LAK RANCH FARMIN AGREEMENT



THIS FARMIN AGREEMENT (the Agreement) is dated and effective as of January 15, 2004, by and between IVANHOE ENERGY (USA) INC. (Ivanhoe) and DEREK RESOURCES (U.S.A.) INC.  (Derek);



WHEREAS Derek is the lessee of the LAK Ranch Leases as set forth in Exhibit A, attached hereto and incorporated herein by this reference;



AND WHEREAS pursuant to the SEC Agreement, as defined below, Derek holds an undivided 5% Working Interest in the LAK Ranch Area in trust for SEC until such time as Derek has expended the Funds provided by SEC to Derek pursuant to the SEC Agreement and transfers the aforementioned Working Interest to SEC;



AND WHEREAS Ivanhoe desires to earn a Working Interest in the LAK Ranch Leases and LAK Ranch Area, subject to the conditions hereof and the requirements and obligations to be performed by Ivanhoe set out in this Agreement;



AND WHEREAS the Parties desire to possibly further explore and develop the lands subject to the LAK Ranch Leases and the LAK Ranch Area for the production of oil, gas and other hydrocarbon substances;



NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, it is understood and agreed by and between the Parties, as follows:



ARTICLE I



DEFINITIONS



In this Agreement, including the recitals, this Section and the Exhibits, unless there is something in the context or subject matter inconsistent therewith, the following terms shall have the meanings hereinafter set forth:



1.1

Affiliate  of a Party means any company or other entity that (i) controls, (ii) is controlled by or (iii) is under common control with such Party.  For the purpose of this definition, control shall mean the ownership, directly or indirectly, of 50% or more of the stock or other units of ownership having the right to vote for the election of directors of such company or other entity.



1.2

Area of Mutual Interest or AMI  shall have the meaning ascribed in Article   III, Section 3.1.



1.3

Capital Expenditures  means expenditures for capital items or purposes as distinguished from operating costs and expenditures, in accordance with generally accepted accounting principles generally applied in the United States oil and gas industry and as defined in COPAS.



1.4

Dollars or the symbol $- means legal tender of the United States of America.



1.5

Effective Date  means the effective date of this Agreement, being 12:00 p.m. Central Standard Time on January 15, 2004.



1.6

Funds  means the monies provided by SEC to Derek pursuant to the SEC Agreement which Derek agreed to spend on operating and development expenses on the LAK Ranch Area and which upon its complete expenditure, SEC will earn an undivided 5% working interest in the LAK Ranch Area.



1.7

Gross Negligence or Willful Misconduct - means any act or failure to act (whether sole, joint or concurrent) by any person or entity which was intended to cause, or which was in reckless disregard of or wanton indifference to, harmful consequences such person or entity knew, or should have known, such act or failure would have on the safety or property of another person or entity.



1.8

Joint Account  means the account established and maintained by Operator to record all expenditures, receipts, materials and other assets acquired or used in the conduct of Joint Operations.



1.9

Joint Operating Agreement or JOA  means the Joint Operating Agreement referred to in Article VIII, a form of which is attached hereto and made a part hereof as Exhibit  C.



1.10

Joint Operations  - mean operations, whether for the Pilot Phase, Phase 1 or subsequently, conducted by Operator for the benefit and account of the Parties pursuant to any or all this Agreement, the Joint Operating Agreement, the LAK Ranch Lease and any New Lease.



1.11

 LAK Ranch Area  refers to the area outlined on the plat attached hereto and made a part hereof as Exhibit B.



1.12

LAK Ranch Leases  means the Leases listed on Exhibit A attached hereto and made a part hereof and covering lands located within the confines of the LAK Ranch Area.



1.13

LAK Ranch Program  means the program summarized on Exhibit E to this Agreement summarizing the work to be done during the Pilot Phase and Phase 1.



1.14

New Lease has the meaning ascribed to it in Section 3.2.



1.15

Non-Operator  means a Party other than the Operator. Derek is initially the Non-Operator, but should SEC be assigned a Working Interest by Derek , SEC shall also be a Non-Operator.



1.16

Operator means at any time the Party appointed to conduct Joint Operations on behalf of the Parties, and initially shall mean Ivanhoe.



1.17

Other Costs  mean costs other than Capital Expenditures, for which the Parties will be liable and pay in accordance with their Working Interests, as provided in Section 4.4.



1.18

Lease  means an oil and gas lease and any oil, gas, and mineral lease, mineral interest, or any other instrument granting the right to explore for, drill, and take oil, gas, and other minerals.



1.19

Party and Parties  means initially Ivanhoe and Derek, individually or collectively, as the case may be, and/or their successors and assigns.  If Derek spends the Funds, and assigns a 5% Working Interest to SEC, then SEC shall be a Party or one of the Parties, and assume its Working Interest share of all obligations and liabilities as a Party to and under this Agreement, including with respect to representations and warranties and under the Joint Operating Agreement and the LAK Ranch Lease.



1.20

Phase 1  means the work and activities described as Phase 1 in the LAK Ranch Program Summary attached as Exhibit E.



1.21

Pilot Phase  means the work described as the Pilot Phase in the LAK Ranch Program Summary attached as Exhibit E.



1.22

SEC  means SEC Oil and Gas Partnership.



1.23

SEC Agreement  means the document entitled LAK Ranch Oil Project  Amended Heads of Agreement, dated October 30, 2003, between Derek and SEC and any and all agreements that may be substituted therefore.



1.24

Substances  means all severed crude oil, natural gas, casinghead gas, gasoline, natural gasoline, petroleum, natural gas liquids, condensate, products, liquids and other hydrocarbons and other minerals of every kind and description produced under the LAK Ranch Leases from the LAK Ranch Area.



1.25

Working Interest  means the undivided participating interest of a Party in the benefits and obligations under this Agreement, the Joint Operating Agreement, the LAK Ranch Lease and any other Lease that may be taken by the Parties in the LAK Ranch Area.  Expression of working interests as a percentage means the indicated percentage of 100%.



ARTICLE II



ATTACHMENT AND EXHIBITS



2.1

Exhibits  The following Exhibits, attached hereto, are incorporated herein and made a part hereof for all purposes:

Exhibit A

LAK Ranch Leases and Lands

Exhibit B

LAK Ranch Area/ AMI

Exhibit C

Joint Operating Agreement

Exhibit D

Environmental Compliance

Exhibit E

LAK Ranch Program Summary





ARTICLE III



AREA OF MUTUAL INTEREST



3.1

Area of Mutual Interest  The Parties  hereby establish an Area of Mutual Interest or AMI, covering the lands located within the area outlined on the plat attached hereto and made a part hereof as Exhibit B and within two (2) miles of that area.  The AMI shall continue in effect as long as the Parties jointly own Leases within the AMI and shall continue in effect under the JOA and until one year after the JOA terminates.



3.2

Acquisition/Option  Should any Party directly or indirectly, acquire a Lease (New Lease), in addition to or in substitution for all or any part of the LAK Ranch Lease, affecting any lands located, fully or partially within the AMI, such Party (the Acquiring Party) shall immediately give written notice thereof to each other Party (a Non-Acquiring Party), together with all pertinent details and information, including copies of all instruments of conveyance (including but not limited to, copies of the New Lease, assignments, subleases, farmouts, and other contracts affecting the LAK Ranch Lease and or the LAK Ranch Area), copies of paid drafts or checks and itemized invoices of the actual costs expended  incurred and to be incurred by the Acquiring Party, including any bonus, administrative fees, brokerage, legal and recordation costs, and any other direct costs (said actual costs are referred to as Acquisition Costs). A Non-Acquiring Party shall have 30 days (or 48 hours if a rig capable of performing a drilling operation is on location in preparation for drilling), from receipt of such notice to elect in writing to acquire its proportionate interest in the New Lease by paying its proportionate share of the cost and assuming its proportionate share of the obligations.  Failure to respond by the deadlines stated herein shall be deemed an election not to participate in the acquisition described in said notice.  Failure to pay said proportionate share of costs within 30 days following an election to participate shall result in a forfeiture of a Non-Acquiring Partys interest with the same effect as if said Party had initially elected not to participate.  If less than all Parties elect to participate in said acquisition, the lands and/or depths covered by any New Lease shall be excluded from the AMI and the New Lease acquired shall not be subject to this Agreement, but shall belong entirely to the Parties participating in the acquisition.



3.3

Payment/Assignment  If a Non-Acquiring Party elects to participate in such acquisition it shall pay to the Acquiring Party its proportionate share of the Acquisition Costs for such interest within 30 days after receipt of an invoice for said costs. Upon receipt of said payment, the Acquiring Party shall execute and deliver to the Non-Acquiring Party an assignment of the interest due the Non-Acquiring Party, pursuant to which the Non-Acquiring Party shall bear and assume its proportionate share of all obligations, covenants, conditions, requirements, and terms associated with the acquisition.



3.4

Encumbrances  Any assignment made pursuant to this Article III shall be free and clear of any encumbrances placed on the assigned New Lease in favor of or by the Acquiring Party, but otherwise shall be made without warranty of title, either express or implied, except by, through, and under the Acquiring Party.  The assignment shall be made and accepted subject to, and assignee shall expressly assume its proportionate share of, all obligations of the assignor pertaining to the New Lease.



3.5

Merger  The provisions of this Article III shall not apply to Lease acquisitions resulting from mergers, consolidations or reorganizations involving all or substantially all of the properties or assets of the Acquiring Party.





ARTICLE IV



IVANHOE CASH PAYMENT AND PARTIES WORKING INTERESTS



4.1

Ivanhoe Cash Payment.  Contemporaneously with the signing of this Agreement, Ivanhoe will make a one-time cash payment to Derek of $100,000, in consideration of which Derek will assign to Ivanhoe a 30% Working Interest and Ivanhoe shall undertake to complete the Pilot Phase as described in Section 4.5.



4.2

Ivanhoe Earning.  Ivanhoe is entitled to earn up to an additional 30% Working Interest for a total Working Interest of 60%, by participating in the Pilot Phase and Phase 1, and paying Capital Expenditures and Other Costs, as provided in Sections 4.3 through 4.6 below.  The following are the initial Working Interests of the Parties:

Derek70%

Ivanhoe.30%



4.3

Capital Expenditures.  If Ivanhoe participates in the Pilot Phase and Phase 1, Ivanhoe shall make Capital Expenditures in accordance with work programs and budgets prepared by Ivanhoe in consultation with the Parties.   Ivanhoes initial 30% Working Interest shall be increased by a proportional 6% for every $1,000,000, or part thereof, it incurs on a 100% basis for Capital Expenditures (that is without contribution by the other Parties) for the LAK Ranch Program during the Pilot Phase and Phase 1, up to a maximum of 60% Working Interest.  For further clarity, at the time of determination and adjustment of Ivanhoes interest for incurred Capital Expenditures, for any portion of the Capital Expenditures less than a full multiple of one million ($1,000,000) dollars (the Portion), the increase in interest shall be determined based upon the following formula:



[Portion] X 6%

1,000,000



Ivanhoes Working Interest will be determined and adjusted at the end of each quarter based on cumulative Capital Expenditures it has incurred on a 100% basis through the quarter.  If Ivanhoe participates in Phase I and, upon completion of the work program for Phase I, Ivanhoe has incurred less than $5,000,000 on Capital Expenditures on a 100% basis, additional Capital Expenditures for work on the LAK Ranch Lease agreed by the Parties to be performed, shall be paid 100% by Ivanhoe until it has incurred an aggregate of $5,000,000 between the Pilot Phase and Phase I.   When Ivanhoe has incurred a total of $5,000,000 on Capital Expenditures on a 100% basis during the Pilot Phase and Phase 1 and subsequently, as appropriate, additional LAK Ranch Program costs, including Capital Expenditures, will be paid by the Parties in proportion to their respective Working Interests at the time, which will be as follows:

Ivanhoe.60%

Derek40%



4.4

Other Costs.  Ivanhoes commitments to make Capital Expenditures on a 100% basis shall apply only to Capital Expenditures of the LAK Ranch Program.   Lease operating costs, Operators overhead costs agreed in the JOA and all such similar costs during the Pilot Phase and Phase 1  (Other Costs) will be paid and shared by the Parties in proportion to their respective Working Interests from time to time during the Pilot Phase, Phase 1 and subsequently.  Ivanhoe shall have no liability for Other Costs incurred prior to the Effective Date. Other Costs from and after the Effective Date will be paid by the Parties pursuant to cash calls or advance provisions of the JOA.  If one or more of the Parties fails to pay their share of Other Costs for the Pilot Phase and/or Phase 1, and Ivanhoe pays Other Costs to continue operations, then such delinquent amounts shall bear interest at the rate provided in the JOA and shall be subject to the remedies for collection provided in the JOA.



4.5

Pilot Phase.  Ivanhoe undertakes the work program for the Pilot Phase, which consists of the work program described in the LAK  Ranch Program details attached as Exhibit E  to this Agreement.  Ivanhoe will pay 100% of the Capital Expenditures of the Pilot Phase.  The Capital Expenditures budgeted to be spent in performing such work does not constitute an obligation to spend that amount.



Operations being conducted on the LAK Ranch Lease by Derek were ordered stopped by the Wyoming Oil and Gas Commission .  Before Ivanhoe can commence work on the Pilot Phase, it must obtain approval of the Commission and possibly other Wyoming and Federal agencies in order to resume operations.  Promptly after the Effective Date, Ivanhoe, with the other Parties cooperation and assistance, will undertake the necessary studies and work in order to obtain all the approvals to resume operations.   Such work will be pursued diligently in order to obtain the approval as quickly as possible, but in the event that notwithstanding such diligent efforts such approvals are not obtained within one year after the Effective Date, Ivanhoe will have the option to terminate this Agreement and will have no further obligation to the other Parties.  The costs of obtaining the above approvals to resume operations shall be Other Costs  to be shared by the Parties in proportion to their respective Working Interests, i.e., Ivanhoe 30% and Derek 70%.



4.6

Phase 1.   Phase 1 consists of the work program described in the LAK Ranch Program details attached as Exhibit E to this Agreement.  Ivanhoe shall have the option to elect to participate in Phase 1, within 30 days after completion and evaluation of the results of the Pilot Phase.  If Ivanhoe does not elect to participate in Phase 1, Ivanhoe shall retain a 15% Working Interest and shall reassign to the Parties the remaining 15% of its initial Working Interest.



4.7

SEC Interest.  If the Funds have been spent by Derek and a Working Interest has been assigned to SEC, then Dereks Working Interest shall be reduced by 5% and SEC shall have a 5% Working Interest.  Ivanhoes Working Interest shall not be reduced or affected by the assignment of a Working Interest to SEC.



4.8

Delivery of Assignments  Unless otherwise provided herein, any assignment due any Party, shall be delivered in a form suitable for recording and within 15 days of the date on which it was executed.



4.9

Assignment of Real and Personal Property  Any assignment of a Working Interest hereunder shall include an assignment of an equal undivided interest in all real and personal property and which is owned by the assigning party, located on or off the LAK Ranch Leases and used in connection with the operations of the Leases, including without limitation, wells, well equipment, casing, tubing, tanks, gathering lines, separators, buildings, pumps, compressors, gas plants, motors, fixtures, machinery, power lines, telegraph and telephone lines, roads, field processing plants, and other improvements used in the operation thereof.



ARTICLE V



JOINT OPERATING AGREEMENT



5.1

Operations  Except as otherwise provided herein, or in the Joint Operating Agreement, the costs, risk, and expenses shall be based on each Partys Working Interest.  All operations hereunder shall be conducted and governed in accordance with the terms and conditions of the Joint Operating Agreement.  The Parties shall execute the Joint Operating Agreement simultaneously with the execution of this Agreement.  Ivanhoe shall be designated Operator under the Joint Operating Agreement, and Derek or Derek and SEC, as the case may be, shall be Non-Operators.   In the event of a conflict between the terms and conditions of this Agreement and the Joint Operating Agreement, the terms and conditions of this Agreement shall prevail.





ARTICLE VI



INFORMATION, TESTS, AND NOTICES



6.1

Access to Operations and Furnishing of Data  The Non-Operators shall, at all times, and at their sole cost and risk, have full and free access to the LAK Ranch Area. Ivanhoe shall obtain and furnish to Non-Operators the following data reports as they are currently produced or compiled so far as they relate to Joint Operations:

(a)

copies of all logs or surveys, including in digitally recorded format if exists;

(b)

daily drilling reports;

(c)

copies of all tests and core data and analysis reports;

(d)

final well recap report;

(e)

copies of plugging reports;

(f)

copies of final geological and geophysical maps, seismic sections and shot point location maps;

(g)

engineering studies, development schedules and quarterly progress reports relating to the LAK Ranch Area;

(h)

field and well performance reports, including reservoir studies and reserve estimates;

(i)

production data;

(j)

as requested by Non-Operators (i) copies of all material reports relating to the LAK Ranch Area furnished to Ivanhoe by any governmental or regulatory body or authority; and (ii) other material studies and reports relating to LAK Ranch Area; and

(k)

such other information as Non-Operators may reasonably request, provided that the requesting Party or Parties pay the costs of preparation of such information and that the preparation of such information will not unduly burden Operators administrative and technical personnel.



6.2

Ivanhoe shall test any wells encountered which Ivanhoe wishes to test  in accordance with good and prudent petroleum industry practices and field conservation principles as are generally followed by the United States petroleum industry, and shall further test all formations indicated by such testing to be productive and considered to have the potential for commercial production in the LAK Ranch Area, provided that they are subject to the LAK Ranch Lease or other Leases granting the Parties the right to do so.  Ivanhoe shall keep an accurate and detailed log of each well drilled hereunder.



ARTICLE VII



CONDUCT OF OPERATIONS/ABANDONMENT



7.1

Diligent Operations and Abandonment  Ivanhoe as Operator shall conduct all operations for the Pilot Phase, Phase 1 and thereafter, in a diligent, safe and efficient manner in accordance with good and prudent petroleum industry practices and field conservation principles as are generally followed by the United States petroleum industry under similar circumstances and at all times in compliance with all applicable laws, ordinances, rules and regulations.  When any programmed well drilled hereunder, reaches the contract depth and has been tested as agreed, Ivanhoe shall either complete the same as a producer, or plug and abandon the same in accordance with all applicable laws and regulations; provided however, that if Ivanhoe desires to abandon the well as a dry hole, Ivanhoe shall so notify Non-Operators who shall then have 48 hours to elect to take over such well and attempt to complete it at their sole cost, risk, and expense. Should any Non-Operator take over the well (Takeover Parties), Ivanhoe shall relinquish all rights thereto, including the materials and equipment used in connection therewith free and clear of all liens and encumbrances not existing as of the date of this Agreement, other than ordinary and usual liens and encumbrances arising from the drilling of the well.  The Takeover Parties shall pay to Ivanhoe the fair market value of such material and of the salvageable in-hole equipment, less the estimated cost of salvage, and the Takeover Parties shall become responsible for the rig time costs.  Upon any such takeover, all rights of Ivanhoe pertaining to the well shall automatically terminate and the Takeover Parties shall be solely responsible for the completion and/or abandonment of the well, and shall indemnify and hold Ivanhoe harmless from any cost or loss relating thereto.



ARTICLE VIII



OPERATOR



8.1

Status of Ivanhoe as Operator.  Notwithstanding the provisions of the JOA, in the absence of Gross Negligence or Willful Misconduct on the part of management level or supervisory personnel of Ivanhoe directly and causally connected with the subject action, Ivanhoe shall not be liable as Operator for damages or losses or otherwise to any other Party for anything done or omitted to be done as Operator in carrying out any Joint Operations,  which shall be for the Joint Account, subject however to Ivanhoes obligation to pay  Capital Expenditures on a 100% basis.  Each Party, including Ivanhoe as a Party, shall bear any losses or liabilities in proportion to their Working Interests; provided, however, that Ivanhoe as a Party or as Operator shall not be liable for losses or liabilities resulting from operations on or related to the LAK Ranch Lease or LAK Ranch Area prior the Effective Date, the liability for which shall be for the account of the other Parties.



8.2

No liability for Losses.  In no case shall the Operator be liable to any Party, or to any third party, for any loss or spillage of oil or gas or other hydrocarbon substances or for any consequential loss, including loss of profit, arising out of its conduct of Joint Operations, or for any damages or losses resulting therefrom.  Each Party shall bear any such losses or liability in proportion to their Working Interests.



