Address for Notices:

                                                1000 Louisiana, Suite #5360
                                                Houston, Texas  77002
                                                Attention:  Mr. A. David Dodd





                                       96

<PAGE>



                                                THE FUJI BANK, LIMITED
                                                HOUSTON AGENCY


                                                By: /s/ Yoshiaki Inoue
Commitment:                                     Name:   Yoshiaki Inoue
                                                Title:  Vice President & Manager
$15,000,000
                                                Address for Notices:

                                                One Houston Center, Suite 4100
                                                1221 McKinney Street
                                                Houston, Texas  77010
                                                Attention:  Mr. Tommy Watts






                                       97

<PAGE>



                                              THE FIRST NATIONAL BANK OF CHICAGO



                                              By:  /s/ Dixon P. Schultz
Commitment:                                   Name:    Dixon P. Schultz
                                              Title:   Vice President
$25,000,000
                                              Address for Notices:

                                              One First National Plaza
                                              10th Floor, Mail Suite 0634
                                              Chicago, Illinois 60670
                                              Attention:  Mr. John Beirne

                                              with a copy to:

                                              1100 Louisiana, Suite 3200
                                              Houston, Texas 77002
                                              Attention:  Ms. Dixon Schultz










                                       98

<PAGE>



                                              SOCIETE GENERALE, SOUTHWEST AGENCY



                                              By:   /s/ Richard A. Erbert
Commitment:                                   Name:     Richard A. Erbert
                                              Title:    Vice President
$25,000,000
                                              Address for Notices:

                                              2001 Ross Avenue, Suite 4800
                                              Dallas, Texas 75201
                                              Attention: Ms. Angela Aldridge

                                              with a copy to:

                                              1111 Bagby, Suite 2020
                                              Houston, Texas  77002
                                              Attention:  Mr. Richard Erbert





                                       99

<PAGE>



                                              THE BANK OF TOKYO-MITSUBISHI, LTD.



                                              By:  /s/ M. G. Meiss
Commitment:                                   Name:    M. G. Meiss
                                              Title:   Vice President
$15,000,000
                                              Address for Notices:

                                              1100 Louisiana, Suite 2800
                                              Houston, Texas  770002-5216
                                              Attention:  Mr. John M. McIntyre




                                       100





                                BANK OF SCOTLAND



                                                     By: /s/ Annie Chin Tat
Commitment:                                          Name:   Annie Chin Tat
                                                     Title:  Vice President
$15,000,000
                                                     Address for Notices:

                                565 Fifth Avenue
                            New York, New York 10017
                        Attention: Ms. Catherine Onifrey






                                       101

<PAGE>



                                             CAISSE NATIONALE DE CREDIT AGRICOLE



                                             By:  /s/ Dean Bulice
Commitment:                                  Name:    Dean Bulice
                                             Title:   Sr. Vice President
$15,000,000
                                             Address for Notices:

                                             600 Travis, Suite 2340
                                             Houston, Texas 77002
                                             Attention:  Mr. Brian Knezeak




                                       102

<PAGE>



                                                 CHRISTIANIA BANK OG KREDITKASSE



                                                 By:  /s/ Peter M. Dodge
Commitment:                                      Name:    Peter M. Dodge
                                                 Title:   First Vice President
$15,000,000


                                                 By:  /s/ Carl Petter Svendsen
                                                 Name:    Carl Petter Svendsen
                                                 Title:   First Vice President


                              Address for Notices:

                               11 West 42nd Street
                                    7th Floor
                            New York, New York 10036
                           Attention: Mr. Peter Dodge





                                       103

<PAGE>



                                                     DEN NORSKE BANK AS



                                                     By:  /s/ Byron L. Cooley
Commitment:                                          Name:    Byron L. Cooley
                                                     Title:   Sr. Vice President
$15,000,000

                                                     By:  /s/ J. Morten Kreutz
                                                     Name:    J. Morten Kreutz
                                                     Title:   Vice President

                                                     Address for Notices:

                                    333 Clay
                                   Suite 4890
                              Houston, Texas 77002
                         Attention: Mr. Byron L. Cooley






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<PAGE>



                                                 WELLS FARGO BANK (TEXAS),
                                                 NATIONAL ASSOCIATION



                                                 By:  /s/ J. Alan Alexander, Jr.
Commitment:                                      Name:    J. Alan Alexander, Jr.
                                                 Title:   Vice President
$25,000,000
                                                 Address for Notices:

                                                 1000 Louisiana Street
                                                 3rd Floor/MAC 5002-031
                                                 Houston, Texas  77002
                                                 Attention:  Mr. Alan Alexander






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<PAGE>



                                                THE BANK OF NOVA SCOTIA



                                                By:  /s/ A. S. Norsworthy
Commitment:                                     Name:    A. S. Norsworthy
                                                Title: Sr. Team Leader - 
                                                       Loan Operations
$10,000,000
                                                Address for Notices:

                                                600 Peachtree Street, Suite 2700
                                                Atlanta, Georgia 30308
                                                Attention:  Mr. Cleve Bushey






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<PAGE>



                                    CIBC INC.



                                                   By: /s/ Aleksandra K. Dymanus
Commitment:                                        Name:   Aleksandra K. Dymanus
                                                   Title:
$10,000,000

                              Address for Notices:

                                 Two Paces West
                              2727 Paces Ferry Road
                                   Suite 1200
                             Atlanta, Georgia 30339
                           Attention: Loan Operations

                                 with a copy to:

                       Canadian Imperial Bank of Commerce
                               Two Houston Center
                                909 Fannin Street
                              Houston, Texas 77010
                           Attention: Mr. Brian Myers






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<PAGE>



                                   MELLON BANK



                                                    By: /s/ E. Marc Cuenod, Jr.
Commitment:                                         Name:   E. Marc Cuenod, Jr.
                                                    Title:  First Vice President
$15,000,000
                              Address for Notices:

                                   Mellon Bank
                             One Mellon Bank Center
                                  Room 151-4425
                       Pittsburgh, Pennsylvania 15258-0001
                 Attention: Manager, Energy and Utilities Group

                                 with a copy to:

                            Mellon Financial Services
                           1100 Louisiana, 36th Floor
                            Houston, Texas 77002-5210
                          Attention: Ms. Melissa Bauman





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<PAGE>



                                              FIRST UNION NATIONAL BANK OF NORTH
                                              CAROLINA


                                              By:  /s/ Michael J. Kolosowsky
Commitment:                                   Name:    Michael J. Kolosowsky
                                              Title:   Vice President
$15,000,000
                              Address for Notices:

                   First Union National Bank of North Carolina
                             1001 Fannin, Suite 2255
                              Houston, Texas 77002
                         Attention: Mr. Jay M. Chernosky




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<PAGE>


                                       BANK OF MONTREAL



                                       By:  /s/Robert L. Roberts
Commitment:                            Name:   Robert L. Roberts
                                       Title:  Director, U. S. Corporate Banking
$10,000,000

                                       Address for Notices:

                                       700 Louisiana, Suite 4400
                                       Houston, Texas 77002
                                       Attention: Mr. Brian Otis



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