**CONTRACT
      OPERATING AGREEMENT**







**THIS
      CONTRACT OPERATING AGREEMENT** (this
“ **Contract
      Operating Agreement** ”
or
      this
“ **Agreement** ”)
      is
      entered into this 8 th day of
      April, 2008, to be effective as of the 1st day of April, 2008 (“ **Effective
      Date** ”),
      between and among **South
      Texas Oil Company** ,
      a
      Nevada corporation (“ **South
      Texas** ”),
      including its subsidiaries, **STO
      Operating Company** ,
      a Texas
      corporation (“ **STO
      Operating** ”); **STO
      Drilling Company** ,
      a Texas
      corporation (“ **STO
      Drilling** ”); **Southern
      Texas Oil Company** ,
      a Texas
      corporation (“ **Southern
      Texas** ”);
      and **STO
      Properties LLC** ,
      a Texas
      limited liability company (“ **STO
      Properties** ”),
      any
      or all of which subsidiaries of South Texas may be referred to as “Subsidiaries”
and **South
      Texas** ,
      together with such Subsidiaries, individually or collectively, may be referred
      to herein as “ **STO** ”,
      all of
      which collectively constitute the Party of the First Part for which the Services
      are to be performed, whose address is 769 Highway 95 N., Bastrop, Texas 78602,
      and **Sonterra
      Operating, Inc.** ,
      a
      Delaware corporation (“ **Sonterra** ”),
      Party
      of the Second Part which shall perform the Services, whose address is 300 E.
      Sonterra Blvd., Suite 1220, San Antonio, Texas 78258. STO and Sonterra are
      sometimes herein referred to together as the “ **Parties** ”,
      and
      individually as a “ **Party** .”




**WHEREAS** ,
      from
      and after various dates prior to the Effective Date of this Contract Operating
      Agreement, (i) STO Operating has acquired, is a current owner of, and is the
      operator of vast majority of the certain producing, non-producing, and
      undeveloped oil and gas properties located in the State of Texas owned by STO
      Operating and Southern Texas (the “ **Texas
      Properties** ”);
      and
      (ii) STO Operating has acquired, is a current owner of, and is a non-operator
      of
      the certain producing, non-producing, and undeveloped oil and gas properties
      located in the State of Colorado owned by STO Properties (the “ **Colorado
      Properties** ”),
      which
      Texas Properties and Colorado Properties are more fully defined in Paragraph
      1
      below and more fully described in **Exhibits
      “A”** and
“ **B”,** respectively,
      attached hereto and made a part hereof;




**WHEREAS** ,
      STO and
      Sonterra desire that, for the duration of the Contract Operating Term, STO
      shall
      continue to act as operator of record for any Texas Properties in the State
      of
      Texas described on Exhibit “A” for which it is the current
      operator;




**WHEREAS** ,
      although STO is not currently the operator of, and regardless of whether STO
      hereafter elects to become operator of, the Colorado oil and gas properties
      located in the Denver-Julesberg Basin (“ **DJ
      Basin Properties** ”),
      STO
      shall, with Sonterra’s assistance, continue to lead the technical efforts with
      respect to the DJ Basin Properties as more fully described in **Exhibit
      “B”** attached
      hereto and made a part hereof;




**WHEREAS,** STO
      and
      Sonterra desire that Sonterra shall perform certain Operating Services and
      certain Accounting Services (each as defined in Paragraph 2 below) primarily
      for
      the Texas Properties that are currently, or hereafter become, operated by STO
      (“ **Operated
      Properties** ”)
      and
      secondarily for the Texas Properties and Colorado Properties not operated by
      STO
      (“ **Non-Operated
      Properties** ”)
      from
      the Effective Date (“ **Commencement
      Date** ”)
      for
      the duration of the Contract Operating Term (including any extension thereof),
      in each case to the extent that such Operating and Accounting Services are
      (i)
      appropriate for the safe, efficient, and productive operation of the business
      of
      STO; (ii) consistent with best industry practices; (iii) in accordance with
      applicable Federal and State laws; (iv) in accordance with applicable Securities
      and Exchange Commission rules and regulations; (v) in accordance with applicable
      Financial Accounting Standards Board (“ **FASB** ”)
      publications and guidance; (vi) consistent with being a reasonable prudent
      operator as such term is commonly used in the oil and gas industry; and (vii)
      in
      accordance with the terms and conditions of this Contract Operating Agreement
      (“all of which standards enumerated in (i), (ii), (iii), (iv), (v), (vi) and
      (vii) above shall be individually or collectively, as applicable, referred
      to
      herein as “ **Applicable
      Operating Standards** ”);







**NOW,
      THEREFORE** ,
      for and
      in consideration of the mutual covenants herein, the Parties stipulate and
      agree
      as follows:




1. **DEFINITIONS** **.** Unless
      otherwise defined in this Contract Operating Agreement, capitalized terms used
      herein have the meanings given to such terms below.