8.3

Government Approvals.  In the conduct of the Pilot Phase, Phase 1 and Joint Operations, the Operator shall:

(a)

Pay to the government of the State of Wyoming or the Federal Government, as applicable, (collectively, the Government) for the Joint Account, within the periods and in the manner prescribed by all applicable laws, ordinances, rules, and regulations, all periodic payments, royalties, taxes, fees and other payments pertaining to the Joint Operations (such amounts to be treated under this Agreement as Capital Expenditures or Other Costs, as the case may be, in accordance with generally accepted accounting principles) but excluding any taxes measured by the incomes of any of the Parties; and

(b)

Have the exclusive right and obligation to represent the Parties in all dealings with the Government with respect to matters arising under the Joint Operations.   The Operator shall notify the Non-Operators as soon as possible of such meetings.  Subject to any necessary Government approvals, Non-Operators shall have the right to attend any meetings with the Government with respect to such matters, but only in the capacity of observers.  Nothing contained in this Agreement shall restrict any Party from holding discussions with the Government with respect to any issue peculiar to its particular business interests arising under the LAK Ranch Leases or this Agreement, but in such event, such Party shall promptly advise the other Parties, if possible, before and in any event promptly after such discussions, provided that such Party shall not be required to divulge to the other Parties any matters discussed to the extent the same involve proprietary information or matters not affecting the other Parties.



ARTICLE IX



TITLE AND OTHER REPRESENTATIONS AND WARRANTIES



9.1

Title and Curative Work.  Except for those encumbrances and royalties created by, through or under Derek or SEC including but not limited to those set out in Exhibit A, Derek does not warrant title, express or implied, to the LAK Ranch Leases.  Derek shall not be obligated to perform any curative work or to furnish any materials with respect thereto, other than copies of such title opinions and other relevant documents as they may have in their possession.  Nevertheless, during the term of this Agreement or the JOA, any curative work by Derek shall enure to the benefit of Ivanhoe and Ivanhoe shall be promptly furnished with copies of all opinions and curative instruments pertaining to the LAK Ranch Leases and the LAK Ranch Area.  Derek shall make available to Ivanhoe, all records and lease files pertaining to the LAK Ranch Leases.  To the extent that title to one or more of the Leases included in the drilling unit for any programmed well in the LAK Ranch Program is such that a reasonable and prudent Operator would require in Ivanhoes opinion curative action to be taken, except as set out above, Ivanhoe may undertake such curative action, in which case, the time in which operations are to be started, shall be extended by the period of time necessary for Ivanhoe to complete such curative work.



9.2

Other Representations and Warranties of Derek.  Derek, on its own behalf and for SEC to the extent that SEC will earn a Working Interest in the LAK Ranch Area, represents and warrants to Ivanhoe as follows:



9.2.1

Encumbrances on the LAK Ranch Area.  Exhibit A sets forth a description of  (a) all overriding royalties, production payments or preferential rights of any nature of third parties with respect to the LAK Ranch Leases and the Substances,  (b) all rights-of-way and other agreements and other rights relating to the use or ownership of the surface or surface properties that are used or held for use in connection with the production of Substances from the LAK Ranch Area, (c) all contracts, licenses, permits, approvals, consents, certificates and other rights granted by governmental authorities and all certificates of convenience or necessity, immunities, privileges, grants and other rights that relate to the LAK Ranch Area or the ownership or operation of the LAK Ranch Area and the LAK Ranch Leases. Ivanhoe and the interests of Ivanhoe in the LAK Ranch Leases and the LAK Ranch Area shall at all times be free and clear of any obligation under the SEC Agreement.   Derek and SEC agree that Derek and its interests in the LAK Ranch Leases and the LAK Ranch Area, alone shall be responsible for performance of all obligations to SEC under the SEC Agreement and/or any other agreement or arrangement between Derek and SEC.



9.2.2

Litigation and Claims.  There are no claims, demands, filings, investigations, administrative proceedings, actions, suits or other legal proceedings pending or, to the best of their knowledge, threatened, with respect the LAK Ranch Leases or LAK Ranch Area or the ownership or operation thereof, other than proceedings relating to the oil and gas industry generally and as to which neither Derek and or SEC is a named party; and  no written notice from any governmental authority or any other person has been received by either Derek or SEC claiming any violation of any law, rule, regulation, ordinance, order, decision or decree of any governmental authority  (including, without limitation, any such law, rule, regulation, ordinance, order, decision or decree concerning the conservation of natural resources) except for funds owed to Bateman Engineering Inc. ("Bateman") in the approximate amount of $285,000, which funds shall be paid by Derek to Bateman within ten (10) days of the Effective Date.



9.2.3

Approval and Preferential Rights.  There are no approvals or consents required to be obtained by Derek for consummation of the transactions contemplated by this Agreement and no preferential purchase rights that affect the transactions contemplated by this Agreement.



9.2.4

Compliance with Laws and Permits.  The operations conducted by Derek on the LAK Ranch Area and LAK Ranch Leases have been and currently are, in compliance with the provisions and requirements of all laws, rules, regulations, ordinances, orders, decisions and decrees of all governmental authorities having jurisdiction with respect thereto, except where noncompliance would not reasonably be expected to have a material adverse effect on the operation thereof.  All necessary government permits, licenses and other authorizations would not reasonably be expected to have a material adverse effect on the ownership or operation of the LAK Ranch Leases. Neither has Derek received a demand from a governmental authority to plug and abandon any well on the LAK Ranch Leases that has not been plugged and abandoned.



9.2.5

Environmental Compliance.  No pollutant, waste, contaminant, or hazardous, extremely hazardous, or toxic material, substance, chemical or waste identified, defined or regulated as such under any law relating to health, safety or environmental matters is present, or has been handled, managed, stored, transported, processed, treated, disposed of, released, migrated or has escaped on, in, from, under or in connection with the LAK Ranch Lease or LAK Ranch Area or the ownership or operation thereof such as to cause a condition or circumstance that would reasonably be expected to result in a violation of any law relating to health and safety or environmental matters or in a remediation, removal, response, restoration, abatement, investigative or monitoring obligation, other than violations or obligations that would not reasonably be expected to have  a material adverse effect on the ownership or operation of the LAK Ranch Leases or LAK Ranch Area.



9.2.6

Production Burdens, Taxes and Expenses.  All payments due under or with respect to the LAK Ranch Leases have been properly and timely paid. All ad valorem, property, production, severance and other taxes based on or measured by the ownership of the LAK Ranch Leases and the LAK Ranch Area based on or measured by the ownership of such properties or the production of Substances therefrom have been properly and timely paid.



ARTICLE X



RELATIONSHIP/TAXATION



10.1

Relationship of the Parties  This Agreement does not create, and shall not be construed to create, a partnership, association, joint venture or fiduciary relationship of any kind or character between the Parties, and shall not be construed to impose any duty, obligation or liability arising from such a relationship by or with respect to any Party.  Notwithstanding any provisions herein that the rights and liabilities hereunder are several and not joint or collective or that this Agreement and the operations hereunder shall not constitute a partnership, each Party elects to be excluded from the application of all or any part of the provisions of Subchapter K, Chapter 1, Subtitle A, U.S. Internal Revenue Code of 1986, as amended, or similar provisions of applicable State laws.



ARTICLE XI



FORCE MAJEURE



11.1

Force Majeure  If a Party is rendered unable, wholly or in part, by Force Majeure, to carry out its obligations under this Agreement, other than the obligations to pay money, that Party shall give the other Parties prompt written notice of the Force Majeure with reasonably full particulars concerning it; thereupon the obligations of the Party giving the notice, so far as they are affected by the Force Majeure, shall be suspended during the continuance of the Force Majeure, and such reasonable time thereafter as the affected Party reasonably requires under the circumstances to carry out its obligations.  The affected Party shall use all reasonable diligence to remove the Force Majeure situation and resume the performance of its obligations as quickly as practicable.  The requirement that any Force Majeure shall be remedied with all reasonable dispatch, shall not require the settlement of strikes, lockouts, or other labor difficulty by the Parties involved, contrary to its wishes; how all such difficulties shall be handled shall be entirely within the discretion of the Party concerned.



11.2

Claims.  The term Force Majeure shall mean any circumstances not within the reasonable control, directly or indirectly, of the Party affected including but not limited to an act of God, strike, lockout or other industrial disturbance, terrorist act, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion, governmental delay, restraint or inaction, unavailability of equipment, but only if and to the extent that any act to which Force Majeure is claimed:



(a)

Such circumstances, despite the exercise of reasonable diligence, cannot be or be caused to be prevented, avoided or removed by such Party; and



(b)

In the case of claims by such Party, such event materially adversely affects (in case and/or time) the ability of the Party to perform its obligations under this Agreement, the Joint Operating Agreement or any Lease, and the Party has taken all reasonable precautions, exercised due care and has taken all reasonable alternative measures in order to avoid the effect of such event on the Partys ability to perform its obligations under this Agreement and to mitigate the consequences thereof.



ARTICLE XII



ASSIGNMENTS



OPTION TO PURCHASE INTERESTS



12.1

Right of First Refusal   Other than as required and allowed as between one Party to this Agreement to another Party or third party elsewhere in this Agreement and subject to this Section, a Party shall not dispose of any of its Working Interest, whether by assignment, sale, trade, lease, sublease or farmout, without first complying with the following provisions:



(a)

The Party wishing to make the disposition (in this Section called the Disposing Party) shall give notice to each other Party (in this Section called an Offeree) of its intention to make the disposition, including in such notice a description of the Working Interest proposed to be disposed of, the identity of the proposed assignee, the price or other consideration for which the Disposing Party is prepared to make such disposition, the proposed effective date and closing date of the transaction and any other information respecting the transaction which would be material to the exercise of the Offerees rights hereunder (such notice in this Article called the Disposition Notice).



(b)

In the event the consideration described in the Disposition Notice cannot be matched in kind and the Disposition Notice does not include the Disposing Partys bona fide estimate of the value, in cash, of such consideration, an Offeree may, within seven (7) days of the receipt by the Offerees of the Disposition Notice, request the Disposing Party to provide such estimate to the Offerees, whereupon the Disposing Party shall provide such estimate in a timely manner, and in no event in excess of 15 business days,  and the election period provided herein to the Offerees shall be suspended until such estimate is received by the Offerees. Failure to provide such cash equivalent estimate shall be grounds for refusal by any or all of the Offerees of consent to the disposition.



(c)

In the event of a dispute as to the reasonableness of an estimate of the cash value of the consideration described in the Disposition Notice or provided pursuant to paragraph (b) herein, as the case may be, the matter shall be referred to arbitration as provided in Section 16.8.



(d)

Within the later of:  i) thirty (30) days from the receipt of the Disposition Notice, as modified by any suspension pursuant to paragraph (b) herein; or ii) if applicable, fifteen (15) days from receipt of notice of the arbitrated value determined pursuant to Section 16.8, an Offeree may give notice to the Disposing Party that it elects to purchase the Working Interest described in the Disposition Notice for the applicable price (in this Section called a Notice of Acceptance).  A Notice of Acceptance shall create a binding contractual obligation upon the Disposing Party to sell, and upon an Offeree giving a Notice of Acceptance to purchase, for the applicable price, all of the Working Interest included in such Disposition Notice on the terms and conditions set forth in the Disposition Notice.  However, if more than one Offeree gives a Notice of Acceptance, each such Offeree shall purchase the Working Interest to which such Notice of Acceptance pertains in the proportion its Working Interest bears to the total Working Interests of such Offerees.



(e)

In the event that the Working Interest described in the Disposition Notice is not disposed of to one or more of the Offerees pursuant to the preceding paragraph, the disposition to the proposed assignee shall be subject to the consent of the Offerees.  Such consent shall not be unreasonably withheld, and it shall be reasonable for an Offeree to withhold its consent to the disposition if it reasonably believes that the disposition would be likely to have a material adverse effect on it, its Working Interest or operations to be conducted hereunder, including, without limiting the generality of all or any part of the foregoing, a reasonable belief that the proposed assignee does not have the financial capability to meet prospective obligations arising out of this Agreement.  However, an Offeree shall be deemed to have consented to the disposition to the proposed assignee, unless, within the time period prescribed in paragraph (d) herein, the Offeree advises the other parties, by notice, that it is not prepared to consent to such disposition.



(f)

If the Working Interest described in the Disposition Notice is not disposed of to one or more the Offerees pursuant to paragraph (d) herein, the Disposing party may, subject to  obtaining the consents prescribed by the preceding paragraph, dispose of such Working Interest at any time within one hundred and fifty (150) days from the issuance of such Disposition Notice, provided that such disposition is not on terms that are more favorable to such purchaser than those offered in the Disposition Notice.



(g)

Following a disposition herein or one hundred fifty (150) days following the issuance of a Disposition Notice from which a disposition did not result, as the case may be, the provisions of this Section shall once again apply to the Working Interest described in the Disposition Notice.



12.2

Section 12.1 shall not apply in the following instances, namely:



(a)

An assignment made by way of security for the assignors present or future indebtedness, or liabilities (whether contingent, direct or indirect and whether financial or otherwise), the issuance of the bonds or debentures of a corporation, or the performance of the obligations of the assignor as a guarantor under a guarantee, provided that in the event the security is enforced by sale or foreclosure, Section 12.1 shall apply



(b)

A disposition to an Affiliate of the assignor, or in consequence of a merger or amalgamation of the assignor with another corporation or pursuant to an assignment, sale or disposition made by a Party of its entire Working Interest to a corporation in return for shares in that corporation or to a registered partnership in return for an interest in that partnership.



(c)

A disposition made by the assignor of all, or substantially all, or of an undivided interest in all or substantially all, of its petroleum and natural gas rights; provided, however, if the LAK Ranch Leases and any other Lease interests of Derek and/or SEC are all or substantially all of the net assets held by them, then Section 12.1 shall apply.



(d)

A disposition by Derek to SEC pursuant to the terms of the SEC Agreeement.



However, a Party making such a disposition pursuant to paragraph (b), (c) or (d) of this Clause shall advise the other Parties of such disposition in a timely manner.



12.3

If any assignment of Working Interest is made to multiple assignees so as to increase the expense or duties of the Operator, the Operator may require the assignees (and the assignor if it retains a Working Interest) to appoint one of their number as representing all of them for the purposes of this Agreement, unless arrangements satisfactory to the Operator are made to compensate the Operator for the increased expenses or duties.





ARTICLE XIII



INSURANCE



13.1

Insurance Requirements  Before commencing operations within the LAK Ranch Area, pursuant to this Agreement, Ivanhoe shall procure and shall thereafter maintain in force during the term of this Agreement, the insurance hereinafter described, covering the operations to be performed hereunder by Ivanhoe as Operator.  The costs of all insurance carried by the Operator for the benefit of the Parties and the Joint Operations shall be for the Joint Account of the Parties.



(a)

Workers Compensation and Occupational Disease Insurance, satisfying the legal requirements of the State of Wyoming and Employers Liability Insurance with a minimum of $1,000,000.00 per occurrence.



(b)

Comprehensive general liability insurance, including personal injury blanket contractual liability and property damage, with coverage of at least $1,000,000 combined single limit or the equivalent;  owned and non-owned automobile liability, including personal injury and property damage, with coverage of at least $1,000,000, combined single limit or the equivalent; products liability and completed operations coverage of at least $1,000,000, combined single limit or the equivalent



(c)

Umbrella liability insurance, with at least $4,000,000 combined single limit per occurrence and at least $10,000,000 in the aggregate;



(d)

Control of well seepage and pollution, and well Restoration/Redrill Insurance with a combined single limit of at least $3,000,000 per occurrence.



(e)

Each and every policy required hereinabove in (b), (c) and (d)  shall name Non-Operators  as additional insured.



(f)

With the exception of Paragraph 13.1 (a), the Parties agree to mutually waive subrogation in favor of each other on all insurances carried by each Party and/or obtain such waiver from the insurance carrier if so required by the insurance contract.  If such waiver is not obtained, the Party failing to do so shall indemnify the other Parties for any claim by an insurance carrier arising out of subrogation.



13.2

Certificates of Insurance.  Before commencing any work hereunder, Ivanhoe shall furnish to Non-Operators Certificates of Insurance evidencing the issuance to Ivanhoe of the policies of insurance providing the types of coverage and limits of liability prescribed above, and certifying that Non-Operators shall be given not less than 30 days written notice prior to any material change, substitution or cancellation prior to the normal expiration dates. Cancellation or expiration of any of said policies of insurance shall not preclude Ivanhoe from recovery thereunder for any liability arising under this Agreement.



ARTICLE XIV



FAILURE TO DRILL



14.1

Failure to Comply  - Under no circumstances shall Ivanhoe be liable for its failure to drill or complete any programmed well in the LAK Ranch Program, or the manner in which it is drilled, tested or completed.



ARTICLE XV

NOTICES



15.1

Notices  All notices between the Parties authorized or required by any of the provisions of this Agreement, unless otherwise specifically provided, shall be given in writing and delivered in person by mail, courier service, facsimile, or e-mail, postage or charges prepaid or by telex or telecopier and addressed to the Party to whom the notice is given as follows.





Derek:

Derek Resources (U.S.A.) Inc.

Street Address:

Suite 1550, 355 Burrard Street

Vancouver B. C., Canada V6C 2G8

Attention:

Barry C. J. Ehrl, President & CEO

Telephone:

604-331-1757

Facsimile:

604-669-5193

E- mail:

info@derekresources.com



Ivanhoe:

Ivanhoe Energy (USA) Inc.

Street Address:

5060 California Avenue, Suite 400

Bakersfield, California 93309

Mailing Address:

P.O. Box 9279

Bakersfield, CA  93389-9279

Attention:

Robert Coffey, Vice-President, Operations

Telephone:

661-869-8332

Facsimile:

661-869-2820

E-mail

rcoffey@ivanhoeenergy.com



Copy to:

Oscar Blake, General Counsel





The originating notice given under any provision hereof shall be deemed given only when received by the Party to whom such notice is directed, and the time for such Party to give any notice in response thereto shall run from the date the originating notice is received.  The second or any responsive notice shall be deemed given when deposited in the mail or with the courier service, with postage or charges prepaid, or upon transmission by facsimile or telecopier.  Each Party shall have the right to change its address, or the person to receive such notice, at any time, and from time to time by giving written notice thereof to the other Party.



ARTICLE XVI



ADDITIONAL TERMS, PROVISIONS, AND COVENANTS



16.1

Time and Specific Performance of Essence  Time and specific performance are of the essence of this Agreement.



16.2

Laws and Regulations; Applicable Law  Ivanhoe as Operator shall comply with and conduct its operations hereunder in accordance with all applicable laws, ordinances, rules, and regulations. This Agreement shall be construed and interpreted under and in accordance with the laws of the State of Wyoming.



16.3

Headings and Interpretation The  section and other headings used throughout this Agreement are for administrative convenience only and shall be disregarded for purposes of construing this Agreement. Words importing the singular shall include the plural and vice versa, and the use of one gender includes any other gender, except where the context otherwise requires.



16.4

Waiver  Any of the terms, provisions, covenants, representations or conditions hereof may be waived only by a written instrument executed by the Party waiving compliance.  The failure of any Party at any time or times to require performance of any provisions hereof shall in no manner affect the right to enforce the same.  No waiver by any Party of any condition or of the breach of any term, provision, covenant, representation or warranty contained in this Agreement, whether by conduct or otherwise, 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 the breach of any other term, provision, covenant, representation or warranty.



16.5

Press Releases  No Party shall distribute any information or photographs concerning operations hereunder to the press or other media without the approval of the other Parties.  In the event of a requirement by a regulatory agency [including the Securities Exchange Commission or the U.S. or securities regulatory authorities of Canada, or any stock exchange on which the securities of a Party or its Affiliate (to the extent the Affiliate either owns a majority interest in a Party, or a Party owns a majority interest in the Affiliate) are listed], or of an emergency involving extensive property damage, operations failure, loss of human life or other clear emergency, the Parties are deemed authorized to furnish such minimum, strictly factual information as is necessary to satisfy requirements of appropriate regulatory authorities, or the legitimate public interest on the part of the press, other media, and duly constituted authorities if time does not permit the obtaining of prior approval by the other Party, but the Party furnishing such information shall promptly advise the other Party of the information so furnished.



16.6

Amendments  This Agreement may be amended, modified, changed, altered or supplemented only by written instrument duly executed by the Parties specifically for such purpose and which specifically refers to this Agreement.



16.7

Conflicts  In the event of a conflict between provisions of this Agreement and those contained in any of the agreements attached hereto, the provisions of this Agreement shall prevail.



16.8

Arbitration  Unless otherwise expressly agreed in writing by all of the Parties to any claim, dispute or controversy (the Dispute), the following procedures shall be implemented for resolving any Dispute:



(a)

Any Party may invoke these dispute resolution procedures (the Procedures) by providing written notice of any Dispute to the other Parties.  Within thirty (30) days after such notice is given, all the Parties shall attempt to resolve the Dispute through negotiations at a meeting, which shall be attended by representatives of each of the Parties having decision-making authority as well as by management-level personnel of each of the Parties who have not previously been directly engaged in directing or responding to the Dispute;



(b)

If a Dispute is not resolved after negotiations in a meeting as set out above, the Dispute shall be submitted to mandatory and binding arbitration at the election of any Party by sending a notice of arbitration to the other Parties;



(c)

The Arbitration proceedings shall administered and conducted in accordance with the Commercial Rules of Arbitration of the American Arbitration Association.