A. The
      term
“ **AFE** ”
shall
      mean Authorization for Expenditure;




B.
            The
                term “**Contract**”
                shall mean any joint operating agreement (“**JOA**”),
                Marketing Contract, or other contractual agreement to which STO was
                a
                party prior to the Effective Date or which STO enters into after
                the
                Effective Date; and




C.
            The
                terms “**Operated
                Properties**”
                or “**Properties**”
                shall include the Bastrop I, Bastrop II, Central Texas, and the Southern
                Texas Properties, whether described under named Wells or as properties
                not
                yet in a unit on attached**Exhibit
                “A”**,
                sometimes also referred to internally at STO as the:




(1)
      Bastrop Properties (which consists of contiguous oil and gas leasehold interests
      in both the Bastrop I and II Prospects in Bastrop County, Texas);




(2)
      Giddings Field Properties (Central Texas Leases, which consists of oil and
      gas
      leasehold interests in Burleson, Brazos, Fayette, Gonzales, and Lee Counties,
      Texas); and




(3)
      Big
      Foot, Kyote, and Somerset Fields (Southern Texas Leases, which consist of oil
      and gas leasehold interests in Atascosa and Frio Counties, Texas).




D.
            The
                terms “**Non-Operated****Properties**”
                or “**Properties**”
                shall consist of the D-J Basin Properties, described on attached**Exhibits
                “B”**.







2. **SCOPE
      OF SERVICES** **.** As
      of the Effective Date, Sonterra will begin overseeing daily operations, in
      the
      name of, on behalf of, and for the benefit of STO, of both Operating Services
      and Accounting Services for the Operated Properties and Accounting Services
      for
      the Non-Operated Properties as an independent contractor acting in the role
      of
      Contract Operator, subject to the terms, conditions, and limitations set forth
      in this Contract Operating Agreement (as the context indicates, individually
      or
      collectively, the “ **Operating
      Services** ”,
      the
“ **Accounting
      Services** ”,
      or the
“ **Services** ”).




In
      the
      performance of the Services contemplated hereunder, Sonterra shall perform
      (or
      shall cause the employees, consultants, and representatives of STO to perform)
      the Services in the name of the applicable STO entity and in accordance with
      Applicable Operating Standards, which Services shall consist of the following
      duties:




**(a)** operating
      the Operated Properties and, to a lesser extent consistent with the role of
      a
      non-operator, managing the Non-Operating Properties; provided, however, that
      STO
      will remain as the operator of record for the Operated Properties and that
      STO
      will continue to be responsible under law and in fact for the performance of
      certain functions and activities for which Sonterra is not responsible as
      described in Paragraph 5;




**(b)** performing
      all functions in the name of STO and except as limited in Paragraph 5 below,
      otherwise act as a Contract Operator as generally understood in the oil and
      gas
      industry and in accordance with Applicable Operating Standards and duties
      imposed under any Contracts to which any STO entity is a party, including
      without limitation performing the duties of Operator under any JOA or as
      Operator in a manner consistent with JOA standards in the event that the STO
      entity has no partners in particular wells and leases;




**(c)** overseeing
      marketing, nominations, gas control, and other similar services under existing
      Contracts that STO is a party to or under Contracts that STO enters into on
      Sonterra’s recommendation to gather, transport, market, store, or sell the oil
      and gas production from the Properties (individually or collectively,
“ **Marketing
      Contracts** ”)
      or
      under Marketing Contracts hereafter entered into on a spot or month-to-month
      basis and (with STO’s prior written approval) to receive proceeds from (i) the
      sale of production attributable to the Properties (to the extent not paid by
      the
      purchasers of production directly to STO); (ii) gathering, compressing,
      transporting, drilling, or other services rendered by Sonterra on behalf of
      STO;
      and/or (iii) payments not encompassed within (i) or (ii) immediately above,
      such
      as gas balancing payments in lieu of in kind volumes, overpayments of AFEs,
      cash
      calls, insurance, taxes or items similar or dissimilar to those enumerated
      in **(e)** below in
      which STO is entitled to payment, or other payments for the benefit of
      STO;