(d)

The Dispute shall be decided by three independent arbitrators (Arbitrators)  (that is having no substantial economic or other material relationship with any or all of the Parties). The Parties shall attempt to agree on two of the independent arbitrators (the Agreed Arbitrators) with the third being appointed by the Agreed Arbitrators.  Should any Party refuse or neglect to join in the timely appointment of the Agreed Arbitrators, the Agreed Arbitrators shall be appointed by the American Arbitration Association, and the Arbitration shall proceed notwithstanding the non-appointment and non-attendance of such Party in the appointment process.



(e)

The Arbitrators shall have 30 days after their appointment within which to allow discovery, hear evidence, and issue its decision or award and shall in good faith attempt to comply with such time limits; provided, however, if the Arbitrators, at their  sole and reasonable discretion, believe additional time is necessary to reach a decision, they may notify the Parties and extend the time to reach a decision in 30 day increments, but in no event to exceed an additional 60 days.



(f)

The decision or award of the Arbitrators shall be by majority vote. shall be in writing and shall state its detailed reasoning for the award.  Discovery of evidence shall be conducted expeditiously by the Parties, bearing in mind the Parties desire to limit discovery and to expedite the decision or award of the Arbitrators at the most reasonable cost and expense of the Parties.  Judgment upon an award rendered pursuant to such arbitration may be entered in any court having jurisdiction or application may be made to such court for a judicial acceptance of the award, and an order of enforcement, as the case may be. The place of Arbitration shall be Denver, Colorado.  All questions arising out of this Agreement and their rights and obligations created herein, or its validity, existence, interpretation, performance or breach shall be governed by the laws of the State of Wyoming, without regard to conflict of laws principles.  The Arbitrators shall not award consequential or punitive damages to any Party.  The costs and expenses of the arbitration proceeding, including the fees of the arbitrators and all costs and expenses, including legal fees and witness fees, incurred by the prevailing Party, shall be borne by the losing Party, such award of costs to be decided and specified by the Arbitrators.



16.9

Entire Agreement  When executed by the duly authorized representatives of the Parties, this Agreement shall constitute the entire agreement between the Parties regarding the LAK Ranch Leases, and the LAK Ranch Area and Area of Mutual Interest and shall supersede and replace any and all other writings, understandings or memoranda of understanding entered into or discussed prior to the Effective Date.



16.10

Savings Clause  If any part or portion of this Agreement is held to be invalid, such invalidity of any such part or portion shall not affect any remaining part or portion hereof.



16.11

Corporate Authority  The Parties represent that, as of the date of the execution hereof, they are duly authorized, validly existing, and in good standing under the laws of the jurisdictions of organization and are qualified and authorized to do business in the State of Wyoming and that all requisite corporate power and authority to execute, deliver, and effectuate this Agreement have been duly obtained.



16.12

Further Assurances  Each Party shall promptly execute, acknowledge, and deliver to the other Party such other instruments and take such other action as may be necessary or convenient in order to effect the transactions contemplated in this Agreement.



IN WITNESS WHEREOF, the Parties hereto have executed this Agreement to be effective as of the Effective Date.



IVANHOE ENERGY (USA) INC.



BY:       /s/ E.L. Daniel

E. L. DANIEL, President





DEREK RESOURCES (U.S.A.) INC.



BY:     /s/ B. Ehrl

BARRY C. J. EHRL, President & CEO

EXHIBIT A



Attached to and made a part of that certain Farmin Agreement dated January 15, 2004, by and between Ivanhoe Energy (USA Inc., and Derek Resources (USA) Inc.



All lands are in Weston County, Wyoming



Description of Lands



Tract A

Township 44 North, Range 60 West, 6th P.M.

Section 6:

Southwest Quarter, Northeast Quarter, East Half of the Northwest Quarter, and West Half of the Southeast Quarter (SW/4, NE/4, E/2 NW/4, W/2 SE/4).

Section 7:

West Half, and West Half of the East Half (W/2, W/2 E/2).

Section 18:

South Half of the Southwest Quarter, and the Northwest Quarter (S/2 SW/4, NW/4).

Section 19:

West Half of West Half, Northeast Quarter of the Northwest Quarter (W/2 W/2, NE/4 NW/4).

Township 44 North, Range 61 West, 6th P.M.

Section 1:

Southeast Quarter (SE/4).

Section 11:

Southeast Quarter, East Half of the Northeast Quarter, and South Half of the Southwest Quarter (SE/4, E/2 NE/4, S/2 SW/4).

Section 12:

All.

Section 13:

West Half, and South Half of the Southeast Quarter (W/2, S/2 SE/4).

Section 14:

All.

Section 22:

Northeast Quarter (NE/4).

Section 23:

North Half, Southeast Quarter, East Half of the Southwest Quarter (N/2, SE, E/2 SW/4).

Section 24:

North Half, Southeast Quarter, and East Half of the Southwest Quarter (N/2, SE/4, E/2 SW/4).

Section 25:

Northwest Quarter of the Northeast Quarter, North Half of the Northwest Quarter, Southwest Quarter of the Northwest Quarter, and Northwest Quarter of the Southwest Quarter (NW/4 NE/4, N/2 NW/4, SW/4 NW/4, NW/4 SW/4.

Section 26:

East Half of the Northeast Quarter, and Northeast Quarter of the Southeast Quarter (E/2 NE/4, NE/4 SE/4).

Section 30:

West Half of the Northwest Quarter (W/4 NW/4).



Tract B

Township 44 North, Range 61 West, 6th P.M.

Section 24:

Southeast Quarter of the Southeast Quarter (SE/4 SE/4).

Section 24:

Northeast Quarter of the Southeast Quarter (NE/4 SE/4)

Section 25:

South Half of the Southwest Quarter, the Northeast Quarter of the Southwest Quarter, Northwest Quarter of the Southeast Quarter, East Half of the Northeast Quarter, Southwest Quarter of the Northeast Quarter, and Southeast Quarter of the Northwest Quarter (S/2 SW/4, NE/4 SW/4, NW/4 SE/4, E/4 NE/4, SW/4 NE/4, SE/4 NW/4).



Tract C

Township 44 North, Range 60 West, 6th P.M.

Section 18:

North Half of the Southwest Quarter (N/2 SW/4).

Township 44 North, Range 61 West, 6th P.M.

Section 13:

Northeast Quarter, and North Half of the Southeast Quarter (NE/4, N/2 SE/4).



Tract D

Township 44 North, Range 61 West, 6th P.M.

Section 22:

Southeast Quarter (SE/4.

Section 27:

West Half of the East Half (W/2 E/2).



Tract E

Township 44 North, Range 60 West, 6th P.M.

Section 24:

Southeast Quarter of the Southeast Quarter (SE/4,SE/4)

Additional Property Leased from the Federal Government



Township 44 North, Range 61 West, 6th P.M.

Section 1:

South Half of the Southwest Quarter (S/2 SW/4).

Section 10:

Southwest Quarter of the Northeast Quarter (SW/4 NE/4).

Section 10:

West Half of the Southeast Quarter, Southeast Quarter of the Southeast Quarter (W/2 SE/4, SE/4 SE/4), excluding 13.77 acres in railroad right-of-way WyW0119068.

Section 15:

West Half of the East Half, East Half of the West Half, Northwest Quarter of the Northwest Quarter, Southwest Quarter of the Southwest Quarter (W/2 E/2, E/2 W/2, NW/4 NW/4, SW/4 SW/4).

Section 15:

East Half of the East Half (E/2 E/2), excluding 23.78 acres in railroad right-of-way WyW0119068.

Section 25:

Northeast Quarter of the Southeast Quarter, South half of the Southeast Quarter (NE/4 SE/4, S/2 SE/4).

Section 26:

Northwest Quarter of the Northeast Quarter, East Half of the Southwest Quarter (NW/4 NE/4, E/2 SW/4).

Section 26:

East Half of the Northwest Quarter, Southeast Quarter of the Southeast Quarter (E/2 NW/4, SE/4 SE/4), excluding 14.23 acres in railroad right-of-way WyW0119068.



Oil and Gas Leases subject to this Agreement

A.

Oil and Gas Lease, dated January 10, 1981, by and between Donald B. Roberts, B.M. Stewart, and Sheri Vineyard, as Lessors, and Exoil Services, Inc., as Lessee, recorded in Book 87, Page 189, Official Records of Weston County, Wyoming.



B.

Oil and Gas Lease, dated effective August 31, 1958, by and between the U.S. Department of Interior, Bureau of Land Management, as Lessor, and Edel P. Smith, as Lessee, being identified as Lease Serial Number W-022180-A.



C.

Oil and Gas Lease, dated effective December 1, 1999, by and between the U.S. Department of Interior, Bureau of Land Management, as Lessor, and Cove Energy, as Lessee, being identified as Lease Serial Number W-149512



Burdens on Production

Tract A

19.9501%

Tract B

19.9501%

Tract C

11.7875% (Based on 50% leased)

Tract D

11.7875% (Based on 50% leased)

Tract E

19.9501%

Exhibit Bto Farmin Agreement

LAK Ranch Area / AMI



Original LAK Property and Adjoining Property



|Description of Property                                           
|------------------------------------------------------------------
|Tract A                                                           
|Township 44 North, Range 60 West, 6th P.M., Weston County, Wyoming
|Section 6:                                                        
|Section 7:                                                        
|Section 18:                                                       
|Section 19:                                                       
|Township 44 North, Range 61 West, 6th P.M., Weston County, Wyoming
|Section 1:                                                        
|Section 11:                                                       
|Section 12:                                                       
|Section 13:                                                       
|Section 14:                                                       
|Section 22                                                        
|Section 23                                                        
|Section 24                                                        
|Section 25                                                        
|Section 26                                                        
|Section 30                                                        
|Tract B                                                           
|Township 44 North, Range 61 West, 6th P.M., Weston County, Wyoming
|Section 24:                                                       
|Section 24:                                                       
|Section 25:                                                       
|Tract C                                                           
|Township 44 North, Range 60 West, 6th P.M., Weston County, Wyoming
|Section 18:                                                       
|Township 44 North, Range 61 West, 6th P.M., Weston County, Wyoming
|Section 13:                                                       
|Tract D                                                           
|Township 44 North, Range 61 West, 6th P.M., Weston County, Wyoming
|Section 22:                                                       
|Section 27:                                                       



Additional Property Leased from the Federal Government



|Description of Property                                           
|------------------------------------------------------------------
|Township 44 North, Range 61 West, 6th P.M., Weston County, Wyoming
|Section 10:                                                       
|Section 10:                                                       
|Section 15:                                                       
|Section 15:                                                       
|Section 25                                                        
|Section 26:                                                       
|Section 26:                                                       



Additional Property Leased from Edel P. Smith and Accidental Oil Company



|Description of Property                                           
|------------------------------------------------------------------
|Township 44 North, Range 61 West, 6th P.M., Weston County, Wyoming
|Section 1:                                                        



---

Exhibit C



Attached to and made a part of that certain Farmin Agreement dated January 15, 2004, by and between Ivanhoe Energy (USA) Inc. (IVAN), as Operator and Derek Resources (U.S.A.) Inc., as Non-Operator.







A.A.P.L. FORM 610 - 1989



MODEL FORM OPERATING AGREEMENT

















OPERATING AGREEMENT



DATED



|                    | January  15                                       | ,          | 2004    | ,
|------------------- | ------------------------------------------------- | ---------- | ------- | -
|year               
|OPERATOR            | Ivanhoe Energy (USA) Inc.                        
|                   
|CONTRACT AREA       | Pursuant to the Farmin Agreement referenced above
|                   
|                   
|                   
|                   
|                   
|COUNTY OR PARISH OF | Weston                                            | , STATE OF | Wyoming





























COPYRIGHT 1989  ALL RIGHTS RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 4100 FOSSIL CREEK BLVD.
FORT WORTH, TEXAS, 76137, APPROVED FORM.

A.A.P.L. NO. 610  1989

---

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989





TABLE OF CONTENTS



Article

Title

Page

I.

DEFINITIONS

1

II.

EXHIBITS

1

III.

INTERESTS OF PARTIES

2

A.  OIL AND GAS INTERESTS:

2

B.  INTERESTS OF PARTIES IN COSTS AND PRODUCTION:

2

C.  SUBSEQUENTLY CREATED INTERESTS:

2

IV.

TITLES

2

A.  TITLE EXAMINATION:

2

B.  LOSS OR FAILURE OF TITLE:

3

1.  Failure of Title

3

2.  Loss by Non-Payment or Erroneous Payment of Amount Due

3

3.  Other Losses

3

4.  Curing Title

3

V.

OPERATOR

4

A.  DESIGNATION AND RESPONSIBILITIES OF OPERATOR:

4

B.  RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:

4

1.  Resignation or Removal of Operator

4

2.  Selection of Successor Operator

4

3.  Effect of Bankruptcy

4

C.  EMPLOYEES AND CONTRACTORS:

4

D.  RIGHTS AND DUTIES OF OPERATOR:

4

1.  Competitive Rates and Use of Affiliates

4

2.  Discharge of Joint Account Obligations

4

3.  Protection from Liens

4

4.  Custody of Funds

5

5.  Access to Contract Area and Records

5

6.  Filing and Furnishing Governmental Reports

5

7.  Drilling and Testing Operations

5

8.  Cost Estimates

5

9.  Insurance

5

VI.

DRILLING AND DEVELOPMENT

5

A.  INITIAL WELL:

5

B.  SUBSEQUENT OPERATIONS:

5

1.  Proposed Operations

5

2.  Operations by Less Than All Parties

6

3.  Stand-By Costs

7

4.  Deepening

8

5.  Sidetracking

8

6.  Order of Preference of Operations

8

7.  Conformity to Spacing Pattern

9

8.  Paying Wells

9

C.  COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:

9

1.  Completion

9

2.  Rework, Recomplete or Plug Back

9

D.  OTHER OPERATIONS:

9

E.  ABANDONMENT OF WELLS:

9

1.  Abandonment of Dry Holes

9

2.  Abandonment of Wells That Have Produced

10

3.  Abandonment of Non-Consent Operations

10

F.  TERMINATION OF OPERATIONS:

10

G.  TAKING PRODUCTION IN KIND:

10

(Option 1) Gas Balancing Agreement

10

(Option 2) No Gas Balancing Agreement

11

VII.

EXPENDITURES AND LIABILITY OF PARTIES

11

A.  LIABILITY OF PARTIES:

11

B.  LIENS AND SECURITY INTERESTS:

12

C.  ADVANCES:

12

D.  DEFAULTS AND REMEDIES:

12

1.  Suspension of Rights

13

2.  Suit for Damages

13

3.  Deemed Non-Consent

13

4.  Advance Payment

13

5.  Costs and Attorneys Fees

13

E.  RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:

13

F.  TAXES:

13

VIII.

ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

14

A.  SURRENDER OF LEASES:

14

B.  RENEWAL OR EXTENSION OF LEASES:

14

C.  ACREAGE OR CASH CONTRIBUTIONS:

14

i



---

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989





TABLE OF CONTENTS



D.

ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:

15

E.

WAIVER OF RIGHTS TO PARTITION:

15

F.

PREFERENTIAL RIGHT TO PURCHASE:

15

IX.

INTERNAL REVENUE CODE ELECTION

15

X.

CLAIMS AND LAWSUITS

15

XI.

FORCE MAJEURE

16

XII.

NOTICES

16

XIII.

TERM OF AGREEMENT

16

XIV.

COMPLIANCE WITH LAWS AND REGULATIONS

16

A.

LAWS, REGULATIONS AND ORDERS:

16

B.

GOVERNING LAW:

16

C.

REGULATORY AGENCIES:

16

XV.

MISCELLANEOUS

17

A.

EXECUTION:

17

B.

SUCCESSORS AND ASSIGNS:

17

C.

COUNTERPARTS:

17

D.

SEVERABILITY

17

XVI.

OTHER PROVISIONS

17



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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989



OPERATING AGREEMENT



THIS AGREEMENT, entered into by and between  Ivanhoe Energy (USA) Inc.

,

hereinafter designated and referred to as "Operator," and the signatory party or parties other than Operator, sometimes

hereinafter referred to individually as "Non-Operator," and collectively as "Non-Operators."



WITNESSETH:



WHEREAS, the parties to this agreement are owners of Oil and Gas Leases and/or Oil and Gas Interests in the land

identified in Exhibit "A," and the parties hereto have reached an agreement to explore and develop these Leases and/or Oil

and Gas Interests for the production of Oil and Gas to the extent and as hereinafter provided,



NOW, THEREFORE, it is agreed as follows:



ARTICLE I.



DEFINITIONS



As used in this agreement, the following words and terms shall have the meanings here ascribed to them:



A.  The term "AFE" shall mean an Authority for Expenditure prepared by a party to this agreement for the purpose of

estimating the costs to be incurred in conducting an operation hereunder.



B.  The term "Completion" or "Complete" shall mean a single operation intended to complete a well as a producer of Oil

and Gas in one or more Zones, including, but not limited to, the setting of production casing, perforating, well stimulation

and production testing conducted in such operation.



C.  The term "Contract Area" shall mean all of the lands, Oil and Gas Leases and/or Oil and Gas Interests intended to be

developed and operated for Oil and Gas purposes under this agreement.  Such lands, Oil and Gas Leases and Oil and Gas

Interests are described in Exhibit "A."



D.  The term "Deepen" shall mean a single operation whereby a well is drilled to an objective Zone below the deepest

Zone in which the well was previously drilled, or below the Deepest Zone proposed in the associated AFE, whichever is the

lesser.



E.  The terms "Drilling Party" and "Consenting Party" shall mean a party who agrees to join in and pay its share of the

cost of any operation conducted under the provisions of this agreement.



F.  The term "Drilling Unit" shall mean the area fixed for the drilling of one well by order or rule of any state or federal

body having authority.  If a Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be the drilling unit as

established by the pattern of drilling in the Contract Area unless fixed by express agreement of the Drilling Parties.



G.  The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas Interest on which a proposed well is to be

located.



H.  The term "Initial Well" shall mean the well required to be drilled by the parties hereto as provided in Article VI.A.



I.  The term "Non-Consent Well" shall mean a well in which less than all parties have conducted an operation as

provided in Article VI.B.2.



J.  The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a party who elects not to participate in a

proposed operation.



K.  The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas condensate, and/or all other liquid or gaseous

hydrocarbons and other marketable substances produced therewith, unless an intent to limit the inclusiveness of this term is

specifically stated.



L.  The term "Oil and Gas Interests" or "Interests" shall mean unleased fee and mineral interests in Oil and Gas in tracts

of land lying within the Contract Area which are owned by parties to this agreement.



M.  The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean the oil and gas leases or interests therein

covering tracts of land lying within the Contract Area which are owned by the parties to this agreement.



N.  The term "Plug Back" shall mean a single operation whereby a deeper Zone is abandoned in order to attempt a

Completion in a shallower Zone.



O.  The term "Recompletion" or "Recomplete" shall mean an operation whereby a Completion in one Zone is abandoned

in order to attempt a Completion in a different Zone within the existing wellbore.



P.  The term "Rework" shall mean an operation conducted in the wellbore of a well after it is Completed to secure,

restore, or improve production in a Zone which is currently open to production in the wellbore.  Such operations include, but

are not limited to, well stimulation operations but exclude any routine repair or maintenance work or drilling, Sidetracking,

Deepening, Completing, Recompleting, or Plugging Back of a well.



Q.  The term "Sidetrack" shall mean the directional control and intentional deviation of a well from vertical so as to

change the bottom hole location unless done to straighten the hole or drill around junk in the hole to overcome other

mechanical difficulties.



R.  The term "Zone" shall mean a stratum of earth containing or thought to contain a common accumulation of Oil and

Gas separately producible from any other common accumulation of Oil and Gas.



Unless the context otherwise clearly indicates, words used in the singular include the plural, the word "person" includes

natural and artificial persons, the plural includes the singular, and any gender includes the masculine, feminine, and neuter.



ARTICLE II.



EXHIBITS



The following exhibits, as indicated below and attached hereto, are incorporated in and made a part hereof:



X

A.

Exhibit "A," shall include the following information:



(1) Description of lands subject to this agreement,



(2) Restrictions, if any, as to depths, formations, or substances,



(3) Parties to agreement with addresses and telephone numbers for notice purposes,



(4) Percentages or fractional interests of parties to this agreement,



(5) Oil and Gas Leases and/or Oil and Gas Interests subject to this agreement,



(6) Burdens on production.



B.

Exhibit "B," Form of Lease.



X

C.

Exhibit "C," Accounting Procedure.



X

D.

Exhibit "D," Insurance.



X

E.

Exhibit "E," Gas Balancing Agreement.



X

F.

Exhibit "F," Non-Discrimination and Certification of Non-Segregated Facilities.



G.

Exhibit "G," Tax Partnership.



X

H.

Other:

Memorandum of Operating Agreement





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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989



If any provision of any exhibit, except Exhibits "E," "F" and "G," is inconsistent with any provision contained in

the body of this agreement, the provisions in the body of this agreement shall prevail.



ARTICLE III.



INTERESTS OF PARTIES



A.  Oil and Gas Interests:



If any party owns an Oil and Gas Interest in the Contract Area, that Interest shall be treated for all purposes of this

agreement and during the term hereof as if it were covered by the form of Oil and Gas Lease attached hereto as Exhibit "B,"

and the owner thereof shall be deemed to own both royalty interest in such lease and the interest of the lessee thereunder.



B.  Interests of Parties in Costs and Production:



Unless changed by other provisions, all costs and liabilities incurred in operations under this agreement shall be borne

and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by the parties as their

interests are set forth in Exhibit "A."  In the same manner, the parties shall also own all production of Oil and Gas from the

Contract Area subject, however, to the payment of royalties and other burdens on production as described hereafter.



Regardless of which party has contributed any Oil and Gas Lease or Oil and Gas Interest on which royalty or other

burdens may be payable and except as otherwise expressly provided in this agreement, each party shall pay or deliver, or

cause to be paid or delivered, all burdens on its share of the production from the Contract Area up to, but not in excess of,

20%

and shall indemnify, defend and hold the other parties free from any liability therefor.

Except as otherwise expressly provided in this agreement, if any party has contributed hereto any Lease or Interest which is

burdened with any royalty, overriding royalty, production payment or other burden on production in excess of the amounts

stipulated above, such party so burdened shall assume and alone bear all such excess obligations and shall indemnify, defend

and hold the other parties hereto harmless from any and all claims attributable to such excess burden.  However, so long as

the Drilling Unit for the productive Zone(s) is identical with the Contract Area, each party shall pay or deliver, or cause to

be paid or delivered, all burdens on production from the Contract Area due under the terms of the Oil and Gas Lease(s)

which such party has contributed to this agreement, and shall indemnify, defend and hold the other parties free from any

liability therefor.



No party shall ever be responsible, on a price basis higher than the price received by such party, to any other party's

lessor or royalty owner, and if such other party's lessor or royalty owner should demand and receive settlement on a higher

price basis, the party contributing the affected Lease shall bear the additional royalty burden attributable to such higher price.



Nothing contained in this Article III.B. shall be deemed an assignment or cross-assignment of interests covered hereby,

and in the event two or more parties contribute to this agreement jointly owned Leases, the parties' undivided interests in

said Leaseholds shall be deemed separate leasehold interests for the purposes of this agreement.



C.  Subsequently Created Interests:



If any party has contributed hereto a Lease or Interest that is burdened with an assignment of production given as security

for the payment of money, or if, after the date of this agreement, any party creates an overriding royalty, production

payment, net profits interest, assignment of production or other burden payable out of production attributable to its working

interest hereunder, such burden shall be deemed a "Subsequently Created Interest."  Further, if any party has contributed

hereto a Lease or Interest burdened with an overriding royalty, production payment, net profits interests, or other burden

payable out of production created prior to the date of this agreement, and such burden is not shown on Exhibit "A," such

burden also shall be deemed a Subsequently Created Interest to the extent such burden causes the burdens on such party's

Lease or Interest to exceed the amount stipulated in Article III.B. above.



The party whose interest is burdened with the Subsequently Created Interest (the "Burdened Party") shall assume and

alone bear, pay and discharge the Subsequently Created Interest and shall indemnify, defend and hold harmless the other

parties from and against any liability therefor.  Further, if the Burdened Party fails to pay, when due, its share of expenses

chargeable hereunder, all provisions of Article VII.B. shall be enforceable against the Subsequently Created Interest in the

same manner as they are enforceable against the working interest of the Burdened Party.  If the Burdened Party is required

under this agreement to assign or relinquish to any other party, or parties, all or a portion of its working interest and/or the

production attributable thereto, said other party, or parties, shall receive said assignment and/or production free and clear of

said Subsequently Created Interest, and the Burdened Party shall indemnify, defend and hold harmless said other party, or

parties, from any and all claims and demands for payment asserted by owners of the Subsequently Created Interest.



ARTICLE IV.



TITLES



A.  Title Examination:



Title examination shall be made on the Drillsite of any proposed well prior to commencement of drilling operations and,

if a majority in interest of the Drilling Parties so request or Operator so elects, title examination shall be made on the entire

Drilling Unit, or maximum anticipated Drilling Unit, of the well.   The opinion will include the ownership of the working

interest, minerals, royalty, overriding royalty and production payments under the applicable Leases.   Each party contributing

Leases and/or Oil and Gas Interests to be included in the Drillsite or Drilling Unit, if appropriate, shall furnish to Operator

all abstracts (including federal lease status reports), title opinions, title papers and curative material in its possession free of

charge.  All such information not in the possession of or made available to Operator by the parties, but necessary for the

examination of the title, shall be obtained by Operator.  Operator shall cause title to be examined by attorneys on its staff or

by outside attorneys.  Copies of all title opinions shall be furnished to each Drilling Party.  Costs incurred by Operator in

procuring abstracts, fees paid outside attorneys for title examination (including preliminary, supplemental, shut-in royalty

opinions and division order title opinions) and other direct charges as provided in Exhibit "C" shall be borne by the Drilling

Parties in the proportion that the interest of each Drilling Party bears to the total interest of all Drilling Parties as such

interests appear in Exhibit "A."  Operator shall make no charge for services rendered by its staff attorneys or other personnel

in the performance of the above functions.



Each party shall be responsible for securing curative matter and pooling amendments or agreements required in

connection with Leases or Oil and Gas Interests contributed by such party.  Operator shall be responsible for the preparation

and recording of pooling designations or declarations and communitization agreements as well as the conduct of hearings

before governmental agencies for the securing of spacing or pooling orders or any other orders necessary or appropriate to

the conduct of operations hereunder.  This shall not prevent any party from appearing on its own behalf at such hearings.

Costs incurred by Operator, including fees paid to outside attorneys, which are associated with hearings before governmental

agencies, and which costs are necessary and proper for the activities contemplated under this agreement, shall be direct

charges to the joint account and shall not be covered by the administrative overhead charges as provided in Exhibit "C."



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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989



Operator shall make no charge for services rendered by its staff attorneys or other personnel in the performance of the above

functions.



No well shall be drilled on the Contract Area until after (1) the title to the Drillsite or Drilling Unit, if appropriate, has

been examined as above provided, and (2) the title has been approved by the examining attorney or title has been accepted by

all of the Drilling Parties in such well.



B. Loss or Failure of Title:



1.Failure of Title: Should any Oil and Gas Interest or Oil and Gas Lease be lost through failure of title, which results in a

reduction of interest from that shown on Exhibit "A," the party credited with contributing the affected Lease or Interest

(including, if applicable, a successor in interest to such party) shall have ninety (90) days from final determination of title

failure to acquire a new lease or other instrument curing the entirety of the title failure, which acquisition will not be subject

to Article VIII.B., and failing to do so, this agreement, nevertheless, shall continue in force as to all remaining Oil and Gas

Leases and Interests; and,



(a) The party credited with contributing the Oil and Gas Lease or Interest affected by the title failure (including, if

applicable, a successor in interest to such party) shall bear alone the entire loss and it shall not be entitled to recover from

Operator or the other parties any development or operating costs which it may have previously paid or incurred, but there

shall be no additional liability on its part to the other parties hereto by reason of such title failure;



(b) There shall be no retroactive adjustment of expenses incurred or revenues received from the operation of the

Lease or Interest which has failed, but the interests of the parties contained on Exhibit "A" shall be revised on an acreage

basis, as of the time it is determined finally that title failure has occurred, so that the interest of the party whose Lease or

Interest is affected by the title failure will thereafter be reduced in the Contract Area by the amount of the Lease or Interest failed;



(c) If the proportionate interest of the other parties hereto in any producing well previously drilled on the Contract

Area is increased by reason of the title failure, the party who bore the costs incurred in connection with such well attributable

to the Lease or Interest which has failed shall receive the proceeds attributable to the increase in such interest (less costs and

burdens attributable thereto) until it has been reimbursed for unrecovered costs paid by it in connection with such well

attributable to such failed Lease or Interest;



(d) Should any person not a party to this agreement, who is determined to be the owner of any Lease or Interest

which has failed, pay in any manner any part of the cost of operation, development, or equipment, such amount shall be paid

to the party or parties who bore the costs which are so refunded;



(e) Any liability to account to a person not a party to this agreement for prior production of Oil and Gas which arises

by reason of title failure shall be borne severally by each party (including a predecessor to a current party) who received

production for which such accounting is required based on the amount of such production received, and each such party shall

severally indemnify, defend and hold harmless all other parties hereto for any such liability to account;



(f) No charge shall be made to the joint account for legal expenses, fees or salaries in connection with the defense of

the Lease or Interest claimed to have failed, but if the party contributing such Lease or Interest hereto elects to defend its title

it shall bear all expenses in connection therewith; and



(g) If any party is given credit on Exhibit "A" to a Lease or Interest which is limited solely to ownership of an

interest in the wellbore of any well or wells and the production therefrom, such party's absence of interest in the remainder

of the Contract Area shall be considered a Failure of Title as to such remaining Contract Area unless that absence of interest

is reflected on Exhibit "A."



2.Loss by Non-Payment or Erroneous Payment of Amount Due: If, through mistake or oversight, any rental, shut-in well

payment, minimum royalty or royalty payment, or other payment necessary to maintain all or a portion of an Oil and Gas

Lease or interest is not paid or is erroneously paid, and as a result a Lease or Interest terminates, there shall be no monetary

liability against the party who failed to make such payment.  Unless the party who failed to make the required payment

secures a new Lease or Interest covering the same interest within ninety (90) days from the discovery of the failure to make

proper payment, which acquisition will not be subject to Article VIII.B., the interests of the parties reflected on Exhibit "A"

shall be revised on an acreage basis, effective as of the date of termination of the Lease or Interest involved, and the party

who failed to make proper payment will no longer be credited with an interest in the Contract Area on account of ownership

of the Lease or Interest which has terminated.  If the party who failed to make the required payment shall not have been fully

reimbursed, at the time of the loss, from the proceeds of the sale of Oil and Gas attributable to the lost Lease or Interest,

calculated on an acreage basis, for the development and operating costs previously paid on account of such Lease or Interest,

it shall be reimbursed for unrecovered actual costs previously paid by it (but not for its share of the cost of any dry hole

previously drilled or wells previously abandoned) from so much of the following as is necessary to effect reimbursement:



(a) Proceeds of Oil and Gas produced prior to termination of the Lease or Interest, less operating expenses and lease

burdens chargeable hereunder to the person who failed to make payment, previously accrued to the credit of the lost Lease or

Interest, on an acreage basis, up to the amount of unrecovered costs;



(b) Proceeds of Oil and Gas, less operating expenses and lease burdens chargeable hereunder to the person who failed

to make payment, up to the amount of unrecovered costs attributable to that portion of Oil and Gas thereafter produced and

marketed (excluding production from any wells thereafter drilled) which, in the absence of such Lease or Interest termination,

would be attributable to the lost Lease or Interest on an acreage basis and which as a result of such Lease or Interest

termination is credited to other parties, the proceeds of said portion of the Oil and Gas to be contributed by the other parties

in proportion to their respective interests reflected on Exhibit "A"; and,



(c) Any monies, up to the amount of unrecovered costs, that may be paid by any party who is, or becomes, the owner

of the Lease or Interest lost, for the privilege of participating in the Contract Area or becoming a party to this agreement.



3. Other Losses: All losses of Leases or Interests committed to this agreement, other than those set forth in Articles

IV.B.1. and IV.B.2. above, shall be joint losses and shall be borne by all parties in proportion to their interests shown on

Exhibit "A."  This shall include but not be limited to the loss of any Lease or Interest through failure to develop or because

express or implied covenants have not been performed (other than performance which requires only the payment of money),

and the loss of any Lease by expiration at the end of its primary term if it is not renewed or extended.  There shall be no

readjustment of interests in the remaining portion of the Contract Area on account of any joint loss.



4.Curing Title: In the event of a Failure of Title under Article IV.B.1. or a loss of title under Article IV.B.2. above, any

Lease or Interest acquired by any party hereto (other than the party whose interest has failed or was lost) during the ninety

(90) day period provided by Article IV.B.1. and Article IV.B.2. above covering all or a portion of the interest that has failed

or was lost shall be offered at cost to the party whose interest has failed or was lost, and the provisions of Article VIII.B.

shall not apply to such acquisition.

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989



ARTICLE V.



OPERATOR



A.  Designation and Responsibilities of Operator:



Ivanhoe Energy (USA) Inc. shall be the Operator of the Contract Area, and shall conduct

and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of

this agreement.  In its performance of services hereunder for the Non-Operators, Operator shall be an independent contractor

not subject to the control or direction of the Non-Operators except as to the type of operation to be undertaken in accordance

with the election procedures contained in this agreement.  Operator shall not be deemed, or hold itself out as, the agent of the

Non-Operators with authority to bind them to any obligation or liability assumed or incurred by Operator as to any third

party.  Operator shall conduct its activities under this agreement as a reasonable prudent operator, in a good and workmanlike

manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and

regulation, but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred

except such as may result from gross negligence or willful misconduct.



B. Resignation or Removal of Operator and Selection of Successor:



1. Resignation or Removal of Operator: Operator may resign at any time by giving written notice thereof to Non-Operators.

If Operator terminates its legal existence, no longer owns an interest hereunder in the Contract Area, or is no longer capable of

serving as Operator, Operator shall be deemed to have resigned without any action by Non-Operators, except the selection of a

successor.  Operator may be removed only for good cause by the affirmative vote of Non-Operators owning a majority interest

based on ownership as shown on Exhibit "A" remaining after excluding the voting interest of Operator; such vote shall not be

deemed effective until a written notice has been delivered to the Operator by a Non-Operator detailing the alleged default and

Operator has failed to cure the default within thirty (30) days from its receipt of the notice or, if the default concerns an

operation then being conducted, within forty-eight (48) hours of its receipt of the notice.  For purposes hereof, "good cause" shall

mean not only gross negligence or willful misconduct but also the material breach of or inability to meet the standards of

operation contained in Article V.A. or material failure or inability to perform its obligations under this agreement.



Subject to Article VII.D.1., such resignation or removal shall not become effective until 7:00 o'clock A.M. on the first

day of the calendar month following the expiration of ninety (90) days after the giving of notice of resignation by Operator

or action by the Non-Operators to remove Operator, unless a successor Operator has been selected and assumes the duties of

Operator at an earlier date. Operator, after effective date of resignation or removal, shall be bound by the terms hereof as a

Non-Operator.  A change of a corporate name or structure of Operator or transfer of Operator's interest to any single

subsidiary, parent or successor corporation shall not be the basis for removal of Operator.



2.  Selection of Successor Operator: Upon the resignation or removal of Operator under any provision of this agreement, a

successor Operator shall be selected by the parties.  The successor Operator shall be selected from the parties owning an

interest in the Contract Area at the time such successor Operator is selected.  The successor Operator shall be selected by the

affirmative vote of two (2) or more parties owning a majority interest based on ownership as shown on Exhibit "A";

provided, however, if an Operator which has been removed or is deemed to have resigned fails to vote or votes only to

succeed itself, the successor Operator shall be selected by the affirmative vote of the party or parties owning a majority

interest based on ownership as shown on Exhibit "A" remaining after excluding the voting interest of the Operator that was

removed or resigned.  The former Operator shall promptly deliver to the successor Operator all records and data relating to

the operations conducted by the former Operator to the extent such records and data are not already in the possession of the

successor operator.  Any cost of obtaining or copying the former Operator's records and data shall be charged to the joint

account.



3.  Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is placed in receivership, it shall be deemed to have

resigned without any action by Non-Operators, except the selection of a successor.  If a petition for relief under the federal

bankruptcy laws is filed by or against Operator, and the removal of Operator is prevented by the federal bankruptcy court, all

Non-Operators and Operator shall comprise an interim operating committee to serve until Operator has elected to reject or

assume this agreement pursuant to the Bankruptcy Code, and an election to reject this agreement by Operator as a debtor in

possession, or by a trustee in bankruptcy, shall be deemed a resignation as Operator without any action by Non-Operators,

except the selection of a successor.  During the period of time the operating committee controls operations, all actions shall

require the approval of two (2) or more parties owning a majority interest based on ownership as shown on Exhibit "A."  In

the event there are only two (2) parties to this agreement, during the period of time the operating committee controls

operations, a third party acceptable to Operator, Non-Operator and the federal bankruptcy court shall be selected as a

member of the operating committee, and all actions shall require the approval of two (2) members of the operating

committee without regard for their interest in the Contract Area based on Exhibit "A."



C.  Employees and Contractors:



The number of employees or contractors used by Operator in conducting operations hereunder, their selection, and the

hours of labor and the compensation for services performed shall be determined Operator, and all such employees or

contractors shall be the employees or contractors of Operator.



D.  Rights and Duties of Operator:



1. Competitive Rates and Use of Affiliates: All wells drilled on the Contract Area shall be drilled on a competitive

contract basis at the usual rates prevailing in the area.  If it so desires, Operator may employ its own tools and equipment in

the drilling of wells, but its charges therefor shall not exceed the prevailing rates in the area and the rate of such charges

shall be agreed upon by the parties in writing before drilling operations are commenced, and such work shall be performed by

Operator under the same terms and conditions as are customary and usual in the area in contracts of independent contractors

who are doing work of a similar nature.  All work performed or materials supplied by affiliates or related parties of Operator

shall be performed or supplied at competitive rates, pursuant to written agreement, and in accordance with customs and

standards prevailing in  the industry.



2. Discharge of Joint Account Obligations: Except as herein otherwise specifically provided, Operator shall promptly pay

and discharge expenses incurred in the development and operation of the Contract Area pursuant to this agreement and shall

charge each of the parties hereto with their respective proportionate shares upon the expense basis provided in Exhibit "C."

Operator shall keep an accurate record of the joint account hereunder, showing expenses incurred and charges and credits

made and received.



3. Protection from Liens: Operator shall pay, or cause to be paid, as and when they become due and payable, all accounts

of contractors and suppliers and wages and salaries for services rendered or performed, and for materials supplied on, to or in

respect of the Contract Area or any operations for the joint account thereof, and shall keep the Contract Area free from

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989



liens and encumbrances resulting therefrom except for those resulting from a bona fide dispute as to services rendered or

materials supplied.



4. Custody of Funds: Operator shall hold for the account of the Non-Operators any funds of the Non-Operators advanced

or paid to the Operator, either for the conduct of operations hereunder or as a result of the sale of production from the

Contract Area, and such funds shall remain the funds of the Non-Operators on whose account they are advanced or paid until

used for their intended purpose or otherwise delivered to the Non-Operators or applied toward the payment of debts as

provided in Article VII.B.  Nothing in this paragraph shall be construed to establish a fiduciary relationship between Operator

and Non-Operators for any purpose other than to account for Non-Operator funds as herein specifically provided.  Nothing in

this paragraph shall require the maintenance by Operator of separate accounts for the funds of Non-Operators unless the

parties otherwise specifically agree.



5. Access to Contract Area and Records: Operator shall, except as otherwise provided herein, permit each Non-Operator

or its duly authorized representative, at the Non-Operator's sole risk and cost, full and free access at all reasonable times to

all operations of every kind and character being conducted for the joint account on the Contract Area and to the records of

operations conducted thereon or production therefrom, including Operator's books and records relating thereto.  Such access

rights shall not be exercised in a manner interfering with Operator's conduct of an operation hereunder and shall not obligate

Operator to furnish any geologic or geophysical data of an interpretive nature unless the cost of preparation of such

interpretive data was charged to the joint account.  Operator will furnish to each Non-Operator upon request copies of any

and all reports and information obtained by Operator in connection with production and related items, including, without

limitation, meter and chart reports, production purchaser statements, run tickets and monthly gauge reports, but excluding

purchase contracts and pricing information to the extent not applicable to the production of the Non-Operator seeking the

information.  Any audit of Operator's records relating to amounts expended and the appropriateness of such expenditures

shall be conducted in accordance with the audit protocol specified in Exhibit "C."



6. Filing and Furnishing Governmental Reports: Operator will file, and upon written request promptly furnish copies to

each requesting Non-Operator not in default of its payment obligations, all operational notices, reports or applications

required to be filed by local, State, Federal or Indian agencies or authorities having jurisdiction over operations hereunder.

Each Non-Operator shall provide to Operator on a timely basis all information necessary to Operator to make such filings.