**(d)** overseeing
      land administration, landman, regulatory compliance, production reporting,
      geoscience, technical, operational, secretarial, and other duties and
      responsibilities performed by STO personnel, including its employees,
      consultants, contractors, and subcontractors, encompassed within the general
      and
      administrative overhead of STO;







( **e** ) administering
      the books, records and accounts associated with ownership of the Properties,
      including, but not limited to, providing STO with copies of daily drilling,
      workover and safety incident reports; preparing and filing all appropriate
      forms
      and reports for governmental agencies; and preparing and sending reports, change
      of operator notices or designations to third party co-owners as
      necessary;




**(f)** paying
      or
      causing to be paid severance, production and similar taxes, lease rentals,
      shut-in royalties, minimum royalties, payments in lieu of production, royalties,
      overriding royalties, production payments, net profit payments and other similar
      burdens associated with the ownership of the Properties, to the extent that,
      prior to Commencement Date, such amounts were paid directly by STO and not
      by
      either the operators of the Properties or by the purchasers of production from
      the Properties;




**(g)** paying
      or
      causing to be paid operating costs associated with ownership of the Properties
      or the operation of the Operated Properties;




**(h)** sending
      joint interest billings and cash calls to owners of the Operated Properties
      and
      receive cash calls and billings from joint interest owners attributable to
      the
      Operated Properties;




**(i)** submitting
      reports regarding royalty payments to federal, state or tribal authorities
      concerning the Properties, as appropriate;




**(j)** submitting
      production and severance tax reports with respect to the Operated Properties
      to
      federal, state or tribal authorities, with contemporaneous copies to STO
      concerning the Properties, as appropriate; and




**(k)** preparing
      a Contract Operating Term Final Report summarizing, with copies of appropriate
      supporting documentation, Sonterra’s activities on behalf of STO during the
      Contract Operating Term not more than ninety (90) days after the expiration
      of
      the Contract Operating Term.




Services
      described in clauses **(a)** , **(b)** , **(c)** ,
      ( **d** ),
      and
      ( **e** ),
      except
      to the extent that a portion of such Services also constitute Accounting
      Services, shall be referred to herein as **“Operating
      Services.”** Services
      described in clauses **(f)** , **(g)** , **(h)** , **(i),
      (j),** and **(k)** shall be
      referred to herein as **“Accounting
      Services.”** As used
      in this Agreement, the **"Contract
      Operating Term Final Report"** shall
      mean the final report that will be prepared by Sonterra based upon all actual
      production, sales proceeds, joint interest billings, and cash calls attributable
      to STO, all actual expenses and costs attributable to STO pursuant to this
      Contract Operating Agreement, and all other amounts attributable to STO that
      are
      accrued or owed, but are not yet paid or payable during the Contract Operating
      Term. As soon as practicable, but in any event within thirty (30) days after
      receipt of the Contract Operating Term Final Report, STO shall prepare and
      deliver a written response either: (1) acknowledging receipt of and agreement
      with the Contract Operating Term Final Report or (2) containing any proposed
      changes to the Contract Operating Term Final Report, together with an
      explanation of any such changes and the reasons therefore. To the extent that
      STO may suggest changes to the Contract Operating Term Final Report with which
      Sonterra does not agree, the Parties shall endeavor in good faith to reconcile
      their respective divergent positions with respect to such Report.