7. Drilling and Testing Operations: The following provisions shall apply to each well drilled hereunder, including but not

limited to the Initial Well:



(a) Operator will promptly advise Non-Operators of the date on which the well is spudded, or the date on which

drilling operations are commenced.



(b) Operator will send to Non-Operators such reports, test results and notices regarding the progress of operations on  the well

as the Non-Operators shall reasonably request, including, but not limited to, daily drilling reports, completion reports, and well logs.



(c) Operator shall adequately test all Zones encountered which may reasonably be expected to be capable of producing

Oil and Gas in paying quantities as a result of examination of the electric log or any other logs or cores or tests conducted

hereunder.



8. Cost Estimates: Upon request of any Consenting Party, Operator shall furnish estimates of current and cumulative costs

incurred for the joint account at reasonable intervals during the conduct of any operation pursuant to this agreement.

Operator shall not be held liable for errors in such estimates so long as the estimates are made in good faith.



9. Insurance: At all times while operations are conducted hereunder, Operator shall comply with the workers

compensation law of the state where the operations are being conducted; provided, however, that Operator may be a self-

insurer for liability under said compensation laws in which event the only charge that shall be made to the joint account shall

be as provided in Exhibit "C."  Operator shall also carry or provide insurance for the benefit of the joint account of the parties

as outlined in Exhibit "D" attached hereto and made a part hereof.  Operator shall require all contractors engaged in work on

or for the Contract Area to comply with the workers compensation law of the state where the operations are being conducted

and to maintain such other insurance as Operator may require.



In the event automobile liability insurance is specified in said Exhibit "D," or subsequently receives the approval of the

parties, no direct charge shall be made by Operator for premiums paid for such insurance for Operator's automotive

equipment.



ARTICLE VI.



DRILLING AND DEVELOPMENT



A.  Initial Well:



On or before the

day of

,

, Operator shall commence the drilling of the Initial

Well at the following location:







Pursuant to the Farmin Agreement to which this Operating Agreement is attached.



















and shall thereafter continue the drilling of the well with due diligence to



























The drilling of the Initial Well and the participation therein by all parties is obligatory, subject to Article VI.C.1. as to participation

in Completion operations and Article VI.F. as to termination of operations and Article XI as to occurrence of force majeure.



B.  SubsequentOperations:



1.  Proposed Operations: If any party hereto should desire to drill any well on the Contract Area other than the Initial Well, or

if any party should desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a well no longer capable of

producing in paying quantities in which such party has not otherwise relinquished its interest in the proposed objective Zone under

this agreement, the party desiring to drill, Rework, Sidetrack, Deepen, Recomplete or Plug Back such a well shall give written

notice of the proposed operation to the parties who have not otherwise relinquished their interest in such objective Zone

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989



under this agreement and to all other parties in the case of a proposal for Sidetracking or Deepening, specifying the work to be

performed, the location, proposed depth, objective Zone and the estimated cost of the operation.  The parties to whom such a

notice is delivered shall have thirty (30) days after receipt of the notice within which to notify the party proposing to do the work

whether they elect to participate in the cost of the proposed operation.  If a drilling rig is on location, notice of a proposal to

Rework, Sidetrack, Recomplete, Plug Back or Deepen may be given by telephone and the response period shall be limited to forty-

eight (48) hours, exclusive of Saturday, Sunday and legal holidays.  Failure of a party to whom such notice is delivered to reply

within the period above fixed shall constitute an election by that party not to participate in the cost of the proposed operation.

Any proposal by a party to conduct an operation conflicting with the operation initially proposed shall be delivered to all parties

within the time and in the manner provided in Article VI.B.6.



If all parties to whom such notice is delivered elect to participate in such a proposed operation, the parties shall be

contractually committed to participate therein provided such operations are commenced within the time period hereafter set

forth, and Operator shall, no later than ninety (90) days after expiration of the notice period of thirty (30) days (or as

promptly as practicable after the expiration of the forty-eight (48) hour period when a drilling rig is on location, as the case

may be), actually commence the proposed operation and thereafter complete it with due diligence at the risk and expense of

the parties participating therein; provided, however, said commencement date may be extended upon written notice of same

by Operator to the other parties, for a period of up to thirty (30) additional days if, in the sole opinion of Operator, such

additional time is reasonably necessary to obtain permits from governmental authorities, surface rights (including rights-of-

way) or appropriate drilling equipment, or to complete title examination or curative matter required for title approval or

acceptance.  If the actual operation has not been commenced within the time provided (including any extension thereof as

specifically permitted herein or in the force majeure provisions of Article XI) and if any party hereto still desires to conduct

said operation, written notice proposing same must be resubmitted to the other parties in accordance herewith as if no prior

proposal had been made.  Those parties that did not participate in the drilling of a well for which a proposal to Deepen or

Sidetrack is made hereunder shall, if such parties desire to participate in the proposed Deepening or Sidetracking operation,

reimburse the Drilling Parties in accordance with Article VI.B.4. in the event of a Deepening operation and in accordance

with Article VI.B.5. in the event of a Sidetracking operation.



2.  Operations by Less Than All Parties:



(a) Determination of Participation.  If any party to whom such notice is delivered as provided in Article VI.B.1. or

VI.C.1. (Option No. 2) elects not to participate in the proposed operation, then, in order to be entitled to the benefits of this

Article, the party or parties giving the notice and such other parties as shall elect to participate in the operation shall, no

later than ninety (90) days after the expiration of the notice period of thirty (30) days (or as promptly as practicable after the

expiration of the forty-eight (48) hour period when a drilling rig is on location, as the case may be) actually commence the

proposed operation and complete it with due diligence.  Operator shall perform all work for the account of the Consenting

Parties; provided, however, if no drilling rig or other equipment is on location, and if Operator is a Non-Consenting Party,

the Consenting Parties shall either: (i) request Operator to perform the work required by such proposed operation for the

account of the Consenting Parties, or (ii) designate one of the Consenting Parties as Operator to perform such work.  The

rights and duties granted to and imposed upon the Operator under this agreement are granted to and imposed upon the party

designated as Operator for an operation in which the original Operator is a Non-Consenting Party.  Consenting Parties, when

conducting operations on the Contract Area pursuant to this Article VI.B.2., shall comply with all terms and conditions of this

agreement.



If less than all parties approve any proposed operation, the proposing party, immediately after the expiration of the

applicable notice period, shall advise all Parties of the total interest of the parties approving such operation and its

recommendation as to whether the Consenting Parties should proceed with the operation as proposed.  Each Consenting Party,

within forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after delivery receipt of such notice, shall advise the

proposing party of its desire to (i) limit participation to such party's interest as shown on Exhibit "A" or (ii) carry only its

proportionate part (determined by dividing such party's interest in the Contract Area by the interests of all Consenting Parties in

the Contract Area) of Non-Consenting Parties' interests, or (iii) carry its proportionate part (determined as provided in (ii)) of

Non-Consenting Parties' interests together with all or a portion of its proportionate part of any Non-Consenting Parties'

interests that any Consenting Party did not elect to take.  Any interest of Non-Consenting Parties that is not carried by a

Consenting Party shall be deemed to be carried by the party proposing the operation if such party does not withdraw its

proposal.  Failure to advise the proposing party within the time required shall be deemed an election under (i). In the event a

drilling rig is on location, notice may be given by telephone, and the time permitted for such a response shall not exceed a

total of forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays). The proposing party, at its election, may

withdraw such proposal if there is less than 100% participation and shall notify all parties of such decision within ten (10)

days, or within twenty-four (24) hours if a drilling rig is on location, following expiration of the applicable response period.

If 100% subscription to the proposed operation is obtained, the proposing party shall promptly notify the Consenting Parties

of their proportionate interests in the operation and the party serving as Operator shall commence such operation within the

period provided in Article VI.B.1., subject to the same extension right as provided therein.



(b) Relinquishment of Interest for Non-Participation. The entire cost and risk of conducting such operations shall be

borne by the Consenting Parties in the proportions they have elected to bear same under the terms of the preceding

paragraph.  Consenting Parties shall keep the leasehold estates involved in such operations free and clear of all liens and

encumbrances of every kind created by or arising from the operations of the Consenting Parties.  If such an operation results

in a dry hole, then subject to Articles VI.B.6. and VI.E.3., the Consenting Parties shall plug and abandon the well and restore

the surface location at their sole cost, risk and expense; provided, however, that those Non-Consenting Parties that

participated in the drilling, Deepening or Sidetracking of the well shall remain liable for, and shall pay, their proportionate

shares of the cost of plugging and abandoning the well and restoring the surface location insofar only as those costs were not

increased by the subsequent operations of the Consenting Parties.  If any well drilled, Reworked, Sidetracked, Deepened,

Recompleted or Plugged Back under the provisions of this Article results in a well capable of producing Oil and/or Gas in

paying quantities, the Consenting Parties shall Complete and equip the well to produce at their sole cost and risk, and the

well shall then be turned over to Operator (if the Operator did not conduct the operation) and shall be operated by it at the

expense and for the account of the Consenting Parties.  Upon commencement of operations for the drilling, Reworking,

Sidetracking, Recompleting, Deepening or Plugging Back of any such well by Consenting Parties in accordance with the

provisions of this Article, each Non-Consenting Party shall be deemed to have relinquished to Consenting Parties, and the

Consenting Parties shall own and be entitled to receive, in proportion to their respective interests, all of such Non-

Consenting Party's interest in the well and share of production therefrom or, in the case of a Reworking, Sidetracking,

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989



Deepening, Recompleting or Plugging Back, or a Completion pursuant to Article VI.C.1.  Option No. 2, all of such Non-

Consenting Party's interest in the production obtained from the operation in which the Non-Consenting Party did not elect

to participate.  Such relinquishment shall be effective until the proceeds of the sale of such share, calculated at the well, or

market value thereof if such share is not sold (after deducting applicable ad valorem, production, severance, and excise taxes,

royalty, overriding royalty and other interests not excepted by Article III.C. payable out of or measured by the production

from such well accruing with respect to such interest until it reverts), shall equal the total of the following:



(i)

100

% of each such Non-Consenting Party's share of the cost of any newly acquired surface equipment

beyond the wellhead connections (including but not limited to stock tanks, separators, treaters, pumping equipment and

piping), plus 100% of each such Non-Consenting Party's share of the cost of operation of the well commencing with first

production and continuing until each such Non-Consenting Party's relinquished interest shall revert to it under other

provisions of this Article, it being agreed that each Non-Consenting Party's share of such costs and equipment will be that

interest which would have been chargeable to such Non-Consenting Party had it participated in the well from the beginning

of the operations; and



(ii)

300

% of (a) that portion of the costs and expenses of drilling, Reworking, Sidetracking, Deepening,

Plugging Back, testing, Completing, and Recompleting, after deducting any cash contributions received under Article VIII.C.,

and of (b) that portion of the cost of newly acquired equipment in the well (to and including the wellhead connections),

which would have been chargeable to such Non-Consenting Party if it had participated therein.



Notwithstanding anything to the contrary in this Article VI.B., if the well does not reach the deepest objective Zone

described in the notice proposing the well for reasons other than the encountering of granite or practically impenetrable

substance or other condition in the hole rendering further operations impracticable, Operator shall give notice thereof to each

Non-Consenting Party who submitted or voted for an alternative proposal under Article VI.B.6. to drill the well to a

shallower Zone than the deepest objective Zone proposed in the notice under which the well was drilled, and each such Non-

Consenting Party shall have the option to participate in the initial proposed Completion of the well by paying its share of the

cost of drilling the well to its actual depth, calculated in the manner provided in Article VI.B.4. (a).  If any such Non-

Consenting Party does not elect to participate in the first Completion proposed for such well, the relinquishment provisions

of this Article VI.B.2. (b) shall apply to such party's interest.



(c) Reworking, Recompleting or Plugging Back. An election not to participate in the drilling, Sidetracking or

Deepening of a well shall be deemed an election not to participate in any Reworking, Recompletion or Plugging Back operation proposed in

such a well, or portion thereof, to which the initial non-consent election applied that is conducted at any time prior to full

recovery by the Consenting Parties of the Non-Consenting Party's recoupment amount.  Similarly, an election not to

participate in the Completing or Recompleting of a well shall be deemed an election not to participate in any Reworking

operation proposed in such a well, or portion thereof, to which the initial non-consent election applied that is conducted at

any time prior to full recovery by the Consenting Parties of the Non-Consenting Party's recoupment amount.  Any such

Reworking, Recompleting or Plugging Back operation conducted during the recoupment period shall be deemed part of the

cost of operation of said well and there shall be added to the sums to be recouped by the Consenting Parties ___200____% of

that portion of the costs of the Reworking, Recompleting or Plugging Back operation which would have been chargeable to

such Non-Consenting Party had it participated therein.  If such a Reworking, Recompleting or Plugging Back operation is

proposed during such recoupment period, the provisions of this Article VI.B. shall be applicable as between said Consenting

Parties in said well.



(d) Recoupment Matters. During the period of time Consenting Parties are entitled to receive Non-Consenting Party's

share of production, or the proceeds therefrom, Consenting Parties shall be responsible for the payment of all ad valorem,

production, severance, excise, gathering and other taxes, and all royalty, overriding royalty and other burdens applicable to

Non-Consenting Party's share of production not excepted by Article III.C.



In the case of any Reworking, Sidetracking, Plugging Back, Recompleting or Deepening operation, the Consenting

Parties shall be permitted to use, free of cost, all casing, tubing and other equipment in the well, but the ownership of all

such equipment shall remain unchanged; and upon abandonment of a well after such Reworking, Sidetracking, Plugging Back,

Recompleting or Deepening, the Consenting Parties shall account for all such equipment to the owners thereof, with each

party receiving its proportionate part in kind or in value, less cost of salvage.



Within ninety (90) days after the completion of any operation under this Article, the party conducting the operations

for the Consenting Parties shall furnish each Non-Consenting Party with an inventory of the equipment in and connected to

the well, and an itemized statement of the cost of drilling, Sidetracking, Deepening, Plugging Back, testing, Completing,

Recompleting, and equipping the well for production; or, at its option, the operating party, in lieu of an itemized statement

of such costs of operation, may submit a detailed statement of monthly billings.  Each month thereafter, during the time the

Consenting Parties are being reimbursed as provided above, the party conducting the operations for the Consenting Parties

shall furnish the Non-Consenting Parties with an itemized statement of all costs and liabilities incurred in the operation of

the well, together with a statement of the quantity of Oil and Gas produced from it and the amount of proceeds realized from

the sale of the well's working interest production during the preceding month.  In determining the quantity of Oil and Gas

produced during any month, Consenting Parties shall use industry accepted methods such as but not limited to metering or

periodic well tests.  Any amount realized from the sale or other disposition of equipment newly acquired in connection with

any such operation which would have been owned by a Non-Consenting Party had it participated therein shall be credited

against the total unreturned costs of the work done and of the equipment purchased in determining when the interest of such

Non-Consenting Party shall revert to it as above provided; and if there is a credit balance, it shall be paid to such Non-

Consenting Party.



If and when the Consenting Parties recover from a Non-Consenting Party's relinquished interest the amounts provided

for above, the relinquished interests of such Non-Consenting Party shall automatically revert to it as of 7:00 a.m. on the day

following the day on which such recoupment occurs, and, from and after such reversion, such Non-Consenting Party shall

own the same interest in such well, the material and equipment in or pertaining thereto, and the production therefrom as

such Non-Consenting Party would have been entitled to had it participated in the drilling, Sidetracking, Reworking,

Deepening, Recompleting or Plugging Back of said well.  Thereafter, such Non-Consenting Party shall be charged with and

shall pay its proportionate part of the further costs of the operation of said well in accordance with the terms of this

agreement and Exhibit "C" attached hereto.



3. Stand-By Costs: When a well which has been drilled or Deepened has reached its authorized depth and all tests have

been completed and the results thereof furnished to the parties, or when operations on the well have been otherwise

terminated pursuant to Article VI.F., stand-by costs incurred pending response to a party's notice proposing a Reworking,

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989



Sidetracking, Deepening, Recompleting, Plugging Back or Completing operation in such a well (including the period required

under Article VI.B.6. to resolve competing proposals) shall be charged and borne as part of the drilling or Deepening

operation just completed.  Stand-by costs subsequent to all parties responding, or expiration of the response time permitted,

whichever first occurs, and prior to agreement as to the participating interests of all Consenting Parties pursuant to the terms

of the second grammatical paragraph of Article VI.B.2. (a), shall be charged to and borne as part of the proposed operation,

but if the proposal is subsequently withdrawn because of insufficient participation, such stand-by costs shall be allocated

between the Consenting Parties in the proportion each Consenting Party's interest as shown on Exhibit "A" bears to the total

interest as shown on Exhibit "A" of all Consenting Parties.



In the event that notice for a Sidetracking operation is given while the drilling rig to be utilized is on location, any party

may request and receive up to five (5) additional days after expiration of the forty-eight hour response period specified in

Article VI.B.1. within which to respond by paying for all stand-by costs and other costs incurred during such extended

response period; Operator may require such party to pay the estimated stand-by time in advance as a condition to extending

the response period.  If more than one party elects to take such additional time to respond to the notice, standby costs shall be

allocated between the parties taking additional time to respond on a day-to-day basis in the proportion each electing party's

interest as shown on Exhibit "A" bears to the total interest as shown on Exhibit "A" of all the electing parties.



4. Deepening: If less than all parties elect to participate in a drilling, Sidetracking, or Deepening operation proposed

pursuant to Article VI.B.1., the interest relinquished by the Non-Consenting Parties to the Consenting Parties under Article

VI.B.2. shall relate only and be limited to the lesser of (i) the total depth actually drilled or (ii) the objective depth or Zone

of which the parties were given notice under Article VI.B.1. ("Initial Objective").  Such well shall not be Deepened beyond the

Initial Objective without first complying with this Article to afford the Non-Consenting Parties the opportunity to participate

in the Deepening operation.



In the event any Consenting Party desires to drill or Deepen a Non-Consent Well to a depth below the Initial Objective,

such party shall give notice thereof, complying with the requirements of Article VI.B.1., to all parties (including Non-

Consenting Parties).  Thereupon, Articles VI.B.1. and 2. shall apply and all parties receiving such notice shall have the right to

participate or not participate in the Deepening of such well pursuant to said Articles VI.B.1. and 2.  If a Deepening operation

is approved pursuant to such provisions, and if any Non-Consenting Party elects to participate in the Deepening operation,

such Non-Consenting party shall pay or make reimbursement (as the case may be) of the following costs and expenses.



(a) If the proposal to Deepen is made prior to the Completion of such well as a well capable of producing in paying

quantities, such Non-Consenting Party shall pay (or reimburse Consenting Parties for, as the case may be) that share of costs

and expenses incurred in connection with the drilling of said well from the surface to the Initial Objective which Non-

Consenting Party would have paid had such Non-Consenting Party agreed to participate therein, plus the Non-Consenting

Party's share of the cost of Deepening and of participating in any further operations on the well in accordance with the other

provisions of this Agreement; provided, however, all costs for testing and Completion or attempted Completion of the well

incurred by Consenting Parties prior to the point of actual operations to Deepen beyond the Initial Objective shall be for the

sole account of Consenting Parties.



(b) If the proposal is made for a Non-Consent Well that has been previously Completed as a well capable of producing

in paying quantities, but is no longer capable of producing in paying quantities, such Non-Consenting Party shall pay (or

reimburse Consenting Parties for, as the case may be) its proportionate share of all costs of drilling, Completing, and

equipping said well from the surface to the Initial Objective, calculated in the manner provided in paragraph (a) above, less

those costs recouped by the Consenting Parties from the sale of production from the well.  The Non-Consenting Party shall

also pay its proportionate share of all costs of re-entering said well.  The Non-Consenting Parties' proportionate part (based

on the percentage of such well Non-Consenting Party would have owned had it previously participated in such Non-Consent

Well) of the costs of salvable materials and equipment remaining in the hole and salvable surface equipment used in

connection with such well shall be determined in accordance with Exhibit "C."  If the Consenting Parties have recouped the

cost of drilling, Completing, and equipping the well at the time such Deepening operation is conducted, then a Non-

Consenting Party may participate in the Deepening of the well with no payment for costs incurred prior to re-entering the

well for Deepening



The foregoing shall not imply a right of any Consenting Party to propose any Deepening for a Non-Consent Well prior

to the drilling of such well to its Initial Objective without the consent of the other Consenting Parties as provided in Article

VI.F.



5. Sidetracking: Any party having the right to participate in a proposed Sidetracking operation that does not own an

interest in the affected wellbore at the time of the notice shall, upon electing to participate, tender to the wellbore owners its

proportionate share (equal to its interest in the Sidetracking operation) of the value of that portion of the existing wellbore

to be utilized as follows:



(a) If the proposal is for Sidetracking an existing dry hole, reimbursement shall be on the basis of the actual costs

incurred in the initial drilling of the well down to the depth at which the Sidetracking operation is initiated.



(b) If the proposal is for Sidetracking a well which has previously produced, reimbursement shall be on the basis of

such party's proportionate share of drilling and equipping costs incurred in the initial drilling of the well down to the depth

at which the Sidetracking operation is conducted, calculated in the manner described in Article VI.B.4(b) above.  Such party's

proportionate share of the cost of the well's salvable materials and equipment down to the depth at which the Sidetracking

operation is initiated shall be determined in accordance with the provisions of Exhibit "C."



6. Order of Preference of Operations. Except as otherwise specifically provided in this agreement, if any party desires to

propose the conduct of an operation that conflicts with a proposal that has been made by a party under this Article VI, such

party shall have fifteen (15) days from delivery of the initial proposal, in the case of a proposal to drill a well or to perform

an operation on a well where no drilling rig is on location, or twenty-four (24) hours, (exclusive of Saturday, Sunday and legal holidays), from delivery of the initial proposal, if a drilling rig is on location for the well on which such operation is to be

conducted, to deliver to all parties entitled to participate in the proposed operation such party's alternative proposal, such

alternate proposal to contain the same information required to be included in the initial proposal.  Each party receiving such

proposals shall elect by delivery of notice to Operator within five (5) days after expiration of the proposal period, or within

twenty-four (24) hours (exclusive of Saturday, Sunday and legal holidays) if a drilling rig is on location for the well that is the

subject of the proposals, to participate in one of the competing proposals.  Any party not electing within the time required

shall be deemed not to have voted.  The proposal receiving the vote of parties owning the largest aggregate percentage

interest of the parties voting shall have priority over all other competing proposals; in the case of a tie vote, the

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initial proposal shall prevail. Operator shall deliver notice of such result to all parties entitled to participate in the operation

within five (5) days after expiration of the election period (or within twenty-four (24) hours, exclusive of Saturday, Sunday

and legal holidays, if a drilling rig is on location).  Each party shall then have two (2) days (or twenty-four (24) hours if a rig

is on location) from receipt of such notice to elect by delivery of notice to Operator to participate in such operation or to

relinquish interest in the affected well pursuant to the provisions of Article VI.B.2.; failure by a party to deliver notice within

such period shall be deemed an election not to participate in the prevailing proposal.



7. Paying Wells. No party shall conduct any Reworking, Deepening, Plugging Back, Completion, Recompletion, or

Sidetracking operation under this agreement with respect to any well then capable of producing in paying quantities except

with the consent of parties with majority interest in percentage of that have not relinquished interests in the well at the time of such operation.



C.  Completion of Wells; Reworking and Plugging Back:



1. Completion: Without the consent of all parties, no well shall be drilled, Deepened or Sidetracked, except any well

drilled, Deepened or Sidetracked pursuant to the provisions of Article VI.B.2. of this agreement.  Consent to the drilling,

Deepening or Sidetracking shall include:



o

Option No. 1:All necessary expenditures for the drilling, Deepening or Sidetracking, testing, Completing and

equipping of the well, including necessary tankage and/or surface facilities.



x

Option No. 2: All necessary expenditures for the drilling, Deepening or Sidetracking and testing of the well. When

such well has reached its authorized depth, and all logs, cores and other tests have been completed, and the results

thereof furnished to the parties, Operator shall give immediate notice to the Non-Operators having the right to

participate in a Completion attempt whether or not Operator recommends attempting to Complete the well,

together with Operator's AFE for Completion costs if not previously provided.  The parties receiving such notice

shall have forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) in which to elect by delivery of

notice to Operator to participate in a recommended Completion attempt or to make a Completion proposal with an

accompanying AFE.  Operator shall deliver any such Completion proposal, or any Completion proposal conflicting

with Operator's proposal, to the other parties entitled to participate in such Completion in accordance with the

procedures specified in Article VI.B.6.  Election to participate in a Completion attempt shall include consent to all

necessary expenditures for the Completing and equipping of such well, including necessary tankage and/or surface

facilities but excluding any stimulation operation not contained on the Completion AFE.  Failure of any party

receiving such notice to reply within the period above fixed shall constitute an election by that party not to

participate in the cost of the Completion attempt; provided, that Article VI.B.6. shall control in the case of

conflicting Completion proposals.  If one or more, but less than all of the parties, elect to attempt a Completion, the

provision of Article VI.B.2. hereof (the phrase "Reworking, Sidetracking, Deepening, Recompleting or Plugging

Back" as contained in Article VI.B.2. shall be deemed to include "Completing") shall apply to the operations

thereafter conducted by less than all parties; provided, however, that Article VI.B.2. shall apply separately to each

separate Completion or Recompletion attempt undertaken hereunder, and an election to become a Non-Consenting

Party as to one Completion or Recompletion attempt shall not prevent a party from becoming a Consenting Party

in subsequent Completion or Recompletion attempts regardless whether the Consenting Parties as to earlier

Completions or Recompletion have recouped their costs pursuant to Article VI.B.2.; provided further, that any

recoupment of costs by a Consenting Party shall be made solely from the production attributable to the Zone in

which the Completion attempt is made.  Election by a previous Non-Consenting party to participate in a subsequent

Completion or Recompletion attempt shall require such party to pay its proportionate share of the cost of salvable

materials and equipment installed in the well pursuant to the previous Completion or Recompletion attempt,

insofar and only insofar as such materials and equipment benefit the Zone in which such party participates in a

Completion attempt.



2. Rework, Recomplete or Plug Back: No well shall be Reworked, Recompleted or Plugged Back except a well Reworked,

Recompleted, or Plugged Back pursuant to the provisions of Article VI.B.2. of this agreement.  Consent to the Reworking,

Recompleting or Plugging Back of a well shall include all necessary expenditures in conducting such operations and

Completing and equipping of said well, including necessary tankage and/or surface facilities.

D.  Other Operations:



Operator shall not undertake any single project reasonably estimated to require an expenditure in excess of



Twenty-Five Thousand----------------------------------------------------------

Dollars ($25,000.00

) except in connection with the

drilling, Sidetracking, Reworking, Deepening, Completing, Recompleting or Plugging Back of a well that has been previously

authorized by or pursuant to this agreement; provided, however, that, in case of explosion, fire, flood or other sudden

emergency, whether of the same or different nature, Operator may take such steps and incur such expenses as in its opinion

are required to deal with the emergency to safeguard life and property but Operator, as promptly as possible, shall report the

emergency to the other parties.  If Operator prepares an AFE for its own use, Operator shall furnish any Non-Operator so

requesting an information copy thereof for any single project costing in excess of

Twenty-Five Thousand---------------------------

Dollars

($25,000.00).  Any party who has not relinquished its interest in a well shall have the right to propose that

Operator perform repair work or undertake the installation of artificial lift equipment or ancillary production facilities such as

salt water disposal wells or to conduct additional work with respect to a well drilled hereunder or other similar project (but

not including the installation of gathering lines or other transportation or marketing facilities, the installation of which shall

be governed by separate agreement between the parties) reasonably estimated to require an expenditure in excess of the

amount first set forth above in this Article VI.D. (except in connection with an operation required to be proposed under

Articles VI.B.1. or VI.C.1. Option No. 2, which shall be governed exclusively be those Articles).  Operator shall deliver such

proposal to all parties entitled to participate therein.  If within thirty (30) days thereof Operator secures the written consent

of any party or parties owning at least

51

% of the interests of the parties entitled to participate in such operation,

each party having the right to participate in such project shall be bound by the terms of such proposal and shall be obligated

to pay its proportionate share of the costs of the proposed project as if it had consented to such project pursuant to the terms

of the proposal.



E.  Abandonment of Wells:



1.  Abandonment of Dry Holes: Except for any well drilled or Deepened pursuant to Article VI.B.2., any well which has

been drilled or Deepened under the terms of this agreement and is proposed to be completed as a dry hole shall not be

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plugged and abandoned without the consent of all parties.  Should Operator, after diligent effort, be unable to contact any

party, or should any party fail to reply within forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after

delivery of notice of the proposal to plug and abandon such well, such party shall be deemed to have consented to the

proposed abandonment.  All such wells shall be plugged and abandoned in accordance with applicable regulations and at the

cost, risk and expense of the parties who participated in the cost of drilling or Deepening such well.  Any party who objects to

plugging and abandoning such well by notice delivered to Operator within forty-eight (48) hours (exclusive of Saturday, Sunday and legal



holidays) after delivery of notice of the proposed plugging shall take over the well as of the end of such

forty-eight (48) hour notice period and conduct further operations in search of Oil and/or Gas subject to the provisions of

Article VI.B.; failure of such party to provide proof reasonably satisfactory to Operator of its financial capability to conduct

such operations or to take over the well within such period or thereafter to conduct operations on such well or plug and

abandon such well shall entitle Operator to retain or take possession of the well and plug and abandon the well.  The party

taking over the well shall indemnify Operator (if Operator is an abandoning party) and the other abandoning parties against

liability for any further operations conducted on such well except for the costs of plugging and abandoning the well and

restoring the surface, for which the abandoning parties shall remain proportionately liable.



2. Abandonment of Wells That Have Produced: Except for any well in which a Non-Consent operation has been

conducted hereunder for which the Consenting Parties have not been fully reimbursed as herein provided, any well which has

been completed as a producer capable of production, whether or not such well has produced, shall not be plugged and abandoned without the consent of all parties.  If all parties consent to

such abandonment, the well shall be plugged and abandoned in accordance with applicable regulations and at the cost, risk

and expense of all the parties hereto.  Failure of a party to reply within sixty (60) days of delivery of notice of proposed

abandonment shall be deemed an election to consent to the proposal.  If, within sixty (60) days after delivery of notice of the

proposed abandonment of any well, all parties do not agree to the abandonment of such well, those wishing to continue its

operation from the Zone then open to production shall be obligated to take over the well as of the expiration of the

applicable notice period and shall indemnify Operator (if Operator is an abandoning party) and the other abandoning parties

against liability for any further operations on the well conducted by such parties.  Failure of such party or parties to provide

proof reasonably satisfactory to Operator of their financial capability to conduct such operations or to take over the well

within the required period or thereafter to conduct operations on such well shall entitle operator to retain or take possession

of such well and plug and abandon the well.



Parties taking over a well as provided herein shall tender to each of the other parties its proportionate share of the value of

the well's salvable material and equipment, determined in accordance with the provisions of Exhibit "C," less the estimated cost

of salvaging and the estimated cost of plugging and abandoning and restoring the surface; provided, however, that in the event

the estimated plugging and abandoning and surface restoration costs and the estimated cost of salvaging are higher than the

value of the well's salvable material and equipment, each of the abandoning parties shall tender to the parties continuing

operations their proportionate shares of the estimated excess cost.  Each abandoning party shall assign to the non-abandoning

parties, without warranty, express or implied, as to title or as to quantity, or fitness for use of the equipment and material, all

of its interest in the wellbore of the well and related equipment, together with its interest in the Leasehold insofar and only

insofar as such Leasehold covers the right to obtain production from that wellbore in the Zone then open to production.  If the

interest of the abandoning party is or includes and Oil and Gas Interest, such party shall execute and deliver to the non-

abandoning party or parties an oil and gas lease, limited to the wellbore and the Zone then open to production, for a term of

one (1) year and so long thereafter as Oil and/or Gas is produced from the Zone covered thereby, such lease to be on the form

attached as Exhibit "B."  The assignments or leases so limited shall encompass the Drilling Unit upon which the well is located.

The payments by, and the assignments or leases to, the assignees shall be in a ratio based upon the relationship of their

respective percentage of participation in the Contract Area to the aggregate of the percentages of participation in the Contract

Area of all assignees.  There shall be no readjustment of interests in the remaining portions of the Contract Area.



Thereafter, abandoning parties shall have no further responsibility, liability, or interest in the operation of or production

from the well in the Zone then open other than the royalties retained in any lease made under the terms of this Article.  Upon

request, Operator shall continue to operate the assigned well for the account of the non-abandoning parties at the rates and

charges contemplated by this agreement, plus any additional cost and charges which may arise as the result of the separate

ownership of the assigned well.  Upon proposed abandonment of the producing Zone assigned or leased, the assignor or lessor

shall then have the option to repurchase its prior interest in the well (using the same valuation formula) and participate in

further operations therein subject to the provisions hereof.



3. Abandonment of Non-Consent Operations: The provisions of Article VI.E.1. or VI.E.2. above shall be applicable as

between Consenting Parties in the event of the proposed abandonment of any well excepted from said Articles; provided,

however, no well shall be permanently plugged and abandoned unless and until all parties having the right to conduct further

operations therein have been notified of the proposed abandonment and afforded the opportunity to elect to take over the well

in accordance with the provisions of this Article VI.E.; and provided further, that Non-Consenting Parties who own an interest

in a portion of the well shall pay their proportionate shares of abandonment and surface restoration cost for such well as

provided in Article VI.B.2.(b).



F.  Termination of Operations:



Upon the commencement of an operation for the drilling, Reworking, Sidetracking, Plugging Back, Deepening, testing,

Completion or plugging of a well, including but not limited to the Initial Well, such operation shall not be terminated without

consent of parties bearing _75____% of the costs of such operation; provided, however, that in the event granite or other

practically impenetrable substance or condition in the hole is encountered which renders further operations impractical,

Operator may discontinue operations and give notice of such condition in the manner provided in Article VI.B.1, and the

provisions of Article VI.B. or VI.E. shall thereafter apply to such operation, as appropriate.



G.  Taking Production in Kind:



x

Option No. 1: Gas Balancing Agreement Attached



Each party shall have the right to take in kind or separately dispose of its proportionate share of all Oil and Gas produced from



the Contract Area, exclusive of production which may be used in development and producing operations and in preparing and

treating Oil and Gas for marketing purposes and production unavoidably lost.  Any extra expenditure incurred in the taking

in kind or separate disposition by any party of its proportionate share of the production shall be borne by such party.  Any

party taking its share of production in kind shall be required to pay for only its proportionate share of such part of

Operator's surface facilities which it uses.





Each party shall execute such division orders and contracts as may be necessary for the sale of its interest in

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production from the Contract Area, and, except as provided in Article VII.B., shall be entitled to receive payment

directly from the purchaser thereof for its share of all production.



If any party fails to make the arrangements necessary to take in kind or separately dispose of its proportionate

share of the Oil produced from the Contract Area, Operator shall have the right, subject to the revocation at will by

the party owning it, but not the obligation, to purchase such Oil and/or Gas or sell it to others at any time and from time to

time, for the account of the non-taking party.  Any such purchase or sale by Operator may be terminated by

Operator upon at least ten (10) days written notice to the owner of said production and shall be subject always to

the right of the owner of the production upon at least ten (10) days written notice to Operator to exercise at any

time its right to take in kind, or separately dispose of, its share of all Oil and/or Gas not previously delivered to a purchaser.

Any purchase or sale by Operator of any other party's share of Oil and/or Gas shall be only for such reasonable periods of time

as are consistent with the minimum needs of the industry under the particular circumstances, but in no event for a

period in excess of one (1) year.



Any such sale by Operator shall be in a manner commercially reasonable under the circumstances but Operator

shall have no duty to share any existing market or to obtain a price equal to that received under any existing

market.  The sale or delivery by Operator of a non-taking party's share of Oil under the terms of any existing

contract of Operator shall not give the non-taking party any interest in or make the non-taking party a party to said

contract.  No purchase shall be made by Operator without first giving the non-taking party at least ten (10) days

written notice of such intended purchase and the price to be paid or the pricing basis to be used.



All parties shall give timely written notice to Operator of their Gas marketing arrangements for the following

month, excluding price, and shall notify Operator immediately in the event of a change in such arrangements.

Operator shall maintain records of all marketing arrangements, and of volumes actually sold or transported, which

records shall be made available to Non-Operators upon reasonable request.



In the event one or more parties' separate disposition of its share of the Gas causes split-stream deliveries to separate

pipelines and/or deliveries which on a day-to-day basis for any reason are not exactly equal to a party's respective proportion-

ate share of total Gas sales to be allocated to it, the balancing or accounting between the parties shall be in accordance with

any Gas balancing agreement between the parties hereto, whether such an agreement is attached as Exhibit "E" or is a

separate agreement.  Operator shall give notice to all parties of the first sales of Gas from any well under this agreement.



o

Option No. 2:No Gas Balancing Agreement:



Each party shall take in kind or separately dispose of its proportionate share of all Oil and Gas produced from

the Contract Area, exclusive of production which may be used in development and producing operations and in

preparing and treating Oil and Gas for marketing purposes and production unavoidably lost.  Any extra expenditures

incurred in the taking in kind or separate disposition by any party of its proportionate share of the production shall

be borne by such party.  Any party taking its share of production in kind shall be required to pay for only its

proportionate share of such part of Operator's surface facilities which it uses.



Each party shall execute such division orders and contracts as may be necessary for the sale of its interest in

production from the Contract Area, and, except as provided in Article VII.B., shall be entitled to receive payment

directly from the purchaser thereof for its share of all production.



If any party fails to make the arrangements necessary to take in kind or separately dispose of its proportionate

share of the Oil and/or Gas produced from the Contract Area, Operator shall have the right, subject to the

revocation at will by the party owning it, but not the obligation, to purchase such Oil and/or Gas or sell it to others

at any time and from time to time, for the account of the non-taking party.  Any such purchase or sale by Operator

may be terminated by Operator upon at least ten (10) days written notice to the owner of said production and shall

be subject always to the right of the owner of the production upon at least ten (10) days written notice to Operator

to exercise its right to take in kind, or separately dispose of, its share of all Oil and/or Gas not previously delivered

to a purchaser; provided, however, that the effective date of any such revocation may be deferred at Operator's

election for a period not to exceed ninety (90) days if Operator has committed such production to a purchase

contract having a term extending beyond such ten (10) -day period.  Any purchase or sale by Operator of any other



party's share of Oil and/or Gas shall be only for such reasonable periods of time as are consistent with the

minimum needs of the industry under the particular circumstances, but in no event for a period in excess of one (1)

year.



Any such sale by Operator shall be in a manner commercially reasonable under the circumstances, but Operator

shall have no duty to share any existing market or transportation arrangement or to obtain a price or transportation

fee equal to that received under any existing market or transportation arrangement.  The sale or delivery by

Operator of a non-taking party's share of production under the terms of any existing contract of Operator shall not

give the non-taking party any interest in or make the non-taking party a party to said contract.  No purchase of Oil

and Gas and no sale of Gas shall be made by Operator without first giving the non-taking party ten days written

notice of such intended purchase or sale and the price to be paid or the pricing basis to be used. Operator shall give

notice to all parties of the first sale of Gas from any well under this Agreement.



All parties shall give timely written notice to Operator of their Gas marketing arrangements for the following

month, excluding price, and shall notify Operator immediately in the event of a change in such arrangements.

Operator shall maintain records of all marketing arrangements, and of volumes actually sold or transported, which

records shall be made available to Non-Operators upon reasonable request.



ARTICLE VII.



EXPENDITURES AND LIABILITY OF PARTIES



A.  Liability of Parties:



The liability of the parties shall be several, not joint or collective. Each party shall be responsible only for its obligations,

and shall be liable only for its proportionate share of the costs of developing and operating the Contract Area.  Accordingly, the

liens granted among the parties in Article VII.B. are given to secure only the debts of each severally, and no party shall have

any liability to third parties hereunder to satisfy the default of any other party in the payment of any expense or obligation

hereunder.  It is not the intention of the parties to create, nor shall this agreement be construed as creating, a mining or other

partnership, joint venture, agency relationship or association, or to render the parties liable as partners, co-venturers, or

principals.  In their relations with each other under this agreement, the parties shall not be considered fiduciaries or to have

established a confidential relationship but rather shall be free to act on an arm's-length basis in accordance with their own

respective self-interest, subject, however, to the obligation of the parties to act in good faith in their dealings with each other

with respect to activities hereunder.

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B.  Liens and Security Interests:



Each party grants to the other parties hereto a lien upon any interest it now owns or hereafter acquires in Oil and Gas

Leases and Oil and Gas Interests in the Contract Area, and a security interest and/or purchase money security interest in any

interest it now owns or hereafter acquires in the personal property and fixtures on or used or obtained for use in connection

therewith, to secure performance of all of its obligations under this agreement including but not limited to payment of expense,

interest and fees, the proper disbursement of all monies paid hereunder, the assignment or relinquishment of interest in Oil

and Gas Leases as required hereunder, and the proper performance of operations hereunder.  Such lien and security interest

granted by each party hereto shall include such party's leasehold interests, working interests, operating rights, and royalty and

overriding royalty interests in the Contract Area now owned or hereafter acquired and in lands pooled or unitized therewith or

otherwise becoming subject to this agreement, the Oil and Gas when extracted therefrom and equipment situated thereon or

used or obtained for use in connection therewith (including, without limitation, all wells, tools, and tubular goods), and accounts

(including, without limitation, accounts arising from gas imbalances or from the sale of Oil and/or Gas at the wellhead),

contract rights, inventory and general intangibles relating thereto or arising therefrom, and all proceeds and products of the

foregoing.