3. **BILLINGS
      TO OTHERS** **.** During
      the Contract Operating Term, (a) Sonterra shall oversee, prepare and send,
      in
      the name of and on behalf of STO, all joint interest billings for the Operated
      Properties to joint interest owners of the Operated Properties;




(b)  If
      Sonterra receives any subsequent invoices that pertain to the operations of
      the
      Operated Properties after the Contract Operating Term, and those invoices
      pertain to charges subsequent to the expiration of the Term, Sonterra shall
      forward all such invoices to STO for payment by STO;




(c)  STO
      shall
      reimburse Sonterra for all invoices paid by Sonterra, if any, on behalf of
      STO,
      incurred hereunder within ten (10) business days of receipt of notice of such
      payments and supporting documentation; and




(d)  The
      Parties contemplate that all monies to be paid or received during the Contract
      Operating Term shall be paid or received by and in the name of STO, but Sonterra
      agrees to promptly turn over any funds it inadvertently may receive in the
      course of performing Services hereunder and STO agrees to reimburse Sonterra
      for
      any funds, if any, that STO has paid on STO’s behalf.




4. **CONTRACT
      OPERATING TERM AND EARLY TERMINATION** **.** This
      Agreement commences as of the Effective Date and shall continue for a period
      of
      three (3) calendar months through June 30, 2008, and shall automatically
      continue from month to month thereafter unless terminated by either Party for
      one or more extended periods of one calendar month each upon written notice
      sent
      by overnight courier not less than thirty (30) days prior to the expiration
      of
      the Contract Operating Term or any extension thereof, or unless earlier
      terminated by mutual agreement of Sonterra and STO. Sonterra shall secure and
      thereafter retain possession and control in its office of all records and files
      of STO at such time as Sonterra deems desirable or reasonably necessary for
      providing Operating Services and Accounting Services, but STO shall grant
      immediate electronic access to and furnish physical access to and/or copies
      of
      all records and files to Sonterra as deemed desirable or necessary by STO or
      Sonterra to perform the Services contemplated under this Contract Operating
      Agreement.




5. **LIMITATION
      ON SERVICES** **.** The
      following limitations apply with respect to the Services contemplated hereunder
      in connection with performing the Operating Services:




(a) Sonterra
      shall not enter into any Contract in its own name or on its own behalf, and
      STO
      shall be obligated to enter into all Contracts reasonably acceptable to STO
      and
      Sonterra, in the final discretion of STO, that may be necessary for the
      operation of the Operated Properties or to otherwise perform the Services.
      Each
      of STO and Sonterra agree to consult with the CEO of the other Party with
      respect to any Contract having a duration in excess of three (3) calendar months
      and/or with respect to any proposed capital expenditures in excess of
      $25,000.00, with the final decision to be made in any event by the Executive
      Committee of STO in the event that the CEO of Sonterra and the CEO of STO do
      not
      concur on the decision with respect to such matter. Upon request, Sonterra
      agrees to join with STO in the execution of any Contract requiring Sonterra’s
      joinder, if any, that may be necessary for the operation of the Operated
      Properties during the Contract Operating Term of this Contract Operating
      Agreement; **provided,
      however, that Sonterra shall have no contractual liability under any such
      Contract and shall be entitled to indemnification from STO pursuant to Paragraph
      7(c) below** ;







(b) the
      scope
      of Operating Services shall include, but Sonterra shall not be responsible
      for
      the results of or any liability associated with, providing in good faith any
      technical evaluation regarding any drilling, reworking or other capital
      expenditure projects. Sonterra shall be responsible for timely forwarding
      notices to STO to enable STO to make informed responses and to direct Sonterra
      to make such responses on STO's behalf. After receiving Sonterra's written
      recommendations, STO shall be responsible for making any response or
      non-responses to any elections (including AFEs) pertaining to the Operated
      or
      Non-Operated Properties, but Sonterra shall have no responsibility or liability
      therefor if STO does not receive Sonterra's directions regarding an election
      to
      be made by STO. **Sonterra
      (including for all purposes hereunder its officers, directors, employees,
      agents, consultants, or representatives) shall not be responsible for the
      accuracy of any information furnished in good faith by Sonterra or any of its
      Subsidiaries by Sonterra, and shall not be liable to STO or to any third parties
      for any (i) claims based upon the inclusion of any inaccurate information
      furnished by Sonterra to STO and used by STO in any reports or (ii) results
      obtained from any other use by STO of any inaccurate information so furnished.** STO
      acknowledges and agrees that its employees and the employees of STO's
      Subsidiaries shall be required to, and will in fact, devote substantial time
      in
      assist Sonterra in the performance of Services to STO and its Subsidiaries
      to
      enable Sonterra to continue the operation of the Properties and the performance
      of the Operating Services and Accounting Services in the same manner as STO
      did
      immediately prior to Commencement Date or as otherwise required by Contract
      or
      applicable law. STO also acknowledges that the employees of Sonterra providing
      the Services have, and will continue to have, responsibilities with respect
      to
      the business of Sonterra to which said Sonterra employees will be required
      to
      devote substantial time and effort, in addition to the business of STO and
      its
      Affiliates, other than the operation of the Operated and Non-Properties and
      the
      Operating and Accounting Services to be performed hereunder; and