To perfect the lien and security agreement provided herein, each party hereto shall execute and acknowledge the recording

supplement and/or any financing statement prepared and submitted by any party hereto in conjunction herewith or at any time

following execution hereof, and Operator is authorized to file this agreement or the recording supplement executed herewith as

a lien or mortgage in the applicable real estate records and as a financing statement with the proper officer under the Uniform

Commercial Code in the state in which the Contract Area is situated and such other states as Operator shall deem appropriate

to perfect the security interest granted hereunder.  Any party may file this agreement, the recording supplement executed

herewith, or such other documents as it deems necessary as a lien or mortgage in the applicable real estate records and/or a

financing statement with the proper officer under the Uniform Commercial Code.



Each party represents and warrants to the other parties hereto that the lien and security interest granted by such party to

the other parties shall be a first and prior lien, and each party hereby agrees to maintain the priority of said lien and security

interest against all persons acquiring an interest in Oil and Gas Leases and Interests covered by this agreement by, through or

under such party.  All parties acquiring an interest in Oil and Gas Leases and Oil and Gas Interests covered by this agreement,

whether by assignment, merger, mortgage, operation of law, or otherwise, shall be deemed to have taken subject

to the lien and security interest granted by this Article VII.B. as to all obligations attributable to such interest hereunder

whether or not such obligations arise before or after such interest is acquired.



To the extent that parties have a security interest under the Uniform Commercial Code of the state in which the

Contract Area is situated, they shall be entitled to exercise the rights and remedies of a secured party under the Code.

The bringing of a suit and the obtaining of judgment by a party for the secured indebtedness shall not be deemed an

election of remedies or otherwise affect the lien rights or security interest as security for the payment thereof.  In

addition, upon default by any party in the payment of its share of expenses, interests or fees, or upon the improper use

of funds by the Operator, the other parties shall have the right, without prejudice to other rights or remedies, to collect

from the purchaser the proceeds from the sale of such defaulting party's share of Oil and Gas until the amount owed by

such party, plus interest as provided in "Exhibit C," has been received, and shall have the right to offset the amount

owed against the proceeds from the sale of such defaulting party's share of Oil and Gas.  All purchasers of production

may rely on a notification of default from the non-defaulting party or parties stating the amount due as a result of the

default, and all parties waive any recourse available against purchasers for releasing production proceeds as provided in

this paragraph.



If any party fails to pay its share of cost within one hundred twenty (120) days after rendition of a statement therefor by

Operator, the non-defaulting parties, including Operator, shall upon request by Operator, pay the unpaid amount in the

proportion that the interest of each such party bears to the interest of all such parties.  The amount paid by each party so

paying its share of the unpaid amount shall be secured by the liens and security rights described in Article VII.B., and each

paying party may independently pursue any remedy available hereunder or otherwise.



If any party does not perform all of its obligations hereunder, and the failure to perform subjects such party to foreclosure

or execution proceedings pursuant to the provisions of this agreement, to the extent allowed by governing law, the defaulting

party waives any available right of redemption from and after the date of judgment, any required valuation or appraisement

of the mortgaged or secured property prior to sale, any available right to stay execution or to require a marshaling of assets

and any required bond in the event a receiver is appointed.  In addition, to the extent permitted by applicable law, each party

hereby grants to the other parties a power of sale as to any property that is subject to the lien and security rights granted

hereunder, such power to be exercised in the manner provided by applicable law or otherwise in a commercially reasonable

manner and upon reasonable notice.



Each party agrees that the other parties shall be entitled to utilize the provisions of Oil and Gas lien law or other lien

law of any state in which the Contract Area is situated to enforce the obligations of each party hereunder.  Without limiting

the generality of the foregoing, to the extent permitted by applicable law, Non-Operators agree that Operator may invoke or

utilize the mechanics' or materialmen's lien law of the state in which the Contract Area is situated in order to secure the

payment to Operator of any sum due hereunder for services performed or materials supplied by Operator.

C.  Advances:



Operator, at its election, shall have the right from time to time to demand and receive from one or more of the other

parties payment in advance of their respective shares of the estimated amount of the expense to be incurred in operations

hereunder during the next succeeding month, which right may be exercised only by submission to each such party of an

itemized statement of such estimated expense, together with an invoice for its share thereof.  Each such statement and invoice

for the payment in advance of estimated expense shall be submitted on or before the 20th day of the next preceding month.

Each party shall pay to Operator its proportionate share of such estimate within fifteen (15) days after such estimate and

invoice is received.  If any party fails to pay its share of said estimate within said time, the amount due shall bear interest as

provided in Exhibit "C" until paid.  Proper adjustment shall be made monthly between advances and actual expense to the end

that each party shall bear and pay its proportionate share of actual expenses incurred, and no more.



D.  Defaults and Remedies:



If any party fails to discharge any financial obligation under this agreement, including without limitation the failure to

make any advance under the preceding Article VII.C. or any other provision of this agreement, within the period required for

such payment hereunder, then in addition to the remedies provided in Article VII.B. or elsewhere in this agreement, the

remedies specified below shall be applicable.  For purposes of this Article VII.D., all notices and elections shall be delivered

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only by Operator, except that Operator shall deliver any such notice and election requested by a non-defaulting Non-Operator,

and when Operator is the party in default, the applicable notices and elections can be delivered by any Non-Operator.

Election of any one or more of the following remedies shall not preclude the subsequent use of any other remedy specified

below or otherwise available to a non-defaulting party.



1. Suspension of Rights: Any party may deliver to the party in default a Notice of Default, which shall specify the default,

specify the action to be taken to cure the default, and specify that failure to take such action will result in the exercise of one

or more of the remedies provided in this Article.  If the default is not cured within thirty (30) days of the delivery of such

Notice of Default, all of the rights of the defaulting party granted by this agreement may upon notice be suspended until the

default is cured, without prejudice to the right of the non-defaulting party or parties to continue to enforce the obligations of

the defaulting party previously accrued or thereafter accruing under this agreement.  If Operator is the party in default, the

Non-Operators shall have in addition the right, by vote of Non-Operators owning a majority in interest in the Contract Area

after excluding the voting interest of Operator, to appoint a new Operator effective immediately.  The rights of a defaulting

party that may be suspended hereunder at the election of the non-defaulting parties shall include, without limitation, the right

to receive information as to any operation conducted hereunder during the period of such default, the right to elect to

participate in an operation proposed under Article VI.B. of this agreement, the right to participate in an operation being

conducted under this agreement even if the party has previously elected to participate in such operation, and the right to

receive proceeds of production from any well subject to this agreement.



2. Suit for Damages: Non-defaulting parties or Operator for the benefit of non-defaulting parties may sue (at joint

account expense) to collect the amounts in default, plus interest accruing on the amounts recovered from the date of default

until the date of collection at the rate specified in Exhibit "C" attached hereto.  Nothing herein shall prevent any party from

suing any defaulting party to collect consequential damages accruing to such party as a result of the default.



3. Deemed Non-Consent: The non-defaulting party may deliver a written Notice of Non-Consent Election to the

defaulting party at any time after the expiration of the thirty-day cure period following delivery of the Notice of Default, in

which event if the billing is for the drilling a new well or the Plugging Back, Sidetracking, Reworking or Deepening of a

well which is to be or has been plugged as a dry hole, or for the Completion or Recompletion of any well, the defaulting

party will be conclusively deemed to have elected not to participate in the operation and to be a Non-Consenting Party with

respect thereto under Article VI.B. or VI.C., as the case may be, to the extent of the costs unpaid by such party,

notwithstanding any election to participate theretofore made.  If election is made to proceed under this provision, then the

non-defaulting parties may not elect to sue for the unpaid amount pursuant to Article VII.D.2.



Until the delivery of such Notice of Non-Consent Election to the defaulting party, such party shall have the right to cure

its default by paying its unpaid share of costs plus interest at the rate set forth in Exhibit "C," provided, however, such

payment shall not prejudice the rights of the non-defaulting parties to pursue remedies for damages incurred by the non-

defaulting parties as a result of the default.  Any interest relinquished pursuant to this Article VII.D.3. shall be offered to the

non-defaulting parties in proportion to their interests, and the non-defaulting parties electing to participate in the ownership

of such interest shall be required to contribute their shares of the defaulted amount upon their election to participate therein.



4. Advance Payment: If a default is not cured within thirty (30) days of the delivery of a Notice of Default, Operator, or

Non-Operators if Operator is the defaulting party, may thereafter require advance payment from the defaulting

party of such defaulting party's anticipated share of any item of expense for which Operator, or Non-Operators, as the case may

be, would be entitled to reimbursement under any provision of this agreement, whether or not such expense was the subject of

the previous default.  Such right includes, but is not limited to, the right to require advance payment for the estimated costs of

drilling a well or Completion of a well as to which an election to participate in drilling or Completion has been made.  If the

defaulting party fails to pay the required advance payment, the non-defaulting parties may pursue any of the remedies provided

in the Article VII.D. or any other default remedy provided elsewhere in this agreement.  Any excess of funds advanced remaining

when the operation is completed and all costs have been paid shall be promptly returned to the advancing party.



5. Costs and Attorneys' Fees: In the event any party is required to bring legal proceedings to enforce any financial

obligation of a party hereunder, the prevailing party in such action shall be entitled to recover all court costs, costs of

collection, and a reasonable attorney's fee, which the lien provided for herein shall also secure.



E.  Rentals, Shut-in Well Payments and Minimum Royalties:



Rentals, shut-in well payments and minimum royalties which may be required under the terms of any lease shall be paid

by the party or parties who subjected such lease to this agreement at its or their expense.  In the event two or more parties

own and have contributed interests in the same lease to this agreement, such parties may designate one of such parties to

make said payments for and on behalf of all such parties.  Any party may request, and shall be entitled to receive, proper

evidence of all such payments.  In the event of failure to make proper payment of any rental, shut-in well payment or

minimum royalty through mistake or oversight where such payment is required to continue the lease in force, any loss which

results from such non-payment shall be borne in accordance with the provisions of Article IV.B.2.



Operator shall notify Non-Operators of the anticipated completion of a shut-in well, or the shutting in or return to

production of a producing well, at least five (5) days (excluding Saturday, Sunday, and legal holidays) prior to taking such

action, or at the earliest opportunity permitted by circumstances, but assumes no liability for failure to do so.  In the event of

failure by Operator to so notify Non-Operators, the loss of any lease contributed hereto by Non-Operators for failure to make

timely payments of any shut-in well payment shall be borne jointly by the parties hereto under the provisions of Article

IV.B.3.



F.  Taxes:



Beginning with the first calendar year after the effective date hereof, Operator shall render for ad valorem taxation all

property subject to this agreement which by law should be rendered for such taxes, and it shall pay all such taxes assessed

thereon before they become delinquent.  Prior to the rendition date, each Non-Operator shall furnish Operator information as

to burdens (to include, but not be limited to, royalties, overriding royalties and production payments) on Leases and Oil and

Gas Interests contributed by such Non-Operator.  If the assessed valuation of any Lease is reduced by reason of its being

subject to outstanding excess royalties, overriding royalties or production payments, the reduction in ad valorem taxes

resulting therefrom shall inure to the benefit of the owner or owners of such Lease, and Operator shall adjust the charge to

such owner or owners so as to reflect the benefit of such reduction.  If the ad valorem taxes are based in whole or in part

upon separate valuations of each party's working interest, then notwithstanding anything to the contrary herein, charges to

the joint account shall be made and paid by the parties hereto in accordance with the tax value generated by each party's

working interest.  Operator shall bill the other parties for their proportionate shares of all tax payments in the manner

provided in Exhibit "C."

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If Operator considers any tax assessment improper, Operator may, at its discretion, protest within the time and manner

prescribed by law, and prosecute the protest to a final determination, unless all parties agree to abandon the protest prior to final

determination.  During the pendency of administrative or judicial proceedings, Operator may elect to pay, under protest, all such taxes

and any interest and penalty.  When any such protested assessment shall have been finally determined, Operator shall pay the tax for

the joint account, together with any interest and penalty accrued, and the total cost shall then be assessed against the parties, and be

paid by them, as provided in Exhibit "C."



Each party shall pay or cause to be paid all production, severance, excise, gathering and other taxes imposed upon or with respect

to the production or handling of such party's share of Oil and Gas produced under the terms of this agreement.



ARTICLE VIII.



ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST



A.  Surrender of Leases:



The Leases covered by this agreement, insofar as they embrace acreage in the Contract Area, shall not be surrendered in whole

or in part unless all parties consent thereto.



However, should any party desire to surrender its interest in any Lease or in any portion thereof, such party shall give written

notice of the proposed surrender to all parties, and the parties to whom such notice is delivered shall have thirty (30) days after

delivery of the notice within which to notify the party proposing the surrender whether they elect to consent thereto.  Failure of a

party to whom such notice is delivered to reply within said 30-day period shall constitute a consent to the surrender of the Leases

described in the notice.  If all parties do not agree or consent thereto, the party desiring to surrender shall assign, without express or

implied warranty of title, all of its interest in such Lease, or portion thereof, and any well, material and equipment which may be

located thereon and any rights in production thereafter secured, to the parties not consenting to such surrender.  If the interest of the

assigning party is or includes an Oil and Gas Interest, the assigning party shall execute and deliver to the party or parties not

consenting to such surrender an oil and gas lease covering such Oil and Gas Interest for a term of one (1) year and so long

thereafter as Oil and/or Gas is produced from the land covered thereby, such lease to be on the form attached hereto as Exhibit "B."

Upon such assignment or lease, the assigning party shall be relieved from all obligations thereafter accruing, but not theretofore

accrued, with respect to the interest assigned or leased and the operation of any well attributable thereto, and the assigning party

shall have no further interest in the assigned or leased premises and its equipment and production other than the royalties retained

in any lease made under the terms of this Article.  The party assignee or lessee shall pay to the party assignor or lessor the

reasonable salvage value of the latter's interest in any well's salvable materials and equipment attributable to the assigned or leased

acreage.  The value of all salvable materials and equipment shall be determined in accordance with the provisions of Exhibit "C," less

the estimated cost of salvaging and the estimated cost of plugging and abandoning and restoring the surface.  If such value is less

than such costs, then the party assignor or lessor shall pay to the party assignee or lessee the amount of such deficit.  If the

assignment or lease is in favor of more than one party, the interest shall be shared by such parties in the proportions that the

interest of each bears to the total interest of all such parties.  If the interest of the parties to whom the assignment is to be made

varies according to depth, then the interest assigned shall similarly reflect such variances.



Any assignment, lease or surrender made under this provision shall not reduce or change the assignor's, lessor's or surrendering

party's interest as it was immediately before the assignment, lease or surrender in the balance of the Contract Area; and the acreage

assigned, leased or surrendered, and subsequent operations thereon, shall not thereafter be subject to the terms and provisions of this

agreement but shall be deemed subject to an Operating Agreement in the form of this agreement.



B. Renewal or Extension of Leases:



If any party secures a renewal or replacement of an Oil and Gas Lease or Interest subject to this agreement, then all other parties

shall be notified promptly upon such acquisition or, in the case of a replacement Lease taken before expiration of an existing Lease,

promptly upon expiration of the existing Lease.  The parties notified shall have the right for a period of thirty (30) days following

delivery of such notice in which to elect to participate in the ownership of the renewal or replacement Lease, insofar as such Lease

affects lands within the Contract Area, by paying to the party who acquired it their proportionate shares of the acquisition cost

allocated to that part of such Lease within the Contract Area, which shall be in proportion to the interest held at that time by the

parties in the Contract Area.  Each party who participates in the purchase of a renewal or replacement Lease shall be given an

assignment of its proportionate interest therein by the acquiring party.



If some, but less than all, of the parties elect to participate in the purchase of a renewal or replacement Lease, it shall be owned

by the parties who elect to participate therein, in a ratio based upon the relationship of their respective percentage of participation in

the Contract Area to the aggregate of the percentages of participation in the Contract Area of all parties participating in the

purchase of such renewal or replacement Lease.  The acquisition of a renewal or replacement Lease by any or all of the parties hereto

shall not cause a readjustment of the interests of the parties stated in Exhibit "A," but any renewal or replacement Lease in which

less than all parties elect to participate shall not be subject to this agreement but shall be deemed subject to a separate Operating

Agreement in the form of this agreement.



If the interests of the parties in the Contract Area vary according to depth, then their right to participate proportionately in

renewal or replacement Leases and their right to receive an assignment of interest shall also reflect such depth variances.



The provisions of this Article shall apply to renewal or replacement Leases whether they are for the entire interest covered by

the expiring Lease or cover only a portion of its area or an interest therein.  Any renewal or replacement Lease taken before the

expiration of its predecessor Lease, or taken or contracted for or becoming effective within six (6) months after the expiration of the

existing Lease, shall be subject to this provision so long as this agreement is in effect at the time of such acquisition or at the time

the renewal or replacement Lease becomes effective; but any Lease taken or contracted for more than six (6) months after the

expiration of an existing Lease shall not be deemed a renewal or replacement Lease and shall not be subject to the provisions of this

agreement.



The provisions in this Article shall also be applicable to extensions of Oil and Gas Leases.



C.  Acreage or Cash Contributions:



While this agreement is in force, if any party contracts for a contribution of cash towards the drilling of a well or any other

operation on the Contract Area, such contribution shall be paid to the party who conducted the drilling or other operation and shall

be applied by it against the cost of such drilling or other operation.  If the contribution be in the form of acreage, the party to whom

the contribution is made shall promptly tender an assignment of the acreage, without warranty of title, to the Drilling Parties in the

proportions said Drilling Parties shared the cost of drilling the well. Such acreage shall become a separate Contract Area and, to  the

extent possible, be governed by provisions identical to this agreement.  Each party shall promptly notify all other parties of any

acreage or cash contributions it may obtain in support of any well or any other operation on the Contract Area.  The above

provisions shall also be applicable to optional rights to earn acreage outside the Contract Area which are in support of well drilled

inside Contract Area.

- 14 -



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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989



If any party contracts for any consideration relating to disposition of such party's share of substances produced hereunder,

such consideration shall not be deemed a contribution as contemplated in this Article VIII.C.



D.  Assignment; Maintenance of Uniform Interest:



For the purpose of maintaining uniformity of ownership in the Contract Area in the Oil and Gas Leases, Oil and Gas

Interests, wells, equipment and production covered by this agreement no party shall sell, encumber, transfer or make other

disposition of its interest in the Oil and Gas Leases and Oil and Gas Interests embraced within the Contract Area or in wells,

equipment and production unless such disposition covers either:



1.

the entire interest of the party in all Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production; or



2.

an equal undivided percent of the party's present interest in all Oil and Gas Leases, Oil and Gas Interests, wells,

equipment and production in the Contract Area.



Every sale, encumbrance, transfer or other disposition made by any party shall be made expressly subject to this agreement

and shall be made without prejudice to the right of the other parties, and any transferee of an ownership interest in any Oil and

Gas Lease or Interest shall be deemed a party to this agreement as to the interest conveyed from and after the effective date of

the transfer of ownership; provided, however, that the other parties shall not be required to recognize any such sale,

encumbrance, transfer or other disposition for any purpose hereunder until thirty (30) days after they have received a copy of the

instrument of transfer or other satisfactory evidence thereof in writing from the transferor or transferee.  No assignment or other

disposition of interest by a party shall relieve such party of obligations previously incurred by such party hereunder with respect

to the interest transferred, including without limitation the obligation of a party to pay all costs attributable to an operation

conducted hereunder in which such party has agreed to participate prior to making such assignment, and the lien and security

interest granted by Article VII.B. shall continue to burden the interest transferred to secure payment of any such obligations.



If, at any time the interest of any party is divided among and owned by four or more co-owners, Operator, at its discretion,

may require such co-owners to appoint a single trustee or agent with full authority to receive notices, approve expenditures,

receive billings for and approve and pay such party's share of the joint expenses, and to deal generally with, and with power to

bind, the co-owners of such party's interest within the scope of the operations embraced in this agreement; however, all such co-

owners shall have the right to enter into and execute all contracts or agreements for the disposition of their respective shares of

the Oil and Gas produced from the Contract Area and they shall have the right to receive, separately, payment of the sale

proceeds thereof.



E. Waiver of Rights to Partition:



If permitted by the laws of the state or states in which the property covered hereby is located, each party hereto owning an

undivided interest in the Contract Area waives any and all rights it may have to partition and have set aside to it in severalty its

undivided interest therein.



F.  Preferential Right to Purchase:



o

(Optional; Check if applicable.)