(c) **Sonterra
      shall not be required to drill any well nor undertake any other drilling,
      workover or other capital expense operations (individually or collectively,
      “Drilling Operations”) with respect to any Operated Properties, but shall
      provide any services in the nature of Operating Services in support of any
      such
      operations undertaken by STO. In the event that STO elects to conduct such
      operations and Sonterra agrees to perform Operating Services with respect to
      the
      requested drilling, workover or other capital expense operations, however,
      Sonterra shall do so without additional charge to STO, with the express
      understanding and agreement by STO that Sonterra shall not be exposed to, and
      STO agrees to protect, defend, and hold Sonterra harmless from, any liability
      or
      responsibility for any acts or failures to act on the part of Sonterra with
      respect to any such operations undertaken by STO, all of which operations shall
      be at STO’s sole risk and expense.**







6.  **COMPENSATION
      AND FEES** .
      As and
      for compensation for Services to be rendered hereunder, STO agrees to pay
      Sonterra the sum of $75,000 per month, plus reimburse Sonterra for all of its
      out-of-pocket costs and expenses, all of which shall be payable within ten
      (10)
      days after receipt of the monthly invoice from Sonterra. Any and all expenses
      anticipated to be incurred by Sonterra in connection with its performance
      hereunder in excess of $25,000 per item, or $75,000 for a series of related
      items, shall be pre-approved by STO’s CEO as a condition of
      reimbursement.




7. **DISCLAIMER
      OF WARRANTIES/INDEMNIFICATION** **.**




**(a)**  **Notwithstanding
      any other term of this Agreement to the contrary, Sonterra makes no, and in
      fact
      expressly disclaims any and all, representations and warranties, express,
      implied or statutory, with respect to the performance or results of the
      Services, except that Sonterra shall perform the Services during the term of
      this Agreement in a manner consistent with best industry practice, or as
      otherwise required by Contract or applicable law.**




**(b)**  **Each
      Party hereby agrees to defend, indemnify, release, and hold the other Party
      harmless, including its respective officers, directors, employees, agents,
      representatives, contractors or subcontractors, from and against any and all
      claims, demands, lawsuits, or other legal or contractual liability, including
      any damages, expenses, costs, interest, and attorneys’ fees associated therewith
      (individually or collectively, “Liabilities”) on account of personal injury,
      bodily injury or death to its own personnel and representatives to the extent
      such injury, death, damage or loss arises out of or is attributable to the
      Operating Services or the performance thereof by any of Sonterra’s respective
      officers, directors, employees, agents, representatives, contractors or
      subcontractors,** **regardless
      of whether such Liabilities are allegedly or deemed to be caused by, in whole
      or
      in part, the joint, several, active, passive, sole or concurrent negligent
      acts
      or omissions or the strict liability (statutory or otherwise) or other legal
      fault attributable to Sonterra, but if and only to the extent any such
      Liabilities are caused by willful misconduct of
      Sonterra** **.** ****




**(c)**  **The
      provisions of Paragraph (b) and (d) shall not be applicable to any Liabilities
      arising out of the performance of any duties and responsibilities performed
      by
      Sonterra pursuant to Paragraph 5 (c) and, accordingly, STO hereby agrees to
      defend, indemnify, release, and hold Sonterra harmless, including its respective
      officers, directors, employees, agents, representatives, contractors or
      subcontractors, from and against any and all Liabilities with respect to
      Drilling Operations undertaken by STO.**





(d)  The
      mutual indemnification obligations in Paragraph 7(b) are intended to comply
      with
      applicable “knock-for-knock” oilfield anti-indemnity laws or similar Laws. To
      the extent such indemnification provisions are found to violate any applicable
      Law, or in the event any applicable Law is enacted or amended that would cause
      these provisions to be in violation of such Law, then this Agreement shall
      automatically be amended to provide that the indemnification provided hereunder
      shall extend only to the maximum extent permitted by the applicable Law. Any
      person or entity entitled to indemnification shall be deemed to be a STO
      Indemnified Party or Sonterra Indemnified Party, as applicable.







8. **FORCE
      MAJEURE** **.** (a) If any Party is rendered unable, wholly or in part, by an event of
      force majeure to carry out its obligations under this Agreement, other than
      obligations to make money payments which shall not be affected by any such
      event, that Party shall give the non-affected Party prompt written notice of
      the
      force majeure event with reasonably full particulars of the event and its
      consequent inability to carry out its obligations, whereupon the obligations
      of
      the Party giving notice, to the extent affected by the event of force majeure,
      shall be suspended during, but no longer than, the duration of the event of
      force majeure. The affected Party shall use all reasonable diligence to remedy
      the inability to perform its obligation caused by the event of force majeure
      as
      quickly as reasonably possible under the circumstances.




(b) The
      requirement that any event of force majeure shall be remedied with all
      reasonable dispatch shall not require the settlement of strikes, lockouts,
      or
      other labor difficulty by the Party involved in a manner or on terms contrary
      to
      such Party’s wishes, and the handling and resolution of such labor difficulties
      shall be entirely within the discretion of the Party concerned.




(c) The
      term
“ **event
      of force majeure** ”
shall
      mean an act of God, strike, lockout, or other industrial disturbance, act of
      the
      public enemy, war, blockade, terrorism, public riot, lightning, fire, storm,
      flood, explosion, governmental action, governmental delay, restraint or
      inaction, unavailability of equipment, and any other cause, whether of the
      kind
      specifically enumerated above or otherwise, which is not reasonably within
      the
      control of the Party claiming the inability or suspension of
      performance.




9. **ASSIGNABILITY** **.** This
      Agreement may not be assigned by Sonterra without the prior written consent
      of
      STO, and Sonterra may not delegate its duties or responsibilities hereunder
      to a
      third party without the prior written consent of STO. No assignment of any
      rights hereunder by Sonterra shall relieve Sonterra of any obligations and
      responsibilities hereunder.




10. **GOVERNING
      LAW; JURISDICTION, VENUE; JURY WAIVER.** **THIS
      AGREEMENT AND THE LEGAL RELATIONS AMONG THE PARTIES SHALL BE GOVERNED AND
      CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY
      CONFLICTS OF LAW RULE OR PRINCIPLE THAT MIGHT REFER CONSTRUCTION OF SUCH
      PROVISIONS TO THE LAWS OF ANOTHER JURISDICTION. ALL OF THE PARTIES HERETO
      CONSENT TO THE EXERCISE OF JURISDICTION IN PERSONAM BY THE COURTS OF THE STATE
      OF TEXAS FOR ANY ACTION ARISING OUT OF THIS AGREEMENT. ALL ACTIONS OR
      PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH,
      OUT OF, RELATED TO, OR FROM THIS AGREEMENT SHALL BE EXCLUSIVELY LITIGATED IN
      COURTS HAVING A SITUS IN SAN ANTONIO, BEXAR COUNTY, TEXAS. EACH PARTY HERETO
      WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY
      HAVE
      TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT
      OF
      OR RELATING TO THIS AGREEMENT.**







11. **COUNTERPARTS** **.** This Agreement may be executed in any number of counterparts, and each such
      counterpart hereof shall be deemed to be an original instrument, but all of
      such
      counterparts shall constitute for all purposes one agreement. Any signature
      hereto delivered by a Party by facsimile transmission shall be deemed an
      original signature hereto.




12. **INDEPENDENT
      CONTRACTOR** **.** In
      their
      performance of the Services, Sonterra shall be considered an independent
      contractor, and in no event shall either Party be deemed a partner, co-venturer
      or agent of the other Party. None of the persons utilized by Sonterra in the
      performance of Services hereunder shall be deemed to be an employee of STO
      nor
      entitled to any benefits available to an STO employee. Compensation required
      to
      be paid to such persons engaged by Sonterra to perform any Services hereunder
      shall be the sole responsibility of Sonterra.