Should any party desire to sell all or any part of its interests under this agreement, or its rights and interests in the Contract

Area, it shall promptly give written notice to the other parties, with full information concerning its proposed disposition, which

shall include the name and address of the prospective transferee (who must be ready, willing and able to purchase), the purchase

price, a legal description sufficient to identify the property, and all other terms of the offer.  The other parties shall then have an

optional prior right, for a period of ten (10) days after the notice is delivered, to purchase for the stated consideration on the

same terms and conditions the interest which the other party proposes to sell; and, if this optional right is exercised, the

purchasing parties shall share the purchased interest in the proportions that the interest of each bears to the total interest of all

purchasing parties.  However, there shall be no preferential right to purchase in those cases where any party wishes to mortgage

its interests, or to transfer title to its interests to its mortgagee in lieu of or pursuant to foreclosure of a mortgage of its interests,

or to dispose of its interests by merger, reorganization, consolidation, or by sale of all or substantially all of its Oil and Gas assets

to any party, or by transfer of its interests to a subsidiary or parent company or to a subsidiary of a parent company, or to any

company in which such party owns a majority of the stock.



ARTICLE IX.



INTERNAL REVENUE CODE ELECTION



If, for federal income tax purposes, this agreement and the operations hereunder are regarded as a partnership, and if the

parties have not otherwise agreed to form a tax partnership pursuant to Exhibit "G" or other agreement between them, each

party thereby affected elects to be excluded from the application of all of the provisions of Subchapter "K," Chapter 1, Subtitle

"A," of the Internal Revenue Code of 1986, as amended ("Code"), as permitted and authorized by Section 761 of the Code and

the regulations promulgated thereunder.  Operator is authorized and directed to execute on behalf of each party hereby affected

such evidence of this election as may be required by the Secretary of the Treasury of the United States or the Federal Internal

Revenue Service, including specifically, but not by way of limitation, all of the returns, statements, and the data required by

Treasury Regulation §1.761.  Should there be any requirement that each party hereby affected give further evidence of this

election, each such party shall execute such documents and furnish such other evidence as may be required by the Federal Internal

Revenue Service or as may be necessary to evidence this election.  No such party shall give any notices or take any other action

inconsistent with the election made hereby.  If any present or future income tax laws of the state or states in which the Contract

Area is located or any future income tax laws of the United States contain provisions similar to those in Subchapter "K," Chapter

1, Subtitle "A," of the Code, under which an election similar to that provided by Section 761 of the Code is permitted, each party

hereby affected shall make such election as may be permitted or required by such laws.  In making the foregoing election, each

such party states that the income derived by such party from operations hereunder can be adequately determined without the

computation of partnership taxable income.



ARTICLE X.



CLAIMS AND LAWSUITS



Operator may settle any single uninsured third party damage claim or suit arising from operations hereunder if the expenditure

does not exceed

Twenty-Five Thousand -------------------------

Dollars ($25,000.00) and if the payment is in complete settlement

of such claim or suit.  If the amount required for settlement exceeds the above amount, the parties hereto shall assume and take over

the further handling of the claim or suit, unless such authority is delegated to Operator.  All costs and expenses of handling settling,

or otherwise discharging such claim or suit shall be at the joint expense of the parties participating in the operation from which the

claim or suit arises.  If a claim is made against any party or if any party is sued on account of any matter arising from operations

hereunder over which such individual has no control because of the rights given Operator by this agreement, such party shall

immediately notify all other parties, and the claim or suit shall be treated as any other claim or suit involving operations hereunder.

- 15 -



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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989



ARTICLE XI.



FORCE MAJEURE



If any party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this agreement, other

than the obligation to indemnify or make money payments or furnish security, that party shall give to all other parties

prompt written notice of the force majeure with reasonably full particulars concerning it; thereupon, the obligations of the

party giving the notice, so far as they are affected by the force majeure, shall be suspended during, but no longer than, the

continuance of the force majeure.  The term "force majeure," as here employed, shall mean an act of God, strike, lockout, or

other industrial disturbance, act of the public enemy, war, blockade, public riot, lightening, fire, storm, flood or other act of

nature, 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 suspension.



The affected party shall use all reasonable diligence to remove the force majeure situation as quickly as practicable. The

requirement that any 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, contrary to its wishes; how all such difficulties shall be handled shall

be entirely within the discretion of the party concerned.



ARTICLE XII.



NOTICES



All notices authorized or required between the parties by any of the provisions of this agreement, unless otherwise

specifically provided, shall be in writing and delivered in person or by United States mail, courier service, telegram, telex,

telecopier or any other form of facsimile, postage or charges prepaid, and addressed to such parties at the addresses listed on

Exhibit "A."  All telephone or oral notices permitted by this agreement shall be confirmed immediately thereafter by written

notice.  The originating notice given under any provision hereof shall be deemed delivered only when received by the party to

whom such notice is directed, and the time for such party to deliver any notice in response thereto shall run from the date

the originating notice is received.  "Receipt" for purposes of this agreement with respect to written notice delivered hereunder

shall be actual delivery of the notice to the address of the party to be notified specified in accordance with this agreement, or

to the telecopy, facsimile or telex machine of such party.  The second or any responsive notice shall be deemed delivered when

deposited in the United States mail or at the office of the courier or telegraph service, or upon transmittal by telex, telecopy

or facsimile, or when personally delivered to the party to be notified, provided, that when response is required within 24 or

48 hours, such response shall be given orally or by telephone, telex, telecopy or other facsimile within such period. Each party

shall have the right to change its address at any time, and from time to time, by giving written notice thereof to all other

parties.  If a party is not available to receive notice orally or by telephone when a party attempts to deliver a notice required

to be delivered within 24 or 48 hours, the notice may be delivered in writing by any other method specified herein and shall

be deemed delivered in the same manner provided above for any responsive notice.



ARTICLE XIII.



TERM OF AGREEMENT



This agreement shall remain in full force and effect as to the Oil and Gas Leases and/or Oil and Gas Interests subject

hereto for the period of time selected below; provided, however, no party hereto shall ever be construed as having any right, title

or interest in or to any Lease or Oil and Gas Interest contributed by any other party beyond the term of this agreement.



x

Option No. 1: So long as any of the Oil and Gas Leases subject to this agreement remain or are continued in

force as to any part of the Contract Area, whether by production, extension, renewal or otherwise.



o

Option No. 2:In the event the well described in Article VI.A., or any subsequent well drilled under any provision

of this agreement, results in the Completion of a well as a well capable of production of Oil and/or Gas in paying

quantities, this agreement shall continue in force so long as any such well is capable of production, and for an

additional period ofdays thereafter; provided, however, if, prior to the expiration of such

additional period, one or more of the parties hereto are engaged in drilling, Reworking, Deepening, Sidetracking,

Plugging Back, testing or attempting to Complete or Re-complete a well or wells hereunder, this agreement shall

continue in force until such operations have been completed and if production results therefrom, this agreement

shall continue in force as provided herein.  In the event the well described in Article VI.A., or any subsequent well

drilled hereunder, results in a dry hole, and no other well is capable of producing Oil and/or Gas from the

Contract Area, this agreement shall terminate unless drilling, Deepening, Sidetracking, Completing, Re-

completing, Plugging Back or Reworking operations are commenced withindays from the

date of abandonment of said well.  "Abandonment" for such purposes shall mean either (i) a decision by all parties

not to conduct any further operations on the well or (ii) the elapse of 180 days from the conduct of any

operations on the well, whichever first occurs.



The termination of this agreement shall not relieve any party hereto from any expense, liability or other obligation or any

remedy therefor which has accrued or attached prior to the date of such termination.



Upon termination of this agreement and the satisfaction of all obligations hereunder, in the event a memorandum of this

Operating Agreement has been filed of record, Operator is authorized to file of record in all necessary recording offices a

notice of termination, and each party hereto agrees to execute such a notice of termination as to Operator's interest, upon

request of Operator, if Operator has satisfied all its financial obligations.



ARTICLE XIV.



COMPLIANCE WITH LAWS AND REGULATIONS



A.  Laws, Regulations and Orders:



This agreement shall be subject to the applicable laws of the state in which the Contract Area is located, to the valid rules,

regulations, and orders of any duly constituted regulatory body of said state; and to all other applicable federal, state,

and local laws, ordinances, rules, regulations and orders.



B.  Governing Law:



This agreement and all matters pertaining hereto, including but not limited to matters of performance, non-

performance, breach, remedies, procedures, rights, duties, and interpretation or construction, shall be governed and

determined by the law of the state in which the Contract Area is located.  If the Contract Area is in two or more states,

the law of the State of Wyoming  shall govern.



C.  Regulatory Agencies:



Nothing herein contained shall grant, or be construed to grant, Operator the right or authority to waive or release any

rights, privileges, or obligations which Non-Operators may have under federal or state laws or under rules, regulations or

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989



orders promulgated under such laws in reference to oil, gas and mineral operations, including the location, operation, or

production of wells, on tracts offsetting or adjacent to the Contract Area.



With respect to the operations hereunder, Non-Operators agree to release Operator from any and all losses, damages,

injuries, claims and causes of action arising out of, incident to or resulting directly or indirectly from Operator's interpretation

or application of rules, rulings, regulations or orders of the Department of Energy or Federal Energy Regulatory Commission

or predecessor or successor agencies to the extent such interpretation or application was made in good faith and does not

constitute gross negligence.  Each Non-Operator further agrees to reimburse Operator for such Non-Operator's share of

production or any refund, fine, levy or other governmental sanction that Operator may be required to pay as a result of such

an incorrect interpretation or application, together with interest and penalties thereon owing by Operator as a result of such

incorrect interpretation or application.



ARTICLE XV.



MISCELLANEOUS



A.  Execution:



This agreement shall be binding upon each Non-Operator when this agreement or a counterpart thereof has been

executed by such Non-Operator and Operator notwithstanding that this agreement is not then or thereafter executed by all of

the parties to which it is tendered or which are listed on Exhibit "A" as owning an interest in the Contract Area or which

own, in fact, an interest in the Contract Area.  Operator may, however, by written notice to all Non-Operators who have

become bound by this agreement as aforesaid, given at any time prior to the actual spud date of the Initial Well but in no

event later than five days prior to the date specified in Article VI.A. for commencement of the Initial Well, terminate this

agreement if Operator in its sole discretion determines that there is insufficient participation to justify commencement of

drilling operations.  In the event of such a termination by Operator, all further obligations of the parties hereunder shall cease

as of such termination.  In the event any Non-Operator has advanced or prepaid any share of drilling or other costs

hereunder, all sums so advanced shall be returned to such Non-Operator without interest.   In the event Operator proceeds

with drilling operations for the Initial Well without the execution hereof by all persons listed on Exhibit "A" as having a

current working interest in such well, Operator shall indemnify Non-Operators with respect to all costs incurred for the

Initial Well which would have been charged to such person under this agreement if such person had executed the same and

Operator shall receive all revenues which would have been received by such person under this agreement if such person had

executed the same.



B. Successors and Assigns:



This agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs,

devisees, legal representatives, successors and assigns, and the terms hereof shall be deemed to run with the Leases or

Interests included within the Contract Area.



C. Counterparts:



This instrument may be executed in any number of counterparts, each of which shall be considered an original for all

purposes.



D.  Severability:



For the purposes of assuming or rejecting this agreement as an executory contract pursuant to federal bankruptcy laws,

this agreement shall not be severable, but rather must be assumed or rejected in its entirety, and the failure of any party to

this agreement to comply with all of its financial obligations provided herein shall be a material default.



ARTICLE XVI.



OTHER PROVISIONS







Notwithstanding any other provision contained in Articles I through XV to the contrary,



A.

Additional Parties:

There shall be no obligation on the Operator hereof to perform to a multiplicity of parties succeeding to the interest of the parties hereto.  Therefore, in exercising any option, election, consent, notice, acceptance, declination or other right of performance, the respective successors in interest shall act as a unit and shall, moreover, designate one of their number to whom all notices and performance may be tendered and from whom all notices and performance may be obtained and exacted, respectively.

B.

Billing Additional Interests:

The parties further agree that in no event during the term of this agreement shall Operator be required to make more than one (1) billing for the entire interest credited to each Party hereunder.  It is further agreed that if any Party to this Agreement, hereinafter referred to as Selling Party, disposes of part of the interest credited to it hereunder, the Selling Party will be solely responsible for billing its assignee(s), and shall remain primarily liable to the other party for the interest(s) assigned and shall make prompt payment to Operator for the entire amount of statements and billings rendered to it.  It is further understood and agreed that if Selling Party disposes of all its interest as set out hereunder, whether to one or several assignees, Operator shall continue to issue statements and billings to the Selling Party for the interest conveyed until such time as Selling Party has designated and qualified one assignee to receive the billing for the entire interest.  In order to qualify one assignee to receive the billing for the entire interest credited to the Selling Party hereunder, Selling Party shall furnish to Operator the following:

1.  Written notice of the conveyance and photostatic or certified copies of the recorded assignments by which the transfer was made.

2.

The name of the assignee to be billed and a written statement signed by the assigned to be billed in which it consents to receive statements and billings for the entire interest credited to Selling Party on Exhibit A hereunder.

3.

Written consent from all assignees evidencing their consent to have the designee act on their behalf as hereinabove provided.

C.  Workover Operations:

It is agreed that without the mutual consent of all parties, no workover or other operations will be conducted under the provisions of Article VI so long as any completion in the well proposed to be worked over is producing in paying quantities.

D.  Sequence Of Further Operations:

It is agreed that where a well, which has been authorized under the terms of this agreement, by all parties, or by one or more, but less than all parties under Paragraph VI.B. (1) or (2), shall have been drilled to the objective depth or the objective formation, and the parties participating in the well cannot mutually agree upon the sequence and timing of further operations regarding said well, the following elections shall control in the order enumerated hereafter, to wit:

1.  An election to do additional logging, coring or testing;

2.  An election to attempt to complete the well at either the objective depth or objective formation;

3.  An election to plug back and attempt to complete said well;

4.  An election to sidetrack the well;

5.  An election to deepen said well; and

6.  An election to plug and abandon said well.

If at the time said participating parties are considering any of the above elections, the hole is in such a condition that a reasonably prudent Operator would not conduct the operations contemplated by the particular election involved for fear of placing the hole in jeopardy or losing the same prior to completing the well in the objective depth or objective formation, such election shall not be given the priority hereinabove set forth.

E.  Memorandum Of Operating Agreement:

Parties agree to execute a memorandum of this Agreement simultaneously with the execution of this Agreement, which shall be recorded by Operator in each County in which lands comprising all or any part of the Contract Area hereunder are situated.  Operator will prepare the memorandum of this Agreement and circulate same to the Non-Operator for execution.  Upon recording, Operator will provide recordation information to Non-Operator for its records.  A form of said Memorandum, which is attached as Exhibit H hereto, shall include a reference to the pertinent substantive provisions of this Agreement, including the Gas Balancing Agreement.

F.  Headings:

All headings in this agreement are for reference purposes only and have no binding effect on the terms, conditions or provisions of this Agreement.

G.  Confidentiality Of Information:

All geophysical, geological or engineering data acquired by the parties under this Agreement, as a result of joint operations conducted hereunder, shall be kept Confidentialby the parties unless the release of such information to a third party is agreed upon by the parties or is required by law; however, it is agreed that such data may be released to a third party if such third party is a consultant of any party or provided such third party is a prospective partner of such party or is a prospective purchaser of all or any portion of such parties interest.  The term during which information is to be kept Secret and Confidentialshall coincide with the term of this Agreement or for a period of one (1) years from the date of this Agreement, whichever is later.  Unless otherwise provided above, any release of information to a third party must have the prior written consent of all parties hereto, but in any event, said third party must agree in writing to be bound by the provisions of this paragraph.

Nothing herein shall prohibit any party from disclosing necessary information to its affiliate company or whatever information in such manner as may be required by statute, rule or regulation, including the rules and regulations of any stock exchange on which any securities of such party or any affiliate are traded; nor shall any party be prohibited by the terms hereof form disclosing information acquired under this agreement to any financial institution providing or proposing to provide financing to the disclosing party.

H.  News Releases:

Any party hereto or any related party desiring to issue a news release concerning operations conducted within the Contract Area, shall provide the other party(ies) hereto with copies of the proposed release and no such news release shall be issued without first obtaining the written consent of all parties hereto, which consent shall not be unreasonably withheld.  Notwithstanding the immediately preceding sentence, no prior consent shall be required for any news release required by law and/or the Securities and Exchange Commission.  The only exception to the foregoing shall be that in the event of an emergency involving extensive property damage, operations failure, loss of human life or other clear emergency, the Operator is authorized to furnish such minimum, strictly factual information as shall be necessary to satisfy the legitimate public interest on the part of the press and duly constituted authorities if time does not permit the obtaining of prior approval by the other parties hereto.  The Operator shall thereupon promptly advise the other parties hereto of the information so furnished.

I.  Lands Excluded From This Agreement:

In the event that lands covered by a lease or a portion thereof which were initially subject to this Agreement, but in accordance with the terms hereof are no longer subject to this Agreement, and such lands are acquired by one or more parties to this Agreement (provided that at such time two (2) or more parties are signatories to this Agreement), such leasehold or contractual rights and the leasehold covered thereby shall be governed by an operating agreement identical to this Agreement, except that such operating agreement shall be revised to reflect the parties thereto and their percentage ownership, the Contract Area and the Operator, if different.

J.  Conflect Of Terms:

This Agreement is made expressly subject to the Farmin agreement dated January   , 2004, by and between Ivanhoe Energy (USA) Inc., Derek Resources (U.S.A.) ,Inc., and the parties hereto shall be bound by the terms and conditions contained in said Agreement.  In the event that any of the terms of this Operating Agreement conflict with the terms of the Farmin Agreement, the parties hereto agree that the terms of the Farmin Agreement shall prevail.

K.  Metering Of Production:

If a diversity of the working interest ownership in production from a lease subject to this Agreement occurs as a result of operations by less than all parties pursuant to the provisions of this Agreement, it is agreed that the oil, gas or other hydrocarbons produced from the well or wells completed by the consenting party or parties shall be separately measured either by well test or by standard metering equipment (to be properly tested periodically for accuracy), at the option of the Operator, and that the setting of a separate tank battery will not be required unless the purchaser of the production or a governmental regulatory body having jurisdiction will not approve metering for separately measuring the production.

L.  Covenant Running With The Land/Extent Of Obligations:

Should any party hereto sell or transfer any or all of its leasehold estate committed to this Agreement, the obligations, terms and covenants hereof shall be considered covenants running with the land and shall inure to and be binding upon the parties hereto, their respective heirs, devisees, legal representatives, successors and assigns.  The transferring party shall remain bound to and liable for the performance of obligations and covenants of this Agreement until the transferee executes and agrees to become a party to this Agreement.  Should any such transferee fail to assume all of the obligations and covenants of this Agreement, then the transferring party remains bound to the other parties to this agreement for the performance of all obligations, covenants and indemnifications hereof.

M.  Authority For Expenditure Requirements:

Notwithstanding anything herein to the contrary, the proposing party will furnish both a detailed Authority For Expenditure and a detailed program for each proposed operation that is estimated to exceed Twenty-Five Thousand Dollars ($25,000.00)  For purposes of this provision, detailed shall mean information understood by the proposing party to be reasonably necessary for the receiving party to make an informed decision, but in no event shall the proposing party be required to furnish information beyond what is deemed reasonable and prudent in the industry.















IN WITNESS WHEREOF, this agreement shall be effective as of the 15th day of January, 2004.



, who has prepared and circulated this form for execution, represents and warrants

that the form was printed from and, with the exception(s) listed below, is identical to the AAPL Form 610-1989 Model Form

Operating Agreement, as published in computerized form by Forms On-A-Disk, Inc. No changes, alterations, or

modifications, other than those made by strikethrough and/or insertion and that are clearly recognizable as changes in

Articles

, have been made to the form.





ATTEST OR WITNESS:

OPERATOR



IVANHOE ENERGY (USA) INC.



By

C.R. Coffey



C.R. Coffey

Type or print name





Title                        V.P. Operations



Date                       January 16, 2004



Tax ID or S.S. No.77-0492835









NON-OPERATORS





DEREK RESOURCES (U.S.A.) INC.



By

B. Ehrl



B. Ehrl

Type or print name





Title              President & C.E.O.



Date                   January 19/04



Tax ID or S.S. No.           708 993 399





































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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989



ACKNOWLEDGMENTS



Note: The following forms of acknowledgment are the short forms approved by the Uniform Law on Notarial Acts.

The validity and effect of these forms in any state will depend upon the statutes of that state.







Individual acknowledgment:



State of

)



) ss.



County of

)



This instrument was acknowledged before me on



by









(Seal, if any)





Title (and Rank)





My commission expires:









Acknowledgment in representative capacity:



State of

)



) ss.



County of

)



This instrument was acknowledged before me on



by

as



of

.



(Seal, if any)





Title (and Rank)





My commission expires:















































































Signature Version



1