13. **NO
      RESTRICTIONS** **.** STO
      recognizes that Sonterra is not performing the Services under this Agreement
      on
      an exclusive basis and agrees that Sonterra is only obligated to devote such
      time under this Agreement as is reasonably necessary to perform the Services
      in
      the same manner as STO performed such Services immediately prior to the
      Commencement Date. Nothing contained in this Agreement shall prevent either
      Sonterra or STO from engaging in any other business activities.




14.  **NOTICES** **.** (a) All notices and communications required or permitted to be given hereunder
      shall be in writing and shall be delivered personally, or sent by bonded
      overnight courier, or mailed by U.S. Express Mail or by certified or registered
      United States Mail with all postage fully prepaid, or sent by facsimile
      transmission (provided any such facsimile transmission is confirmed either
      orally or by written confirmation), addressed to the appropriate Party, as
      follows:





If
      to
      STO    South Texas Oil Company


769
      Highway 95 N


Bastrop,
      Texas 78602


Fax:
      512-321-4737


Attention:
      Scott Zimmerman, CEO


Scott.zimmerman@southtexasoil.com








With
      a
      copy to:  Roy D.
      Toulan, Jr., Esq.


6
      Wheeler’s Point Road


Gloucester,
      MA 01930-1691


rdtoulan@CorpLegalSolutions.net








If
      to
      Sonterra:  Sonterra  
      Operating, Inc.


300
      East
      Sonterra Blvd., Suite 1220


San
      Antonio, TX 78258


Fax:
      212-545-3317


Attention:
      Wayne A. Psencik, President


wayne@sonterraresources.com





With
      a
      copy
      to: Kirk
      Tucker, Esq.


Thompson
      & Knight LLP


333
      Clay
      Street, Suite 3300


Houston,
      TX 77002


Fax:
      832-397-8038


kirk.tucker@tklaw.com





(b)
      Any
      notice given in accordance herewith shall be deemed to have been given when
      delivered to the addressee in person, or by courier, or transmitted by facsimile
      transmission during normal business hours, or upon actual receipt by the
      addressee after such notice has either been delivered to an overnight courier
      or
      deposited in the United States Mail, as the case may be. The parties hereto
      may
      change the address, telephone numbers, and facsimile numbers to which such
      communications are to be addressed by giving written notice to the other parties
      in the manner provided in this Paragraph
      14 .




15. **INSURANCE** **.** (a) Each party, at its expense, shall procure and maintain, effective as of
      the
      date hereof, commercial general liability insurance with a combined single
      limit
      for bodily injury and property damage of at least U.S. $1,000,000 per
      occurrence, excess liability insurance in
      amounts of not less than $2,000,000 per occurrence in excess of the
      foregoing, and an
      aggregate deductible of not in excess of U.S. $100,000, covering its
      indemnification and other responsibilities under this Agreement.





(b)  All
      insurance policies obtained and maintained as required hereunder shall name
      the
      other Party (and include all of said Party’s Indemnified Parties and the
      contractors and subcontractors of the Indemnified Parties) as additional
      insureds, and shall also include a waiver of subrogation by the insurers in
      favor of the Indemnified Parties (including the contractors and subcontractors
      of the Indemnified Parties). Such insurance shall be primary to any insurance
      maintained by said Party with respect to matters for which the other Party
      is
      responsible under this Agreement.





16. **AMENDMENT** **.** This
      Agreement may be amended only by a formal written instrument duly executed
      by
      the CEOs of both Parties hereto.




17. **WAIVER;
      RIGHTS CUMULATIVE** **.** Any of the terms, covenants, representations, warranties, or conditions hereof
      may be waived only by a formal written instrument executed by or on behalf
      of
      the Party hereto waiving compliance. No course of dealing on the part of STO
      or
      Sonterra, nor by their respective officers, employees, agents, or
      representatives, nor any failure by STO or Sonterra to exercise any of its
      rights under this Agreement shall operate as a waiver thereof nor affect in
      any
      way the right of such Party at a later time to enforce the performance of such
      provision. No waiver by any Party of any condition, or any breach of any term,
      covenant, representation, or warranty contained in this Agreement, in any one
      or
      more instances, shall be deemed to be or construed as a further or continuing
      waiver of any such condition or breach or a waiver of any other condition or
      of
      any breach of any other term, covenant, representation, or warranty. The rights
      of STO and Sonterra under this Agreement shall be cumulative, and the exercise
      or partial exercise of any such right shall not preclude the exercise of any
      other right.







18. **SEVERABILITY** **.** If
      any term or other provision of this Agreement is invalid, illegal, or incapable
      of being enforced by any rule of law or public policy, all other conditions
      and
      provisions of this Agreement shall nevertheless remain in full force and effect
      so long as the economic or legal substance of the transactions contemplated
      hereby is not affected in any adverse manner to any Party. Upon such
      determination that any term or other provision is invalid, illegal, or incapable
      of being enforced, the Parties hereto shall negotiate in good faith to modify
      this Agreement so as to effect the original intent of the Parties as closely
      as
      possible in an acceptable manner to the end that the transactions contemplated
      hereby are fulfilled to the extent possible.




19. **PARTIES
      IN INTEREST** **.** Except for the Parties hereto, no other person shall have any right, benefit,
      priority, or interest hereunder or as a result hereof or have standing to
      require satisfaction of the provisions hereof in accordance with their terms;
      provided that the indemnity and defense provisions in Paragraph 7(b) shall
      inure
      to the benefit of the STO Indemnified Parties and the Sonterra Indemnified
      Parties as provided therein. Any claim for defense, indemnity or hold harmless
      hereunder on behalf of a member of the STO Indemnified Parties or the Sonterra
      Indemnified Parties must be made and administered by STO and Sonterra,
      respectively.




20. **PREPARATION
      OF AGREEMENT** **.** Both STO and Sonterra and their respective counsel participated in the
      preparation of this Agreement. In the event of any ambiguity in this Agreement,
      no presumption shall arise based on the identity of the primary draftsman of
      this Agreement.




21. **ENTIRE
      AGREEMENT; CONFLICTS** .
      THIS
      AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT AMONG STO AND SONTERRA PERTAINING
      TO
      THE PROVISION OF THE SERVICES AND SUPERSEDES ALL PRIOR AGREEMENTS,
      UNDERSTANDINGS, NEGOTIATIONS, AND DISCUSSIONS, WHETHER ORAL OR WRITTEN, OF
      THE
      PARTIES PERTAINING TO THE PROVISION OF THE SERVICES. **THERE
      ARE NO WARRANTIES, REPRESENTATIONS, OR OTHER AGREEMENTS AMONG THE PARTIES
      RELATING TO THE SUBJECT MATTER HEREOF EXCEPT AS SPECIFICALLY SET FORTH IN THIS
      AGREEMENT, AND NEITHER STO NOR SONTERRA SHALL BE BOUND BY OR LIABLE FOR ANY
      ALLEGED REPRESENTATION, PROMISE, INDUCEMENT, OR STATEMENTS OF INTENTION NOT
      SO
      SET FORTH.**







22. **JOINT
      AND SEVERAL LIABILITY** .
      The
      covenants made by each Party are joint and several.




23. **BONDING
      REQUIREMENTS.** STO shall continue to comply with the bonding requirements of the applicable
      governmental agency and other governmental authorities, together with any
      bonding or other security requirements provided for in any Contracts, as they
      relate to the Operated Properties.




The
      Parties have caused their duly authorized representatives to execute this
      Agreement as of the day and year first set forth above.




**PARTY
      OF THE FIRST PART:**





**STO:**





**SOUTH
      TEXAS OIL COMPANY**





By: /s/
      J. Scott Zimmerman


Name:
      J.
      Scott Zimmerman


Title:
      CEO





**STO
      OPERATING COMPANY**





By: /s/
      J. Scott Zimmerman


Name:
      J.
      Scott Zimmerman


Title:
      CEO





**STO
      DRILLING COMPANY**





By: /s/
      J. Scott Zimmerman


Name:
      J.
      Scott Zimmerman


Title:
      CEO





**SOUTHERN
      TEXAS OIL COMPANY**





By: /s/
      J. Scott Zimmerman


Name:
      J.
      Scott Zimmerman


Title:
      CEO





**STO
      PROPERTIES LLC**





By: /s/
      J. Scott Zimmerman


Name:
      J.
      Scott Zimmerman


Title:
      CEO











**PARTY
      OF THE SECOND PART:**







**SONTERRA:**








**SONTERRA
      OPERATING, INC.**





By: /s/
      Wayne A. Psencik


Name:
      Wayne A. Psencik


Title:
      President